Starbreeze reported net sales in Q4 of SEK33.6m was in line with our estimate of SEK34.1m. EBIT of SEK4.3m was above our estimate of SEK-0.6m.

Other revenue which is related to the net effect of exchange rates in different assets was SEK8.1m in comparison to our estimate of SEK2.0m. This difference of around SEK6m is the whole explanation for the higher-than-expected EBIT during the quarter.

Operational cash flow was SEK10.1m (12.4) after changes in working capital. Total cash-flow from the period SEK-11.3m (20.2). Cash and cash equivalents at the end of the period were SEK108.2m (128.6).

During the year, Starbreeze released 13 DLCs for Payday 2 and during the quarter monthly active users had its second-best quarter of the year. Starbreeze community on the PC platform Steam reached 8.6 million members (a small increase from last quarter of almost 8.5 million).

Starbreeze has recruited 9 employees during the quarter, and CEO Tobias Sjögren highlighted two key employees that the studio hired in its new UK studio. Both these talents have been successful in working with a Games a Service model before and have a good reputation in the industry which should help Starbreeze in reaching more potential employees in its new studio.

During the earnings call CEO Tobias Sjögren mentioned Starbreeze Nebula the community platform that Starbreeze launched in 2022. This is one of the initiatives to gather the major community of more than eight million members to migrate to a Starbreeze platform that the company has better control of (marketing expenses are impacted by the cost to develop Starbreeze Nebula).

Close after the Q4-result was published, Starbreeze announced the partnership with the production company “Stockholm Syndrome” to prepare a pitch for a potential TV series or movie. This means a pitch including for example a story and cast, will be presented to, for example Netflix and Amazon Prime (likely). This kind of process will likely take several years until a potential release. Starbreeze sees this primary as a marketing opportunity to increase sales of the Payday-games.

In five years (2023-2027) the company has a goal to have at least three internally developed games on the market. We assume that Starbreeze will bet on a licensed IP for the game planned to be released in 2025. We expect that Starbreeze will co-finance and co-publish the game with a partner. How much Starbreeze will be able to finance itself of course depends on the success of Payday and how much of the convertible loan of currently SEK215m Digital Bros will covert to Starbreeze shares.

To the key question to Starbreeze-investors. When will Payday 3 launch this year? In the Nvidia GeForce leak from November 2021, Payday 3 was set for a release on March 14 2023. Due to the fact that this leak is more than one year old, we do not think this information is so trustworthy anymore. We have previously assumed that Payday 3 will be released in August this year, celebrating Payday 2´s 10^th anniversary. We, however, still believe it is more likely that the game will be released close to the summer period than the Christmas period.

Distribution fees

During the quarter, Starbreeze reached a new milestone. The PC platform Steam, which is Payday’s main sales channel, has reduced its distribution fee from 25% to 20%. This means Payday 2 has generated USD50m on Steam according to the company’s (Valve Corp) communicated policy since 2018. However, Payday 3 will start from scratch, which means the distribution fee will start at 30% of revenue, climbing down to 25% of revenue at USD10m, and then 20% of revenue at USD50m (if the game is reaching that milestone). However, due to Payday’s solid track record on Steam for more than 10 years, we expect that the Payday 3 will get good marketing at a low cost on Steam.

Payday 3 budget

In the Q4-report Starbreeze short-term debt (current liabilities) increased by approximately SEK180 million (transferred from non-current liabilities in the balance sheet). In the earnings call, this change was explained, and it is due to Payday 3 upcoming release.  This amount is the sum of the money received from the publisher Koch Media meaning Payday 3 has received SEK180m so far for Payday 3 we expect. SEK27m was obtained from Koch Media in Q4, which means approximately SEK240m of finance has been received at launch for developing the game. Adding the marketing budget, we assume approximately SEK300m has been received from the Payday 3 publisher.

It is uncertain how much of the Payday 3 development has been financed by Starbreeze. We have previously calculated that the total budget at launch will be approximately SEK420m. If Starbreeze has financed half the development budget, this would mean that the development budget is SEK480m at launch excluding marketing costs.

Estimate changes for 2023: We have only done minor changes to our estimates following the Q4-result. We have lowered our direct costs somewhat in Q1 and Q2 due to the lower distribution fee (from 25% to 20% of revenue) from the PC platform Steam for Payday 2.

We have increased the financial expenses in 2023 to SEK58.6m from SEK28.6m. The majority of this change is due to the uncertainty of how fast the interest related to the convertible loan will be lowered after the release of Payday 3.

The dramatically lower EBITDA and EBIT margin in 2024 is due to the agreements with Payday 3’s publisher Koch Media and Digital Bros (505 Games). 

In our base case we expect that it will be challenging to show sales growth the years after 2023, and the release of Payday 3. With its Games as s Service business model and the release of one new game in 2025 and, thereafter, at least one additional game release in 2026/2027, Starbreeze of course have the potential to show growth in 2024 or 2025. This scenario is illustrated in our bull case, were Starbreeze return to growth in 2025.

Our fair value range is unchanged at SEK0.8-5 with a base case of SEK2.2 per share. Our WACC has been increased to 12% (9%). In our new version of Redeye Rating, our “People” parameter on Starbreeze scores lower, due to higher requirements on ownership. Starbreeze’s WACC is, however relatively low still, which is a result of the high long-term debt (SEK380m) in relation to its market capitalization.

It is hard to do a peer valuation on Starbreeze. In 2023 Starbreeze is a “special situation” due to the release of Payday 3. According to our estimates, the valuation of EV/EBIT 5.3x look extremely attractive for a pure game studio. But the big question is of course, how well Starbreeze will build its enterprise after 2024.