Starbreeze: Q4 Preview- No trend reversal
Research Update
2024-02-07
14:55
On Thursday, February 15, Starbreeze will publish its year-end report. Despite the release of new content (DLC) at the end of last year, player activity for Payday 3 on Steam has remained very low. As we did not see any significant trend reversal in player activity on Steam (the only digital platform with public user data), we lowered our sales estimates for Payday 3.
TO
JW
Tomas Otterbeck
John Westborg
During the quarter, the official launch of the indie title Roboquest, where Starbreeze is the publisher, took place. The game also became available on Xbox Game Pass, Microsoft's game subscription service, during the quarter. We expect this game to provide support of approximately SEK15m during the quarter. We expect revenue streams from platform fees from Microsoft and game sales.
Towards the end of the year, Starbreeze announced that the game project with the codename "Baxter," expected to be released in 2026, is based on "Dungeons and Dragons." The game will focus on the core elements that Starbreeze has become known for, namely cooperation, action (and adventure), with a "games as a service." business model. This IP had a strong year in 2023, with the critically acclaimed and commercially successful role-playing game "Baldur's Gate 3". A high-budget movie was also released during the year, grossing more than USD200m.
Our lowered estimates for 2024 and 2025 result in lowering our "base case" to SEK0.7 per share (SEK0.85). Our "fair value range" is lowered to SEK0.35-SEK1.2 (SEK0.4-1.4 per share). Given the historically low enterprise value (EV) in Starbreeze, combined with a strong cash position of almost SEK500m, the risk of further disappointments for investors should be rather low.
| SEKm | 2022 | 2023e | 2024e | 2025e | 2026e |
| Revenues | 122.5 | 611.7 | 158.5 | 167.2 | 729.3 |
| Revenue Growth | -2.6% | 400% | -74.1% | 5.5% | 336% |
| EBITDA | 66.3 | 479.6 | 54.3 | 59.2 | 546.4 |
| EBIT | 6.7 | 278.9 | -57.7 | -60.8 | 263.1 |
| EBIT Margin | 5.5% | 45.6% | -36.4% | -36.4% | 36.1% |
| Net Income | -54.7 | 237.9 | -59.7 | -52.8 | 275.1 |
| EV/Sales | 9.8 | 1.5 | 6.3 | 6.9 | 1.0 |
| EV/EBIT | 179 | 3.2 | -17.3 | -18.9 | 2.9 |
Case
Masters of “Games as a Service”
Evidence
Game launch is only the beginning
Challenge
Key personnel have left the building
Challenge
A somewhat weak ownership
Valuation
High dependence on one game launch
We are lowering our sales estimates for Q4, as we see no indications that Payday 3 has reversed the negative trend in popularity that began about a week after launch. We expect sales of around SEK47m to be fairly evenly distributed between Payday 2, Payday 3, and Roboquest. The player activity on Payday 2 has been robust during Q4, with around 30-40 000 concurrent players on a daily basis on Steam. However, with no major DLC releases during the quarter we expect slower sales.
For 2024, we have lowered our full-year estimate for net sales to SEK159m (SEK216m). We have lowered the expected operating result (EBIT) to SEK-58m (SEK0m).
For 2025, we have lowered our full-year estimate for net sales to SEK167m (SEK216m). We have lowered the expected operating result (EBIT) to SEK-61m (SEK-13m).
| Starbreeze: Redeye estimates | |||||||
| (SEKm) | Q1 | Q2 | Q3 | Q4E | 2023E | 2024E | 2025E |
| Net Sales | 26.7 | 43.2 | 494.4 | 47.4 | 611.7 | 158.5 | 167.2 |
| Direct Cost | -15.8 | -17.5 | -164.7 | -23.4 | -221.3 | -132.0 | -140.0 |
| Gross Profit | 10.9 | 25.8 | 329.7 | 24.0 | 390.4 | 26.5 | 27.2 |
| Marketing Cost | -5.6 | -7.5 | -18.3 | -9.5 | -41.0 | -13.3 | -9.3 |
| Admin Cost | -18.5 | -20.8 | -17.9 | -21.2 | -78.3 | -80.0 | -82.0 |
| Other Revenue | 1.6 | -0.4 | 6.3 | 0.2 | 7.8 | 9.1 | 3.3 |
| EBITDA | 4.1 | 14.2 | 444.2 | 17.1 | 479.6 | 54.3 | 59.2 |
| EBIT | -11.5 | -3.0 | 299.9 | -6.4 | 278.9 | -57.7 | -60.8 |
| Financial expenses | -13.1 | -27.0 | -0.1 | -1.5 | -41.7 | -6.0 | 0.0 |
| Net Profit | -24.6 | -29.4 | 299.8 | -8.0 | 237.9 | -63.7 | -60.8 |
| Growth | 14% | 36% | 1373% | 41% | 398% | -74% | 5% |
| Gross margin | 41% | 60% | 67% | 51% | 64% | 17% | 16% |
| EBITDA margin | 15% | 33% | 90% | 36% | 78% | 34% | 3% |
| EBIT margin | -43% | -7% | 61% | -14% | 46% | -36% | -36% |
| D&A | -15.6 | -17.2 | -144.4 | -23.5 | -200.7 | -112.0 | -120.0 |
People: 2
CEO is a game industry veteran. However, the senior team and the CEO have been together for less than five years. The company has an initiative program linked to Payday 3 quality and commercial success, which is positive according to our rating. The biggest reason for the relatively low score in the category “People” is that our new rating generates a lower score in “ownership”. Starbreeze has no owner with a significant stake in the company in its leadership (the Board) or management.
Business: 3
Starbreeze profitability in a three-year period depends on how successful Payday 3 becomes. Payday is a very strong brand. For example, approximately Payday has 8.5 million members within the PC-related community on Steam and 600-800 000 monthly active users. With Starbreeze “Game as a Service” business model, the company has proven for 10 years that its revenue could be described as recurring, which is s a strong sign of financial stability in its core business. However, by its nature, the gaming industry is very competitive, which results in a neutral score in our rating, despite some moats related to the Payday brand.
Financials: 2
Due to no major game releases in tha last few years the financial numbers is relatively weak. Two more points have been added in June 2023 due to the fact that Starbreeze after the right issue is debt free. Starbreeze therefore scores 5 out of 5 regarding its financial condition in our Redeye Rating.
| Income statement | |||||
| SEKm | 2022 | 2023e | 2024e | 2025e | 2026e |
| Revenues | 122.5 | 611.7 | 158.5 | 167.2 | 729.3 |
| Cost of Revenue | 60.5 | 221.3 | 132.0 | 140.0 | 303.3 |
| Operating Expenses | -4.4 | -89.2 | -27.8 | -32.0 | -120.4 |
| EBITDA | 66.3 | 479.6 | 54.3 | 59.2 | 546.4 |
| Depreciation | 15.6 | 11.8 | 16.0 | 3.3 | 14.2 |
| Amortizations | 44.1 | 186.0 | 81.6 | 120.0 | 269.2 |
| EBIT | 6.7 | 278.9 | -57.7 | -60.8 | 263.1 |
| Shares in Associates | 7.3 | 7.3 | 7.3 | 7.3 | 7.3 |
| Interest Expenses | 61.4 | 41.7 | 6.0 | 0.00 | 0.00 |
| Net Financial Items | -61.4 | -41.7 | -6.0 | 0.00 | 0.00 |
| EBT | -54.7 | 237.3 | -63.7 | -60.8 | 263.1 |
| Income Tax Expenses | 0.00 | -0.62 | 0.00 | 0.00 | 0.00 |
| Net Income | -54.7 | 237.9 | -59.7 | -52.8 | 275.1 |
| Balance sheet | |||||
| Assets | |||||
| Non-current assets | |||||
| SEKm | 2022 | 2023e | 2024e | 2025e | 2026e |
| Property, Plant and Equipment (Net) | 2.2 | 2.3 | 181.3 | 385.9 | 563.7 |
| Goodwill | 48.3 | 48.3 | 48.3 | 48.3 | 48.3 |
| Intangible Assets | 502.5 | 330.9 | 255.6 | 142.3 | -105.6 |
| Right-of-Use Assets | 20.4 | 20.4 | 20.4 | 14.0 | 14.0 |
| Other Non-Current Assets | 5.2 | 5.1 | 5.1 | 0.00 | 0.00 |
| Total Non-Current Assets | 585.9 | 414.2 | 518.0 | 597.8 | 527.7 |
| Current assets | |||||
| SEKm | 2022 | 2023e | 2024e | 2025e | 2026e |
| Inventories | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Accounts Receivable | 11.6 | 31.4 | 12.7 | 13.4 | 58.3 |
| Other Current Assets | 40.6 | 43.5 | 12.7 | 13.4 | 58.3 |
| Cash Equivalents | 108.2 | 498.7 | 390.6 | 242.7 | 640.0 |
| Total Current Assets | 160.5 | 573.6 | 416.0 | 269.5 | 756.7 |
| Total Assets | 746.4 | 987.8 | 934.0 | 867.3 | 1,284.4 |
| Equity and Liabilities | |||||
| Equity | |||||
| SEKm | 2022 | 2023e | 2024e | 2025e | 2026e |
| Non Controlling Interest | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Shareholder's Equity | 56.8 | 798.4 | 816.7 | 751.9 | 1,025.0 |
| Non-current liabilities | |||||
| SEKm | 2022 | 2023e | 2024e | 2025e | 2026e |
| Long Term Debt | 381.0 | 2.0 | 2.0 | 2.0 | 2.0 |
| Long Term Lease Liabilities | 5.4 | 5.4 | 5.4 | 5.4 | 5.4 |
| Other Long Term Liabilities | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Total Non-Current Liabilities | 386.5 | 7.5 | 7.5 | 7.5 | 7.5 |
| Current liabilities | |||||
| SEKm | 2022 | 2023e | 2024e | 2025e | 2026e |
| Short Term Debt | 247.8 | 0.00 | 0.00 | 0.00 | 0.00 |
| Short Term Lease Liabilities | 16.2 | 11.0 | 11.0 | 11.0 | 11.0 |
| Accounts Payable | 0.00 | 78.2 | 11.1 | 11.7 | 87.5 |
| Other Current Liabilities | 39.2 | 83.8 | 89.2 | 89.6 | 155.8 |
| Total Current Liabilities | 303.2 | 173.0 | 111.3 | 112.3 | 254.3 |
| Total Liabilities and Equity | 746.4 | 978.9 | 935.5 | 871.7 | 1,286.8 |
| Cash flow | |||||
| SEKm | 2022 | 2023e | 2024e | 2025e | 2026e |
| Operating Cash Flow | 10.1 | 382.3 | 93.3 | 66.8 | 610.5 |
| Investing Cash Flow | -148.0 | -116.3 | -201.3 | -214.7 | -213.3 |
| Financing Cash Flow | 0.00 | 280.0 | 0.00 | 0.00 | 0.00 |
Disclosures and disclaimers