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Redeye Gaming Event
14:00-14:30 Introduction to the Gaming industry; Redeye presentation
14:30 – 15:00 Panel One; How to invest in Gaming Companies? • Eric Sprincorn, Fondförvaltare Swedbank • Henrik Sandell, Fondförvaltare Didner&Gerge • Per H Börjesson, VD Spiltan • Jörgen Larsson, VD Stillfront • Lars Wingefors, VD THQ
15.00-15:30 Panel Two; Winning ideas and processes in the production of gaming titles • Christofer Sundberg, Creative Director Avalanche Studios • Martin Sahlin, Creative Director Coldwood • Victor Magnusson, Lead Designer Fatshark • Stefan Ljungqvist, Goodbye Kansas • Johan Pilestedt, VD Arrowhead
15:30-16:00 Panel Three; How to run a successful gaming company? • Lars Wingefors, VD THQ • Jörgen Larsson, VD Stillfront • Sebastian Ahlskog, CFO Starbreeze • Stefan Wikstrand, CFO G5 Entertainment • Peter Levin, VD Goodbye Kansas • Rickard Blomberg, vVD Fatshark • Rui Manuel Monteiro Casais, VD Funcom
Schedule and participants
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Introduction to the Gaming Industry
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Size and growth The market is expected to continue to show robust growth in the coming years. The growth is structural and therefore less cyclical than many industries. Mobile is expected to be the strongest growing segment and China the strongest growing geographical market. Asia-Pacific has a huge population but the spend per capita and per gamer is still much lower than in the West. Revenue per capita is: - SEK 600 in North America - SEK 370 in Europé - SEK 100 i Asia-Pacific Data from App Annie showed that China nearly doubled the iOS App Store Games revenue vs a year earlier in Q2 2015. In two years revenues has tripled. Mobile is expected to generate nearly SEK 500 billion in 2019, thereby reaching the same revenue as for console and PC combined. Hence, total market is expected to reach revenues of around SEK 1 trillion in 2019.
Expectedgrowthandsizepersegment(bnSEK)
Globalgamesmarketperregion2016
CAGRAllsegments7%CAGRMobile17%
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Gaming revenues The platform owners are the winners as a result of the digitalization of the industry. Tencent and NetEase dominate the Chinese market with large online platforms providing games services. Apple and Google owns the biggest mobile gaming platforms. Sony has its 10 year old Playstation Store (PSN).The company has the strongest growth of them all in H1 2016, around 35 %. Valve’s Steam generated revenues of SEK 32 bn in 2016. The number of game titles in the on-line store increased by 75% but the revenues remained flat. The number of players and revenue per game decreased which shows that competition has increased. The boxed console and PC games stands for a minority of the games sales in China and South Korea. The boxed industry is almost non-existing and it was totally forbidden to sell consoles until mid 2015.
Gamingrevenuesfrompubliclytradedcompanies(SEKBillion)
23%
29%
52%
48%
41%
37%
51%
49%
28%
47%
56%
47%
26%
22%
20%
5%
3%
16%
Germany
USA
Japan
SouthKorea
China
Global
Mobile Digital(Console/PC) Physical(Console/PC)
MobilevsDigitalvsPhysicalsales,Marketshares
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Game genres Shooter/FPS:FirstPersonShooterExamples:CallofDuty,BaDlefield,Doom
AcVon/Adventure:Playedinthirdperson.Thegamesarestorydrivenwithafocus
onacKonandcollecKnginventories.OMenproblemsolvingandpuzzle-elements.
Examples:Zelda,GTA,TombRaider,SuperMarioBros
RPG:RolePlayingGame.Characterevolvesasthegameprogresses.Customizable
characters.MostgamestodayareAcKonRPGs.
Exemples:Witcher,FinalFantasy,Skyrim,MassEffect
MMORPG:MassiveMulK-playerOn-lineRPG.Thousandsofindividualsplayon-line
simultaneously.GameenvironmentisconstantlyacKve.Paidaccountsandin-
gamepurchasing.
Exemples:WorldofWarcraM,EVE,TheElderScrollsOnline
Strategy:LogicalandtacKcalgameplay.
MOBA:MulK-playerOnlineBaDleArena.Real-Kmestrategy.
Examples:ClashofClans,LeagueofLegends,DOTA,StarcraM
SimulaVon:DesignedtocloselysimulaterealworldacKviKes.Usuallynostrictly
definedgoalsinthegame.
Examples:SimCity,Sims,FarmingSimulatorPuzzle:ObjecKvetosolveorsurvivethepuzzle.Playersintelligenceisprimaryand
controllerskillsissecondary.Tetrisinventedthesub-genreMatch3Puzzle.
Examples:Tetris,CandyCrushSaga,Unravel
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Gaming genres and sales Console/PC A consolidated industry with a
minority of the companies standing for the majority of the revenues. There are a few dominant game titles within each of the segments (Console, PC and Mobile) with very high loyalty and stable revenues. Eg FIFA and Call of Duty have been the highest grossing games for several years on console. Violent games stands for over 50% of the revenues on console and PC. Over 500 new mobile games are introduced in App Store every day. However, only 40 % are newcomers on the highest grossing Top Ten- list. The biggest surprises in 2016 were: - Pokémon with revenues over SEK 11 billion. - The Division is a new franchise that is setting new records. Developed in Sweden by Massive Interactive, owned by Ubisoft. - Blizzard does it again with new franchise Overwatch. The game has potential to be a long term revenue generator.
Mobile
Game Genre RevenueGameofWar-FireAge Strategy 11.6ClashofClans Strategy 11MonsterStrike Action 10MobileStrike(NEW) Strategy 9.6ClashRoyale(NEW) CardBattler 7.8PokémonGO(NEW) Collection 7CandyCrushSaga Match3Puzzle 6.7Puzzle&Dragons Puzzle 6Fate/GrandOrder(NEW) CardGame 4.8CandyCrushSodaSaga Match3Puzzle 3.3
Game Genre RevenueFIFA17 Sports 12Battlefield1 Shooter 9CallofDuty Shooter 8.5PokémonSun/Moon Collection 6TheDivision Action 5
Game Genre RevenueLeagueofLegends MOBA 15WorldofWarcraft MMORPG 9CrossFire Shooter 8.8DungeonFighterOnline Beat'emup 8.5Overwatch Shooter 4.5
Revenuesfromhighestgrossinggamesin2016(SEKBillion)
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Industry value chain Developers can be divided into three different categories. First-party developers are part of a platform owner. Second-party developers are connected to a platform owner but is independently owned. Third party developers are platform independent. There has been a dramatic change from physical distibution to digital distribution. - Loser: Retailer - Winner: Distributor Higher revenues for publishers and in some cases developers. Distributors such as Apple and Google are minimazing risk and maximazing profits thanks to digital distribution.
DEVELOPER ThepeoplethatmakethegamePUBLISHER Production,marketingandpromotionDISTRIBUTOR TheplatformownerandlogisticsdeliveryRETAILER TheoutletwheretheproductisboughtCONSUMER Thepeoplethatbuythegame
PhysicaldistribuVon
DigitaldistribuVon
DistribuVonformatofreleasedgames
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Revenue models
Downloadable Content (DLC) /Expansion pack: Usually extended story line, new game areas or objects which are distributed digitally by the game's official publisher. Extra content is generating 2x revenues in comparison to the traditional model of ”Full games sales” for EA. Microtransactions from FIFA’s Ultimate Team is a large contributor to revenues. F2P (Free to Play) has been dominating the mobile industry: Nintendo tried charging players when launching Super Mario Run but without success. Freemium is starting to take a position in the console industry as well. Subscription-based is the new trend. EA, Sony and Microsoft have launched new subscription based services. This could be a new revenue model for mobile gaming. Possibly for the whole industry as well where the dominating giants charge subscriptions for all their games cross-plattform.
FullgameTradiKonalmodelwherethecustomerpaysforthewholegameupfront.
ExtracontentOMencalled”Add-ons”andDLC(DownloadableContent).Mostprofitableandbiggestrevenue
driverinrecentyears.
Freemium/F2PMostcommoninmobilegames.TheplayerhastopaymoneytosaveKmeorovercome
challengesthataretofrustraKng.
SubscripVon-basedThebigpublishersanddistributorshavestartedtodoit”theSpoKfy-way”.
EA’sDigitalNetRevenuein2016(SEKmillion)(55%oftotalnetrevenue)
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The Nordic Gaming Universe
The Nordic Gaming market is diverse with leading companies from all countries. Sweden and Finland stand out with the largest regional industries. The Swedish companies have a diverse presence in the industry with both mobile only developers like King, sandbox maker Mojang and AAA studios like DICE and MASSIVE. In Finland, mobile game developers are dominating with giants like SUPERCELL and Rovio. The largest Danish developer, IO Interactive, has produced the widely popular Hitman series. Unity is the developer of the Unity 3D game engine. In Norway, the MMORPG maker Funcom stands out and in Iceland, the creator of EVE Online, CCP, is a large player.
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The Swedish market
The Swedish Game developer industry has grown substantially over the past five years. Both in terms of number of companies, employees and revenues. According to Dataspelsbranschen, there were 236 registered businesses in Sweden with a focus on game development. These companies generated revenues of approximately SEK 12bn. Over the past five years, the number of employees and revenues has grown annually by 17% and 60%. Revenues are growing significantly faster than the number of employees and companies. The reasons are the pronounced economies of scale in the business model and that several companies have had their commercial breakthrough in the past few years. Most companies are located in the larger cities of Sweden. Skövde stands out as a pronounced Gaming hub given the small size of the town.
39%
9%11%7%
4%
30%
N.ocompanies
Stockholm
Malmö
Göteborg
Skövde
Uppsala
Other
106
236
0
50
100
150
200
250
2010 2015
N.oofcompanies
CAGR17%
1 101
11 904
0
2000
4000
6000
8000
10000
12000
14000
2010 2015
RevenuemSEK
CAGR60%
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Outperformance of the sector The Video Game Index consists of the larger international player’s and can be viewed as a visualization of the global video game industry. The Index has outperformed the market, measured by the S&P 500 over the past three years. Digitalization continues to create value for game makers. The listed Swedish companies have outperformed the market by a wide margin. On average, the group has returned 139% over the past year. G5 has had incredible performance as Hidden City continues to climb the charts. Last year’s newcomer Stillfront has also shown strong returns over the previous year. Starbreeze, the star of 2015, has had the lowest return in the last year but still beating the OMXS30 by a wide margin. The two large IPOs, Paradox and THQ Nordic, has yielded high returns. Both IPOs were massively oversubscribed and attracted both institutional and private investors. Smaller IPOs have shown less impressive returns. The key seems to have both an existing revenue generating portfolio and a promising pipeline, not just one of the two.
Market cap performance1 month 3 months 6 months 1 year
Paradox -5% 13% 7% 72%Starbreeze -5% -11% -26% 30%THQ 6% 34% 95% 95%G5 -3% 86% 305% 419%Stillfront -6% 27% 66% 81%
OMXS 30 -1% 3% 9% 17%Average -3% 30% 89% 139%
S ource:R edeyeR esearch&B loomberg
Global Video Game Index & S&P 500
S ource:B loomberg
60708090
100110120130140150160
VideoGameIndex S&P500
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Valuation levels
Overall, we can say that the Valuation levels differ to some degree due to region and game genres. In our sample, there is some distortion due to outliers. The Swedish companies are relatively uncovered by the analyst community, something we aim to improve. Some qualitative factors that affect the valuations are; - Quality and risk of current
portfolio and pipeline of projects
- IP ownership - Track record for the company
regarding past hits. - Segment focus of games
(console, PC, F2p online, Xplatform, mobile, etc..).
It all boils down to cash flow generating possibilities in the future for the company. On an overall level, the multiple valuation range from; 2-5x EV/S and 15-30 EV/EBIT. Profitability and growth prospects is the main focus for receiving higher multiples.
Peer valuationSALES CAGR
CompanyEV
(MSEK) 2017E 2018E 2017E 2018E 2019E 16-19E 2017E 2018E 2019ESwedish GamingParadox Interactive 5 746 n.m. n.m. n.m. n.m. n.m. n.m. n.m. n.m. n.m.Starbreeze 3 867 3.2x 3.3x 11.3x 27.0x 266.7x 49% 28% 12% 1%THQ Nordic 2 714 4.8x 3.8x 19.2x 14.5x 12.8x 41% 25% 26% 25%G5 Entertainment 1 452 2.6x 2.3x 30.9x 27.4x 25.9x 7% 8% 9% 9%Stillfront 465 2.7x 1.9x 12.9x 5.5x 5.9x 40% 21% 34% 30%
Median 2 714 3.0x 2.8x 16x 21x 19x 41% 23% 19% 17%
Mobile/casualZynga 14 031 1.9x 1.8x 48.3x 30.0x 43.1x 11% 4% 6% 4%Com2us 6 220 1.4x 1.3x 3.6x 3.3x 3.1x 13% 39% 40% 36%G5 Entertainment 1 452 2.6x 2.3x 30.9x 27.4x 25.9x 7% 8% 9% 9%GLU 1 368 0.7x 0.6x n.m. n.m. n.m. 12% -11% -4% 1%
Median 3 836 1.7x 1.5x 31x 27x 26x 12% 6% 7% 6%
International GamingTencent 2 324 468 11.7x 8.7x 32.9x 25.7x 20.3x 35% 35% 34% 34%Activision 345 568 6.0x 5.5x 18.1x 15.2x 13.4x 6% 33% 36% 38%EA 219 025 4.9x 4.6x 16.1x 14.8x 12.8x 10% 30% 31% 35%Nintendo 201 783 5.4x 3.4x 108.0x 25.5x 17.1x 26% 5% 13% 17%Bandai Namco 46 948 1.0x 1.0x 9.8x 8.8x 8.1x 8% 10% 11% 11%Take-Two 43 680 2.6x 2.2x 17.1x 10.8x 10.7x 15% 15% 20% 22%Ubisoft 39 000 2.7x 2.4x 19.8x 15.1x 11.7x 13% 14% 16% 18%CD projekt 13 917 12.9x 16.0x 24.5x 41.6x 16.0x 1% 53% 38% 47%
Median 124 366 5.1x 4.0x 19x 15x 13x 11% 23% 26% 28%
Peer Group median 3 836 3.0x 2.8x 19x 21x 19x 12% 23% 19% 17%
S ource:B loomberg&R edeyeR esearch
EV/Sales EV/EBIT EBIT margin
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M&A
Profound presence from the public companies in the M&A spectrum. Some consolidation as larger companies acquire smaller studios but keep them independent. This list does not include acquisitions of IPs. There is a wide spread of valuation multiples, but most sell between 1.5-3x EV/S. The large transactions of Mojang and King do of course standout. The trend with large international companies like EA, Activision Blizzard, Microsoft and Ubisoft acquiring successful Swedish companies will most likely continue. - However, Paradox’s and
THQ’s IPOs might indicate a shift to preferring the public markets instead of a trade sale.
Gaming M&A in Sweden
Year Target Buyer Trans. Value (MSEK)
EV/S
2015 King Activision Blizzard 49 900 2.3x2014 Mojang Microsoft 17 795 7.7x2016 Starbreeze Smilegate Ent. 3442015 DreamHack AB MTG 244 3.5x2014 Geminose Inc Starbreeze 1202016 Dhruva Interactive Starbreeze 75 1.8x2016 Nozon Starbreeze 71 3.1x2016 ePAWN Starbreeze 522015 Resolution Games Partech Int. 512016 Babil Games Stillfront 41 1.5x2016 Simutronics Stillfront 9 0.9x2015 Delinquent Interactive Mobile Access Group2015 White Wolf Publishing Paradox Interactive2015 Farm Clan G5 Entertainment2014 Bitsquid Autodesk2014 Free Lunch Design Palringo LimitedS ource:RedeyeRes earch,companyw ebs ites &Datas pels brans chen
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Trends – ongoing
Digital distribution - Changing the value chain. Benefit for the platform owners, distributors (often the same) and publisher/developers but not the retailers (expect Amazon).
Mobile - The smartphone opened up the Casual gaming and a whole new game segment. The first hurdle to start playing games has been lowered.
Demographic shifts - First generation of gamers coming of age as new enters. Broadening the gamer audience.
New geographical markets - Asia, MENA, and India driving forces and in some cases untouched ground for many Western gaming companies. Global improved living standards leads to more free time = more time to play games.
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Trends - emerging • VR & AR
• Esports
Virtual reality Computer tech that use virtual reality headsets to generate the realistic images, sounds. VR is not new for gaming, but the technique is maturing. However, we believe it will take 2-3 generations before the market takes of. Augmented reality View of a physical, real-world environment whose elements are augmented (or supplemented) by computer-generated sensory input such as sound, video, graphics or GPS data. Will likely take off before VR as the hurdle to use is smaller. Early examples are Pokemon Go (semi AR) and Google Glasses. Esports: Competitive gaming soon has a larger audience than ordinary sports. This will only continue as a new generation of gamers mature. New industries emerge such as Game betting companies and different streaming services.
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Why invest in Gaming companies The video game industry provides investors the opportunity to benefit from an ongoing secular growth trend. Globally improved living standards lead to higher disposable income, more spare time and increased demand for entertainment. Other factors are demographic shifts, digitalization( reduces cost and time to market) and the smartphone era continues to broaden the gamer audience. Key industry drivers include: Globally increased demand for free time entertainment Global living standards are improving, this leads to more free time and an increased demand for entertainment. This trend benefits the video game industry as a whole.
Gamers come of age Demographic shift increases the average age of gamers. Popularity for games grew large during the 80s and 90s; these are now in their mid-thirties with life-time peak of spending power.
Digitalization lower cost of distribution and increase availability The rise of digital distribution have led to lower costs for selling games, which leads to an increased share of profits for game developers. The Improved profits lead to greater reinvestment opportunity’s and thus improving the gaming experience and drive innovation.
Smartphone broadens gamer audience The rise of the smartphone have resulted in a relatively new game genre; Casual games. The reduced “hurdle” for start playing games have also increased the likelihood of “new” gamers trying other more hardcore game genres, thus increasing the gamer audience. Why now? The main secular forces behind the growth of the video game industry will continue for many years. The opportunity in new markets continue to be enormous and new trends like esports, VR and AR has only just begun to take form. The theme focus on three high-growth subthemes: Improved quality of life leading to more free time • Rise of new technologies • On going digitalization
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Participant description Redeye
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Participant description Institutional investors
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Participant description Gaming Industry Management
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Participant description Gaming Industry Management
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Participant description Gaming Industry Management
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Participant description Gaming Industry Management
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