Company Updates - TBLD

On Tuesday (23 Apr), tinyBuild released their preliminary results for FY23 via RNS, followed later by presentations to analysts and investors. Unsurprisingly, given the equity raise earlier this year, they don't make for pleasant reading, but let's walk through the lowlights:

• Revenue fell 29.4% to $44,663k (FY22: $63,295k), while the fall in gross profit before software development cost impairments of 68.0% to $13,683k (FY22: $42,703k) was even more pronounced, due to a 50.4% increase in cost of sales to $30,980k (FY22: $20,592k).
• Most of the revenue decline was attributable to a 69.6% fall in development services revenue to $6,919k (FY22: $22,744k), as far fewer platform deals were signed during the year. These platform deal revenues are also very high margin with respect to gross profit, which means there isn't a commensurate decrease in cost of sales when they are lost.
• Game and merchandise royalties saw a more modest 8.6% decrease to $36,581k (FY22: $40,020k), but with more of the fall being borne by own-IP revenue which declined 11.7% to $23,765k (FY22: $26,915k), while 3rd-party IP revenue declined 2.2% to $12,816k (FY22: $13,105k). The resultant share of game and merchandise royalty revenue from own-IP decreased to 65.0% in FY23, from 67.3% in FY22.
• One thing that didn't decrease was events revenue from DevGAMM, which actually saw an increase of 119% to $1,163k (FY22: $531k), as they were able to hold significantly more in-person conferences than the year before.
• The increase in cost of sales can be partially explained by a 84.1% increase in amortisation of capitalised software development costs to $10,652k (FY22: $5,787k), for the games released at the end of 2022 and during 2023. Given that there was no increase in 3rd-party IP revenues, I can only think that the own-IP revenue must have shifted towards lower margin 2nd-party IP (where the development is outsourced), with a consequent increase in cost of sales for the same revenue.
• A smaller revenue contribution from new releases in 2023 resulted in 92% of all gaming revenue coming from the back catalogue, compared with 80% in 2022. Several flops (Farworld Pioneers, Stray Souls, Hello Engineer) combined with release delays (Level Zero, Broken Roads, Lil' Guardsman, Tamarak Trail, Critter Cove, Kill It With Fire 2) were the primary cause.
• The company has recognised an impairment of capitalised software development costs amounting to $36,206k, due to a significant number of project cancellations and reduced return expectations. This coincided with the closure of at least one studio in the second half of the year (Hakjak).
• Post-period end there have been further studio closures, namely Moon Moose (Cartel Tycoon) in February and Demagic (various projects with expertise in porting) in March. We also heard that Totally Reliable Delivery Service has been sold to Atari for an undisclosed sum (don't know what's happened to the developer We're Five Games), Not Games studio has been sold (while retaining the Not For Broadcast game itself), and tinyBuild will no longer be publishing Critter Cove.
• Subtracting this impairment figure gives us a gross loss of $22,523k (FY22: $42,608k profit).
• General administrative expenses grew 11.8% to $26,090k (FY22: $23,328k) largely due to inflation and staff relocation. The cost cutting actions taken in December will flow through in 2024 and help to bring this down, but I'd also expect the shift towards GaaS titles - where much of the ongoing expenditure post-release cannot be capitalised - to put upward pressure on general administrative expenses in the future. Though of course this will equally lower the amortisation expense, so the net effect is the same.
• Also recognised in operating expenses were impairment charges for goodwill, customer relationships and purchased intellectual property totalling $11,849k. These were attributable to Versus Evil (which was closed down in December following the legal settlement) and Red Cerberus.
• I should note at this point that Red Cerberus is still around, and despite underperforming expectations (due in part to being subscale), they aren't a cash drain on tinyBuild. There is therefore no need to close them to save cash like there was with Versus Evil, and management has said they have a plan improve performance which I'd expect to involve scaling up operations. There's also the option of a sale if required.
• Subtracting these operating expenses, and a few other items including the cash payment to Steve Escalante of $3,500k to settle the legal claim against the company, we get an operating loss of $63,757k (FY22: $15,923k profit).
• Then adding on net finance income and tax gains, we arrive at the net loss for the year of $62,845k (FY22: $11,513k profit). This is a pretty staggering figure, equating to more than twice the current market cap of the company. It's clear that a lot of value destruction has occurred, whether caused by the economic environment or management action.
• Carrying this across to the statement of financial position, we can see that shareholder equity has fallen 56.6% to $48,456k (FY22: $111,634k), with retained earnings now negative $18,213k (FY22: positive $43,910k). On a per share basis, the impact is further exacerbated by the dilution from the equity raise at the start of 2024, bringing the book value per share down 78% to c.$0.12 (FY22: c.$0.55).
• Cash generated from operations fell 55.3% to $10,617k (FY22: $19,268k), while they were still spending $33,313k (FY22: $41,119k) on investing activities.
• Combining this with $1,562k (FY22: $485k) used in financing activities, net cash outflows were $23,996k (FY22: $22,336k), leaving a cash balance at the year end of just $2,500k (FY22: $26,496k).
• Investment spend was predominantly focused on software development costs, amounting to $31,899k (FY22: $35,789k), with an another $1,234k being used to purchase Not Games (which they've now sold).
• This rate of spend did not leave much margin for error, and due to the multi-year commitment required for game development, they were unable to cut expenditure without writing off a lot of the investment made up to that point.
• In 2023 they had over 50 projects under development, of which more than 20 had annual spend of >$500k. For the top-10, it's likely the annual spend was >$1m. Some of these projects have now been cancelled (or will be before their completion) due to tighter budget constraints and reassessments of expected ROI.
• The delayed releases that have been launched so far in 2024 have been a mixed bag. Starting with the positives, Lil' Guardsman and Kill It With Fire 2 have both been well received. The former was released on 23 Jan and so far has 465 reviews on Steam with a 94% positive rating, while the latter was released in early access on 16 Apr and has since racked up 241 reviews with a 95% positive rating.
• On the negative side were pretty lack-lustre receptions for Tamarak Trail (released on 29 Feb) with 49 reviews, of which 67% were positive, and Broken Roads (released on 10 Apr) with 166 reviews, of which 43% were positive. Broken Roads is particularly disappointing given its high wishlist ranking prior to release.
• When asked about the underperformance of Broken Roads, management said the game was a "2 out of 10" back in November 2023, and by delaying the release until April 2024 they were able to get it up to a "6 out of 10", but further investment to improve the game was likely to have diminishing returns.
• We also heard that Michael Schauble (Chief Commercial Officer) resigned in March this year, which probably tells you all you need to know about the prospect of a recovery in platform deal revenues in 2024.
• So where does this leave the company financially? As of 31 Mar 2024, the company had "high single-digit millions" in cash remaining, which is expected to decrease over the next few months before recovering in H2 with the release of a slate of high potential titles (Kingmakers, Streets of Rogue 2, and Level Zero: Extraction).
• It's clear the company isn't out of the woods yet, with Broken Roads having used up most of the available slack, leaving little left to absorb any further release delays or flops.
• If there are any more setbacks, there's still a real possibility that management will have to resort to further asset sales or project cancellations, but one would hope every effort will be taken to avoid another equity raise.

I've painted a pretty bleak picture in the passages above, but I still do see potential for a very bright future for the company if it can successfully navigate the next 12-18 months. Let's change tack and look at some highlights:

• Since its announcement back in February, Kingmakers has now shot up the Steam wishlist rankings to #42 with 30,678 followers. Exact wishlist numbers haven't been disclosed, but I would estimate them to be somewhere between 400k-500k currently.
• Streets of Rogue 2 continues to garner interest, now ranking #78 in the Steam wishlist rankings with 21,878 followers. We also have more concrete wishlist numbers, as tinyBuild recently announced the game has passed the 300k wishlist milestone. There is going to be a demo released in time for the June Steam Next Fest, so we could see wishlist growth accelerate.
• On 15th March, Level Zero: Extraction held a closed beta to which 150k people signed up, with a peak concurrent player count of 2,628. This served to propel the game up the wishlist rankings to #114 with 16,430 followers. We have been told concretely that the game has passed 200k wishlists and there is going to be an open beta (no restrictions on the number of people admitted) in the summer. This too should help accelerate wishlist growth prior to launch later this year.
• On 1st April, a new game called Duckside was announced, with the date being purposefully chosen to give the impression that it could be an April fools joke. The game is being developed by tinyBuild Riga (the team behind Hello Engineer), and as the name suggests it's a comical Deadside spin-off where you play as a duck.
• What's quite interesting here is that the game is built using the existing Deadside tech stack, allowing the developers to get it to its current, highly playable state in a matter of months rather than years. Having a separate team work with the Deadside assets has also brought fresh eyes and experience to the table, with lessons learned being passed in both directions.
• On 18th April, just a few weeks after the game's announcement, a closed beta was held for Duckside to which 100k people signed up, with a peak concurrent player count of 1,618. The beta is still live as of the 28th April, with a 24-hour peak concurrent player count of 925.
• We were told during the investor call that out of the announced pipeline of 10 games, there were only a couple that weren't own-IP. I'm pretty confident the first of these is Train Valley World, since it belongs to an existing franchise, and a process of elimination brings the candidates for the second down to Ferocious, Kingmakers, Level Zero: Extraction, and VOIN.
• This means in any case that most of the publishing contracts they have been signing with external developers have involved the transfer of IP ownership to tinyBuild, not just those where the developers were brought in-house via an acquihire or whole-company acquisition.
• I could be wrong, but I have a growing suspicion that Kingmakers is a 2nd-party title. Let me explain my reasoning. First of all, during the call, management said they expected own-IP to make up a greater proportion of revenue in 2024 vs 2023. Given that Kingmakers is looking likely to dominate revenue this year, it therefore follows that it must be own-IP or else this revenue mix prediction would not be plausible. Secondly, there was mention of repurposing the game's innovative technology for other titles, which generally implies tinyBuild owns it. Am I wrong? Let me know what you think.
• Level Zero: Extraction is a little less certain, but the fact they were able to influence the developers to take a complete change of game direction suggests a certain level of control (above zero). Though maybe they just made a very convincing case?
• Nevertheless, this presents some very exciting prospects. If they own the intellectual property for these technologies, there's the potential to reuse them across multiple titles, enabling much more rapid and lower cost development of new games (much like we've seen with Duckside). Think Call of Duty with their re-skinned new releases every year, or the Total War real-time strategy games, or Paradox Interactive's grand strategy titles. The franchise possibilities are massive.
• We could be looking at a very different company in 5 years.

https://www.londonstockexchange.com/news-article/TBLD/preliminary-unaudited-results-to-ye-31-dec-2023/16435136