Starbreeze Q1 on Tuesday: Yet no clear evidence of a turnaround in the short-term

Starbreeze's Q1 results are set to be released on Tuesday May 14, 2024. Despite efforts like Operation Medic Bag (OMB) for PAYDAY 3 (“PD3”), player numbers continue to decline, raising concerns about the revenue outlook for 2024. Our Q1 revenue estimates stand at 40.9 MSEK (Q4’23: 69.2 MSEK), underscoring the persistent challenges posed by declining player activity since PD3 launch. Insights from interim CEO Juergen Goeldner shared in the report will be particularly enlightening for grasping the management's strategy amidst these challenges and gauging their expectations regarding the timing and visibility of PD3's turnaround.

Declining net sales QoQ but improved EBIT due to lower amortization are expected

With yet no clear evidence of a turnaround in PD3 player activity on Steam (the only publicly available source), continuously lower peaks, and the lion's share of the reviews regarding PD3 are still within negative territory, we expect a QoQ decline in revenue for Starbreeze in Q1. Our net sales estimate of 40.9 MSEK marks a 41% decline compared to Q4’23 (69.2 MSEK) but at the same time represents a 53% increase on a year-over-year basis (Q1’23: 26.7 MSEK). The player activity on PD2 has remained somewhat stable to slightly declining during the quarter, hence, the projected drop in revenues QoQ is largely attributable to PD3. Furthermore, given the successful launch of Roboquest during Q4’23, we anticipate some further tailwinds concerning third-party publishing sales in Q1. The Early Access launch of The Tribe Must Survive in February 2024, has not made a significant impact thus far, consequently, we anticipate its contribution to net sales to be minimal.

With lower expected amortization and game development costs, along with other OPEX-related items, EBIT is estimated to be -19.6 MSEK (Q1’23: -11.6 MSEK), representing a notable improvement on a QoQ basis (Q4’23: -95 MSEK).

The Operation Medic Bag has not yet been able to cure the declining player activity

On February 15, 2024, Starbreeze launched the so-called Operation Medic Bag (“OMB”), a project aimed at addressing feedback from the PAYDAY 3 community. Following this, Starbreeze released the 1^st and 2^nd patches of OMB, introducing new features and general improvements to the game during the first quarter. After the quarter, Starbreeze released some sought-after features such as Quickplay and Player Merging in a late April update. Other features such as offline mode are yet to come.

Looking at player activity, it is evident that Starbreeze is still struggling to lure back the players into PD3, with the number of concurrent users (CCU) hovering around very low levels of 200-900 players on Steam in recent months.

Upcoming updates and DLC expansions will be crucial to gaining back players’ trust and engagement in PAYDAY 3

2024 will be all about Starbreeze’s ability to lure back the player base from PD2 to PD3 as well as attract new players through initiatives like OMB and upcoming DLC’s. However, there's scant evidence that current efforts and investments have been sufficient to address the current challenges. Our FY2024 revenue estimates currently stand at 160 MSEK (FY’23: 634 MSEK), with an EBIT estimate of -89 MSEK (FY’23: 190 MSEK), reflecting these challenges. Regarding PD3, we anticipate a modest, albeit gradual, improvement from Q1 and onwards as a result of the ongoing efforts (e.g. OMB and upcoming DLC’s) to increase player engagement. Revenues related to PD2 are expected to modestly decline throughout the year, given the operational focus on PD3 and project Baxter, along with the absence of new additional content for PD2.

While Starbreeze's strong balance sheet, with approximately 348 MSEK in cash and cash equivalents as of Q4’23, provides short-term stability amidst weak player activity, prolonged challenges may strain future financial performance. However, the longer it takes for Starbreeze to turnaround PD3, and the more capital Starbreeze invests in PD3 with a low ROI, the harder it gets to justify the costs of updates in our view, given the large investments that are associated with the project Baxter. On the other side, the commitment to the owners of the gold and silver editions, along with other external factors, complicates this decision.  Insights from Starbreeze’s interim CEO Juergen Goeldner in the Q1 report, especially concerning this dynamic, alongside the management's perspective on the progression of the PD3 turnaround and the anticipated timeline for tangible results from their efforts and investments, will be of significant interest.