26 September 2022

Devolver Digital, Inc.

("Devolver Digital", "Devolver" or the "Company", and the Company together with all of its subsidiary undertakings "the Group")

Unaudited results for the six months ended 30 June 2022

Strong second half expected to underpin 2022 recovery

Devolver Digital, an award-winning digital publisher and developer of independent ("indie") video games, announces its unaudited results for the six months ended 30 June 2022. All figures relate to this period unless otherwise stated.

Financial highlights

o  1H revenues rose 14% year-on-year to US$53.0 million (1H 2021: US$46.4 million).

o  Normalised gross profit increased 22% to US$19.0 million (1H 2021: US$15.5 million).

o  Normalised Adjusted EBITDA fell 46% to US$6.8 million (1H 2021: US$12.6 million), reflecting underperformance of 1H releases, and increased administrative and headcount costs.

o  Statutory net loss for 1H 2022 was US$16.6 million (1H 2021: US$79.5 million profit), including non-cash impact of US$11.5 million of share-based payments.

o  Cash of US$74.2m supports investment in organic growth, and strategic acquisitions.

Strategic highlights

o  Engagement and quality of new titles benefitting from return to face-to-face interaction.

o  Post-Covid resumption of game-play testing, studio visits, game conference participation.

o  Strengthening the bench: targeted investment in talent to drive growth & raise game quality.

o  Back catalogue of 97 titles continues to perform strongly.

Title releases and industry recognition 

o  7 new titles released in the first half of 2022 (2021 1H: 3).

o  Back catalogue continues to perform, at 64% of total 1H revenue (2021 1H: 77%).

o  5 titles with 80+ Metacritic scores released year to date (2 in 2H, average score 79 to date).

o  2021 hit releases - continued strong momentum as back catalogue contributors in 1H 2022.

Current trading and outlook

o Guidance maintained for full year 2022: revenues are expected to range between US$130 million and US$140 million, implying year-on-year growth of over 30%, while adjusted EBITDA is expected to range between US$27 million and US$32 million, implying year-on-year growth of c.15%.

o On-track to release 12 new games in 2022 across the Devolver Group.

o 2H 2022 titles include Cult of The Lamb, Return to Monkey Island, McPixel 3, Reigns: Three Kingdoms, as well as subsidiary Good Shepherd's Hard West 2. 

o August 2022 release Cult of The Lamb has already exceeded full-year expectations.

o 2023 - 2025 titles:   There are currently over 30 titles in the pipeline for the next three years.

o Title success to date in 2H, particularly Cult of the Lamb, has been offset by weaker than expected subscription deal demand.

Harry Miller, Executive Chairman of Devolver, said:

"Devolver's revenues grew by 14% year-over-year, despite a challenging first half, underlining the resilience of our proven model.  We expect a strong second half based on highly anticipated new releases and the benefits of our diversified model with a back catalogue of 97 fun-filled titles.  Combined with the performance of new releases such as Cult of the Lamb and Return to Monkey Island, this supports our expectation of a strong recovery in the second half of 2022."

Douglas Morin, Chief Executive Officer of Devolver, said:

"The return of face-to-face interaction and gaming conferences has helped unleash the full potential of Devolver's unique culture and experienced team of talented people. We are seeing this with the success of Cult of The Lamb, which beat all Devolver records for first day and first week unit sales on all platforms, excepting 2020's Fall Guys. Return to Monkey Island, released one week ago, has also generated great excitement in its first week. We have a clear strategy and a strong pipeline for the next three years that will continue to diversify our revenues across titles, developers, platforms and geography." 

Enquiries:

Devolver Digital overview

Devolver Digital is an award-winning video games publisher in the indie games space with a balanced portfolio of third-party and own-IP. The Company has an emphasis on premium games and has a back catalogue of over 90 titles, with more than 30 titles in the pipeline. Through recent acquisitions, Devolver now has its own-IP franchises, in-house studios developing first-party IP and two publishing brands. The Company is registered in Wilmington, Delaware, USA.

OPERATING REVIEW

Momentum regained after a challenging first half

Devolver released 7 new titles in 1H 2022, including Shadow Warrior 3, Weird West, Tentacular and Trek to Yomi. Revenue growth was 14% in the first half with sales from new games slower than anticipated, reflecting a competitive release window and specific factors for certain titles which have been actively addressed for future releases. In the first half there was an expected step-up in amortisation costs expensed upon release, largely related to three of the more heavily-invested games, as well as increases in general operating expenses due to inflation, headcount increases and greater marketing expenditure.

The second quarter of 2022 saw the relaxation of Covid controls and a normalisation in travel, meaning we were able to meet again with our colleagues, partners and game-developers, gamers, influencers, and everyone involved in the complex game-production ecosystem. This has made an enormous difference in terms of ensuring the quality and positioning of our games.

This resumption of normal activities has released great pent-up enthusiasm for Devolver's games. At Pax East held in Boston in April there was a two-hour queue for gamers to try out the demo of Cult of the Lamb, our recent new game release. During the Steam Next Fest week in June, where 1,056 candidate games were whittled down to 65, Devolver registered 3 game demos in the Top 10 out of the candidate list. Cult of the Lamb was the Number 1 wish-listed game of all demos featured, while future releases Anger Foot and Terra Nil were also featured in the Top 10 most wish-listed games.

2021 hit releases support back catalogue strength

An encouraging trend through the first half was the strong performance of titles launched in 2021 that continue to perform like newly-released titles in 2022. BAFTA-winning Inscryption was only released in October 2021 yet reached a year-end 2021 total of 920,000 in unit sales. Since then, Inscryption has motored on and as of end June 2022 had registered sales of 1.46 million units since launch. Other 2021 hit releases Loop Hero and Death's Door also continue to show strong sales year to date in 2022.

Our back catalogue includes all titles released in or prior to the last financial year (2021 or earlier). As of 31 December 2021, the back catalogue consists of 97 titles, including numerous indie cult classics, supporting highly diversified revenues with minimal reliance on any one title release. Back catalogue revenue accounted for 64% in 1H 2022, due to more new releases in the period (7) compared to the 1H of 2021 (3 releases) when back catalogue accounted for 77% of our revenues.

Investing for long-term growth

We continue to add talent across the group in several essential areas, from production, quality assurance, marketing, finance and legal. New team members have also been brought in to focus specifically on gameplay, marketing and user engagement. New releases are increasingly complex, often involving same day-date releases across multiple platforms, allowing Devolver to capitalise on the synergies generated through a single launch campaign across these platforms.  Additional talent enables us to raise the level of 'polish' we provide to the new titles we release and drive unit sales across multiple platforms and geographies.

Strengthening our bench of talent has a knock-on positive effect on medium term cost control, as we are able to bring key expertise in-house, generating cost savings, delivering better products and reducing third-party payments such as professional fees. As part of this, we are building a management oversight team for Quality Assurance testing, and also strengthening our in-house finance and legal capabilities.

The Group currently has operating subsidiaries in the United Kingdom, the Netherlands, Croatia, Poland and the United States. Total headcount has increased from 185 one year ago to 225 at the end of 1H 2022.

FINANCIAL REVIEW

Unaudited first half 2022 results to June 30 2022

The unaudited financial results included in this announcement cover the Group's combined activities for the six months ended 30^th June 2022 (prepared in accordance with applicable International Financial Reporting Standards, "IFRS").

Normalised Adjusted results

The following refers to Normalised Adjusted results, as presented in the financial statements contained within this release. Normalised Adjusted results exclude any one-time exceptional items during the respective half-year periods.

Sustained revenue momentum

Devolver Digital's first half 2022 performance was in line with updated expectations set in the trading update dated June 13 2022. Revenues of US$53.0 million rose 14.1% year-over-year, representing approximately 40% of the mid-point of the full year guidance range of US$130 to US$140 million. Normalised gross profit was US$19.0 million, an increase of 22.1% year-over-year. Normalised Adjusted EBITDA fell 45.8% to US$6.8 million, representing 23% of the mid-point of the full year guidance range of US$27 million and US$32 million. 

Revenue growth was driven by seven new title releases in the first six months of 2022, including Shadow Warrior 3, Weird West, Tentacular and Trek to Yomi. Growth was also supported by steady back catalogue sales including those contained within bundled special deals, and a steady contribution from subsidiaries. 

Normalised gross profit margin increased to 35.8% in the first half of 2022, up from 33.5% in the year-earlier period. Gross margin expansion was limited due to the significant step-up of amortisation expense in 1H 2022 and increased marketing costs following the release of three more heavily-invested titles.

Normalised EBITDA and Normalised Adjusted EBITDA

Normalised EBITDA and normalised adjusted EBITDA results are not intended to replace statutory results and are prepared to provide a more comparable indication of the Group's core business performance by removing the impact of certain items including exceptional items (material and non-recurring), and other, non-trading, items that are reported separately. These results have been presented to provide users with additional information and analysis of the Group's performance, consistent with how the Board monitors results.

The statutory results for 1H 2021 include the gain of the sale of publishing rights to the Fall Guys game, which is excluded from normalised comparative numbers. Further details of adjustments are given in Notes 3 and 4 to the condensed financial statements contained within this semi-annual results release.

EBITDA margins

Normalised Adjusted EBITDA margins were depressed at 12.9% in the first half of 2022, compared to 27.1% the previous year. Lower than expected revenues were insufficient to offset the significant step-up in amortisation expense recorded in cost of sales, and in addition operating expenses increased due to: 1) higher payroll costs (excluding 1H 2021 Fall Guys-related bonus), reflecting the 22% increase in headcount versus 1H 2021; 2) Increases in professional fees for various work streams including audit, accounting, tax and legal fees, and; 3) listed PLC-related costs (Director's fees, NOMAD fees and D&O insurance). 

Impairments/Writedowns

In the first half Devolver wrote-down the entire investment into a discontinued game at a cost of US$721,000, reflected in additional amortisation expense in cost of sales. This expense is adjusted out to derive normalized adjusted gross profit.

Employee Benefit Trust (EBT)

Devolver established an Employee Benefit Trust (EBT) in May 2022 to facilitate stock option exercise by employees and contractors who were awarded 2017 Stock Option plan stock options. The EBT is a Jersey-incorporated Trust enabling option exercise and share settlement off-market without impacting market liquidity. Share purchases by the EBT are funded by way of a loan from Devolver which can request settlement of the loan at any time in future. The shares held by the EBT are consolidated within Devolver's share capital balance. During 1H 2022 there were 1.1 million options exercised for a net paid consideration by Devolver of US$1.5 million. At end 1H 2022 there were 38.9 million options still outstanding with a weighted average exercise price of US$0.37 per option.

Cash Balances

Cash holdings at end June 2022 were US$74.2 million, a reduction of US$12.0 million compared to end 2021's level of US$86.2 million. The reduction in cash balances during the period was primarily due to: 1) lower EBITDA generation in the first half being insufficient to cover US$15.6 million ongoing investment in game development during the period; 2) approximately US$1.5 million spent on settlement of exercised options utilising the Employee Benefit Trust (EBT), and; 3) a US$2 million foreign exchange translation loss on non-US Dollar foreign currency holdings.

Russia/Ukraine conflict

Revenue contributions from the Russia/Ukraine/CIS region remain low in the wake of Russia's invasion of Ukraine, estimated at under 3% of total Group revenues in the first half of 2022, while less than 2.5% of 1H royalty and other expenses were payable into the affected countries in the conflict region. The Company has no full-time employees in the affected geographies and currently believes that the impact from the conflict will not materially affect its operations, revenue or expenses.

CURRENT TRADING OUTLOOK

Titles released so far in 2H include Cult of the Lamb and Return to Monkey Island, as well as Hard West 2 published by our Good Shepherd subsidiary. Cult of the Lamb reached the milestone of selling one million units in just nine days following its release in August, confirming its status as a hit title. It currently enjoys an 82 Metacritic score and an 85 Open Critic rating. We expect Cult of The Lamb to feature strongly in the Autumn and year-end sales seasons. Monkey Island was only released one week ago, currently registering an 88 Metacritic Score with a highly positive critical response so far.

The Board maintains full year 2022 guidance unchanged from the trading update in June 2022, with revenues expected to range between US$130 million and US$140 million, implying year-on-year growth of over 30%, while adjusted EBITDA is expected to range between US$27 million and US$32 million, implying year-on-year growth of c.15%.

The Board expects revenues and gross profit contribution to be weighted towards the second half of FY22 due to new title releases and continued evergreen back catalogue sales, particularly in the 4Q sales season from Halloween through to the New Year which has historically been the strongest quarter of the year. However, gross margin expansion is expected to be limited due to the outperformance of Cult of The Lamb and the associated royalty payment to the third-party game developer. Adjusted EBITDA is expected to be higher in the second half of the year due to higher gross profit generation and operational leverage.  

The success of Cult of the Lamb, which has exceeded expectations for the year, provides a cushion against prevailing industry headwinds. These include weakness in subscription deal demand in 2H 2022, a trend being seen across the sector, as well as the uncertain impact of the global slowdown and cost of living crisis on new releases and back catalogue sales.

Devolver Digital has a healthy and diverse pipeline in terms of titles, developers, platforms and geography. Our total pipeline for 2023 and beyond comprises an exciting line-up of over 30 titles, with a balanced mix of third-party IP and own-IP over a range of investment per title. 

Devolver Digital has a strong balance sheet with cash holdings of US$74.2 million. Our momentum, deep pipeline and strong contribution from extensive back catalogue all support our confidence of further progress in 2022 and in the future. We have a proven strategy that has delivered success for the last 13 years. The Board believes that we are well positioned for future success, and we look forward to reporting on our progress in the year ahead.

Harry Miller

Chairman

26 September 2022

 Consolidated Statement of Profit or Loss

* Adjusted EBITDA is a non-IFRS measure and is defined as earnings before interest, tax, depreciation, amortisation (but not taking out amortisation of capitalised software development costs) and share-based payment expenses.

Consolidated Statement of Comprehensive Income

Consolidated Statement of Financial Position

Consolidated Statement of Changes in Equity

Statement of Cash Flows

Note 1: Basis of preparation and consolidation

These condensed financial statements have been prepared in accordance with the recognition and measurement requirements of International Accounting Standard 34 Interim Financial Reporting. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. The condensed consolidated financial statements as at and for the six months ended June 30, 2022 have been prepared on the same basis as the audited annual financial statements.

In May 2022 Devolver established an Employee Benefit Trust (EBT) to facilitate settlement of employee stock options granted under the 2017 Stock Option Plan. The EBT is a Jersey-based Trust and the Trustees act to the benefit of the employees. The accounting treatment determined that Devolver controls the EBT and must consolidate the EBT in its consolidated financial statements. Most transactions eliminate upon consolidation, with the exception of the purchase by the EBT of Devolver shares from employees. These are recognised at cost as "Issued shares held within the Group". These shares are a separate reserve within equity but may be presented in aggregation with other reserves. The Devolver shares held by the EBT are not revalued. When the EBT sells the shares to a third party, any gains or losses are recognised directly in equity.

Operating results for the six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. For further information, refer to the consolidated financial statements and footnotes thereto included in the Group's annual report for the year ended December 31, 2021.

The Directors are confident that the Group will remain cash positive and will have sufficient funds to continue to meet its liabilities as they fall due for a period of at least 12 months from the date of this first half 2022 announcement and have therefore prepared this unaudited semi-annual announcement on a going concern basis.

Tax charged within 6 months ended 30 June 2022 has been calculated by applying the effective rate of tax which is expected to apply to the Group for the year ending 31 December 2022 as required by IAS 34 'Interim Financial Reporting'. The effective rate of (44.57)% varies from the statutory rate of 21% due to permanent book to tax differences related to stock compensation deductions for foreign entities, which is not deductible for US income taxes.

The financial presentation in this release should be read in conjunction with the notes to the consolidated financial statements as at and for the first half ended 30 June 2022, as contained within this release.

These preliminary unaudited financial statements were approved by the Board of Directors on September 24 2022.

Note 2: Earnings Per Share

Note 3: Normalised Adjusted Results*

* Normalised Adjusted EBITDA makes the following adjustments: it excludes 1) a net gain from the sale of Fall Guys publishing rights; 2) stock compensation (share-based payment) expenses and revaluation of contingent consideration; 3) one-time expenses related to the IPO and other non-recurring items; and 4) amortisation of IP (but does not exclude amortisation of capitalised software development costs), and 5) impairment.

Note 4: Reconciliations to Adjusted EBITDA

Note 5: Intangible Assets