25 September 2023

The information contained within this announcement is deemed by the company to constitute inside information stipulated under the Market Abuse Regulation (EU) No. 596/2014 as it forms part of the domestic law of the United Kingdom by virtue of the European Union (Withdrawal) Act 2018 (as amended) ("UK MAR").  Upon the publication of this announcement via the Regulatory Information Service, this inside information is now considered to be in the public domain.

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 2023

Healthy pipeline for new releases in Q4 2023 and 2024

On track for EBITDA break-even in 2023 and return to growth in 2024

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 2023. All figures relate to this period unless otherwise stated.

Prioritising quality to unlock long-term value

o  As announced in the trading update on 3^rd August 2023, high potential titles have been delayed to 2024 to ensure that they have the time, effort and support to succeed. 

o  As a result, 1H 2023 was an unusually quiet release period with only 4 new titles, of which only one was a major title, Terra Nil (1H 2022: 7 title releases).

o  As also previously announced, Devolver declined subscription deal proposals that undervalued the titles' value and revenue opportunities in 2023 and 2024, resulting in lower subscription revenues.

o  Back catalogue revenues were up 10%, accounting for 87% of total revenues (1H 2022: 64%), reflecting the lower new title contribution and the continued strong performance of Cult of the Lamb.

o  Average 79 Metacritic score for released titles year to date (76 average score for 1H 2023).

o  Steady recovery at Good Shepherd; announced tie-up with Rebellion for 2000 AD IP.

Financial performance reflects unusually quiet 1H release schedule, as expected

o  As flagged, 1H 2023 financial performance has been impacted by a quiet release schedule: revenues down 17%; Normalised Gross Profit down 51%.

o  As expected, Normalised Adjusted EBITDA loss of US$3.5m (1H 2022: US$6.8m profit).

o  Statutory net loss of US$10.1m¹ (1H 2022: US$16.6m loss).

o  Cash of US$64.8m at 30 June 2023 (1H 2022: US$74.2m), following c.US$7.2m purchase of shares in the market for the Employee Benefit Trust.

o  Cost-saving initiatives underway to protect margin and strong net cash position.

Current trading and outlook

o Back catalogue continues to be driven by Cult of the Lamb post 1H 2023 period-end.

o Targeted marketing and the full return of physical gaming events are expected to help drive engagement and maintain quality for upcoming titles.

o 11 new titles expected in 2023, including nine titles published directly by Devolver.

o Seven releases scheduled for 2H 2023 including major titles Wizard With A Gun and The Talos Principle 2, as well as Gunbrella, KarmaZoo and Hellboy: Web of Wyrd. 

o On track to meet previous guidance of break-even profitability in 2023, return to profitable growth in 2024 and acceleration in 2025.

o Healthy pipeline of more than 30 new titles due for release in the next three years.

Harry Miller, Executive Chairman of Devolver, said:

"The first half of 2023 was a reset for Devolver, with delays to new releases as we prioritise the quality and long-term potential of major titles scheduled for the second half of 2023 and 2024.  Devolver's DNA is to commit relatively low spend on high quality titles that stand the test of time.  We look forward to returning to our normal cadence of releases in the rest of 2023 and 2024 with big titles to come such as Wizard With A Gun and The Talos Principle 2, as well as The Plucky Squire and Baby Steps.

As a result of our busy upcoming release schedule, steps to improve our return from our back catalogue and active management of our cost base, Devolver is on track to meet its previous guidance of break-even EBITDA profitability in 2023, a return to profitable growth in 2024 and then an acceleration in 2025."

About Devolver Digital

Devolver is an award-winning video games publisher in the indie games space with a balanced portfolio of third-party and own-IP. Devolver has an emphasis on premium games and has published more than 100 titles, with more than 30 titles in the pipeline scheduled for release over the next three years. Devolver has in-house studios developing first-party IP titles and a complementary publishing brand. Devolver is registered in Wilmington, Delaware, USA. 

Notes:

¹ Including non-cash impact of US$3.9m of share-based payments.

Enquiries

OPERATING REVIEW

1H 2023 - fewer title releases than previous period

Devolver released 4 new titles in 1H 2023, including Devolver Tumble Time, Sludge Life 2 and Terra Nil. Terra Nil was the only major release in 1H 2023, and consequently revenue fell 17% in the first half compared to 1H 2022 which had 7 title releases. As a result, back catalogue accounted for an unusually high 87% of total 1H revenues in the period.

Despite the revenue decline there have been several positive developments in 1H 2023, including our publishing subsidiary Good Shepherd (GSE) posting a steady recovery following the restructuring it underwent early in the year, on track to reach EBITDA break-even by 4Q. GSE recently announced a ground-breaking partnership with Rebellion (Sniper Elite) to develop and publish video game adaptations based on stories from the beloved 2000 AD universe, the home of Judge Dredd, Rogue Trooper, ABC Warrior and more, as well as Rebellion's other comic IP, including Roy of the Rovers and Battle Action. Separately, Cult of the Lamb back catalogue sales have continued to out-perform expectations from the start of 2023. 

Several market events held in 1H 2023 have also added to the excitement about our future releases for 2024 and 2025. Sony held its PlayStation Showcase 2023 in May, featuring 36 games in total including Devolver titles The Talos Principle 2, The Plucky Squire and Neva. The Summer Games Fest 2023 included Devolver Direct, in which several new titles were introduced or updated including Baby Steps, Wizard with a Gun, The Talos Principle 2, and Human Fall Flat 2, the highly anticipated sequel to Human Fall Flat which sold over 40 million copies worldwide since release in July 2016. Devolver Direct enjoyed record viewership numbers and was included in numerous broadcasts archived on YouTube with a combined 4.68 million views just one week post broadcast. Finally, Steam's Next Fest saw the Wizard with a Gun demo post the 5^th highest number of downloads by players out of over 1,000 demos featured in the event. All these developments bode well for the outlook in 2024 and beyond.

2022 hit release supports back catalogue

The August 2022 hit release Cult of The Lamb has provided strong revenue momentum continuing into 1H 2023, the only 2022 release to do so given that 1H 2022 releases did not perform as expected. The contribution from Cult of The Lamb was the principal driver for a 10% increase in back catalogue revenues in 1H 2023 compared to the previous year period. BAFTA-winning Inscryption, an October 2021 release, also continued to perform well in the first six months of 2023. Other back catalogue titles have seen weaker performance in 1H 2023 compared to 1H 2022. Devolver is working hard to stimulate back catalogue sales through a combination of new ports, additional DLC, strategic marketing and strategic pricing mechanisms.

Our back catalogue includes all titles released in or prior to the last financial year (2022 or earlier). As of 31 December 2022, the back catalogue consists of 109 titles, including numerous indie cult classics, supporting highly diversified revenues.

Operating expense containment, selective co-funding on game development

A group-wide exercise to reduce overall expenses is under way. Rental expenses, out-sourced professional fees and other operating and administration fees are all being optimised for efficiency with continual assessment for cost savings. Separately, as part of the directional move towards more participation in the live services area, we will seek co-funding for larger titles where partners can bring strategic value.

FINANCIAL REVIEW

Unaudited first half 2023 results to June 30 2023

The unaudited financial results included in this announcement cover the Group's combined activities for the six months ended 30^th June 2023 (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.

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. Further details of adjustments are given in Notes 3 and 4 to the condensed financial statements contained within this semi-annual results release.

P&L results and margins

Devolver Digital's first half 2023 performance was muted due to a lower number of title releases (4) compared to the previous period (7). Revenues of US$43.9 million fell 17% year-over-year. Normalised gross profit was US$9.4 million, a decline of 51% year-over-year. Normalised Adjusted EBITDA turned to a loss of US$3.5 million from US$6.8 million profit in 1H 2022. 

Normalised gross profit margin decreased to 21.4% in the first half of 2023, down from 35.8% in the year-earlier period. Gross margin was compressed due to the absence of first-party IP and other new releases in recoup during the period, resulting in the royalty pay-out mix being heavily weighted towards third party titles in 1H 2023. This compares to 1H 2022 when new first-party IP and other releases were cushioned while the titles were still in recoup (before royalties are usually paid out).

Normalised Adjusted EBITDA margins were depressed at negative 7.9% in the first half of 2023, compared to positive margin of 12.9% the previous year. The compression in 1H 2023 gross profit had a direct flow through effect to impact Normalised Adjusted EBITDA, despite successfully containing cash operating expenses at similar levels as the 1H of 2022.

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 and stock units vesting under the 2022 Long Term Incentive Plan (LTIP). 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.

Cash Balances

Cash holdings at end of June 2023 were US$64.8 million, a reduction of US$14.7 million compared to end of 2022's level of US$79.5 million. The reduction in cash balances during the period was primarily due to: 1) lower operating cash generation in the first half combined with the US$13.6 million ongoing investment in game development during the period; 2) approximately US$7 million provided to the EBT for the market purchase of c. 19m shares.

CURRENT TRADING OUTLOOK

As noted in our August 2023 update, expected performance for 2023 will be impacted by three key factors: delays to new title releases, a reduction in revenue from subscription deals and relative weakness from our back catalogue with the exception of a few outperforming titles.

Our busy release schedule for Q4 2023 features major titles Wizard with a Gun and The Talos Principle 2, among others.  Waiting until titles are ready has led to delays as we prioritise our strategy to maximise the appeal and success of new titles by increasing investment on development, quality control and marketing.  Giving our titles every chance to succeed is critical to our long-term growth.  As previously indicated, titles such as The Plucky Squire, which has been tracking well with audiences, will now be released in 2024 alongside other titles previously earmarked for release in 2023 such as Anger Foot, Pepper Grinder and Stick It to the Stickman.

After a period of strong growth in subscription deals in 2021 and 2022, we expect the trend of reduced revenues from subscription deals to continue into 2024.  We expect to continue to turn down subscription deal proposals that undervalue the titles' value and revenue opportunity in 2023 and 2024. 

Back catalogue sales have been softer following the weaker performance of three key title releases in 2022, except for Cult of the Lamb and Inscryption which have continued to perform strongly, and a weaker overall economic environment.

As previously indicated in August 2023, we expect Group Normalised Adjusted EBITDA to be at least break-even in 2023, before a return to growth in 2024 and an acceleration in 2025.

Our momentum, robust balance sheet with US$65m in cash at June 2023, deep pipeline and strong contribution from extensive back catalogue all support our confidence of further progress in 2023 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

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, 2023 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 and stock awards granted under the 2022 Long Term Incentive 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 within its consolidated financial statements.

Most transactions eliminate upon consolidation, with the exception of the purchase by the EBT of Devolver shares from employees and shares issued to employees who are exercising options out of the Capital Redemption Reserve. These are recognised at cost as "Issued shares held within the Group". These shares are included within the Capital Redemption Reserve, a separate reserve within equity. 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 30 June 2023 are not necessarily indicative of the results that may be expected for the year ending 31 December 2023. For further information, refer to the consolidated financial statements and footnotes thereto included in the Group's annual report for the year ended 31 December 2022.

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 2023 announcement and have therefore prepared this unaudited semi-annual announcement on a going concern basis.

Tax charged within 6 months ended 30 June 2023 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 (16.2)% varies from the statutory rate of 21% due to: a) permanent book to tax differences related to stock compensation deductions for foreign entities, which is not deductible for US income taxes, and; b) US State tax liabilities.

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 2023, as contained within this release.

These preliminary unaudited financial statements were approved by the Board of Directors on 24 September 2023.

Note 2: Earnings Per Share

Note 3: Normalised Adjusted Results*

* Normalised Adjusted EBITDA makes the following adjustments: it excludes 1) stock compensation (share-based payment) expenses and revaluation of contingent consideration; 2) one-time expenses and other non-recurring items; 3) amortisation of IP (but does not exclude amortisation of capitalised software development costs), and 4) impairment.

Note 4: Reconciliations to Adjusted EBITDA