Embracer Group AB (publ)

Hello and a very warm welcome to Embracer's fiscal Q4 report. Today we have, as always, a lot to talk about. We have very strong sales for Valheim, 6.8 million units sold. We have five days until the release of Biomutant and we also have a pipeline to look forward to. We are going to start today's presentation with a presentation by CEO and founder Lars Vingerfors and CFO Johan Ekström. And then I will come back with a Q&A after that. So without further ado, I'll leave it over to you, Lars and Johan. Please go ahead.

Thank you, Oscar. Hello and good morning, everyone, and very welcome to Karlstad Värmland. I'm really pleased to announce another stable quarter. I'm humbled to report this morning record performance of the group with the net sales growing 80% year-over-year to 2.4 billion Swedish and excellence in the games business area reaching close to 2 billion in sales driven by 85% organic growth. The partner publishing business was stable at a bit over 400 million. Really pleased to see that the profitability came in strong. We have a 216% increase in the operation EBIT that now are about 900 million in the quarter. free cash flow came in at more than 860 million krona in the quarter and that is more than 585 million more than the same period last year the record performance was driven mainly by a fantastic sales of Valheim the game sold 6.8 million copies in the quarter. And this morning our reporting, we are expecting the game to sell another 1 to 1.2 million copies in the quarter ending June. But a lot of great titles performed during the quarter, a great continued performance of SnowRunner, Metro, and many, many other titles. that also delivered a strong back catalog sales. All in all, we have more than 160 game development projects under development at the end of the quarter. That is not including the pipeline from Gearbox and Aspire that came in April 1st. All in all, we are engaging 126 game studios across the world, whereof about half are internal and half are external, engaging more than 5,000 game developers. We had a record investment into our pipeline. We invested 563 million in the quarter. And that is close to five times the value of the game released during the fourth quarter. Looking ahead, we are looking in the current year to have the strongest year ever. We are expecting to complete more than 90 game development projects during the year. for a value, an investment value of between 2.8 to 3.3 billion krona. The first quarter we're expecting 300 to 350 million. As of today, we have more than 17 billion krona in cash or available credit lines. And that was during the quarter increased by the large ABB we made in March, raising more than 7.5 billion kronor. We have, during the past quarter and up until today, been engaging with a lot of fantastic entrepreneurs and creators and companies across the world. This is the ongoing work we are doing. And we are reporting this morning, to give you a bit of color, that we are currently in about 20 late stage talks with those entrepreneurs and creators. We integrated Gearbox EasyBrain Aspire during April and May. And I'm happy to report that the EasyBrain performance are exceeding our expectation at the time of the merger. Also announcing this morning the reformation of a new studio, a game development studio in the UK, Free Radical Design, that is headed up by the original founders of the studio, Free Radical Design, the makers behind TimeSplitters. So with that said, I would like to leave over to Johan to take you through the financial numbers.

thank Norse a yes so let's start by looking at our P&L I'm for the quarter and and the full year and that we can them I conclude that during the quarter had a year solid sales performance where we are growing our top line with eighty percent over last year reaching 2.4 billion second in that sales sales is driven by mainly business area games where we had a strong growth of 119% over last year and a relatively flat performance in the partner publishing film business area. The top line growth fell through to EBITDA, increasing EBITDA over last year with 137% reaching 1,172 million. in the quarter. Operational EBIT in the period 903 million, which is 216% better than last year, yielding a operational EBIT margin of 38% for the quarter. Profitability was increased by the strong growth in the top line, but also a gross margin expansion through the positive product mix shift from partner publishing film to business area games and then also within partner publishing film we had a stable performance of the film segment in the quarter looking at our adjusted EPS for the quarter it amounts to 2.07 SEC per share, which is more than double what we had during the same time last year. Our full year performance is on the top line. We are generating 9 billion in net sales, which is 72% above in the same period last year. And our operational EBIT reached close to 2.9 billion for the full financial year, up 178% compared to the year before that, yielding an operational EBIT volume of 32%. Looking at the full year adjusted EPS, it reached 6.44 per share. which is 129% over last year. And also interesting to note is that if you compare this with the EPS at the time of the IPO, it's actually 14 times higher than it was at the time of the IPO. Turning to the amortizations, as you or no we distinguish between operational amortizations and acquisition related amortizations the operational amortization reached 270 million in the quarter and acquisition related amortizations 758 million in the quarter the operational amortizations is driven mainly by the amortizations on completed game development projects which was 202 in the quarter also other intangible assets mainly related to the film segment added to the operation and amortizations if you look to the acquisition related amortizations the majority is related to goodwill 612 out of the 758 but also acquisition of IP rights We had a solid cash flow generation in the quarter. The cash flow from operating activities increased 211% versus the same period last year, mainly driven by the increased EBITDA and the profitability. We also continue to invest into our business. The total investment in Intangible assets was 599 million in the quarter where 563 is related to game development we also had a cash flow related to acquisitions closed during the period of 405 million cash flow from financing activities is positive close to 6.9 billion net in the quarter it's mainly driven by the share issue that we made in March but it's also reduced by the reduced utilization of credit facilities in course media free cash flow 861 in the quarter trailing 12 months 1685 million in free cash flow and if you look at the quarter you should also bear in mind that you're investing more than ever into our games portfolio and still generating the 861 million taking a closer look at investments made during the quarter the amount of 599 million As said, the majority is related to investment into our games portfolio, 563. Out of the 563 million, 398, or close to 400 million, is investments made through internal studios, and 166 million is investments made with external studios. We also have a 36 million investment in other Insanibels, uh... which is mainly related to our uh... in segment uh... during the quarter we find the lights games over one hundred seventeen million uh... and uh... uh... this can be compared with uh... the investments made into games during the quarter uh... if we look at uh... the increase over last year's uh... we increase with 35 percent over last year. We had 417 a year ago in the quarter and now it's 563. And you can see that we continue to have a higher degree of investments being made with our internal studios. The investments into the games development portfolio also shows in the business related KPIs where we have increased the amount of studios compared to last year. We have 126 studios by the end of March, not including M&A transactions that were closed in the beginning of April. The amount of developers that are engaged in our development projects is five thousand 100 and more than twice as much as we had the same period last year projects in pipelines 160 up sixty percent approximately versus same period last year if we look at the value of finalized game development we expect for the first quarter of this 21-22 fiscal year to complete and release games to a value of between 300 and 350 million. For the full year, we expect the amount to be between 2.8 billion and 3.3 billion. The completion will be back unloaded over the year where you can see that there's a significant expected release value in Q4 and during the year ending March 22 the ambition is to complete more than 90 game development projects summing up to this between 2.8 and 3.3 in completed games value Turning to our balance sheet, total assets at the end of March was close to $34 billion. Looking at assets, there are significant amounts in intangible assets at $16.4 billion in total. These can be divided into operational intangible assets, which is $3.9 billion. and acquisition-related intangible assets, which amounts to 12.5 billion. Out of the operational intangible assets, the vast majority is related to our ongoing game development portfolio, which is 3.2 billion, or 82% of the 3.9% operational intangible assets. Completed games is 513 million, at the end of March. And acquisition-related intangible assets, the majority, 10.8 billion, is related to Goodwill. And we have a strong liquidity. And at the end of the quarter, the available funds amounted to 20.5 billion. And as per now, it's 17.2 billion. Looking at the non-operational amortizations ahead of us, the forecast for this fiscal year is close to 6.7 billion SEK. And for this quarter, April to June, we expect the amortizations on acquisition-related intangibles to amount to 1,670 million SEK. Worth noting here is that the forecast includes all transactions closed as per 31st of March, but also Gearbox, EasyBrain and Aspire, who were closed in the beginning of April.

So, to summarize, Johan, we will have 30 billion SEC in amortizations over the coming five years. Yep. hitting the profitability, the net profitability EBIT before the reported EBIT.

And as we have a straight line amortization schedule for acquisition-rated amortizations, it's for the coming five years, and then, of course, at year six, it will be zero. This is serious.

Thank you so much, Johan.

You're welcome.

So looking at the games business area and the financial performance, we are at the trailing 12 months basis, close to $6.5 billion in sales. And the quarter, again, is close to $2 billion. Looking at the balance, new releases, and back catalog, New releases only were 42%, even though we had Valheim in the quarter. So we really had a strong back catalog sales, way above a billion. The share of digital sales are increasing, driven this quarter partly by Valheim. So 89% of the sales were digital in the quarter for the games business area. And on a trailing 12-month basis, we are up to 80%. Owned share titles are now at 62%. And the rest is then publishing titles, also defining Valheim as a publishing title. So organic growth. Obviously, I'm very pleased this morning to report the full year organic growth of 70%. And we have been having a good organic growth the past years. And I would like to highlight this morning that of the 160 ongoing game development projects, two-thirds of them are based on either new IPs, entirely new IPs, or IPs that we revitalize that has not been with any new content or games the past five years and we have more than 240 IPs in our within our group to work on but still the bottleneck for us and the rest of the industry is talents and games developers so we still have more of dormant IPs licenses and IDs across the group then we have talents to develop this for. So, meaning one third of the portfolio of games development are more on recent established or released IPs. Now, looking at each operational group, we have THQ Nordic that had a stable performance, about 350 million in the quarter. They are at the all-time high on the trailing 12-month basis, as close to 1.8 billion in sales. They had a few titles releasing in the quarter, Monster Jam, Steel Titans 2, and Kingdoms of Amalu re-reckoning on Nintendo Switch. But the business mainly was driven by a continued strong performance of Breakfast, SpongeBob, and Destroy All Humans, and many, many others. Glad to report this morning that Destroy All Humans, the remake released last July, has sold now more than one million copies. And the remake of SpongeBob Battle for Bikini Bottom Rehydrated releasing in June last year has sold way more than two million copies looking ahead finally we are just five days to release by a mutant by mutant has been something that we've been talking every quarterly since the IPO more or less and I'm excited about that release and also happy to to get the reports that are above our expectations in terms of pre-orders. The title will be released globally on the PlayStation 4, Xbox One, and PC on May 25th. Also in the quarter, we are releasing an upgraded version of Request on PlayStation 5, and as well as Destroy All Humans on Nintendo Switch. in the end of the quarter so with that said about the operation performance I think we have Clemens from Vienna with us on on a stream here because Clemens you you made some acquisitions a few days ago and rather than I'm talking about them I would like you to tell us a bit more so how are you doing in Vienna are you playing a bit of by mutant this morning or

We are playing Biomutant since years. Yeah, we are thrilled that the release is next week and we are looking forward to how it will be received by the audience finally. But today I think I should talk a little bit about the three acquisitions we made the last weeks.

We have three slides here. Here we can see the side of appeal, so please go ahead.

Okay, I promised you that I will not spend more than five minutes, although I could talk hours about those amazing studios. First of all, Appeal Studios. The main reason why we acquired Appeal Studios is definitely Yves Collet, his team of leads as the entire development team in the studio, because those guys go always for the maximum possible. Worth mentioning is also that Yves has worked on five generation of consoles so far. So if you remember the early days of console development, you know, those guys were handpicked by the platform holders because not everybody was allowed to develop a PlayStation 1 or PlayStation 2 game back in the 90s. But EVE was constantly among those group of developers. And this says something, at least. They will work in the future on memorable open world games. They started already. So they have two games in development. One is an internal project based on a THG Nordic IP, where luckily Appeal Studios is extremely familiar with this IP. And the other project is for another publisher. So it's a third-party project. So, yeah. Can't wait to reveal the news about this game in development. Kaiko. Kaiko, we know Peter and the gang of Peter since 2014. They helped us a lot with remasters, remakes, and porting projects. An amazing story maybe to tell about the porting project was definitely Darksiders Definitive Edition for the Xbox One. It shows also the technical skills of the studio because it took Peter and his team six weeks to port Darksiders Definitive Edition. from PlayStation 4 to Xbox One, including submission. This is still a benchmark at the record of our porting history within the group. Currently, they work on Fates 1, which is an add-on to Kingdoms of Amalur re-reckoning. After they have finalized this one, which is up for release this summer, they work on a sequel, of one of our most valuable IPs we have in our portfolio, and it's based on an original THQ IP. I hope I can share some assets in 2022 about this project, but watch out. Last but not least, if you could make a slight turn, thank you, Massive Mini Team. This studio was founded by Tim, Michael, and Robert, and they work together with Handy Games since a couple of years now. They helped also with sporting projects, but also with a nice game called Speedlinks. It's the first acquisition of HandyGames, which is making Therianotic GmbH a grandmother company. And I guess the right term for Embracer Group would be a great grandmother company. So I'm really thrilled that HandyGames made this move and set the the ratios to growth going forward. They work on internal and external projects at the moment. And the internal project, which I'm really thrilled to tell you, is based on a US license from a major movie TV studio. This project is up for release in 2022. And this will lift Handy Games as well as Massive Mini Team into new spheres. So watch out. This will be an amazing game for the summer season in 2022. That's it. I can talk for hours, but I will save you from too much.

Well done. Thank you so much and really pleased to welcome all the new team members at TSQ Nordic and Handy Games. Thank you so much and good luck for the remaining five days. bye-bye okay so we that said from THQ Nordic I'm moving over to our friends at Deep Silver that had a stable performance reaching 465 million sales in the quarter on the trailing 12 months basis they are quite stable at about 2 billion SEC releases The most successful release in the quarter was Supercross 4 from our friends at Milestones. They also released Gullsfield Fall during the quarter. But the quarter, as usual, was driven by a very strong back catalog of Metro games, the Kingdom Come Deliverance, the Saints Row series, Outward, and a continued performance of the Milestones lineup. Also, Milestone announced their most ambitious game projects yet, Hot Wheels Unleashed, that will due for release during the current financial year. And I'm pleased to see that it has been a great interest from fans of the Hot Wheels online. Our friends at Vertigo, they announced that their co-op first-person title after the fall will be coming this summer so really excited to to finally have that game coming out flying wild hogs confirming this morning that they having a very exciting pipeline with four titles that will be start releasing this financial year Moving to Stockholm, I'm really happy that Clemens, Andreas, and the team led by Tobias and many others at Starbreeze came to an agreement that Deep Silver will be the publisher of the upcoming Payday 3 for PC and consoles. So all in all, Deep Silver has a very interesting pipeline with some very exciting projects coming out both this financial year as well as future years. Moving to our friends in Florida, New York, St. Petersburg, and many other places around the world, Sabre Interactive, they had a Continued performance, 271 million in sales in the quarter. Continued strong performance of SnowRunner and the World War Z. Now SnowRunner, we are reporting, has sold close to 2 million copies as of end of March. They continue to be very active within the market. cn studios closed uh... legally uh... the position says it was close to legally during quarter and now during uh... end of april uh... they released uh... with uh... really favorable reviews star wars pimble pinball we are also uh... uh... really happy to see that uh... aspire uh... closer in the early april and they will that will help sabre significantly to to increase their presence uh... in the u s market and uh... aspire already released uh... uh... great remake of the old classic star wars uh... report republic commando on uh... playstation four and uh... nintendo switch store owner again released uh... two days ago on uh... switch uh... and on uh... finally on steam and both versions are the game of the year additions and please to see that had a good start on steam looking ahead they having a very very interesting pipeline that this would look big titles I would say more more in in in later or or financial years post the current one but they're having a good pipeline in the current year. Here you can see that the Evil Dead one is the one I can talk about today that are expected during the current financial year. Deka Games had a stable performance, 104 million in the quarter. In the mid-quarter, iYogo and A Thinking Ape, our friends in Vancouver, finally came legally into the group. And we had a bit of revenues from them in the end of the fourth quarter. And the original business model of Decca to take care of great mobile games and continue operating them showed a strong performance, for example, here on zombie catchers that had the most solid quarter during its seven years lifetime. Also, we briefed this morning about this IDFA change. Obviously, this is very early, even though it has been announced and implemented. It's still very early, but so far we have not seen any material change in the business. And we are not expecting that in terms of DECA. And I'm confident our friends at easy brain will adapt to that change well and they are prepared for it for a very long period of time moving to shrub the in Stockholm coffee stain again is just an amazing performance the quarterly sales came in at 781 million which is a 851 percent increase year-over-year and on the trading 12 months basis the coffee stains sales are up to 1.2 billion read the revenue the main revenue driver was while I'm but again a very solid continued performance of satisfactory and deep rock galactic they are very busy and they are having a very interesting pipeline of future projects The only two that are announced are Midnight Ghost Hunt and Songs of Conquest. Moving to our friends around the world at Amplifier, led by the team in Stockholm. They had their larger studio, Tarsier Studios, releasing Little Nightmares 2 during the quarter. I was really pleased to see well received by both gamers and critics alike. And during the quarter, we actually were able to book a royalty from our publishing, our friends at Bandai Namco that are the publisher that have done a great job of publishing this title. Also during the quarter and announced just a week ago, really happy to welcome Frame Break from Skövde into the group. And I can't wait to see what the future holds for that studio. Amplifier continues to invest. They are really organic growth investments for the long term. They are setting up new studios, hiring talents, and building new IPs. So I'm excited what Amplifier and their amazing studios will bring to the group over the coming years. Moving to the partner publishing and film business area. We had a quarter that we were in line with last year, about 400 million. Solid performance of the film business that are increasingly becoming digitally, as well as they have been doing a number of good license deals with TV channels in Germany and Italy. also launched their own YouTube channel movie dome that has more than 100,000 subscribers the first four month and continued solid performance from our friends at solar media in Germany looking at the business we've been stating we are the last man standing within physical distribution Not only because we love and understand and believe in that part of the games industry, also because we think it's a really relevant service to provide both for our internal studios as well as our external partners within the industry. And overall Embracer Group and especially Coach Media are really complementing the industry. That's why I was pleased to see that Coach Media have signed another major game publisher for physical distribution for most countries within Europe. At the same time, we had another business partner moving out with the new releases from the business, and that publisher are insourcing that part of the business. The Coach Media physical a part of publishing business are growing they opened offices in Hong Kong and Tokyo during the period as well as we have decided to invest in the new European Logistics Center it's already existing in in Austria in her phone but now we are investing a good amount into expanding that capacity so I think we increasing the capacity with 60% and with the new robotic systems as well so M&A so just to recap bit of numbers so here you can see them on the left hand the maximum consideration during the the past five years starting 2017 with allocating hundred million krona into acquisitions led by the acquisition of Experiment 101, the makers behind Biomutant. And then been continued building on this strategy. And this year so far, now talking calendar year, we have, if you define them as maximum consideration, invested 22 billion SEC into new talents into the group. The absolute majority are investments within business area games with the a few acquisitions with with the important publishing film number of deals we have done 50 deals since the IPO of acquisitions not counting the assets or IP acquisitions just counting company companies I don't like to use the word positions actually because I see that be more merged with fantastic talents in the industry And even though the legal term is acquisition, I know that. And looking at the verticals and the bolt-on acquisition mergers, it's a good balance. And last year, for example, we invested $7 billion into the new operating units, here defined as verticals. and 6.3 billion in in bolton sorry for being a bit on this very financial terms when talking about people yeah and we continue to work on on this topic across the group both at the parent company embracer here in karlstad stockholm as well obviously across our operating units and we talked to we have been talking to at least or way over 150 companies since the last quarterly and currently we are engaging with the more than 20 late-stage talks defined here some under exclusive otherwise some we believe that we will welcome to the group if concluded But I would like to restate that acquisitions could happen anytime. And we're trying to move the cycle of the whole business and the parent company away from announcing acquisitions at the quarterly reporting and then to have them more regularly integrated. Okay. Johan, I'm leaving over the SpongeBob slide here.

Thank you very much. The sustainability quarterly update. A lot has been done during the quarter within the area, and we are really happy to say that we have done the first global employee survey for Embracer. And also very happy to see that we had a very high response rate from all of the people in the embrace a group 74 percent so very happy about that of course we are processing the information received and we will get get back with more information around this in our sustainability report which is part of the annual report another achievement during the quarter is that we have done a risk analysis and materiality analysis within the ESG area. This has been done together with an external partner assisting us with this and it has been a great work and the outcome is that we will be able to focused areas within sustainability that or ESG that matters most to all of our different stakeholders. We continue to work with the ambassador program and the team there is really focusing on spreading the word of the sustainability framework and also identifying specific actions or initiatives and sharing these across the group. I would like to reiterate our smarter business framework, which is the four pillars that underpins our look and view on sustainability. We have our business sense, solid work, great people, and greener planet. And we really believe that these four pillars in a good way also captures what's important for our stakeholders and the company as such, and of course our employees. I can just highlight that we during May have contributed to

the safer together fundraiser donating sharing knowledge within the really important area of mental health thank you so sustainability part of that for me is it's you know the culture of gaming and part of that culture is the legacy of the industry And as announced last quarterly, it's part of the culture here at Embracer group level here in Sweden to build the archive of all the fantastic industry products made the past 40 years. And happy to see that we now employed our first guy on board. And he has actually acquired a bit of collections the past quarters or the past month. But now, as of this morning, we're announcing to hire more people to build this archive. And here you can actually see a picture of one of our fantastic collections of Sega products. So really pleased about this. And this gives me a bit of joy sometimes in the office, as well as many of other people at the parent company. Happy to share more about this in the future. So deep dive, Johan.

defined as non-recurring information yes and we start off with looking at an interesting graph it shows net sales in business area games during the last fiscal years by by title and the notion here is to see that we have a real diversified revenue base out of the total net sales within business area games of 6.4 billion top 10 titles amounts to 44 percent and and even if you look at approximately the top 40 titles you reach 74 percent of game sales interesting you Also, I would like to give an update on the IFRS conversion and the regulated market. As communicated a quarter ago, the Board of Directors decided in mid-February to convert to IFRS and thereby start the process of becoming listed on a regulated market. And the overall timeline for the project is estimated to be between 18 and 36 months from February. A lot of it A lot has been achieved in the quarter. We are very happy to say that we have signed with a senior resource that will be instrumental for the overall process of listing on the regulated market. We have also strengthened the group finance team here in Karlstad with a senior resource as head of financial control. starts officially in June, but has already been part of the early stage phases in the IFRS conversion. We made an evaluation and an agreement with an external partner to provide support and expertise throughout this IFRS conversion project.

One of the big fours, I would imagine you are. Yes, it is.

yes so and also this quarter we present you with the project or why scatter graph when we look at the contribution in relation to the investment for release games and the sample as always includes titles where we have either had sales above 40 million SEC or investments of 40 million SEC And it's roughly, it's a bit more than 30 projects in the sample. And of course, if you look down at, you would have at 1.0, that would be the break-even, where the contribution is equal to the investment. The weighted average for us is 3.3. And if you look at this in terms of return profile, if you have an investment period of, maybe two to three years, and then you have a return period of two years. The internal rate of return in average for organic investments looks very attractive, which is also why it's the key priority to continue to invest into organic growth. We were presented with a challenge this quarter in the graph. to get all the scatters into the diagram we needed to adopt the y-axis here a bit yes last but not least we will take a time to go through the our PPA process and the reason is we got a bit of questions from stakeholders and shareholders past period so I think

It would be great to just revisit the topic of how we're doing the PPA.

Yeah, so basically it's a five-step process. It starts with number one, where you need to identify the purchase price. And of course, that would be then including the upfront consideration and then the conditional consideration. Step number two, is to identify the value of what you have purchased, which is the net asset value in the target company. The first step in this is to obtain an opening balance sheet for the target, and that's basically the balance sheet at closing date of transaction according to the target's statutory principles. And then you perform and document a gap analysis, where you look at the statutory gap vis-a-vis the K3 and embracer gap. Then, next, after that, you do adjustments to align the opening balance with K3. You can, in parts, or when you look at the acquisitions Embracer makes, it's very common that you would need to look into the recognition of ongoing game development. Always taking into account that it needs to fulfill the criteria for capitalization on the K3. Another thing to look at is recognizing completed games development project. They also need to fulfill the criteria or K3 to be able to be capitalized. And in that respect, you also need to take into account amortizations that would be related to the specific project. Could be other adjustments as well. If you acquire a company that historically has had a more cash-based accounting, well, then you need to change it to accrual-based accounting. Always when doing this, it's based on materiality. and traceability, the availability of historical data. Once that's done, it's step three, four, five, basically calculating the surplus value related to the transaction, allocating the surplus value to other identifiable acquisition-related intangible assets, and then last but not least, you would have the residual, which is basically will be classified and reported as goodwill. When we look at this, we feel that by following the above five step process, it's our assessment that the operational EBIT presents a representative picture of Embracer's operational and organic performance. we can have a bit of a deeper look into step number two on this slide where you recognize ongoing game development as said earlier it needs to always fulfill the criteria for capitalization on the k3 and what you start to do is that you assess the type of commercial agreements that is linked to the relevant projects Generally speaking, there will be two types of agreements, either an internal development agreement or a work-for-hire development agreement. And then for internal development agreements, you should capitalize development expenses during the development period and start amortizations as the development is completed. For work-for-hire development projects, development expenses will be occurred or expands as occurred and revenue will be recognized based on the percentage of completion method based on these rules we can conclude that if you have a studio working with work for higher development projects they will not recognize an internment asset related to game development Studios or publishers that fund their own development projects should recognize ongoing game development assets. If you have a publisher that applies K3 and it acquires a studio that is currently working on a project funded by the same publisher, you will have at the closing date, the publisher has already capitalized its investment into development project. hands there will be no additional recognition ongoing game development in the PPA relating to the position of the studio if you look at the financial year you have 100 162 million has been recognized as either ongoing game development or finalized game development in that position that has been closed during 20 21 important here is to recognize that to companies has had important work-for-hire businesses one is Sabre and the other is flying wild hog and looking at existing publishing relationships at least there has been existing publishing relationships with for a purple lamp I've also made a simple example of operational a bit and it's two different cases the underlying assumptions are the same and on the basically the assumption is that you are developing a game it the expenses are 10 million per year and takes three years to do it and the ROI expected is three times the investment and it's the two-thirds in year four and the last third in year five and the assumption is also that you released game in the beginning of year 4 on the first case on the top and side shows an organic investment and its implication on operation a bit per year on the left hand side and on the balance sheet to the right hand side so basically during the development phase year one two three it's zero impact on operation a bit once the game is released you will get contributions for the net sales from the game and that's also when you start to amortize the development project the second case shows a situation where the studio publisher is acquired at the end of year two and we also are assuming that the value of the ongoing game development fulfills the criteria of capitalization and it's thereby recognized in the opening balance through the PPA which is the yellow column on the lower right hand graph. What's interesting is that operational profit impact during this time period is the same. So you would have a zero impact year one, two, three, and then you would have the same pattern as if it would have been an organic investment.

Thank you so much, Johan. With that said, we would like to walk over to Oskar for a Q&A.

Great, thank you. So let's start the Q&A. And I want to start by saying that obviously Embracer is maturing as a company and we just heard that Embracer is now a great grandmother. So what does that make you Lars?

Good question, Oskar.

But let's dive into Q4 to start here and starting with Valheim, same as we did last quarter. 6.8 million units sold, and I would say one of the most played games in the world. What can you say about the guidance of 1 to 1.2 million copies in Q1? Is it conservative? Is it realistic? And what do you see for the rest of the year?

Again, this is a publishing project, so in the respect of the team at Iron Gate and the publishing team of Coffee Stain, Obviously, I've been talking to them before providing this number and I'm happy to see it's still performing well on Steam, even though the first craziness in February is obviously on a much lower level now. I think it's hard to give a guidance about this quarter, but I imagine it's a game that people will enjoy playing not only this year, but for the decade to come. I know the team are working to bring out more content, and there is many other ideas for that game in the future. But keep in mind, and with the respect of our philosophy and strategy of leaving great people doing what they want to do, it's a team of five people. But they made an amazing game, so I have the full trust they will continue building on that.

And I suspect, given the interest in this game, that there must also be interest from console platform owners, from streaming platforms, and what have you. So, I mean, what is the plan in terms of porting to console, new content, and how much is it possible to scale up the team, both internally and also with the support from CoffeeStain and Abrazer? I'm...

quite certain there has been a lot of interest about that game on various platforms but you know this is not about the short cash grab to just port and do everything as quick as possible it's all about building a long-term franchise and letting the great people doing it uh taking their time so even though i'm sure there is some short-termness you can grab

think the team you know they have a plan and they will communicate that plan you know when they are ready so yeah and looking at Q for the report here I think what stands out is apart from coffee stains remarkable performance I think margins operating margins and gross margins starting with gross margins what is driving the strong gross margin performance I guess it's I high share of game sales and I think a record high digital share of sales as well. Johan?

Yes, Oskar, it's of course the fabled product mix shift towards business area games and also that the share of digital is high in the quarter. And also as we mentioned within important publishing film segment, film has had a solid performance in the quarter. That's the main drivers. And also, if we look at the specific business area games, we also see that that's a bit better than last year, mainly driven by what we explained.

Yep. Great. And so just, I mean, checking, but you spoke a little bit or indicated the gross margins for Valheim of, I think, 30-35%, excluding the ownership

piece is that still sort of the case or well we haven't publicly announced the exact margins in that but I think coffee stain has a business model of a publishing margin and then they invest in the minority into the game studios and that's how they operate and iron gate are in line with that and I don't think there's change from what I've been stating before

rate that's clear enough at least and I mean I think it's quite obvious that you did receive a contribution from profits from associates from ball him so I guess we should think about it as probably lower contribution in q1 as it came early is that is that the case yeah you know we were happy now we had a financial year and to recognize that and

You want to hear more call on that?

So it's it's recognized and up until the end of March and then and what it will be going forward is basically depending on the performance of the title.

Yep. And just briefly on on the drivers, apart from Walheim in the quarter, I guess it's quite a broad back catalog performance. You mentioned Metro, SnowRunner. Reckfest and Kingdom Come. Anything that stands out in Q4?

Well, you saw the slide of the very diverse range of titles performing. And, you know, titles like, you always see titles like SnowRunner now and Metro and SpongeBob and World War Z and Satisfactory, Deep Rock. You know, there is 10-20 titles constantly performing every quarter. And obviously that is driving a stability in the back catalog revenues.

And a little bit of a boring question, but other external costs, if I may, I mean quite low in the quarter. Is that due to few releases and quite low marketing spend or anything else?

Yeah, so the reason... It's basically lower marketing spend, so no fewer audio releases, and then that's the main driver.

Great. And then quite a lot of acquisitions announced in conjunction with Q2, I believe it was, which is a little bit hard to keep track of. Can you just talk a little bit about, perhaps for you, Johan, about the M&A contribution compared to Q3, what has sort of been added sequentially here?

Start with that. You mean in Q4?

Yeah, in Q4 compared to Q3. I know you finalized some acquisitions mid-quarter.

Yeah, so the acquisition that has been added to the reported numbers for Q4 is basically the ones closed during the quarter. which is ATA and IO and SEM.

And in the greater scheme of things, it's not any significant revenues. Even though every revenue is important.

And then I think also important here, capitalized development sequentially not a huge increase compared to what previous acquisitions have sort of added I guess is that an effect of these studios partly being more work for hire with less capitalized development yes yeah that's the effect and we mentioned it in the quarterly report also that specifically for flying wild hog it's work for hire contract so

that's that's so actually we revisit the PPA yeah so during the fourth flying wild hogs was announced in the end of Q Q 3 and and then during the final quarter here the team has found a lot of time on looking through and assessing these commercial agreements it's sometimes difficult to take time and the conclusions together with external expertise is that they are work-for-hire contracts and that basically means that what was originally added to ongoing game development in q3 is not there anymore and subsequent so subsequently you will have an increase in in goodwill

And you can also see that in the ongoing capitalist development, which didn't increase very much here in Q4. And then turning over to Q1 and the next fiscal year, starting with the raised guidance, 2.8 to 3.3 billion in completed development, which is 300 million higher range. So is that fully a result of the addition of Aspire and more importantly Gearbox. Mainly driven by that.

There is a bit of other additions as well. Okay. So there is always additions to the coming periods. If you are early in the financial year, you can still sign publishing projects coming out in the financial year. Obviously, the later you come into the year, the harder it is to sign new publishing releasing in the same year. We are still in that phase. We are adding new projects for publishing at least that we'll be releasing in the current financial year. Important to state, now we're providing this guidance and we had discussions. Now this guidance is based on the best assessment of the management teams across the world and their expectations of their pipelines as of today or yesterday. So that's how this forecast works.

And a little bit more short term, Q1. And I can just start off by saying that it seems like you have a really strong market share on Steam, an important platform right now. So with that in mind, you You guide for 300 to 350 million in computer development in Q1, which is, I mean, relatively low given the size of the company now. And despite, of course, Biomutant. What can you sort of say about the mix there between large and small titles?

Well, if you compare that number to the 117 we had in Q4, it's a quite healthy increase. So, no, but a good chunk of it is Biomutant. and then there is a number of other releases but obviously many of the product releases are are not that costly that we are releasing and obviously the the switch project they've been working on the past year or so you know, it's important, but it's obviously not any significant amounts. So that's why the overall number is what you see here as a bit lower than you expect, but that's the way it is. We also, you know, we're stating we've also been acquiring the past year and years companies that are very efficient, kind of having a quite low cost base and a very high revenue potential of the project. So that is also lowering that

number of complete completion value yep very clear and and by mutant I mean finally it's time in five days and you wrote in the report and talks about it on stage here strong pre-orders above management expectations so I mean the key question here is what are the management expectations

You always have a... This is a title that is also physical, so there is an expectation of pre-ordering. We had the collector's editions, atomic editions and so on, made for years. Happy to see that they are more or less sold out. So you should be glad to find one. Also happy to see that there is a lot of love, seems to be a lot of love in Japan for the game. So there is also a healthy... addition from pre-orderings in Japan so well I I'm excited as most others to see how first of all the gamers will enjoy the game so the reviews from gamers obviously will be very important but also the reviews from our well-respected critics around the world so I will check a lot of reviews coming in and released the night before release

Great. And in terms of Metacritic, the critic reviews and Steam reviews, what is most important? What are you happy with? And any first indications at all? No, I don't want to step ahead here.

Stefan and the great team at Experiment have worked 24-7 almost, partly to make this happen and Now all people across the publishing team and Stefan and the team are working with the critics and others to explain the game and talk about the game. So it's not my job to sit here to tell anything. And to be honest, I don't really have any information about that.

And I suppose reviews will come out from critics the night before. That's the public information I have. I guess that's correct. Okay. Great. And a few more questions from me before turning over to some questions from the web here. Also looking at the guidance, turning back to that per quarter, it's notable that I suspect that the largest chunk of the projects in terms of value comes in Q4. So first of all, is it correct that the at least two AAA releases will come in Q4, starting with that?

that could be an assumption no it's it's very delicate by me here and and in the respect of the philosophy of letting our great teams talking about the projects and and you know now there's a lot of interest from gamers around the world so in in that respect uh... i'd like to have them talking when they're ready and uh... i mean uh...

You are definitely getting for I mean, I'm talking to the numbers, Oscar. Yeah, absolutely. But I think it was one point six billion in Q4. So assuming that it's two AAA titles, what would be sort of the consideration looking at Q3 versus Q4 for a AAA title in terms of competition, in terms of the volumes of new consoles sold, etc.? ?

I think obviously I'm pleased to see there is a strong demand of the new consoles, so there will be more consoles on the market. We expect the new level of gaming to be stable and to increase over the coming years. And obviously that will also help when releasing fantastic projects. But in the end of the day, it's all about putting out quality products so quality comes first it's really the philosophy and I'm really confident about the pipeline for the year and you know I've been seeing a lot of these products myself and we have external companies doing reviews mock-up reviews and other things so yeah it looks very solid okay

Great, and then I see we have some overlapping questions with the webcast here, so I'll go over to that. And starting with a question here from, let's see, Benjamin May from Berenberg. Is the big Q4 weighted release schedule a function of weighting? Well, actually, I just asked that, so I'll skip that. The second question is that, Take two indicator in the Q4 on Tuesday night. Major new release from from Gearbox will come this financial year. Can we make an assumption that this will feature in the larger Q4 period?

In the respect to take two and Gearbox, you know, I don't really have any comments, so I let them speak. I'm just pleased and excited what they're doing together.

Great, I'll view that as confirmed. Just kidding. But the next question here on the market conditions, I suppose. From Benjamin Megan, we have begun to see a decline in U.S. spend on video games in April, given the tough comparable of last year when consumers were staying home. Have you seen any notable trends that would suggest this is continuing or reversing And do you anticipate this to impact your back catalog growth?

I know we had a bump in April, May, and then it came down last year. But to be honest, you know, I think we have many titles performing well on the platforms right now. And easy brains are reporting, you know, good performance. And so. You know, it's a bit, you know, being in premium mainly. It's a bit lumpy in that sense. You don't have the daily, you don't have the data by the minute as you have in free-to-play and mobile. So I think those companies could talk more about that thing. In premium and within Embracer and with all the organic growth we're having, it's all about, you know, putting out great quality content. So, you know,

I've been stating I'm expecting we asked to grow organically solidly solid this year so that's really the comment I could have on that very good and then turning over to question from Ken Rump hope I pronounced that correctly can you comment on the largest projects within the three billion guidance this year not by name but for instance for instance the largest in in absolute numbers or the total of the top three, top five, or top 10 games? Any sort of input on that?

No, I think I provided guidance previously about, you know, we have been talking previously about some big projects in the previous quarterly reporting, and there is no change to that. And I just see a very wide range fantastic projects and obviously we could have projects with a quite low investment breaking out and then your projects you know the other way around so I'm sorry Ken I don't have a top three guidance here for you understood and then turning over to question from Eric Lindholm register from Nordea with easy brain performing above management expectations with limited IDFA impact

Is it fair to assume that you're leaning towards the higher end of guidance range that you gave in conjunction with the acquisitions?

First of all, you need to remember, EasyBrain, they are really data-driven and quite conservative. So we had an expectation entering with a quite low number in the current quarter and then growing over the year. Now they're a bit above that number. It's not massively, but performing about that number, which really pleases me, obviously, just having them on board. I think the IDFA is super early, and I think the implementation is on a very small amount of phones, so it's very early to say, but so far we have not seen any change in the numbers.

And I think this is an interesting topic, and My impression is sort of that the different players in the ecosystems, consultants, ad agencies and so forth, are sort of managing to go around the system a bit. But the fear is, I guess, that Apple will sort of strike down on that, which may have a bigger impact in due course. Is that also what you're hearing or do you have a view there? There are so many different views on this.

In the end of the day, if we have the world-leading team doing what they're doing, I'm confident they will manage this as good or the best as anyone could do. So that just gives me confidence about the long-term of EasyBrain.

Great. And then a question from Nick Dempsey with Barclays. With the amortization flowing through from gains released in Q4 2022 in particular, should we expect operational EBIT margins to be clearly lower in full year 2023 than in full year 2022 as it comes late in this current fiscal year?

I think it's too early to start talking about those margins. I think in general, when we're looking at the long-term business plans across the group, we see a healthy organic growth, not only this current financial year, but also the years thereafter.

Then I have some questions that were forwarded to me here. In Q3 2020, I believe, the report, it was mentioned that Embraceable would be working towards being listed on the regulated exchange. I mean, what exchanges are being discussed? Does the company already meet the regulatory requirements of the exchanges being discussed? And where are you on the timeline? There is quite a long time period. Any update there?

I think the main focus right now is the IFRS project and the financial control. I've been talking to Nasdaq and we now hired a senior resource coming in. I'm confident we will find its way. I'm interested to talk to the other stock exchanges and to have a discussion whether it's relevant to have a dual listing. But in the other day, I think Stockholm would be the main. That's my assumption. I'm open-minded as always. It's many factors. One factor, I'd like to talk to our shareholders about this, what they think. It's also about the liquidity of the share. If you split it to too many stock exchanges, that could hurt you. But also our stakeholders outside Sweden, shareholders, but also the entrepreneurs. Remember, more than half the companies owned by entrepreneurs and creators that join the group and perhaps there is a demand and wish to have local public market trading the shares well so there's many factors and we will take our time to do this the best absolute way we can understood another question here someone wondering what's happening with all the content deals that are done within the group

and how these are recognized as revenue. Is the whole sum recognized immediately when a game is released, or do you portion it out over, I guess, the contract length?

Johan's question. It depends on the, you need to assess the individual agreement to see if you fulfill the criteria of being able to recognize it as revenue. So the answer is that it depends. And one of the criteria is that you need to fulfill the performance obligations to be able to recognize the revenue. You need to assess if you have done that. And that depends on each individual agreement.

And for example, just to add on there, if you sign, let's say, 12-month agreement with Epic Games, I suppose there are a lot of sort of minimum guarantee agreements. Would that be recognized upfront or over time, or does that depend as well?

Of course, you need to look into the specific agreement relating to that specific game. And then in general, if you have a minimum guarantee, it would be recognized over the time period and not up front.

Got it. Another question here on Flying Wild Hog. You went through this a bit, but maybe it could be good to go into detail. What happened to the company's project on the balance sheet? Why is 29 million going to IP rights and other, and 96 million to goodwill.

Yeah, so I think we touched on it earlier, but in the preliminary PPA that we had, it was closed late in Q3, and in the preliminary PPA we had there, the agreements or the development projects were deemed to be internal development projects at that time and the effect was minimum because it was late late closing in q3 and now as the work has been through the onboarding when you work with the ppa and the assessment is that these agreements are work for hire agreements And if it's a work for hire agreement, you cannot capitalize an intangible asset in terms of ongoing game development. Then we need to remove it and it will be good.

Great. And that means going forward, the same deals or agreements will not be capitalized either. Yeah.

And as you said, of course, then There is no capitalization in Q4 related to that because you don't capitalize the development spend. Instead, you expense it as it occur and you recognize the development income according to the percentage of completion method.

Very clear. Thank you. And then we have a question from Matti Littonen at Bernstein. Thank you for the game's cost value guidance by quarter. Could you tell us roughly how much Bi-Mutant is of the Q1 total?

No, I can't tell you exactly, but it's a healthy share of it.

Okay, I think we'll have to settle for that. And we discussed that. On M&A, you've now stopped, back to my questions now, you've stopped announcing acquisitions in conjunction with reports, so more focuses on the reports. We're trying to avoid it, to focus on the actual report rather than the M&A announcement. Trying to avoid, interesting, going forward. But looking at the comments on M&A, what can you say about the mix there between new potential operating units in the group and smaller sort of add-on acquisitions in the operating units.

No, but there is... It's hard to give you a call on that. I think in general, most transactions you will see is when we Merge with game developers and bolt on to the existing operating units. Building for the future. And then but there is there is there is. You know, we've been talking to quite a few very sizable potential new verticals during the past period of that mentioned 20 plus dialogues. There is a wide range of that 20. I don't want to provide more color on that.

Okay. And the comments in the report about being patient, about focusing on quality first, also in M&A. What do you want to say? What do you mean really there? I think...

For us, it's important to have quality in the process, due diligence, SPA, dialogue, talking to the team, assessment of the games development pipelines, understanding the business. That needs to take some time. And there is a lot of stakeholders, some shareholders pushing, why don't you do more deals? But this is not about doing deals like every morning. the decade to come so we need to really you know get together with the right company and we need to have the right processes and now having a fair sizable more sizable business than we had five years ago it's important that Johan and the team also having a good process to integrate all this and They've done a fantastic job, and I'm really happy now to hear the green lights from also external parties about the processes you've been doing and auditing and all that. But I don't want to destroy that by just throwing things in here overnight.

Understood. And then I had a question from the web there on Gearbox and Take-Two. But looking at the movie instead, I saw that it's supposedly coming out in 2022, the Borderlands movie. In general, is it high potential to release a game in conjunction with a movie coming out? Is that reasonable, given that the last Borderlands came out? I know both the...

Gearbox and TechSoup has a lot of great plans for the IP and a big love for the IP. But I will let them communicate their plans whenever. So in the respect of them, that's an operating thing for them to communicate.

And what are you seeing? It hasn't gone very long since the acquisitions were confirmed or closed. What can you say about the dialogue between the different studios and groups, and how are the plans progressing and potential synergies as well?

Well, again, I think we are one of the companies that has the most synergies within the industry. That's because most of the mergers and acquisitions are done within each operating unit that are fully integrated. Across the group, there is more ongoing projects than ever, I would say. And really good dialogues about both technology, publishing and distribution, marketing, business intelligence. So I think that is a real interesting upside or potential over the coming decade what the wider ecosystem of Embracer could do both financially for us, but also for everyone joining. And I think that why it makes sense to continue our strategy to build a greater and bigger company is the more fantastic people and companies and talents we get on board, the more it makes sense to join.

And on that note, are you seeing an impact from, I mean, the Gearbox acquisition, EasyBrain, and Aspire as well in discussions?

Yeah, sure. You know, Randy and the team is, you know, way well into the discussions. And so, yes.

Great. And... and the notable signing for Korsmedia's part of publishing business announced, I think it was yesterday, on Twitter at least, Activision Blizzard for most EMEA markets, excluding Italy and the UK. What is the impact of that and some context as well, if possible?

No, but I think Coach and Clemens have been talking about consolidation in terms of some bigger players start using their services over time. And he talked about that already three years ago. And I'm pleased to see that start happening now. Doing such a thing is a big thing. So it will take a while until such a thing is fully integrated and it's happening. Again, this is a long-term thing. It's a long-term relationship. It's not about rushing in this quarter. So I think with patience, you will see a gradual top-line revenue coming in from potentially that contract but other contracts in the future. At the same time, we had another partner moving out because they were insourcing. so I think the margins mix between them is this or time we will you know Clemens I've been stating you can see the growth I've been stating to you Oscar and the market here we see a stable partner publishing business so I think as a financial analyst you should not you know be carried away but with that said

I mean, I expect that some of the titles Activision Blizzard has is maybe bigger than Codemasters, for example. Is that a fair assumption, or is there anything missing?

In the respect of the partners, I don't want to talk about titles.

And in terms of phasing during a typical year, I mean, I guess the seasonality may change a little bit from... F1 titles coming out over the summer to perhaps Call of Duty being a key title in fiscal Q3, for example.

Again, I don't want to talk about the details. I think that's why we have such brilliant people like you and other analysts to do this work.

Fair enough, fair enough. Let's see if we have any more questions from the web. I mean, an interesting short video talk by Clemens on video link there. Any hints on Kaiko's project at all? Want to share? One of the biggest IPs in THQ?

Kaiko is a well-trusted partner to the team since seven years, so I'm sure they're entrusting, you know, interesting things to them. So I don't have anything more to disclose. Sorry.

Understood. And looking a bit further out, I mean, we have the guidance for this fiscal year coming now, which has seemed quite exciting. But what can you say about the coming years if you compare it to this year? Should we expect higher value of completed development, or should this be seen as a remarkable year in terms of releases?

The thing I've been stating, we see on top line a healthy organic growth the current year, and I'm expecting that organic growth to continue the years to come. I think that's the color

can give you at the moment. Okay, and I think actually, another question here, just an update on the progress of acquired companies. And I think one important example being Sabre Interactive, she could just talk a little bit about how, when you acquire a company, how you sort of change the focus from work for hire to internal development. and what effects that have over time. And just do that for some key acquisitions would be interesting to hear.

Every company joining or accessing the ecosystem and the smorgasbord of optionalities, how they could, you know, how they potentially could change their business, how they could use synergies, how they can use publishing capacities, At the same time, with the respect of their culture, mindset, and entrepreneurship, they have the operational freedom if they want to continue working with external parties, and if they want to continue working with our fantastic external work-for-hire clients, it's really their decision. I'm really pleased to see the performance of all our companies post-integration. But also it's important to say that they are different in mindset and how they operate and the business models. And I don't believe in that I should tell them, here's the way you should operate. It's my way or no way. That is not the way I operate.

Great. And then I think time to wrap it up. So I'll ask a final question from the web here. Quite classic question. Where do you see yourself and Embracer in 10 years?

The most common question actually is since the IPO. And I've been stating since the IPO I want to build a sizable sizable business with a long-term mindset, complementing the industry with a good business, with strong financials, with stability and diverse. And I think we are on that path, and God knows what that path will look like in 10 years. I think it's important as an operator and an entrepreneur to make to write the daily decisions along the way. And my experience, if you, you know, obviously I have a mind where I'm going and where we are going as a group. But if you start, you need to be adaptive and flexible. And there is a lot of things happening within the industry. I was stating, for example, this morning that, you know, realizing, you know, that the economic value of the games released last year was about $100 million, but the platform holders take $200 million. Is that fair, or is it over time? I think there are things that hopefully will play our way as content creators over the coming decade, and I would like to highlight that this morning. if part of that fees could come to create greater games for our fantastic gamers and customers. That is really what I would like to see.

Great. I think that's a good ending note. Thank you everyone for listening in. That's it for the Q4 presentation. Thank you.

Thank you.