Embracer Group AB

Hello and welcome to Embracer Group's Q1 report. In a quarter of focus on opening up effects and IDFA, the company reports solid organic growth of 10%. and also a solid release for Biomutant, which was profitable within one week. So I think we have a lot to discuss today. We'll start with a presentation by CEO and founder Lars Vingerfors and CFO Johan Ekström. Then we will have some guests from the US, I believe, and then I will be back for a Q&A session. So without further ado, I will leave it over to Lars Vingerfors and Johan Ekström. Please go ahead, guys.

Thank you very much, Oskar. And hello, everyone. And once again, very welcome to Karlstad and Värmland. I'm glad to report another stable quarter. We had record revenues of 3.4 billion. and the games business area segment growing 83% to close to 3 billion krona in the quarter, with the underlying organic growth of 10% on a constant currency basis. The profitability came in nice at a record new of close to 1.3 billion, which is a 79% growth in a quarter. We did have a negative free cash flow driven by increased working capital and increased capex into the future games pipeline. The key drivers in the quarter was the success of Biomutant selling more than one million units as well as a great performance of the recently acquired EasyBrain's title, suduku.com, as well as a continued performance of Valheim. Overall, we have more than 180 projects in the pipeline. And looking to the second half of the year, we have a very wide range of titles in all sizes to be released. and we are expecting to our publishers and developers to announce these titles starting quite soon or very soon up until Christmas for titles coming in the current year as well as in the future years. Looking at the KPIs again, we did make eight acquisitions a few weeks ago. I was really happy to welcome Ghost Ship Games, Easy Trigger, 3D Realms, Force Field, Craze Labs, Grim Frost, Slipgate, and Digix Arch intergroup. And this morning we also announced further three acquisitions, Smartphone Labs, Fractured Byte, and Demiurge, all three within the Saber Interactive vertical. Overall, including the eight acquisitions, but not this morning's acquisitions, we are 77 game development studios internally and are above 8,000 in engaged headcounts across the world. Pleased to see that we are able to increase our investments into the game pipeline. We had a record of 770 invested in the quarter, up from just above 500 million. And if you compare that to the completion value in the quarter reported of 300 million, there is a significant difference. I wouldn't define it as growth capex, but there is a difference that will drive organic growth in the coming years. And if you read the report this morning, we are expecting accelerated organic growth driven in the second half of this current financial year. as well as stable or great growth ahead of the general gaming market in the years to come. We're expecting to complete games in the current quarter ending September of between 225 and 275 million. That's the value of the new releases in the quarter ending now in September. For the full financial year ending in March, we are expecting to complete games of a value of between 2.9 and 3.3 billion. We have started our journey within mobile games a year ago with the acquisition and welcoming Decca and Cango as entrepreneur into the family. And since then we have acquired a number of businesses including Easy Brain in February and now recently Crazy Labs that are expecting to close in the end of this current quarter. And I'm really pleased this morning to announce that the KPIs in the combined business on a performer basis looks solid. We have 33 million players playing our games on a daily basis during the quarter. Or we have 286 million active players of all the games during the quarter. The mobile business had an IDFA change in the end of the quarter ending June. Now that is widely implemented and during past weeks we have seen an improved return of investment on user acquisition and in line with our strategy We are now investing to drive as much value-enhancing growth in the future as possible. Our balance sheet is fully loaded for more acquisitions and welcoming more entrepreneurs and creators into the family. With the closing and payment of the current acquisitions, we are expecting or roughly estimate to have about 8 billion in net cash and 17 billion SEC available, including credit facilities. And we have a large number of ongoing discussions to join the family, including large and transformative acquisitions. But we're being prudent, and this process takes time, sometimes years, at least a notable period of time, and it's important that we make our homework, the due diligence, get to know the entrepreneurs, feel the culture, and obviously having the right terms to welcome them into the family. But if you combine all ongoing discussions, those companies' enterprise values way exceeding the available funds, including the upcoming mandate for share issue. So we need to pick the right companies and being very prudent in our approach to do M&A. So with that said, I would like to welcome our CFO, Johan Ekström.

Thank you, Lars. Yes, so let's start by looking at our P&L for the period. We can conclude that net sales reached 3.4 billion in the quarter, up 66% versus last year. Our EBITDA grew 59% to 1.5 billion and operational EBIT reached almost 1.3 billion in the quarter, growing with 79% over last year and yielding an operational EBIT margin of 37% for the period. The growth in Net sales is driven by the solid performance in business area games, where we had a growth rate of 83%. Growth in part of publishing film was 4%. And the healthy growth in business area games has a favorable product mix impact on our growth margins. So growth margins in the period are up from 63% to 76% in the quarter. We also see a positive effect within business area games with the inclusion of Gearbox and EasyBrain. Adjusted EPS for the period is 2.36 per share, up 52% versus last year. Looking at the training 12 months, we see that we surpass 10 billion in net sales, on a 12-month basis, reaching an operational EBIT of 3.4 billion, yielding an operational EBIT margin of 33%, and an adjusted EPS of 7.23. Let's take a close look at our amortizations. In the quarter, we have operational amortizations of 261 million. These are mainly related to our game development or finalized games that are being amortized. If you look at our acquisition-related amortizations in the period, they were 1,796 million, which is about 126 million above the forecast that was given last quarter. And the reason for that is that when you build a forecast, you use the volume-weighted share price in the share purchase agreement. But then when you look at closing, share price can be different and also exchange rates is different, which explains the gap. The majority of the acquisition-related amortization is related to goodwill. Looking at the cash flow statement, we are growing our free cash flow before changes in working capital with 36% over last year, reaching $466 million in the quarter. This is despite the fact or in addition to us having all-time high investments into our games portfolio of 770 million. And the increase in investments into our games portfolio can be explained by the addition of Aspire and Gearbox in the period, and also increased organic investments into new game development. We also see a shift from co-publishing projects towards internal development made in Sabre Interactive. We had a negative effect from changes in working capital in the quarter, minus 726 million in the quarter. This is explained by royalty payments of 464 million in the quarter, and also seasonal variances in trade payables that were reduced with 372 million. Net cash flow effect from acquisitions closed in the quarter amounted to almost 2.3 billion. If we take a closer look at our investments into intangible assets, that was 829 in total in the quarter. 770 of those are related to investments into our games portfolio. where the majority, 469, is investments through our internal studios. We also have investments into other intangibles of 43 million in the quarter, which is mainly related to our film segment. The value of finalized and completed games was, as Lars said earlier, approximately 300 million in the quarter. Looking at the development of investments into our games portfolio, we are growing with 69% compared to the first quarter of last year. And you can also see here that the share is increasing in terms of internal developments. The increased investments into our games portfolio also shows in our pipeline and development capacity. At the end of the quarter, we had 136 studios engaged in project development. 69 of those are internal and 67 external. We have almost doubled the amount of developers engaged in project development reaching almost 6,400 people at the end of Q1. And the pipeline of projects amounts to 180 at the end of Q1 as opposed to 125 a year ago. If you look at The value of finalized game development over the year, we expect to, during this fiscal year ending March 22, complete more than 90 game development projects, with a total completion value in the range of 2,875 million to 3,325 million. For this second quarter, the value of completed and released games is estimated in the ratio of 225 to 275 million. So the level of completion is expected to be back-end loaded towards the later part of the year, mainly the fourth quarter. Looking at our balance sheet, Total assets amount to 52 billion at the end of June. A big portion of that is related to intangible assets. That's about 35 billion. And if we look at intangible assets, we can divide them into acquisition-related intangible assets and operational intangible assets. While operational intangible assets amount to approximately 4.7 billion, And the majority of that is related to investments into our ongoing game development projects, 3.8. The value of completed games at the end of June was approximately 700 million. Of the acquisition-related intangible assets, goodwill is the majority. It's 27 billion. We continue to have a strong balance sheet with healthy liquidity. At the end of the quarter, available funds were 19.8 billion, and as per today, it's approximately 17 billion in available funds. Net cash at the end of June was 10.3 billion, and today it's approximately 8 billion. If we look at the outlook for non-operational amortizations, we estimate that they will amount to 1.9 billion for this second quarter ending September, and for the full fiscal year amounting to 7.7 billion. This includes transactions closed as per the end of June, and also the transactions that was communicated in the beginning of August, down from the expected closing dates. So it's important to note that the forecasts are based on the average exchange rates for the period, April to June, and that it's based on the purchase price allocations that we have available today. which includes both preliminary and finalized purchase price allocations. Also important to note is that consideration shares related to transactions that were not closed for the end of June are valued at the price set forth in the relevant share purchase price agreement. But then when you look at post-closing, when you do the PPA, they will be valued at the price at that point in time.