Embracer Group AB (publ)

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.

Business areas. Thank you so much, Johan. So let's look in a bit into the business. So in the games business area, we have had a solid performance year over year. And the games business area is now trailing at 7.8 billion in revenues. If you look at the share of new releases versus the back catalog defined, in the quarter we had 29% of the revenues coming from new releases and the balance coming from back catalog titles. The share of the digital sales are in the quarter at 87% and on trailing basis it's 84% and also if you look at the share of own titles this quarter driven by, for example, Biomutant the share is 79% in the quarter so moving over to Vienna and Tirske Nordic and the original company that I was part of funding 2010-11 they actually have a 10 years anniversary coming up and they just ended the best quarter ever in June by the release of Biomutant selling more than 1 million units and we stated in the report this morning that the full investments in development marketing as well as the acquisitions cost for Experiment 101 and the IP was recouped within a week after launch. And we expect the title to be a solid contributor in our catalog for the years to come. They also released the Switch version of This for All Humans in the quarter, as well as the next-gen version of Breakfast, performing well in the quarter. Looking ahead, they're having a very wide pipeline of new games coming out. They have 57 titles or game development projects in the pipeline, where of 43 of them is not announced yet. But looking here, they, for example, have announced titles such as Elex 2, Expeditions Rome, and the expansion of Kingdom of Amalur, re-reckoning Faithworm. The business is now generating close to two billion in revenues on a trailing 12-month basis. The Koch Media publishing business. Now we renamed the business area Deep Silver to Koch Media Publishing because Koch Media Publishing consists of not only Deep Silver but a range of other publishers such as Milestone, in Italy, Vertigo Games, the VR publishers in Holland, the recently launched publishing label out from Munich, Prime Matter, as well as Ravenscourt. Those are the publishers currently within Kortsmedia. In the quarter, they had new releases of primarily MotoGP 21 performing well, as well as the next-gen version of Saints Row, the third remastered on PS5 and Xbox Series X. Catalogue was strong as usual, driven by Metro Exodus primarily, as well as Kingdom Come Deliverance and Saints Row, and many, many other titles. A few weeks ago they announced acquisitions of two new companies, Forcefield in Amsterdam, that will be renamed Vertigo Games Amsterdam, and that will be part of the VR vertical within Quartz Media, driven out of the acquisition of Vertigo Games. As well as DigixArt, the leading or great French indie development studio and I've been really pleased recent days to follow their new release of Road 96 performing well on Steam. Koch Media has a huge pipeline of notable titles coming up this year and coming years. And here we mention a few titles, such as Chorus, Hot Wheels Unleashed, Dead Island 2, King's Bounty 2, Payday 3, After the Fall, and the project at Volition Saints Row. On a trading 12 months basis, they are at just about 2 billion in revenues. And on a quarterly basis, they had revenues of 638 million. Moving to Florida and New York, or Jersey, we have had a stable performance from Sabre Interactive. They came in exactly a year ago into the group, and the comps was a bit tough with a fantastic performance of SnowRunner. But SnowRunner continues to perform well, as well as World War Z and other titles. On a trailing 12 months basis they are stable at 1.1 billion in sales and in the quarter it was just about 300 million. But Sabre is growing fast both organically but also by M&A as you saw this morning. And we set the goal when Sabre joined the group a year ago to grow from 600 to 1500 developers over time and I'm really pleased to see that they have been able to grow from 656 to 1567 end of the quarter and that is not obviously including the acquisitions announced a few weeks ago and this morning. And a few weeks ago, glad to have the Scandinavian companies Slipgate and 3D Realms joining from Jylland and 3D Realms has a fantastic heritage within the industry going way back and are the publishers of the cult game series Duke Nukem that also the group owns through Gearbox. Looking into the pipeline, Saber also has a significant pipeline. I would say primarily that will be released in the coming years. But announced titles, that is not that many right now. but looks strong, is for example Evil Dead, the insurgency sandstorm on Komsol, the World War Z aftermath, as well as the Sand Pimble party from our friends in Budapest. Also worth noting on the Sabre, I was glad to see that they has been starting capitalizing some development within their resources, meaning they will have own projects of titles coming out in the future. So Sabre has a very diverse mix of revenues coming from work for hire, from co-op, development or publishing, as well as own titles. And I'm always supporting the companies if they would like to take some business risk and try to leverage our capacities as a publisher within the group. So moving over to Amplifier, they continue to develop as a company. Amplifier still has very small revenues because more or less all their studios are still working on on their games and that will be released you know the coming years but they have a strong growth model and model how they cooperate with the industry attracting senior talents to set up new companies that and with strong incentives they becoming part of the group when we made the acquisition of amplifier under a different name like two years ago. They had a portfolio of minority-owned game studios and we have been pleased and very proud to see one of the Swedish investment studios, Neon Giants, to have their first release. They are sent to perform very well on Steam with a strong Metacritic and feedback from users, so congratulations to that team. Amplifier currently owns roughly 29% of the studio. They've been building organically to also set up new services within Amplifier, mainly publishing services that would support the studios within that group. Moving to Coffee Stain. They continue to develop as a group and a company. They had a solid, compared to last year, they had a solid performance. Close to 200 million in revenues in the quarter and on trailing 12 months basis, 1.2 billion. Main revenue drivers were the old goat simulator. satisfactory Deep Rock Galactic as well as Valheim. Valheim selling 1.1 million copies during the quarter and the team at Iron Gate that we own to a minority are adding more talents to that team and they are building more content for that game in the future. Also I'm pleased to see that Anton and the team are start doing and allocating some capital into M&A. I'm happy to welcome Easy Trigger from Trollhättan, the developers behind the Hunt Down into the group, as well as finally being able to welcome Ghost Ship Games, one of the absolute leading indie games developers in the world, with the community-driven co-op Deep Rock Galactic from Denmark, as a sister company to Coffee Stain. And Anton and Søren and the rest of the management has some great ideas how to develop this group in the future, so stay tuned. Coffee Stain has a strong pipeline. It's not that many titles announced, but they are very keen to develop the absolute highest quality and together with the communities. So I'm confident about their growth in the future. Right now they announced Midnight Ghost Hunt and Songs of Conquest to be released. Gearbox, I was pleased to welcome them into the group in closing first of April. Gearbox is a fantastic company with, you know, as all companies with, in a positive way, a different culture and a different business, and through AAA development studio. And obviously the makers and creators behind Borderlands, and during the quarter they had the Borderlands 3 Director's Cut released together with their partners at 2K, as well as they continue to work with the external publishing title, Risk of Rain 2. After the quarter end, they released... Tribes of Midgard, another Viking game, and happy to see that sold more than 250,000 copies just within three days. During the quarter, they had revenues just above 400 million SEK. And Gearbox has a strong organic business plan for the future. you know, are building a number of projects. One of the projects were announced with their partner 2K, Tiny Worlds Wonderlands, that will be released in the future, as well as they have the title Homeworld 3, our own IP under development within an external games development studio. They also Wrapping up the principal photography in Budapest for the Borderlands movie that was completed now in June this year. So moving over to Cyprus and Easy Brain. So Easy Brain had a very strong organic growth and a solid performance exceeding the management expectations of EasyBrain. The main revenue contributors was Sudoku, Nonogram, and Blockduku. Revenues in the quarter was 576 million. And the effect of IDFA was lighter than they expected. That helps outperform our initial plans of EasyBrain. They see existing opportunities now to scale up the user acquisitions and will do so in this quarter and onwards. They also have a number of promising titles in the soft launch as well as in development pipeline that further will grow their business. User acquisition spent for EasyBrain in the quarter was 289 million. And in general, I'm super pleased to have them on board. I think the onboarding process with EasyBrain as well as Gearbox and Aspire has been very good. And they have a solid, very solid management team, both in finance and operational. Deka Games also had a solid quarter with revenues of 146 million at the all-time high in the quarter. On a trailing 12-month basis, they are 355 million. Partly in my dorm, realms of the Mad God and kingdoms of Heckfire has been the main contributor to the revenues in the quarter. But the management of Decca, led by Kengo, is very ambitious. So they have multiple IP deals in the works. with their core business model of DECA, as well as a substantial M&A list. So I was really pleased to welcome the management and crazy labs into the group to become a sister company of DECA and forming like a new unit. And within mobile there is more synergies you can have at once. And I'm really pleased to see the cooperation between DECA and Crazy Labs. Crazy Labs is one of the leading hyper-casual publishers of the world. They released 11 new titles worldwide last year, of which eight of them had more than 20 million downloads within the first 12 months. In total have had 4.5 billion downloads of their games since inception, which of 1 billion was last year. And they have 110 million unique monthly active users. As well as being hyper-casual, they also have a strong casual business. And the leading title currently is Super Stylist, but they also have a number of other titles under development. We're expecting Crazy Labs acquisition to close in the end of this quarter. And Kortsmedia, or the partner publishing business segment, led of the Koch Media distribution business, but as well as the business within Game Outlet, my original company here from Karlstad, as well as our friends at Quantic Labs in Romania, forming this financial business unit. Revenues was 466 million in the quarter, and on a trailing 12-month basis, it's actually an all-time high to 2.6 billion. No notable key drivers in revenues in form of titles, but worth mentioning is obviously Resident Evil Village and Nier Replicant being released in certain territories across Europe. The film business continues to have a solid profitability and performance and really excited to see their success at the Cannes Film Festival. And they have the exclusive German rights for the horror movie, Titan, that won the Golden Palms Award. And if you remember, last year they had a Golden Palms winner, Parasite, as well. Overall, Koch Media, including the publishing business, now has more than 2,000 employees, 1,300 in development, 650 people within publishing and distribution, and about 80 people within the film segment. So, looking a bit on the M&A and outlook for that. And before I comment on that, we can just recap a bit on the KPIs on the M&A side. And perhaps Johan, you could help me to get this KPI slide.

So what you can see is that during this calendar year, 2021, we have done 15 deals. And 14 of those within business area games and one within part of publishing film. You can also see on the left-hand side here that the absolute majority of capital allocated to M&A is towards business area games. Further, if you look at the type of companies that has been joining the group, we can see that we have had two new operative groups in EasyBrain and Gearbox joining this calendar year, and then 13 bolt-on transactions has been made. And if you look at the capital allocation of M&A spend, you will see that approximately 18 is towards new operative groups and the remaining 8 towards bolt-on transactions.

I prefer to say mergers rather than acquisitions or bolt-on but because that's what it's all about to merge with the industry and to bring new fantastic talents and people on board but financially I guess acquisitions and bolt-ons is the right definition so talking a bit on the M&A and then you know the coming peers here and what we're building. I would like to state again that I'm a firm believer in the ecosystem we're building, the independent ecosystem, not running our own and consumers' platforms, and complementing the industry, working with industry leaders to leverage our businesses. And I think, and I'm a firm believer of the larger our ecosystem becomes, the greater our output will have over the long term. in terms of synergies and what you're able to achieve and create. And I'm humbled by the interest among creators and entrepreneurs to join the family. I think it's stronger than ever. And we continue to have a large number of ongoing discussions, including large and transformative acquisitions that could create new operating groups. And I'm not stressed. We stay prudent. We need to do our homework. Again, we need to understand the culture. We need to see we're bringing companies with the right mindset on board and preferably with long-term incentives with management and entrepreneurs and the sellers to be in the same boat with them for up to 10 years, preferably. And if you combine the ongoing discussions we have it's exceeding the available funds we have, including the upcoming mandate for share issuer. I'm not saying, you know, I'm just saying this because that it's important that to say, one, we have many alternatives, two, that we need to stay, you know, perhaps not to use the word picky, but to really pick the right companies out there to form, you know, the embracer of tomorrow. and so I'm positive and currently again state that we have 17 billion available in cash plus the potential mandate we will have at next week's extra general meeting so the sustainability So before I head over to you, Johan, I'd like just to state a few things. So COVID-19 is one of today's biggest challenges that we must face. As recent times have shown, there is also other challenges in the society and in our industry. It is important that we, as an industry, but also as individual companies and as a parent company, each take our responsibility to change these social structures and discrimination. For Embrace, as a parent company, our common foundation is our code of compliance, which aims to support inclusion, diversity, and gender equality. Furthermore, we trust that each company in our group listen, discuss and act. A way to measure and follow up our employees is done via a global survey that allows each employee to answer several questions anonymously. So with that said, Johan, do you have some more sustainability updates here?

Yes, so if you look at the activities or initiatives for the quarter, we have sorted them into our four pillars that we have in the sustainability framework, the business sense, the solid work, the great people, and the greener planet. Looking at business sense, Governance is a part of that. So as Embrace Your Group evolves and grows, it's important that we continuously monitor and develop our internal control system and governing documents. What has been done, especially during the quarter, is that we have updated our compliance code to include more elaborate guidance on areas such as social media and political activity. We also launched an elaborate insider Q&A document in the quarter. We think that Embracer Stories is a great way to share stories across the world from our employees. And the focus of this quarter has been on mental health awareness, corporate culture, and the heritage of games within Embracer Stories. As you mentioned, Lars, we do our annual global employee survey. It was conducted previous quarter, and this quarter it has been presented to the respective operative groups. We're also pleased to note that we scored an NPS of plus 29, which according to the scale is good. And we also realize that it's always important to strive for continuous improvement within the area. Looking at Greener Planet, we have compensated for our measured emissions by a factor of 1.5 through supporting two projects, Prony Wind Power and Solevatten. They are focused on health, diversity and generating sustainable energy. For the year, we are setting a climate strategy, and that will include reduction targets that are in alignment with the Paris Agreement. We also feel that it's important to support local communities globally and locally, and here is a flavor of what we currently are supporting as some examples.

Yeah, so thank you for talking about the heritage and games culture. It's one of the Embrace Japan Company focuses and we are building this games archive and there's something always happening each quarter and we now found a head of the archive and he's recruited starting in September, David Bostrom, one of the leading experts on retro gaming in Sweden and also the founder of a leading YouTube show called Gaming Runner. And he will recruit a further team on this. So if you're interested, please reach out on this email address. We also made a number of fantastic purchases that I've been happy to look at that I think will contribute to the archive very well. Archive is, I think, 40-50 thousand different games, but obviously We just get started and there is hundreds of thousands of different games, we believe, in the world. So please reach out if you want to contribute to this. Deep dive, no recurring information?

Yes, so let's have a look at the preliminary PPAs for the quarter. There were significant completion of transactions during the quarter. And this is a summarized view of how they have impacted our financials from a PPA perspective. First, it's important to note that 329 million is recognized as ongoing game development and finished game development in the opening balances. Further, it's important that... During the PPA process, we have identified notable projects to be co-publishing projects, or classified as co-publishing projects. This means that they will be accounted for under the percentage of completion method. And that means that revenues are recognized as a percentage of total project income as work is being performed in the project and you incur expenses. So there is no recognition of the intangible assets for co-publishing projects.

So there is no capitalization of those projects. True. And then there will be potentially further income on royalties in the future of those projects, such as Borderlands being one example.

Yeah.

Worth mentioning on the 325 million, that is primarily... a value that was not in the balance sheet of the companies we acquired. So we added this to the balance sheet. And this will then be amortized and deducted before we account the operational EBIT. Just to be clear.

If we look at the surplus values, raised risk transactions, it's in total 20 billion. The majority is allocated to Goodwill, and there is a $1.8 billion allocation towards IP rights, trademarks, and others. We also provide information in our quarterly on how the consideration is split. So if you look at this, we have upfront consideration paid by shares issued. There are also shares issued on a callback to cover for earnouts. and also provisions made for conditional purchase prices are notes that can be settled either in cash or in shares in the future. Talking about conditional purchase prices, we have extended information in the quarterly report to show that longer time periods for provisions, but also to include clawback shares. And if we start with looking at provisions, they amount to 9.8 billion at the end of June. Out of these, approximately five is to be settled with the issuance of shares in the future, and the remaining part to be settled through cash payments. If we look at the maximum earn-out consideration, there is a cap on the amount of shares that could be issued, and that cap is 26 million shares. If we look at clawback shares, we have out of our 500 million outstanding shares as of end of June, there are approximately 56 million shares issued under clawback rights. Important to note is that these shares have already been issued, so we have the full dilution effect that day one, so there will be no further dilution or effects of clawback shares. What we have provided is the release of the clawback shares over time if certain performance criteria are met.

The clawback shares are released when the earn-out target is met. Yes. Then the shares are? free to, so to say, there could be a minor lockup post that clawback date. But normally it's that date or just a minor period of time.

An update on our IFRS conversion and the regulated market project. We're happy to see a solid progress during the quarter. Within the IFRS project, we have conducted... or collected supplemental data to be able to do the analysis and identify possible differences that need to be documented and covered in the IFRS conversion. So it's progressing well. We want to complete the phase one before we communicate any more solid timeframes than what we have communicated earlier, and that We also expect to complete phase one of the conversion project during this quarter and will be back with a date in the next quarterly report. Looking at the regulated market project, we have signed an agreement with an external partner to provide a support expertise through that process. We have also started with key activities in the quarter, such as conducting a regulated market gap analysis.

We also look at factors such as the potential dual listing or similar.

Yes.

So there's a lot of activity here.

And then finally, we have updated our project ROI slide where we look at the contribution from release games and relate that to an investment. And this is done based on the reported information as per the end of June. The sample includes projects that has either sold more than 40 million or cost more than 40 million. Currently it's 37 projects. And contribution is calculated as gross profit earned, reduced with marketing expenses. for that relevant title, and also in, if relevant, also including profit from associated companies related to the specific title. And investment is, of course, then the capitalized development expenses, including any follow-on investments and investments in associated companies. So we are happy to see that we have a weighted average return of 3.2 for the total sample and of course that's an attractive return profile and also one of the main reasons why we focus and prioritize investments into organic growth.

Thank you Johan and Let's now welcome our friends from America. Matt? I can't hear you, Matt. I hope... I think I was on mute. I think you could probably hear me now.

I didn't want to disturb your presentation. Good morning. I don't know if you can see me, but I hope you can hear me. What's the time? I have Andre. It's four in the morning here, so... Fortunately, your presentation has been riveting so far, so I'm fully awake now. Thank you for that.

Four o'clock. That was about the European time we closed the last deal this morning.

Yes, it was. Yes, it was.

Do we have Andre here as well?

We do. Andre is here. I think he's sitting in a lobby in a hotel in Madrid. That's what it looks like. Am I right? All right. Close? Yes. Okay. I think I've sat in that lobby, too. So, it's, well, God, it's been, I guess the first time I stood up there was in February of last year, and a lot has happened since then. A lot of unexpected things have happened since then, but a lot has happened generally. And so we just wanted to go over some of Sabre's latest activity and a couple of the acquisitions that we've been fortunate enough to sign over the last... Actually, I should say the last couple of weeks, but really I guess you would say it's the last 12 hours because everything always seems to wait until the last possible minute so we can get as little sleep as possible.

Should we start with presenting the three companies? Sure. And then we could sum it up with some general chats before entering a Q&A. So you made the three acquisitions, and we are welcoming 220 people. new colleagues, and I will try to flip slides here while you and Andre are presenting the companies. I'm sorry, Andre, for not being on picture here, having you on picture, but I'm super excited to hear you present the Demiurge.

Well, so Demiurge is a great acquisition for Sabre, and they're a perfect fit. So we kind of have a similar history with Demiurge starting in the work-for-hire space. Demiurge is close to 70 employees. They're based out of Boston, Massachusetts. and they've been doing this for two decades now and have established relationships with all of the leading industry players and have worked on a tremendous number of successful titles over the years, including Model Puzzle Quest and Rocket League and Medal of Honor and Mass Effect and Gears of War, our own Borderlands, and a tremendous number of other titles. At the moment, they are... solidly growing their studio. They were part of Sega but purchased their interest back and have grown the company significantly since then. And we look at Demurge on a go-forward basis. as kind of the hub of our efforts to significantly expand our work-for-hire business within Sabre in the future. We have... and we see a tremendous market opportunity to create tremendous cash flow with highly decreased risk by continuing to work on the work for hire sector. We've done that successfully at Sabre, and it's been our bread and butter for so many years. that we are going to be continuing and growing that business because it's highly profitable and because the demand for resources, especially in light of the absolutely incredible number of acquisitions that have taken place not only by our company but by our competitors and peers over the past couple of years. has really created a demand for high-quality resources that are managed by companies that have significant experience doing that. And so I should state that we're super excited about the prospects of this business. Obviously, Sabre has a tremendous number of our own projects, uh... that we are working on that number is growing and then over the coming months we'll be sharing more about some of these uh... great products that we're working on internally but we feel that the work for higher space is solid it's steady it generates significant cash flow and we know how to do it better than anybody and so there are a few companies that are out there in the market that are successfully doing this and that are trading at high multiples and that are um... qualified and capable, but there's way too much work for the small number of companies that are out there in the market. And so Damirish is a perfect complement to Sabre and does exactly what we've done. They have great contracts in place with some of the leading industry peers. Uh, those contracts will continue. Um, and we'll grow on and we'll grow them. I mean, the one thing I can say about Demers, which is super interesting. And the one thing I can say about Embracer generally is that we are the, one of the few game companies in the world, uh, that although we're sizable and we have a tremendous number of great IP and great projects, no one views us as a competitor. Everyone views us as a partner and a peer. And that's our advantage is that we're, um, We're considered to be complementary to many of the other companies in the industry.

And it's part of the strategy, Matt, to be complementary. We have many complementary businesses, distribution, work for hire, and many other businesses.

You're absolutely right. I think it's just because everybody likes you, Lars. I think that's why we're able to continue to do that. I think it's in spite of me. I think it's because they all like you. But the reality is there are companies out there that say, hey, we're not going to work with this other company because they consider it to be a competitor. But nobody considers Embracer to be a competitor because we're an open company. Because of our structure and the way we operate, we will work with all of our peers, and they will work with us. We were a little bit concerned when we initially signed our deal to join whether or not some of our work-for-hire partners would continue to work with us, but frankly, it's just accelerated. And so we see this as a major opportunity, and... And it's just growing, especially with the latest round of consoles and the new platforms that have come out. The demand for content and competent people that can create that content has just exploded. And really, that opportunity is almost endless at the moment, and we're going to be taking advantage of it. And Demirj, with Kurt and Al and Bart, who sit at the top of the company, who've done this for 20 years and know everybody in the industry, are really the perfect people to help lead us towards becoming the world leader in the work for hire space as well. We're already one of the leading companies doing it, even within Sabre, but this is just another step in that direction.

Thank you Matt. Should we leave over to Andre a bit here, talking about the two complementary acquisitions this morning as well. Smartphone Labs. Andre, why did you bring these talents on board?

Yes, absolutely. I'm super excited to welcome more companies to Sabre's ambassador family today. One of those is Smart Home Labs, SPL. It's a company based in Nasha, about two hours drive from our main St. Petersburg office. We started working with those guys a few years ago, started working on some more mobile projects, but over time that relationship grew and SPL grew with us. They have a quite a few competent developers, engineers, who were able to help us with some of the most challenging projects. The most recent one was putting Wolverine on Switch, and these guys did a very good job handling that project, which is a massive technology challenge, maybe to the level of putting Witcher 3 on Switch. So those guys show exactly their ability. They speak the language, the same language as many of our Russian developers speak, and they're located geographically very close to where we are. We know it's a very strong team, and they will help to feed the beast. I can't agree more with Matt that there's a huge demand for content. Many successful games require, you know, they generate business ideas by putting them on various platforms. such as, for example, this, you know, World War Z, it's a successful game, and putting it in switch will certainly generate additional awareness as well in the future. But somebody has to do the job, so I'm very excited to have SPL on board, and they will help with many of those opportunities moving forward.

Exciting. I know we talked about, you talked highly about that team when we acquired Sabre, and I'm really... pleased to see they've become part of the family, Andrey.

That's exactly true. I remember talking about it a year ago when we were working on our deal and we were thinking about how we can expand. SPL was on the list and I'm excited that a year later SPL is part of the team.

Yeah, well, look, it's the one thing, Lars, that's happened since we joined. Everything that you said we would be able to do, we've been able to do to grow our business. And the results are showing, and they're going to continue to show. So it's fantastic that we're able to have the ability to go out and acquire the resources that we need, not only for our internal projects, but also to move outside and continue to find new partners and new opportunities. with both of these acquisitions. And that, I guess, can lead us on to our third acquisition as well.

Andrei, so please tell us a little more about our friends here in Estonia and Ukraine.

We identified this team a while ago, and we've been impressed by what those guys can do. They actually worked on putting Borderlands on Switch, and they did a fantastic job. They have a long history of working with our brothers and sisters in the family of Gearbox, and they've been working directly with those guys for a very long time. They did other high-profile projects, such as they did a lot of work on remakes of Tony Hawk 1 and 2. The company has about 50-60 employees in Ukraine. The company operates multiple offices in the territory, and I feel like together we will be able to grow this team quite substantially. They're already working on a number of games with Sabre, and those games haven't been announced yet, but they will be in a short amount of time.

Yeah, well, it's probably worth mentioning here that one of the things that we've done over the last 18 months is to utilize our resources in combination with the other divisions within Embracer to exploit product that we've seen opportunity internally. When you have a studio that's capable of porting a game like Borderlands, there are other games as well within the group that require porting. We're doing a lot of that with the other divisions within Embracer to bring those products to life. And adding these resources is not only for the work-for-hire business, but but it's also so that we can take existing Embracer IP or existing product that has the opportunity to generate significant revenues on new platforms and bringing them over to those platforms as well.

Great. So thank you, gentlemen. Before we're finishing this call, How is business, and are you busy in terms of M&A and what's happening, or have you slowed down your... I'm going to slow down after this phone call.

I'm going to try to go to sleep for a couple of hours, but then we're going to start up again. You know, it never ends. And Lars, even if I wanted it to end, you wouldn't let me let it end. It's good. Everything's been great. I don't even know how many projects we have in the pipeline now at Saber Eye. Andre tells me, and every time he does, I fall off my chair. So not only are we doing a lot of amazing things internally that we're going to be announcing over the coming months that I'm super excited about, I would say some of the best work Saber has ever done is certainly out of us, including some projects that we'll be announcing in the next months without reviewing more, because I know that You don't like me to talk too much, Lars, and I can't help myself. But also on the M&A side, we're very active. We've gotten disciplined. I mean, not like we weren't from the start, but we look at a lot of companies, and we try to find the companies that have the best cultural fit. We try to find the companies that can achieve certain objectives like we have now, such as we want to add to our cash flow and add to our cash flow significantly. And Damier is a perfect example of a company that will help us to do that because we have a plan for growing it very, very rapidly. But we're balancing that. This is the way Sabre has always operated. We've always done a mix of our own IP, our own projects, and then projects that are funded by external parties that are profitable basically on a monthly basis. And by doing that, we hedge our risks a little bit, but we still give ourselves all the upside from those new projects that are coming in. And our acquisition strategy is in place primarily to affect that particular type of business, although we are open to any transaction which makes sense and that we think will add benefit to us and to the group.

Well, great. I think you have a fantastic machinery for that, and you're also forwarding opportunities to the group and other companies. I think it's great. So running out of time here, I would like to thank you guys for joining us this morning. And once again, very welcome to these three new fantastic companies into the group.

Thanks for having us, Lars, as usual. I can't wait to give you a big hug in Sweden without a mascot.

Okay. Thanks, Matt. See you soon. Thanks. Okay. So with all this said, I would like to leave over to Oscar.

Thank you for that Lars. So let's dig into the Q&A session and I think there's always a lot to discuss here today. First of all, nice to see Matt and Andre happy and doing well. But let's dig into the Q1 report first. And I mean, there's been a lot of talk here about opening up effects, possibly affecting the performance of companies in the industry, and also about IDF, Apple's changes to its marketing ecosystem, having an impact. So I mean, 10% organic growth, despite very tough comparisons from last year. What can you say about that performance? Are you happy? And after that, I want to break it down a bit as well.

I think, you know, looking in the general market, I think the market is at the same roughly stable level as last year, which was a significant growth from the year before. So I'm glad to see that people are still consuming a lot of games and our games. And, you know, we expect this stable growth situation in the industry this year and then we're expecting a continued nice growth in the industry. Looking at our business, it's obviously hard to measure premium games business on a daily basis in the same way. Many of our titles is premium and you pay to play, so our revenues in that segment is driven by new releases and the performance of the back catalog. I think obviously we had Biomutant driving organic growth. But we also had the wide catalogue of products did contribute. It was a mixed bag of that performance of the back catalogue. Titles that we had content updates for or brought to NextGen and so on obviously had more revenues. But I think we're having a growing wide catalogue of titles adding to the revenues every quarter. Looking at the mobile business, I think, driven by Easy Brain and Crazy Labs, on a performance basis, had a fantastic growth of 37% in a quarter, which is a fantastic achievement if you compare it to last year. So they both had underlying growth in their business, adding more titles, higher performance, and a solid process how to grow their business. faster, I would say, than many others in mobile.

I mean, just breaking down the organic growth performance here, despite tough comparisons, of course, it's been driven long-term about investments that are accelerating as you acquire companies and invest in them. But in this quarter, I mean, Biomutant, as you say, probably a main driver of How about Deep Silver seems quite stable along with Coffee Stain, while Sabre a bit lower year-on-year. If you could just break it down a little bit.

I think Deep Silver or the cross-media publishing as we defined it today had a solid performance, especially driven by the wide catalog. For example, they had a next-gen update on Metro Exodus on PS5 and Xbox Series X that was driving both physical and digital revenues in the quarter. They had a good performance on the MotoGP 21, a new release. And obviously they also made a number of acquisitions, adding Vertigo and many others over the year. Looking at Sabre, they came in a year ago and I'm super happy to have them on board. But having an organic growth case, they had a fantastic first quarter with the SnowRunner. So it was tough comps on that. And I think we saw that in the numbers. That was a bit down from last year. And also the acquired companies is mainly resource companies. Not really driving revenue today. It's more driving revenue of tomorrow. They having a huge pipeline of things coming out. But it's not coming out like this quarter. So that's the thing with Sabre. also on the revenue side, they put some resources that they've been kind of defined as selling as revenues to work on their own projects. So that work is capitalized and will drive further revenues and growth and higher margins in the future. So that's, you know, when you transition a bit of resources within work for hire to own projects that are obviously on the short term lowering the revenues a bit, but on the Long-term, it will drive margins and revenues. But as Matt stated, we will continue, or they will continue, complement the industry with work-for-hire projects, co-op development, publishing projects, as well as totally own publishing projects.

Yeah. I mean, this is really interesting with Sabre. So, I mean, really strong pipeline, apparently, both from you and from the team. What can you say about the pipeline for this year? I mean, we know that Evil Dead is coming in fiscal Q4, I believe, and that it's self-published, as I understand. Is the pipeline strong for this year or should it be seen beyond this year, especially strong?

I would say if you take a higher level view on Sabre and look on pipeline, they will have the years ahead like next financial year and the years after that, there is a significant difference in management expectations revenues on those years than this year. But in the respect of the team and all the titles they have planned for this year, I'm sure it's fantastic and great titles. But looking at actual expected revenues, it's a huge difference. So I think that is the color I would like to give you on that.

Great. And then we have to touch upon BindMutant. I remember last time I was here, or we were here, it was five days until release. Then it came out with, I mean, very high expectations. And, I mean, it seems to have performed quite strongly, despite ratings that were, I would say they were, I mean, decent, but perhaps not the slam dunk that one would have expected. perhaps hope for. So what is your view here after three months later and what do you see ahead?

I think the team and THQ made a fantastic achievement of building this product and shipping it. Twenty people team built over five, six years and to create this enormous game of that small team is just a hell of an achievement in this industry. And they nailed it. They delivered the game according to my expectations, especially financially. We recouped the investment, both for the acquisition and the investment into the game and marketing, and we made profit. What else could you expect? Obviously, there could have been some wrong expectations, and you can debate pricing and other things on the title. But I know there's a lot of fans out there loving it, And there is some other fans out there or gamers having a more difficult time in the beginning playing the game. But in the end, I'm confident the game will find a lot of new players over the coming years and decade, both on the current generations, but potentially also on more platforms in the future.

Great. And then I think a question that many will ask themselves here in the ROI graph. We saw one game having, I think, if I saw it correctly, 2x RY and one game having 3x RY in the past quarter. So which one is Biomutant? Are you willing to shed some hint of that at least?

No, I think it's the work of you, Oskar, and I think you know the title. So I don't want to give too much color on that. I'm glad I made profit. I think that's the first KPI, making the money back and then a healthy return. Both releases in this plotter here made it.

Great. And then looking ahead for Biomutant, we're halfway into Q2 now. We haven't seen discounted sales as far as I know yet. So can we expect that in Q2? I expect that to probably be a sales driver given the high initial price.

Yeah, let's see. I think we need to... I think obviously big promotions will be a good revenue driver in the future of the product. The question is what price point. To be honest, I remain to be seen. But as usual, I want you to be... realistic and not expect too much too soon of everything. I'm just confident that Biomute will bring good revenues in the future and especially on potentially other platforms as well.

Great. And then Valheim we'll have to talk a little bit about. It came in bang in line with guidance. I think 1.1 million units in Q1. As far as I saw, no guidance for Q2, Q3, Q4. What can we expect here ahead? Obviously it had an initial very strong performance.

It's still performing good and it's a fantastic game. But as you noticed, it's been declining a bit in terms of concurrent users and sell-through. But still being one of the top titles, I would say, on Steam. So I'm confident it will continue to perform, but perhaps continue to slow down until they are able to create more content and ship more content whenever and I will let that team and the publisher to communicate that when they are ready but they are obviously working on it and then Deep Silver Metro being a strong performer in the quarter with quite strong performance I would say for Deep Silver compared to previous quarters

Are there any notable platform deals in Q1, or is it driven mainly by game sales? Anything we should be aware of?

Well, there is a bit of platform deals on one of the titles that we highlighted here in the presentation as well. Okay. So, I wouldn't say exceeding Metro, but Some money was accounted for according to accounting rules on that platform deal.

Yeah. And also, just had to check Chivalry 2, which seems to have been quite a success. I mean, mainly digital title and you have the physical side. Is that a meaningful contributor at all?

I care about dollars or kronos, so it's always a meaningful contribution. But financially, it was not a significant contributor, especially not in gross margin or EBIT contribution.

But

Everything counts, and it's a fantastic title. It's a hell of an achievement of the title of the team at Tripwire and their developer of the title, so I'm happy to see the success of it.

Great, and then a few more questions on Q1, then I'm going to go over to some guidance questions or outlook questions. I mean, two questions. two or arguably three notable companies or acquisitions consolidated now in Q1. EasyBrain and Gearbox separate segments and then Aspire. So starting with EasyBrain, I mean, quite a remarkable performance in Q1 given the guidance. And there I think, I mean, the interesting question is regarding IDFA here, the impact here, because you spoke in late May about limited impact, but it was very early at that time. Since then, we have seen peers report some issues with regards to Facebook, for example, and lower Q3 guidance. So what, I mean, how has the impact been felt?

I think the IDFA is, you know, it's now widely implemented. So that's happened during the summer, but obviously that will continue. But also, Ysabane is a different business. They are one of the leading companies in the genre, and they're having an advertisement-driven business. I'm super impressed with the team, how they're able to understand the business and prepare for changes, and then finding the opportunities, and now able to actually invest back into marketing again, or use acquisition. That will drive might put down the profitability in terms of EBIT on the short term, but obviously will drive a lot more profitability and growth on the long term.

So you mentioned in the report that you're seeing increased return on ad spend in the past couple of weeks. Does that mean East Brain had some issues or so in July?

No, but if you spend the money on marketing or use acquisition, you need to believe that you will have a return of investment. I think Without commenting too much, and it's not really my background in mobile gaming, but obviously you need to believe you get the money back you spend to drive new customers. And I think a lot of potential industry peers are struggling with that because they need to find some ways or certain customers. Easy brain business is different. They don't have this in-app purchase to the same degree.

Understood. And costs for advertising have been relatively stable. So is it reasonable to expect growth sequentially from Q1 levels, or is it any seasonal effects to take into account?

You know, I stated we're expecting growth on the eSpring business this year overall, from last year's numbers. And we saw growth this quarter. Potentially, it could be top-line revenue growth, you know, this quarter and then coming quarters. The profitability will be depending on the user acquisition. So it's quite important. And right now, I would say that we're entering an investment phase to drive further growth. They still make good money, but they made a lot of money in Q1. So I'm sure they will make even more money in the future. But I leave that to the management to decide how, what All companies in the group should always invest for the long-term best outcome.

That seems wise. And it's possible to get, just because it's mentioned specifically, could you give some indication also of the margins in Q1 and the margins in Q2? I mean, how big can the difference be? And what can the use acquisition investments differ?

No, but I think it could be quite significant. different. I need to remember if we disclosed their margins in the acquisition of them we did. I think it was 40% roughly if I remember correctly. It's a highly profitable company, about 40% of its margins with a fantastic cash conversion. But over time, top quarters could be about 40% potentially done and perhaps a bit more, but roughly that. And then investment quarters, I It could be lower. Would that be 20 or between 20 and 40? But it's hard, you know. It's a new business for us. But obviously, it doesn't matter for a long term. What I want them to do is just to invest as much as possible to drive their business forward. But I understand your model, Oscar, for the current quarter ending September is important. So I want to be stating that they are investing.

Yep. And then Gearbox, I mean, clearly above my expectations at least in Q1 here. What can you say about the drivers? Is it mainly Borderlands, the Borderlands franchise, anything else? No major releases as far as I know?

No, I think it's a mixture of royalties and then the ongoing projects. And as Johan stated, it's a percentage of completion accounting. So they have most of their teams working on a number of projects and then they could account for it. So I think Gearbox in general would have a stable year, but this is not the year they have... No, this is a starting point for Gearbox. They are investing aggressively into various different sort of things that will drive the long-term growth of Gearbox. But I think the quarters over this year on the financial will be roughly stable or a bit up and down. But I think you should look the years ahead if you value or define Gearbox rather than looking at the quarters this year. It's also a bit complex accounting. Now, percentage of completion is not complex because now it's implemented. But these royalty things is a bit complex. When is those revenues coming in? Not necessarily always the same quarter as the game is released, because it could be depending on specific agreement definitions.

And then two final questions from me for now, before heading over to some questions that I've received here from the stream. But just want to touch on the cost structure. I think we discussed this a little bit earlier. But obviously, really, really strong gross margins in this quarter and really high other operating costs in a quarter where these two companies, EasyBrain and Gearbox, were consolidated. So is it correct to assume that the high gross margins is driven mainly by EasyBrain, which has high degree of advertising revenue? Yes.

That's true, but also driven by Gearbox. They have a high gross margin, but they also, both companies are high, but there's a sizable cost structure added as well. And then we have the marketing investment.

Yeah. And the user acquisition cost is within the operating expenses and disclosed separately, the 289, so that's not part of our gross margins.

Great. Will you be reporting user acquisition costs separately or mention it by quarter ahead, given it's an increasing share of the cost and strategy?

We are defining how we are to report our mobile business. But right now, I think we will continue reporting user acquisition costs because I think it's a relevant KPI in the mobile business. We want to be transparent. We want to show the business at the same time. We don't want to disclose too much for the fierce competition that is out there. So there is a balance. And we need to learn as well as a parent company how to report this. I'm super confident about talking about retro gaming and Biomutants and things, but there is some very complex data-driven stuff here on mobile gaming.

Understood. And then final question from me, you wrote in the report about limited releases here in fiscal Q2 and we know that the comparisons are again quite tough. Is this an indication that organic growth will be limited or even slightly negative in Q2?

I think you need to put realistic expectations on the quarter ending now in September. There is not really any significant releases. There is a A good number of fantastic games coming out at the end of the quarter. Hot Wheels and World War Z. But there is just a few days and obviously those are not significant investments as well. So I think the business will be driven by the back catalogue. So whether it will be a negative organic growth or just a stable or I think put, you know, realistic expectation on the current quarter. I think I'm long-term and, you know, just looking at the financial year, we will have a great year and with, you know, much higher organic growth than we were reporting this morning on the constant currency basis for the year. That's definitely my expectation. So, but that's driven by Q3 and especially Q4.

Yep. Great. And then some questions here from the stream. And let's start with the questions from Martin Arnell from DMV Markets. So regarding your comments about Q4 to become even busier than previously expected. Should we interpret this mainly as a slight shift of pipeline from Q2, Q3 to Q4? And could you say something about trends so far in Q2 in addition to the comments about improved ROI in mobile advertising?

I think in premium gaming it's hard to see its trend. You have new releases, you have some performing well like Tribes of Midgard and a few other titles. But... I think it's hard to give a lot more color on that. I think we see a fair stability of the performance now during the summer. Looking at Q4, obviously we have titles, yes, moving from Q2 to Q4 or Q2 to Q3. So basically polishing more and making sure we're hitting the right release spots. Again, we put quality first and we want to maximize the potential of each and every IP we have in the pipeline.

Fair enough. And then a question from Nick Dempsey of Barclays. And I think we've talked a little bit about it before, but I'll read it here. You've commented that EasyBrain is seeing less of an impact from IDFA than you were expecting. Is that a comment that includes what they have been seeing in July and August? or just up to the end of June? And also, how is the change impacting crazy labs, which will be consolidated here from the start of October, I suppose?

I think that comment includes the business up until today. At the same time, you can say that the management team is very realistic, very data-driven, and they had perhaps a base case that was or conservative, and they're now exceeding that significantly. I love that management style, over-deliver, under-promise. In terms of crazy labs, I'm hearing positive things, and what I see or hear is they've also been tackling the IDFA in a good way. I think it's a bit early to comment that deeper, though. Obviously, we'd like to onboard them now and to close the transaction and then look closer into that business. But they have a significant growth on a performer basis expected this year compared to last year, and obviously a business plan coming seven, eight years that we have been buying into.

Yep. And I mean, I think when you announced just on Crazy Labs here, because I think certain people may have been out when those deals happened. Could you talk a little bit about the growth outlook for Crazy Labs compared to the last 12 months performance? What do you expect? for this fiscal year and also the facing between quarters here. Is it any seasonality or I mean strong sequential growth that one should factor in?

Well, we gave a bit of color of that. We gave a financial range of all the acquisitions made two weeks ago, two to three billion, and then we said in the low range taken for this financial year, meaning close to 2 billion roughly, divided by four quarters, so obviously done roughly 500. How much is that? Is Crazy Labs, you know, I would say the absolute majority of that is Crazy Labs.

So 80, 85% or so-ish. Okay, that's enough for me, thank you. And then we have... Another question from Nick Dempsey of Barclays here. Given the weighting of releases to Q4, how important is it for you to get all of these releases out there within this financial year? If a number of releases slipped into next year, would that matter to you, provided those games met your expectations eventually?

I'm running a business, and at the end of the day I want to complete as good, great games as soon as possible and have those revenues coming in. At the same time, it will not come at the cost of releasing a bad game or releasing it too early, because that would not be wise for all the shareholders and return of investment. So there is a balance, but that is one of the operational freedoms that my companies have. They should maximize the potential of each and every IP. I know everyone is working very hard to make all these fantastic games, but I let them decide when to release and how to release it. With that said, it's really hard to give more color on that. On the long term, a few weeks or a month or a few months or a quarter's difference doesn't really matter so much. especially if you've been working on a game invested for a number of years. At the same time, you know, I always want to deliver.

Yeah, it's an interesting topic, and I mean, I actually looked at the list of notable game delays just during this year. I think it was approaching 40 notable game delays. So, I mean, you have a policy of, I mean, letting the the developers, the publishers, announce news about the releases and potential delays as well, I suppose. So, I mean, the fact that there are no delays announced today, you reiterate the guidance. Should we read into that? What should we read into that? Would you have announced a delay?

No, I think the forecast we give is based on the information I have at hand. We collect all data, we talk to the teams. What titles do you have on hand and when do you expect to release them? And that's the guidance we provide.

And looking ahead here, we have a couple of interesting game events coming up in the coming weeks. So, I mean, in general terms, what events, what type of events do you consider sort of good to announce new titles.

No, I think I don't want to put too much color on that. I think we will be on a lot of different events. So, stay tuned.

Stay tuned, indeed. Great. And then, yeah, save that question for later, but Johan, a question for you. And I mean, in some context, I mean, cash flow is relatively weak, or I mean, quite weak in Q1 here. So the question is from Martin Ornell at EMB Markets. Could you elaborate on the negative change from working capital? Is it mainly course media seasonal swings and royalties to Iron Gate? And also, do you expect it to swing back in coming quarters? And what do you expect in terms of dividend from associated companies?

I think that, well, the explanation is As he mentions, it's what we have said. So if you look at seasonal swings in trade tables, they are seasonal swings, so they can swing both ways. When it comes to payments of royalties, that's not a seasonal swing. But on the other hand, during this quarter, it was an exceptional one. exceptional amount. So we don't expect to have the same exceptional amount looking ahead. Then the final part when it comes to dividends from Wiringate basically. I guess first they need to close the year before they can do it. So I wouldn't expect to have that in the coming two quarters, at least.

Obviously, we'd love to pay a lot of royalties in the future to Iron Gate, because that would mean we'd be selling a lot of Valheim, driving revenues and profitability. But at the current level, obviously, it's been a decline in that, compared to February, March, and that's driving this. It remains to be seen, you know, how Alheims will develop in the future. I'm sure there will be a lot of work. I hope there will be a lot of players returning when they bring out more content. And, you know, I'm sure it's an IP that there is the potential to work on that on a very long-term basis.

Yeah. So I guess it should be seen in the light of a very strong free cash flow in fiscal Q4 last year. and then sort of the royalties being paid now, so it should be seen perhaps over two quarters.

Yeah, and I think it's hard to see, you know, the performance was fantastic, it continued a bit, and now it's been declining a bit, and it's worthwhile to estimate this. Obviously, if the performance of Valheim would have been continuing during the quarter, we would not have seen this big change over time.

I think you're right also there, Oskar, that you should predominantly look at cash flows over more than one time period. I think that's absolutely correct. That's why we're also presenting it on the TTM basis. Although we are investing more than ever into our games portfolio, it's a positive free cash flow on a training 12-month basis.

But I'd like to state that perhaps we got a bit not carried away, but the free cash flow is obviously someone that something that shareholders and analysts have been asking us about all the time, and why don't you have it, and now we had it, we start reporting it, talk about it, but to be honest, it's not really a KPI we're driving the business for. To be honest, I'm happy to see we have a negative free cash flow in a way, because then meaning, part of that at least, meaning that we are investing more into organic growth for the future. So it's not really, it's not like we are chasing the cash flows as such. Because then we would stop all the growth capex-like investments and focusing just on the evergreen titles and maximizing the margins in percentage and all that, what many of the peers are doing. But that's not how we operate.

And a question on the investments, which were quite high in the quarter. So we expect high organic growth here. I'm going to have to raise my estimates, I think. No, just kidding. But the investments were slightly, I think, just slightly higher than what I had expected. And primarily, as it seems, driven by external investments. And obviously, the mix is now different to the previous quarter with Gearbox and other things. So could you talk through a little bit?

Yes, it's driven by the inclusion of Gearbox as their publishing platform. investments. They have a lot of external developers. That's added. There is also a significant increase of investments within, especially I would say, Quarch Media publishing segment. They have a number of big titles they are now investing into with partners, such as Starbreeze, for example, with Payday and many others. And then obviously with the inclusion of Aspire, they have number of products, but they have one significant project that has a sizable investment. That's internal.

And then the other effect, as mentioned, is when we see a shift from co-publishing agreements towards internal development agreements, as we can see in Sabre as well.

Excellent, excellent. I mean, I want to touch also... actually we have a question from Jesper Birch Jensen here as well. We've seen quite few game delays from several of your peers this year. Do you see this affecting any of your titles in Q4 with them being shifted into the next financial year?

As stated, with the information at hand, we don't see that those significant titles, they are still scheduled. What we have seen is that there's been a number of titles shifting from Q2 to Q3, Q4. So I feel good about the pipeline.

Great. And I have a number of questions here, which I will run through quick. Could you give us an update on the outlook for partner publishing for the rest of the year? New releases, what to expect with the reopening of cinemas, etc.?

Yeah, I think the course media film business has been able to convert revenues from physical distribution and cinemas to digital platforms in a good way, especially on the profitability level. So I think perhaps if cinema is opening up and physical retail, it will be a bounce back. But I think that's a stable business. Look at the part of publishing business. Of course, media, as usual, there's base business. But then significant growth in those revenues is driven by big AAA titles. And they have one sizable title that I know is scheduled for our Q3. coming out. At the same time, they have this new cooperation with a major American publisher for Europe. I think that is still in the transition period to be implemented across Europe and to have significant revenues of that this year and remains to be seen. But I know there's a long-term relationship on that and obviously that publisher also have big titles coming out and they had another American publisher indirectly that internalized one of the labels of Koch Media which over now will disappear from the Koch Media lineup as we talked about last quarter so Now I see a stable business.

So Codemasters out and Activation Blizzard in, I think that's been known since before. And I presume, I think I saw some hints about Call of Duty Vanguard. I suppose that could be an interesting Q3, fiscal Q3 title. With respect to all our business partners, I don't want to comment on that. Yep. And then I have a really interesting question from the stream, which I'll be interested to hear the answer to. It's regarding how a sentence in the report should be interpreted. A strong pipeline of new launches during the second half of the year should drive an increasing organic growth for the entire year. Should this be read as the organic growth for this year to be higher than last year's 70% organic growth?

I think, as I stated before, it should be seen out of the organic growth in this current quarter and what the organic growth will be for the full financial year.

I suspect that as much. Let's see if we have some more questions here. So here's another one. My impression from following the news is that competition for Embracer on M&A is much more fierce than it was two years ago. Has there been a change in how potential acquirees approach folks with Embracer? How long it takes from first talk to signature, price expectations and such, compared to two years ago, for example?

Yeah, well, it's more competition. There is more players out there. There is, you know, again all the bankers of the world are engaging in gaming and SPACs and I think the main competitors is significantly larger companies to Embracer and especially one company being very active and pushing a lot and I love that competition and that keeps me awake every morning and love to see that we are winning most cases we want to win and having, you know, fantastic companies. So I think we have a competitive offering at the same time. We don't need to, you know, we work with industry. We don't need to buy all and every company that's available. And people that want to maximize cash exits and, you know, all the respect of that, but that is not the way to go with Embracer. You know, Embracer is something else. It's a starting point of a long journey together and how we could grow their business together. So that appeals to a good number of creators and entrepreneurs out there. And I think that offering is stronger today than it was two years ago. And as stated, the larger our ecosystem becomes, the better we become and the greater output we will have. And I think when I talk to creators and entrepreneurs, they can see the benefit of becoming part of the ecosystem. All these great companies, IPs, abilities we have within this ecosystem. And that's why they would like to join. Aside of we being, you know, whatever, what we are, based in Europe, independent, not running our own end consumer business, not being controlled by anyone, you know, it's owned by the management to the majority.

Great answer. And then we have a question on Tribes of Midgard. what's the percentage cut Gearbox gets from each sale of Tribes of Midgard? And if you can't answer that smart addition there, can you provide me with a ballpark estimate in percentages and are the percentages aligned with the rest of the publishing industry?

I think it's a very good question. I'm happy to see the performance of Tribes of Midgard. I can't really... talk for the actual margins in that. And to be honest, I don't really have that exact number. Even if I had it, I can't disclose it. I know that Gearbox has a good publishing business. I'm sure they're having a margin in line with what you should expect from such a corporation. But I can't really give you color because I don't have it in front of me. We made a lot of work when we brought them on board and you know, I'm happy to see one of the first publishing titles performing well.

And I suppose a typical arrangement, I mean, correct me if I'm wrong, maybe 70% to 80%, or sorry, I mean, paying out 20% to 30% royalties after the investment is recouped. Is that the sort of standard deal, would you say?

Yeah, well, it ranges from 15% to 50%, so depending on manufacturers. But considering if they are financing the development, it should be in that range.

I mean, the presentation now is nearing two hours, but I think maybe five more minutes, if that's fine. I have an interesting question here on the VR side, which I think is interesting and getting more interesting perhaps throughout the year as well. So regarding the acquisition of Forcefield, this is strengthening Embracer within the VR segment. And I'm wondering first, how much in percentage of Embracer's revenue will the VR segment now stand for? What's your view on VR in general? And is it a growing segment, would you say? What is the potential? And how prioritized is the VR segment going forward for Embracer, mostly regarding the M&A side?

So there's a lot of questions. I think on the revenue side, talking about overall embracer, it's not significant today. Vertigo, we discussed bit numbers. Obviously, force field will add to that a bit, but it's a work for hire business that we are, will, I think, to a higher degree, use their resources to produce more own content. That will drive revenues in the coming years, but obviously not in the short term. There is a number of other VR development across the group, both within Saber and other group members. I'm a firm believer in VR. I think it's a fantastic experience. It's a true immersive experience. And I know there's strong platforms investing into the future in this. There's a viable commercial basis now to make your games and make profit. And if it's successful, like Arizona Sunshine, the actual margins is really good if you create a leading IP. And I think now, in the early years of VR, you're able to establish new IPs. So, yes, I would say it's a prioritized area of investment. And the relative development cost for VR games is, comparing to Traditional premium games is much lower and shorter development lead times, I would say, than big premium games. So from that perspective, it's also quite interesting. This doesn't mean that we will go out and buy. There's thousands of VR developers in the world. I would say a good number of hundreds of VR games development studios out there. I'm sure we will add a lot more in the future, but we need to bring the best talents with the right mindset on board. I think Vertigo built a fantastic experience, reputation, knowledge, how to grow Vertigo, both publishing and through own IPs. And I hope they will make more acquisitions in the future as well. But it's really up to Kimara and Richard and the team of coach to support that.

And then on the topic after the fall, it was supposed to come out during the summer. It's now been delayed. We don't have a release date as far as I know, but when should we expect it?

I don't think it's delayed too long.

Okay.

So it's a complex game. It's a big game. It's a AAA VR game. And it's multi-platform cross-play.

It's coming. Stay tuned. And then finally, let's end this with some questions on the latest acquisitions here today. Demiurge seems to have a really long and strong track record. and seems to have been a coveted asset, is my impression, among competitors. So could you talk a little bit about their shift from AAA to free-to-play, and what they're doing now, and what will they scale up for ahead?

Well, they're working on, you saw a few IPs on the screen today, and there's at least one major other IP they're working on with a major peer. Which in the same category, free to play-ish. But like a real gaming product, I would say. So they will continue doing that. They will continue working with those business partners. But obviously, as you're hearing Matt, they will scale up their capacity to make more products and better games. So I just love the heritage of them. You know, 20 years going back and the IPs they've been working on is fantastic. And I think, I don't know them personally myself, but I've been hearing fantastic things from Matt and Andre about their abilities on a technical level as well. And it's a rare asset in that sense. There is not that many companies in the world that are able to do what they are building, doing. And I think especially on that high level, AAA-ish, free-to-play. It's a rare asset. And it's cross-platform as well, I think I read. I can't comment further on that. I need to refer to the presentation.

And then the M&A outlook as the final question here. 8 billion in net cash currently, and 17 including... Currently it's a bit more, but we haven't closed the transaction of Crazy Labs, for example, yet.

But when that is closed, it's expected to be roughly 8, depending on the cash flow.

And 17 billion including credit facilities. So, I mean... there was really nothing new with regards to comments on discussions. But compared to the previous quarter, when you were perhaps more explicit, would you say discussions with larger potential acquisitions has accelerated?

Well, I gave a bit of number of... I don't think it has really changed a lot. I would say if it changed, I think it's more in a way, or more mature dialogues. And I would say a few more sizable. I don't want to put the number out there because it's creating headlines and I don't want to be seen as this big thing just buying for the sense of buying. It's not what it's all about. So it's about finding the right partners. So we are busy. We have more opportunities than we have time to allocate to them. That's the problem. So every day is you know Time allocation is the biggest challenge.

Great. And I think that's a good spot to wrap this up. You're busy and stay tuned. So thank you very much, Lars. Thank you very much, Johan. And thank you very much, everyone, for listening in. That's it for today.

Thank you. Thank you.