Embracer Group AB

Hello and very warm welcome to Karlstad and Embracer Group's fiscal Q2 report. We have a very interesting discussion ahead of us today after I think a solid Q2 report and also some news on the pipeline and the guidance for the coming years. So a lot to talk about as always. With me here today I have CEO and founder Lars Vingerfors and CFO Johan Ekström. I will come back for a Q&A later. Before that, we'll go through a presentation of the quarter and some discussion around that. So without further ado, I will leave it over to you, Lars and Johan. Please go ahead.

Thank you, Oskar. Hello and good morning, everyone, and welcome to Värmland, Sweden. I'm happy to report another stable quarter. Our net sales grow to close to 3.3 billion in the quarter, which were 38% growth year over year. And the sales in business area games grow to just about 2.8 billion, which were 89% growth year over year. The profitability came in in line with the management expectation at close to a billion, which were a 49% growth year over year. The organic growth on the constant currency basis was in line with expectations, but minus 9%. mainly due to a tough comparison period last year with the record performance in that year of quarter of THQ Nordic. But looking at the overall business, the performer growth in the quarter, including the acquired companies, were 11%. And the acquired companies on the performer basis grow close to 30% in the quarter. Strong performance of titles in the quarter were a wide range as usual. On the premium side we had a very strong performance from our friends in Milano that released Hot Wheels Unleashed. Saber also released World War Z Aftermath and Insurgency on console We could also see that we are having a more diverse revenue stream than a year ago and the mobile titles are climbing in our charts So we have three mobile titles in the top six chart here And finally we had a successful release from Gearbox Publishing with Tribes of Midgard Overall, we're reporting to have closer 200 games under development end of the quarter. As of today, we have 86 internal game studios and are engaging more than 9,000 people on a daily basis. We continue to invest as much as we can into the future. The investment into the games development were 881 million in the quarter. And you can relate that to that is just about three times as much as the value of the releases we had in the quarter. And we will talk more about the pipeline soon. Also really happy to see that our internal headcount grow 25% organically. So a lot of, or most of our studios across the world are hiring as much as they can. The mobile games business again had a excellent performance with a 26% growth. We now engaging 32 million players on a daily basis. And on a monthly active users, we have 271 million players. And in total, our companies on a performer basis had 350 million installs of the games. This morning we announced, we opened up a bit more details about our very wide range of games coming in the coming years, and we gave more color on the AAA pipeline. And I will come back to that in a minute in a separate slide. But we are planning to release 25 AAA premium games products until the financial year ending March 2026. We also announced this morning the decision to postpone Saints Row, one of those AAA titles that we previously have scheduled for release in the fourth quarter in the current year, as well as another unannounced but earlier expected AAA title in the fourth quarter. We are changing the forecasting number from the forecast of completed games in quarters to a forecast on our profitability. And this morning we announced the forecast of operation EBIT for the upcoming years. This financial year ending March we are expecting to earn between 4.3 to 4.7 billion krona. The next financial year, we are expecting to earn between 7 and 8.5 billion. And in the year ending March 2024, we are expecting to earn between 7.5 to 10 billion krona. This forecast do not include any new M&A. And this morning, we gave the last forecast of completed games in this financial year. So in the year ending now in December, we expect to complete games between 350 to 400 million, the same as the previous forecast. And in the fourth quarter, we're expecting to release games for the value of 400 to 600 million kronor. So looking at the AAA games in pipeline. So currently we have a pipeline that consists of 25 AAA games for premium PC console. They all have notable or significant marketing budgets and are expected to become multi-million unit sellers. Each game we'll have at least 100 games developer at peak in development, but normally a lot more and up to 250. Again, all games are scheduled to be released during the upcoming years, but no later than the financial year ending March 2026. all except two games are developed at internal studios so looking at these 25 games the development status as of november this month we have 11 of them under full production six of them are under pre-production that still could be a quite sizable team and could run for a notable period of time and we have eight that we define as concept phase that normally is a smaller team that are planning more for the future Looking at how many of them are based on own IPs versus licensed or external IPs. So of the 25, 15 of them are based on group owned IPs. 10 of them is based on either licensed IPs that we control or external IPs that other companies owning. And looking at the publishing, as we see the publishing of the products today, 19 of them will be published by the group companies. And as you know, we have 17 publishers across the group, either fully or partly. And six of them will be published by external publishers. So with that said, I'll hand over to our CFO. Thank you, Lars. Thank you.

So yes, let's start by having a look at our P&L for the quarter and trading 12-month period ending September. Net sales amounted to approximately 3.3 billion in the quarter, which is up 38% versus the same period last year. The growth is driven by business area games, where we have a solid growth of 89% in the quarter, reaching 2.8 billion. If you look at partner publishing film, we had a slower performance in the quarter, so sales are down to 465 million in the quarter. But here it's also important to bear in mind that we last year had two larger releases in the segment and we do not have that this year. The profitability in terms of gross profit increased to 2.5 billion, which is up 85% versus last year. The growth in gross profit is driven by our growth in top line, but also improved profitability in terms of gross margin moving from 57% to 76% in the quarter. This is driven by a positive product mix shift thanks to the increased sales portion going into business area games. Operational EBIT increased 49% over last year, resulting in 973 million operational EBIT in the quarter, yielding a 30% operational EBIT margin. Looking at our adjusted EPS for the quarter it was 0.65 SEC per share. This is down if you compare to the same period last year and it's mainly explained by differences in unrealized and unrealized currency gains and losses as well as discount interest on related to provisions for conditional purchase prices. Adjusting for that, adjusted EPS is up from 0.8 to 0.81 in the quarter. Looking at the full year or 12 months figures, we reach 11.3 billion in net sales. yielding an operational EBIT of close to 3.8 billion with an operational EBIT margin of 33% and an adjusted EPS of 3.36 SEC per share. If you look at our amortizations and depreciations in the quarter and also the bridge between our reported EBITDA and operation EBIT as well as EBIT, we start with the reported EBITDA of 1.6 billion. Then we have operational amortizations of 277 million in the quarter where the majority is related to our business area games and finalized game development amortizations amounting to 221 in the quarter. We have other adjustments of 390 million in the quarter. The majority of this is related to a re-measurement of participations in associated companies. It's an accounting profit that you will see when you move from a majority holding state to a majority holding stake. This amounts to 417 in the quarter and is related to the acquisition of Goldship Games and we exclude that from our operational EBIT. And the other part is a rematchment of a contingent consideration for Milestone where the performance of Milestone has exceeded the expectations that are part of the purchase price analysis and as the purchase price analysis is finalized this flows through the P&L and needs to be excluded from our operational EBIT. Looking at the acquisition related amortizations in the period, they amounted to 2.8 billion SEK. The majority of this is related to Goodwill. And then also to arrive at our reported EBIT, you need to add back the other adjustments that we went through of 390. If we look at the cash flow statement for the quarter, we have a positive free cash flow in the quarter despite the record high investments into our game development portfolio. In total, the investment in intangible assets is 917 million in the quarter. Out of this, 881 is related to investments into our games development portfolio. The increase is mainly related to the addition of Aspire and Gearbox as well as increased organic growth investments into new game development projects where we also see an effect of a shift from co-publishing projects to internal development projects mainly in Saber. We paid 213 million in taxes during the quarter, which is, if you compare it to the full year, it's close to 50% of a full year's cash tax payments.