Embracer Group AB

Good morning and welcome to Embracer Group's fiscal Q1 presentation. My name is Martin Arnell and I'm an equity analyst with D&B Markets in Stockholm and I'm here to moderate the Q&A session after management's presentation. And today's presentation will be first a wrap-up of the quarter, followed by a Q&A, and then management will go through the acquisitions that was announced this morning, followed by a second Q&A. With that, I want to hand over to the CEO and founder Lars Wingefors of Embracer and Johan Ekström, the CFO.

Thank you, Martin. Hello, everyone, and welcome to Karlstad, Sweden.

I'm glad to report another stable quarter alongside some of our most exciting acquisitions ever. As anticipated, the first quarter was quiet, albeit a record quarter for the group in financial terms. Net sales in Q1 grow 107% year over year to 7.1 billion. That is minus 12% organic growth. Adjusted EBIT grow 3% to 1.3 billion with an adjusted EBIT margin of 19%. The operational performance was largely in line with management expectations. The PC console game segment had a low release activity and tough comparisons from the release of Biomutant last year. And back catalog sales was the main driver. The only new release with a notable financial contribution was Evil Dead The Game. The mobile game segment performed strongly, growing by 20% organically. The tabletop game segment grew 6% pro forma, taking market share. We today reiterate our adjusted EBIT forecast for fiscal year 2022-2023 and next fiscal year 2023-2024. In this fiscal year, we expect an adjusted EBIT of between 9.2 to 11.3 billion SEK. And next fiscal year, we expect adjusted EBIT of 10.3 billion to 13.6 billion. This excludes pending acquisitions of Eidos, Crystal Dynamics, Beamdog, and these deals announced this morning. Looking into adjusted EBIT breakdown of the year, we expect Q2 and Q3 to be clearly stronger than Q1, somewhat in Q3's favor, driven by both new releases and seasonality. Q2 is supported by the reboot of Saints Row and other notable platform deals. Further, we expect Q4 to be the clearly strongest quarter of the financial year, driven by a few strong releases, including a long-awaited AAA title, now expected in Q4 and to be announced soon. For the reminder of the year, we expect to notably outgrow the rest of the market, with the overall organic growth of 20-35% for the full financial year for the full group. I'm very proud and thankful to our finance team led by Johan and advisors for finalizing the largest IFRS conversion projects ever in Sweden ahead of original timeline. This is an important milestone in constantly improving corporate governance in our group. The process to change the listing venue to the main market at Nasdaq Stockholm by the end of the calendar year remains on track. We are also introducing new sustainability goals today. After an extended period without major releases in PC console games, we are now entering a new phase of higher release activity. The reboot of Saints Row hitting physical and digital stores on August 23rd will be one of the most important releases in this fiscal year. Excitement for the game among fans is building up, and we will hear more about that very soon in this presentation. THQ held a well-received digital showcase last Friday, announcing a reboot of the iconic horror franchise Alone in the Dark and more than 10 other titles. Next week, there is Gamescom, and we expect a strong lineup of both new products and the very business development schedule. In total, we have 222 games in Games Development Pipeline, including at least 25 AAA projects planned for release until March 2026. Looking at our financial position, we have a total of 20 billion in cash and credit facilities as of this morning. We continue to have conversations with several industry players about supporting our long-term strategy, either through investments or partnership. We continue to grow our organic investments into our games development pipeline with a record of 1.1 billion invested into games development. That will drive the organic growth of the company for many years to come. On the short term, this, however, contributes to the negative free cash flow in the quarter. We do expect a strong free cash flow for the full fiscal year, reducing the leverage of our balance sheet. This morning, I was excited to report five acquisitions, including the IP rights for Lord of the Rings and The Hobbit. On an aggregated basis, the transactions will have a material impact on Embracer and fulfill financial and strategic objectives. From a financial perspective, the transactions on a combined basis will be accretive to earning growth, to adjusted EBIT margin, to cash conversion, as well as to earnings per share and free cash flow per share. Strategically, the transactions further strengthen and diversify Embracer's portfolio with profitable IPs and franchises. In particular, The Lord of the Rings, one of the most iconic IPs around the globe and the entire Middle Earth universe, offers a significant growth opportunity within PC console, mobile and tabletop games. finally with summary summarizing all this information this morning i'm pleased to announce a new operating group free mode and we will soon welcome or in a while in this presentation welcome the ceo league insured on stage and finally i would like to send the congratulations to coach media that finally changed their name to play on So with that said, I would like to show a slide for you that shows our continued growth ambitions. So now looking on the left hand side, we can see the financial growth on a trailing 12 months basis. The group has shown a strong growth in the past four years, both operationally and financially. The headcount has increased from 1,704 years ago to almost 14,000 as the end of June. In the same period, the number of studios has increased from 10 to 120. The pipeline of new releases from 51 games to 222, while also growing in average project size. Financially, in the same period, sales has grown notably and on trailing 12 months basis, we have been reporting now sales of more than 20 billion and adjusted EBIT of more than four and a half billion. For us, it's full speed ahead. We believe that we are well positioned to continue outpace the market growth in all of our four business segments. Due to the investments we have made into our pipeline and the growth potential for our existing products and services. So let's dig into the segments. And before I'm digging into the segments, I would like to inform you that we actually are reporting under the segments as of this morning. So we have four business segments. So this is the operating groups by segment. PC console games. We have mobile games made up of Deca EasyBrain. We have tabletop games that is made up of Asmodee. And then finally, entertainment and services that is made up of PlayOn and PlayOn Pictures, Dark Horse, FreeMode and a number of other businesses. So let's dig into PC and console games segment. The PC and console games segment had a low release activity and tough comparisons from the release of Biomutant last year. And back catalog sales was the main driver. Again, the only new release that had a notable financial contribution was Evil Dead The Game. Other notable releases in the quarter were Songs of Conquest, which received a lot of positive attention from both fans and critics. We had MotoGP 22 from our Italian studio Milestone that got very positive feedback as well as MX versus ATV Legends developed by Rainbow Studios. The revenue contribution of MX versus ATV Legends is expected to be long term. This reporting quarter, it's only included two days of sales since the release. However, that performance was below our management expectations. Looking at the adjusted EBIT for a segment, It didn't grow year over year, it declined because of the comparison quarter of Biomutant. And the lower margin is due to to lower. Sorry, the lower margin is mainly due to product mix with lower margin development revenue and a higher share of publishing titles. Finally, TinyTeen and Wonderlands are a success and we are expecting to receive royalties as financial year progresses. And if you look at this slide, I think it's very interesting to look at the top 10 back catalog titles of share of sales. meaning our catalog titles are widening constantly and the wide catalog above the top 10 back catalog titles are now representing 67% of the back catalog sales in a quarter. If you look at the titles, the top 10 titles, you recognize a lot of names we have been talking around on this quarterly presentations before. Star Trek Online, Borderlands, Wreckfest, Risk of Rain 2, the enormous success of Hot Wheels Unleashed, Deep Rock Galactic, Neverwinter Nights Online, Insurgency, Sandstorm, Valheim, the raving success from last year, and Metro Exodus. So without further ado, I'm very happy to welcome Paul Nichols online. Hey Lars, how are you? I'm great. How are you?