Embracer Group AB (publ)

Good morning and welcome to a Basic Group Q1 presentation. My name is Simon Jönsson, an equity analyst with ABG Sundal Kollier and I will be the host today. We will begin with a presentation of the results by the management team and after which we will follow up with a Q&A session. And to participate on the Q&A, you can either send in your questions using the web or you can join the telephone conference. And without further ado, I will leave the word over to you Lars.

Thank you Simon and hello and welcome everyone to a great Stockholm this morning. So let's go straight into the brief summary of the quarter. I'm pleased to announce a net sales of 10.5 billion which is the growth of 47% year over year or an organic growth of 20% driven by solid performance of Dead Island 2. Our profitability with adjusted EBIT came in at 1.7 billion representing a notable improvement sequentially. The Q1 result is also ahead of management expectations for the quarter. The positive sequential margin development in the quarter is a result of how we deliver on our games pipeline. Our Q1 execution builds a strong foundation to further improve the margin during the year after challenging physical 22, 23. The free cash flow of minus 600 billion, 600 million in Q1 is largely in line with the plan for the year given the continued imbalance between investments of completed PC games game development which in the quarter we invested 1.7 billion into the pipeline but the completion of the value of the game completed including Dead Island was only 800 million. The adjusted earnings per share increased 4% year over year. So now looking again into the operation performance we had Dead Island 2 and Remnant 2 that jumped start the year. In recent months, those titles has been selling very well. Dead Island 2 reached a sell through of over 2 million units in the first month. Released early in second quarter in this quarter, current quarter Remnant 2 sold over 1 million units in the first four days and has continued to sell very well post this period. Developing and publishing great games is our core business and I would like to highlight the great achievements of the teams behind the recent successes of Dead Island 2 which is PlayOn, Publishing and Dumbass Studios. Jagged Alliance 3 with TSQ Nordic Publishing and Hememont Games as a developer. And Remnant 2 with Gearbox Publishing in San Francisco and Gunfire Games. Looking for the year, we reiterate our adjusted EBIT forecast of seven to nine billion for the year. Based on the performance year to date, we have an increased confidence in our forecast range. We're also making good progress on the restructuring program announced on June 13 with ultimate goal of significantly improve free cash flow and reaching a net depth of eight billion by year end. Delivery of the program will allow us to operate with increased efficiency across the group and reduce business risk. This in turn will enable us to continue grow and to deliver a high quality products in the long term. At the same time, we acknowledge the uncertainty that such a program can cause for our colleagues. A painful consequence of the program is that number of talented and passionate team members have left us or will be leaving us before the end of the physical year. With us today, we have Mygge, CFO of Asmodi and one of the key work stream leaders in the restructuring program. She will provide an update on the program towards the end of this presentation. Now looking ahead, we have several large budget games expected in this physical year, including Payday 3 and Warhammer 40,000 Space Marines 2. We have also several other exciting titles such as South Park, Snow Day, Homeworld 3, Hot Wheels Unleashed 2, Teardowns on Console, Alone in the Dark and the new Outkast, A New Beginning. This makes us confident in growth for the remainder of the year in the PC console game segment. Looking beyond that, based on the restructuring program outline in June, we believe we expect to deliver a positive organic growth combined with a lower capex run rate and a more efficient cost structure. We have for several years made strategic investments into accelerated long-term organic growth in PC console games. Ongoing investments into the future game releases has outpaced completed development by a factor of two to three, increasing the value of ongoing game development to more than 10 billion by end of June. Although we now reduce capex and prioritize within our portfolio, completed development should continue to increase as our development pipeline matures, supporting the growth outlook. After the program is completed, more focused investments into our highest return of investment titles should drive both growth and profitability. So let's look at the segments. To start, adjusted EBIT increased by 27% and amounted to 1.7 billion versus 1.3 billion in the quarter, yielding a 16% margin. The increase is mainly driven by PC games console segment and entertainment segments. The entertainment and services segment, which had a strong organic growth and a strong margin in the quarter. Also the mobile game segment performed strongly from a profitability perspective, while tabletop games had a seasonally softer quarter in line with management expectations. Looking in the PC console games segment, sales grew 38% organically in Q1. Revenue from new releases amounted to 1.6 billion in the quarter, an increase of 341% year over year. The main revenue driver among new releases in the quarter was Dead Island 2. Other notable new releases in the quarter was All Elite Wrestling, Fight Forever, developed by external studio, Jokes and published by THQ Nordic. The game was released late in the quarter on June 29 and had a solid contribution in line with the management expectations in the first two days, despite a mixed receptions from critics. Other new releases included the System Shock remake on PC only so far and MotoGP 23, which both had solid reception from both critics and users. Revenue from back catalog titles, which also include platform deals, amounted to 1.6 billion in the quarter, a 10% increase year over year. And here you can look at a lot of familiar IPs we publish, the top 10 titles of back catalog, Star Trek, Deep Rock Galactic, Borderlands, Never Wind Tonight, Welcome to Bloxburg, one of the most popular game on Roblox, Chivalry 2, Risk of Rain 2, SnowRunner, Valheim and Metro Exodus once again. Other revenue amounted to 800 million in the quarter, an increase by 67% year over year. This is mainly driven by growth in number of games under partnership agreement. The adjusted EBIT margin notably improved sequentially, but remains impacted by games development amortization combined with the soft performance of the previous financial year's releases impacting catalog revenue this year. New releases with better ROI at the start of the year provides a strong base for continued margin development improvement throughout the year. Worth highlighting, it's encouraging to see Crystal Dynamic Eidos turnaround to solid profitability is ahead of plan, driven by cost efficiency improvements, the stable back catalog business and increased external funding for ongoing development. This is a testament to the commitment and focus of Crystal Dynamic Eidos management and it's supportive for our larger PC console games business. Looking ahead into the pipeline, again, several additional large budget games are expected in this physical year, 2023-2024. The release of Payday 3 was confirmed in January 2023 and quickly reached 1 million wishlists on Steam, which has up until the end of the year. The game was revealed in Xbox E3 showcase and one of the biggest third party as one of the biggest third party reveals. Payday has recently excited a successful closed beta, which was well received by the Payday community driving a notable pre-order uplift. The full game will be released on September 21st. We also have other, again, other exciting titles such as the recently announced South Park Snow Day coming in this physical year and many other high profile titles. In general, we believe we have a solid pipeline for the reminder of the year, even if something unknown to us today would drop out of the year to ensure polishing and optimal release slots, we have confidence enough to deliver on our targets. Aside the titles you see on this slide, we still have more than 60 other products that will ship according to my management during this physical year. Looking on the return of investments, I'm happy to see an improved performance of new game releases in first quarter. Dead Island 2 and All Elite Wrestling had an ROI of around two to three, factor two to three in the release quarter alone, which should increase over time. Note that the wrestling game came out very late in the quarter. The weighted average ROI now stands at 241 as of end of the quarter compared to 248 in the end of last quarter and is still weighed down by soft releases in last fiscal year and the short period of inclusion of the stronger Q1 releases. We are confident in an improved ROI throughout the year. Driven by successful releases in Q1 and at the start of Q2, as well as our pipeline of upcoming releases. Looking at investments and the pipeline, the PC console game segment continues to make notable investments into the future. In total, 1.7 billion in the quarter compared to 1.1 billion last year were invested. The final value of the completed and released games during the quarter amounted to 800 million compared to 545 million last year. Driven this quarter by the release of Dead Island 2. In total, we had 215 ongoing game development projects as of end of June, of which 62 has been announced. Looking to mobile games, I'm pleased that the segment had a solid performance in profitability, which was ahead of our expectations. Even though organic growth was minus 12%, it's a notable sequential improvement compared to last quarter. The mobile games saw some headwind from lower ad prices year over year, impacted by platform changes related to privacy, a bit lower player engagement post COVID and macroeconomic factors. The negative growth is also a result of lower user acquisition investment in recent quarter as a response to new market circumstances aimed to keep desired profitability levels. Underlying trends though, have started to improve, including some positive trends with regards to monetization. Despite the sequential increase in user acquisition costs, profitability was strong and ahead of management expectations with adjusted EBIT margin of 29%, driven by systematic investment to balance growth and profitability. The mobile business are expected to show positive organic growth for the full year and continue to add both earning and cashflow diversification. Looking into tabletop games, the sales amounted to 3.2 billion in the quarter, an increase of 20% compared to the same period last year or by 9% organic growth and 7% performance in constant currency. Growth was driven by trading card games product category with more contained growth for board games. From a geographical perspective, growth in Europe notably outperformed growth in the US. Adjusted EBIT amounted to 206 million with adjusted EBIT margin of 6.5%. The result is in line with management expectation in one of the seasonally weakest quarter of the year. On a year basis, the profitability was impacted by a product mix more geared towards trading card games, similar to in recent quarters. Operating costs also increased year over year due to inflation and the run rate impact of prior years recruitments. In addition, in the comparative quarter last year, benefited from notable cost facing into later quarters as a result of shifts of activities during the initial integration phase after transaction of closing. These impacts are expected to moderate over the next quarters. While the first fiscal quarter is historically appeared with significant inventory buildup in the preparation for the peak season, the inventory increase was around 400 million lower compared to Q1 last year. This resulted in a positive free cash flow for Asmodi in the quarter. The company is expected to convert about 100% of its adjusted EBIT into free cash flow in this fiscal year with a positive contribution in the first half of the financial year compared to the cash consumption seen in first half last year. Also worth highlighting, Asmodi signed a new partnership with Palindrome, one of Embrace Studios in operative group of amplifier to expand the legends of the five rings universe in the video game. Asmodi also received three prestigious Spiel des Jahres of awards at the recent ceremony in July. Looking into entertainment and services, we had a very strong quarter, growing 70% organically with 16% adjusted EBIT margin. The strong organic growth is primarily driven by PlayOn Partner Publishing Division, which had two notable releases from partners in the end of the quarter, contributing to the organic growth. The higher margin is primarily explained by a strong contribution from Middle Earth Enterprises, driven by strong licensing revenue for the Lord of the Rings. The performance of Middle Earth Enterprises is well ahead of the business plan developed at the time of acquisition a year ago. It's encouraging to see many exciting external projects based on this incredible IP, including the recently successfully released Magic the Gathering trading card game, The Lord of the Rings Tales of Middle Earth, and the upcoming PC console survival crafting game, The Lord of the Rings Return to Moria, as well as many other exciting new products that will grow that IP further. These two titles are examples of potential key drivers for Middle Earth Enterprises during this financial year. I would also like to highlight other businesses within the freemode vertical, such as Limited Run Games, that hosted a recent showcase announcing an exciting pipeline of classic games, such as Jurassic Park Classic Games Collection, Clock Tower, and Gexxed Triology. Iconic IPs if you've been in this industry for many years. Also in the quarter, Dark Horse and Asmodee also signed an agreement for the release over the next three years of a range of collectibles, art prints, and comics based on Asmodee's Legends of the Five Rings, an Arkham Horror IP. Soon, Johan, it's your turn. One slide more. So just to give you a bit of update on the market. I'm pleased to see that there is a growth forecast again in this industry. The global games market is expected to generate $188 billion, which is an increase of 3% year over year. The growth will be driven by a better console supply, a stronger new release lineup, and digital sales among other factors. The longer term growth prospects also remain strong and total games market values are expected to reach $212 billion by 2026. The console market this year expected to see the strongest growth with around 7% year over year. Also the tabletop market was slightly down by around 1% year over year in the first quarter. Growth was driven by the, in Europe, growing 8% while US market decreased. Growth in Europe was driven primarily by trading cards, which was up around 25% year over year, while board games market also grow slightly at 2% year over year. With that said, I would like to hand over to Johan. Thank you Lars.

Let's have a look at the financial performance in our first quarter this year. So if we start to zoom out, we note that we have a solid or strong top line growth in the quarter, increasing our trading 12 months net sales to 41 billion. We see an improved gross margin in the quarter, 63%. It's mainly driven by improvements within the PC console segment and the entertainment and service segment. We note an increase in user acquisition costs in the mobile segment, which is the first time we see that in a year. We also note that marketing expenses outside in the mobile game segment was relatively high in the quarter in order to support releases, mainly the violin two. Operating expenses remained fairly in line with last quarter in absolute terms, about 2.7 billion. In relation to net sales, they were lower at 26%. Due to the strong adjusted EBIT growth in the quarter, our trading 12 months adjusted EBIT increased and was 6.7 billion at the end of June. If we look at our cash flow and net debt, we note that the free cash flow is negative in the quarter, 600 million, which is broadly in line with our internal expectations. The main reason for the soft free cash flow performance in the quarter is the high level of investments going into the games pipeline. And in order to build the foundation for growth in cash flow and profits for the future. Also worth noting is that Q1 is the low season for our businesses and they are gearing up towards the high season in Q3. We had net investment in financial assets of 200 million in the quarter. This is mainly driven by a long term licensing contract within the entertainment and services segment. The increase in working capital was 500 million in the quarter, significantly less than what was during the same period last year. The main reason for the increase in working capital is seasonal buildup of inventory in the tabletop segments and an increase in operating receivables in entertainment and services and tabletop, mainly driven by strong sales in the later part of the quarter. The M&A outflow in the quarter is related to historical acquisitions. If we look at our net debt, it amounted to 16.8 billion. At the end of June, available funds was 5 billion. We expect to significantly improve our free cash flow generation already in Q2 and to reach our net debt target of 8 billion by the end of the financial year. With notable positive impacts from our restructuring program during the second half of this year. In July, we signed credit and facilities loan agreements with our banks, extending the maturity to October 2024. So as of today, the parent company has no short term liabilities. Further negotiations regarding longer term extensions are continuing according to plan with our banks and is expected to be concluded during the fall. In the loan agreement, we have a covenant and as per the end of June, we have substantial headroom to those covenants. Looking ahead, as Lars mentioned earlier, we reiterate the forecast for this financial year. We do this with increased confidence based on the performance year to date. If we look at the segments, we expect a solid earnings growth within PC console. It's driven by releases of more large and mid sized internally developed games during this year compared to last year. And we also expect that the adjusted EBIT within the segment will be weighted towards the second half of this fiscal year. Driven by improved ROI on releases in H1 and a strong lineup of releases during the second half of this year. For the mobile games segment, we expect a low single digit organic growth with gradually stronger growth during the year. The adjusted EBIT margin is expected to be largely in line with last year or slightly above. For the tabletop game segment, we expect a high single digit organic growth driven by the trading card product area with an adjusted EBIT margin slightly below what we saw last year. We also expect that earnings seasonality will be more pronounced this year, driven by cost facing timing of new releases as well as product mix.

Thank you so much, Johan. Let's welcome Mygge up on stage.

Thank you very much, Lars. Good morning, everyone. I'm very happy to be here today. I'll start today by providing a reminder of our objectives and the focus areas of the program. I'll give a brief overview of the program structure that's been implemented. And then we'll be looking at what's been achieved, what's been progressed so far. As you know, on June 13th, we have announced a comprehensive restructuring program to start effective immediately. The objectives of the restructuring program is to deliver a set of operational and financial measures so as to increase our cash conversion, reduce OPEX and reduce CAPEX. This is to make us a leaner group, a stronger group, a more focused self-sufficient company. In the two months since the announcement, the target announced has been translated into a group-wide detailed plan. We aim to deliver savings of at least 2.9 billion in CAPEX, at least 0.8 billion SEC in overheads on a full year basis by the end of 2024, 2025. The outcome of this program is expected to nearly halve the opening net debt position, reaching 8 billion SEC by the end of this fiscal year. The initiatives under the program can be grouped under three main focus areas, CAPEX and OPEX savings, capital allocation, and efficiency improvements, which will be delivered in phases. The first phase focuses on CAPEX reductions as well as overhead savings. A second phase, which is running in parallel, but which is to take a bit more time, focuses on optimization of our capital as well as further opportunities in our CAPEX reductions. This phase includes a global review of our existing pipeline, the launch of a group-wide green light process, as well as the pursuit of opportunities for increased partner funding and some potential divestments. Both of these phases kicked off immediately after the announcement, and I'll provide an update on where we stand in the coming slide. The third phase of the program will focus on further capital allocation and efficiency improvements through internal consolidation, further resource utilization, and more synergies across the group. In the two months since the program was announced, a clearly defined program has been put in place under the leadership of the executive management. This is a group-wide program with the engagement and commitment of everyone of senior management experts across the group. Having said all of that, let's take a look at the progress we've made so far. As I mentioned earlier, the first phase of the program focusing on CAPEX reductions and OPEC savings kicked off immediately after the launch of the program. A first round review of capital expenditure has been completed. Initial actions have been taken on closure and other initiatives on the reduction of number of studios and projects. In the case of studio closures or divestments, you would understand in respect of due process and also commercial sensibility, we will not be commenting on the specifics. If needed, communication will be provided by the relevant operative groups. A review of our operating groups' overhead costs has also been completed. We communicated the target savings of 0.8 billion SEC. In coordination with all the operative groups, that target is now translated into a detailed list of initiatives. And the operative groups are committed to, are responsible for in delivering these targets. Implementation of these savings under the first stage has already begun and is expected to continue over the remainder of the year. The second phase of the program, which is running in parallel with the initial phase on cost savings, focuses on the optimal allocation of our capital and further KEPAC savings. In this regard, a detailed review of our pipeline for PC console is in progress. This review covers certain creative initiatives and commercial aspects. And it's worth mentioning that it involves a team of experts across the group from our PC console operative units. The finalization of the review, as well as the execution of the recommendations, is expected to be ahead of the next interim report and it will result in further KEPAC savings. In addition, a group-wide investment green lighting process has been designed and is being rolled out for new investments. We have also set high priority on increasing external funding of certain larger projects and exploring potential divestment opportunities. Overall, good progress has been made in the last two months since the program was launched. And we are tracking towards the objectives we had set. Further updates will be provided during the next interim report in November. I'll hand back now to Lars.

Thank you, Mygge. And I would like to just give a few final remarks before Simon can start the Q&A. You know, we started this company with a vision to support entrepreneurs and creators. And that is still my firm's belief today. When the music now has stopped playing in the financial markets, we need to adopt to a new reality. And I've been getting a strong understanding and buy-in from entrepreneurs across the group that they will be team players in the process. I still feel people are very supportive of Embracer and are committed to the long term. So am I. The Embracer model is getting adjusted and improved. But my long term vision is still unchanged. We shouldn't lose the sight of the fact that Embracer remains a leading group of successful entrepreneurs, creative talents and world class IPs. As an entrepreneur, you are learning lessons as you go about. And one important belief is that you have to be open-minded, listen and show respect of others. In the end, you have to stick to what you believe in and stay true to your own values. In hindsight, I have made mistakes. But we have also done a lot of things right. When we have had the recent evaluation during the summer, it's apparent that it's a fantastic amount of hidden gems in terms of new business growing and amazing games being built across the group. It is painful for all of us to have talents leaving the group. But we are doing everything we can to avoid corporate stupidity without changing the overreaching targets and goals. In the past period, we have been engaging with global gaming industry leaders, as well as global leading financial sponsors that are eager to help us in the transition. These dialogues give us great flexibility and confidence about delivering on the goals we set out. We will pick the ways that combined gives us the best value for both our people and shareholders. To summarize, we had a great start of this fiscal year. That gives me and the management great confidence to deliver what we set out to do. I'm confident we are on the right track. And looking ahead of this fiscal year, we will see a growth also for the years to come. Thank you very much.

Thank you.

Welcome to the Q&A session. And just before we start, I just want to say again that we will open up the telephone conference later and also take questions from the web. But first, I will start off with some questions. We will start off with restructuring process that you ended up presenting. You gave some more color. And it seems like the review process is finalized. I was wondering, you know, the time you have had so far, how has the recruitment changed internally? Because if you look back in recent months and quarters, there has been a company-wide increase in staff, developers, etc. So maybe just go through how the recruitment or number of developers has changed over the recent months and possibly even here in July and August.

Well, we didn't comment on that specifically. Obviously, we are adapting to the restructuring program across the group. But we will still continue to hire when needed with new talents for specific investments or businesses, as well as we are adjusting projects and other businesses. That has to be a natural process which is ongoing. Myge, feel free if you would like to add more color to that, but we haven't specifically talked about number of employees in stone, for example.

All right. Just looking at the numbers today, the headcounts, we can see that the external developers has increased while the internal has increased slightly. Could you say anything about how the allocation is looking internally? Is it more to increase the number of developers on the AAA projects or how should we view it?

I think the evaluation is down. On each game's projects own merits, whether it's a AAA game or a AA game or an indie game, you need to look at the future potential of the game and what you really believe of the existing phase the projects are in. Obviously, it's easier to evaluate games coming out the coming year or two years than things that are projected for being further ahead. I think that's why the majority of the adjustments are made on games that is still not announced because they are further out in development.

It's fair to assume that most of the projects in later stages are going to be finalized or is that something you can give Caloron?

Yes, I think that's a fair assumption. At the same time, the piano is quite wide and we're playing it not only by doing layoffs, obviously, we're trying to find new partners for our games or new homes to certain studios. Potentially, it could be easier to find partners for games that are playable or you can actually see what it is. Rather than a PowerPoint.

How is the sentiment around partnering up, laying over some of the development on partners, given the outcome of the transformative partnership, how is the market, how is the sentiment around potential partners?

I think it's great. I think it's a great market. The need for content is very strong. In general, there is growth in the market, consumers would like to have more products and there is a healthy competition between the different players. I think we are well positioned. Now, obviously, everyone needs to adapt to a new global environment driven by macroeconomic factors, but still, I think it's a good market.

Talking a bit about studios, Campfire and Cabal announced that they are going to potentially close down. Are you evaluating more closings or is this an example of something that you haven't announced, what they have announced, and there could be more? Yes,

I can't comment on that specifically, but I could confirm to you that we have been taking actions on studios either by closing or divestments already that is not publicly announced.

Could you share some colour on the timeline in those processes? Is it that you start off with trying to get some kind of agreement to potentially divesting or selling assets and then later on, if that's not an option, you have to close it down or maybe try to explain to us to make us better understand other processes parallel to this.

I think it's a bit of commercial sensitivity around specifically how we go about. It kind of varies by studio, but in the end of the day, we try to find new homes for our people, but ultimately, we need to make a final call and do layoffs in a few instances. But again, you can partner up, you can do divestments, you could adjust the studio, you could internally find other resources. So there are many ways how to optimize this. In the end of the day, our overreaching target is to reach 8 billion net depth in the end of the year. That's our focus.

Great. Turning to PC console performance and maybe a broad look on the market here as well. Looking at backlog sales, we have seen a decline over the last two quarters. It could be of course part because of seasonality, but you also spoke about a lack of contribution from last year's releases. So maybe if you can break that down a bit more, if there is an underlying weaker market overall for the older titles in addition to weaker performance of your releases last year, or is there a contribution for both of those factors, or is it mainly you see that your releases last year were weaker?

I think that's a key factor. In order to have a good catalogue, you need to deliver great new games over time, which is adding to the catalogue. That is the main factor of a bit softer catalogue in this quarter. And in recent quarters. I would say it's simple as that.

So

there's no deceleration you would say in the older titles? Of course. Some titles, or most titles, are declining over time. Unless you add more content, or unless there is a life for it. We have service titles, we have titles growing, or show very good stability over time. But unless you do anything, and it's a single player experience for example, that would decline over time.

Of course. I'm just referring to some of your peers have reported weaker catalogue sales, believe in the market. It seems like you haven't really seen any trend

shift. I don't see any trend shift. If you see any significant trend shift, obviously I think that would be public knowledge, but we haven't seen that. A

question on the tabletop segment, and mainly referring to the market here, but the sales mix again more tilted towards trading cards as you have been guiding for. Can you give any colour on the split in the market growth here? It was down 1% in the quarter. How was the different segments?

The overall target is slightly below zero, but within that indeed trading cards are doing very well. Obviously it is also in relation with the releases and the timing, it does create a mixed effect. So the game's performance in comparison follows a softer level, but that is to be also looked at in comparison to the last two years, which as you know during COVID has way outperformed the market.

Breaking down, looking at the sequential movements in the game's part, have you seen any slowdowns or is it more a steady trend in negative growth for the board game segment?

The segment itself is the market which is resilient, so we don't see big swings. From one quarter to another in terms of market trend, there is no important change of pattern, and that is also why we are trading against our objectives and we are in line with what we were forecasting.

We have you here about the potential savings in tabletop. Is that different how you view the potential cost savings in Asmo D compared to the group level? You mainly talked about studios and projects. Is the tabletop segment part of the restructuring program?

I think it would be fair to say that the tabletop segment is very light capex driven, so we are not relying on capex. So naturally the portion of overhead savings will be higher when it comes to Asmo D or tabletop. As I said, overall the round on overhead savings has already been completed and it goes for Asmo D as well. We are confident to trade against the objectives. As part of being one operative group and the overall process, I feel also committed to delivering that target.

A final one before turning over to the telephone conference. We have a lot of questions regarding the transformative partnership and rumors of the partner being Sevi Gaming. Is that something you want to comment on?

No, for several reasons we will not comment on whom the partner were, including legal reasons. We will not comment on business partnerships unless both partners would like to do that. But again, as stated when announcing the news last quarterly, the background given to us why the partnership didn't happen was not because of the terms or the pipeline of games. It was more that they would like to do something in the future but not now, which became a no for us.

That makes sense. With that said, I will leave over to the telephone conference.

If you wish to ask a question, please dial star 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star 5 again on your telephone keypad.

The next question comes from Nick Dempsey from Barclays. Please go ahead.

Good morning guys. I have three questions. The first one, of the 1.6 billion SEC of net sales from bank catalogue and platform deals in PC console, can you give us a rough indication of how much of that is coming from platform deals as opposed to bank catalogue in the quarter? Second question, when you refer to positive growth in revenue beyond FY24, I think at the full year 23 results you referred to healthy growth. Am I right in reading into this change in phraseology that the work on cost and capex is trimming your future revenue growth ambitions? And the third question, just on working capital, we saw an outflow in Q1 of just over 500 million. Would you expect a group-wide working capital inflow in Q2?

Thank you Nick. Perhaps I could start with the first question at least. I think the portion of platform deals are small in the first quarter. We haven't given any specifics but it would surprise me if that is about 10% of that number. In terms of wording on growth, I think it's difficult to elaborate on that more than we still see a growth in the business in the years ahead. It goes without saying that the restructuring program would lower the amount of games in the pipeline. But still, as you saw in the quarter, we still have a significant gap between the completion of games, 800 this quarter and 1.7 invested. So we still have a potential growth capex in the future post the restructuring program. Johan, do you have any more to add to that growth thing?

No, I think as I also elaborated during the presentation, as the games pipeline matures, it's expected to drive growth in the future. If we move to working capital, it was negative 500 in the quarter. We said today that we expect a significant improvement in free cash flow already in Q2. I think if you look at working capital over the year, we will need to see a positive working capital development year to go. If that is how much of that we see in Q2, I think it's better to focus on what we see for year to go. You should also bear in mind what we have said earlier, if you look at the phasing of cash flow, it will definitely be highest in Q3. And then free cash flow generation will be significantly stronger in Q2 without elaborating on the specific line item for working capital in the quarter. Thank

you

very

much. Hi, good morning. Thank you for taking the questions. Just with respect to your cost restructuring program and the green lighting process, how much of your 215 projects could be impacted by this? Could you maybe give us some idea of the phasing of when these games were expected to be released or the stages of completion that they're at? Secondly, are there any one-off items we should be thinking about for this year in terms of the full year guidance, such as licensing revenues and whether that impacts the quarterly progression for this year? And then finally, could you just remind us again what were the exact moving drivers between the 7 to 9 billion of your full year guidance? Is it that you're factoring game delays or is it just the ROI of the games or is there some other factor? Thank you.

Should we start with the last one, Johan?

Yeah, I think when we look at the guidance for the year between 7 and 9, obviously it's important what we say today that we have increased confidence based on the performance year to date. We could also worth noting that it's three quarters to go and that together with the color we give on how the EBIT is faced over the year, especially during the high season, it's one swing factor. And of course, you will always have the risk of delays, state changes, and the risk of reception or releases.

But that management expectations have changed, but it's still within the guidance. And then you always have downsides and upsides to that, but we feel an increased confidence in delivering because of that within that guidance. But I have to remind everyone again that we are a games company and it's very hard to forecast exactly how the game receptions are. It helps to have a diverse business, but still we have the beauty of a bit of volatility of PC games, console games.

And then there was a question on the number of studios, part of the restructuring program. I think as Mige explained today and reiterated, the important part for us is to achieve the objectives set out, which is a 2.9 capex saving as well as a 0.8 opex saving and reaching the 8 billion net debt by the end of the year.

The overreaching targets is obviously the net debt by end of the year. In terms of number of projects, there is 215 under development, where of 62 being announced, so the bulk of them not being announced. And I think it's fair to assume that most of the cuts will be on titles that is further out in that slate. But how many, it's too early to say. And then regarding licensing revenues, whether it's one offs, well we don't expect any one offs. Obviously there is swings in the licensing business, such as Middle Earth Enterprises. Some quarters will be better than others, but just looking at the business like Middle Earth Enterprises, they have hundreds of revenue lines that are constant coming through from old movies, old games, merchandise. And then there is new revenues coming in when signing contracts. But there is also a lot of new contracts coming through, so I wouldn't say it's one offs, but it could be swings between the quarters.

Thank you.

The next question comes from Martin Arnell from DNB Markets. Please go ahead.

Thank you and good morning. My first question is, you comment on the increased confidence on the Fourier guidance and that your expectations have changed a little bit, although still within the guidance. Could you give some specifics as to what's changed? Is it both PC console or is it entertainment and services results, which was pretty high in the quarter?

I think one of the reasons for the increased confidence in the forecast 7 to 9 is, as we said, the performance here to date. And if you look at the performance of two large releases, that's within PC console. And then I think also, as we said, we exceeded our internal targets for Q1. And I think part of that is the performance also in entertainment and services in the quarter.

And then obviously we have a greater confidence in the pipeline that the pipeline will be shipping as planned. There is always things moving out, but now we can see more visibility of the release dates, the finalization of the games. There is still a notable amount of games being released in the second half and also in the fourth quarter. And obviously we're taking into consideration that there will be things moving out, but we don't know what. But that's included into the guidance. And we obviously believe that we have enough headroom.

Okay, great. Thanks. And I think you mentioned that the second half is obviously a little bit higher expectations than the first half. Can you say anything, Johan, about the phasing of the quarter? I think you mentioned Q3 should be the strongest for the cash flow quarter. Should we look at that similar phasing when it comes to just a little bit?

I think if you look at our segment's tabletop, Novi, they have their strongest systems in Q3. And then when you look at PC console, of course, it's more difficult. You need to factor in timing of releases. But obviously Q3, we need to perform a healthy part of the expectations for this year to meet our plan.

Okay, thanks. And just a final question from me would be, I mean, it has now been a quarter since you announced the missing out of a potential groundbreaking strategic partnership. And I would just like to know how has your thoughts been around this now when you've had some time to digest this whole situation?

I think that perhaps requires a bit more time than another conference. But I think the idea to partner up with someone to finance and to share business risks, and that both partners have been in the same boat. I think is still valid. And obviously we do that with industry partners already today. But this was on the greater scale. And Embrace there again being the only company with such a broad pipeline, including a significant I think it's a very interesting proposal for players. Now that's history. Now we have taken control in our own hands. We are adapting, adjusting, and we have left this behind us. There is, I personally have done a lot of learnings and it's been, I have to say, painful. But as an entrepreneur, you learn as you go.

Okay, thanks guys.

The next question comes from Eric Larson from SEB. Please go ahead.

Thank you and good morning. So two questions from my side. You mentioned that you expect much stronger cash flow already in Q2. So I was wondering if you could give some color on sort of which the primary drivers are here and does this include any expectations on external publishing agreements?

I don't think we have provided color in

the report. No, we haven't. I think what we do say is that the effects of the restructuring program will of course help us to meet our year-end target of net debt. But that's expected to fall within the second half of the quarter in terms of capex and opex savings. I think that is color that you have given.

All right. And last and final question. If you could just comment your underlying earnings in PC console, meaning excluding Dead Island, how is it developing and do you expect this restructuring to have a positive impact already in Q2?

In terms of earnings, I think it's too early to...

Yeah, I would say that if you look at the contribution from the restructuring program, we expect to see those effects in the second half of the year, so starting Q3. Obviously, if you talk about PC console, the main difference is the capex savings, but we also have, as Mygge explained, a group-wide reduction target on opex, which will also be a part of the operating groups that are in the PC console segment. So, what effects of that is for the second half of the year?

All right. Perfect. Thank you.

There are no more questions at this time, so I hand the conference back to the studio.

And to round this off, first, most of the questions in the web have been already answered by other questions, but we have a question from the audience here. Rasmus.

Yes. Hi, Rasmus Engberg with Handelsbanken. I had a couple of questions. Just firstly, to be clear, what was better than your anticipation in the quarter?

Well, Dead Island 2 obviously has been a greater performance in terms of ebit. Mobile games have been stronger in terms of profitability.

Yeah, I think you should mention entertainment and services.

That has a significantly better performance also in the quarter.

Thanks. And with regard to the upcoming quarter, how do you see that compared to the first quarter in terms of firstly, adjusted ebit?

We expect just a bit to comment on phasing. When we talk about the forecast, it's important to reiterate that we expect a solid second half of the year. And that also ties into the seasonality within tabletop and mobile. And then when it comes to PC console,

the release dates and also the catalogue sales from the successful releases we already had. So, yeah, we are sitting here with greater confidence.

No comment on Q2 compared to Q1?

No, I would like to deliver and let's focus on the full year.

And then a final question. Are you saying, Johan, with regards to the net debt that would come off or the cash flow will be significantly positive in the second quarter or clearly positive? What are you actually telling us?

I think we said that we expect a significantly stronger free cash flow already in Q2. Q1. Q1. And then we reiterated the full year target for net debt where we expect a notable contribution from the restructuring program, second part of the year.

Very good, thanks. Thank you, Espo. A quick follow up on Dead Island over performance versus expectations. What can you say on the backlog sales of the title so far? Is that also exceeding expectations or giving history of the title and your expectations?

I think Dead Island had a really strong release window. We have seen more normal performance according to our expectations. What we now expect obviously is promotions but primarily new addition of new content coming through. So there is significant amount of content coming through for the game in the year. That would improve the sales of the base game as well. That's our expectations. Then looking a year ahead we would have a release on another platform that also will drive notable sales.

Great.

With that said, thank you so much

for your presentation. Thank you audience for tuning in.