Embracer Group AB

Welcome to Embracer Group Q1 Interim Report 2025-26. During the question and answer session, participants are able to ask questions by dialing pound key five on the telephone keypad. Please limit yourself to two questions at the time and then return to the queue. Now we'll hand the conference over to CEO Phil Rogers and CFO Muge Bouillon. Please go ahead.

Thank you. And good morning, everyone. And thank you for joining our webcast today on our Q1 results. Today marks a change from our most recent quarterly updates in that we're talking to you from our Stockholm office. We have a short presentation to cover the main beats for our operating segments, a look at our financial performance, and then closing on how we're seeing the outlook and the times ahead before turning over to Q&A. It also makes a change for me to be here becoming the group CEO on the 1st of August, just a couple of weeks ago. It's an honor to lead Embracer at this pivotal moment of our evolution. And I'm grateful to the board and to Lars in particular for the trust placed in me. And with that, I'll jump straight in. Overall, our Group Q1 results reflect a quiet quarter for PC console releases. Net sales were 3.4 billion sec, which represents a 31% year-over-year decline, but a much tighter 2% organic decline when we consider the impact of our divestments last year. on adjusted EBIT, all that came in at 75 million SEC. This was down from 579 million SEC reported in Q1 last year, or down from 250 million SEC when we factor in those divestments again. Now, I don't want to spend too long on this slide because we'll dive into more details as we look at the segments. But I do think it's important to highlight the free cash flow generation over the trailing 12 months or TTM at 1.2 billion SEC. Muge will talk more about this in the financial performance. But for me, I want to highlight the significant progress we've made in strengthening the group's balance sheet. Just looking beyond the data a little, and as I said in the introduction, this really is a pivotal moment for our group. Coffee Stain is on track for its separate listing later in 2025 with a powerful combination of strong IPs, engaged communities, and innovative talent. We're confident in its future as a standalone company. And as Embracer evolves from a collective to a cohesive business in fellowship entertainment, It will hold one of the most exciting IP portfolios in the games industry with globally recognised franchises, including the Lord of the Rings, Tomb Raider, Kingdom Come Deliverance, Metro Dead Island, Darksiders and Remnant, to name just a few. And we really believe we're laying the groundwork for a more agile and more empowered organisation centred around such IPs. So here we're looking at the PC console segment and our Q1 net sales were 1.6 billion sec, a quarter with no major releases. Our focus in the quarter was really on extending the player reach of Kingdom Come Deliverance 2, but sales did fall short on where we had initially planned. Our thesis is that despite early price promotions and a DLC activity, there were some competitor titles launched in the quarter which absorbed significant player time and attention. So mid-quarter, we decided to double down efforts on Q2 and beyond. Our team is now finalizing the next major new content drop, Legacy of the Forge, and this is shaping up to be a deep gameplay drop. one we hope our loyal player audience will love. The team is focused, the plan is in motion, and we're fully on it. We're delighted that Kingdom Come Deliverance 2 is widely regarded as a Game of the Year contender, and we want this to be one of the success stories of the year for players, for the amazing creators at Warhorse, and for our wider group. A smaller release, but Milestone's annual MotoGP game got off to a solid start, launching 30th April. Touching on the adjusted EBIT margin, while it was down slightly on a year-over-year basis, reflecting the negative sales growth, while we had a softer quarter for new releases and catalog, we're not happy with the margin and underlying profitability in the quarter. Just touching and looking into Q2 a little, while Killing Floor 3 released in July, sales have come in below our initial expectations. Now, this is a core co-op first-person shooter FPS, and the team at Tripwire is working hard on updates with open communication with players. On 1st of August, Titan Quest 2 started its early access. We've got some encouraging engagement and player data, and we're looking forward to the full release, including console, for this action RPG. We're showing this slide for consistency with our recent quarterlies. And whilst we're used to seeing the data points, I do want to stress some key thoughts. Firstly, as we said before, we're not happy with how our returns have been trending. Second, we know our future is focused on our core IP. And when we look deeper into the underlying data set, Our returns on core IP trend above three, whereas non-core is below two. Now, perhaps this is no surprise because our core IPs got deeper and in many cases, longer relationship with our players for whom we're making better gains, helping us drive better returns. Finally on this data, and as I wrote in the broader CEO comments this morning, our investment allocation into our core IP projects is growing, expecting to reach 40% this year, up from 20% last year. Now, of course, the backdrop here is an overall lower capex spend as we've cut back on non-core capital allocation and also factoring the divestments I mentioned earlier. But this shows a clear direction of strategic intent. Let's look at the pipeline. Well, as of today, we've got 39 announced titles. It was fun to see the gamer reaction to the recent THQ Digital Showcase. Several of those games that we revealed then are shown here, and our talented teams are working hard on getting those games ready for release. Darksiders 4 from Gunfire Games certainly caught attention and trended well with notable wish lists on Steam. Whilst that's not a game for this fiscal year, it is one we and certainly the players based on that reaction are excited about. If our team at Gunfire can bring that same magic to Darksiders as they brought to Remnant, then players are in for a real treat. And of course, Gamescom next week. We're excited about that. It'll be another key beat for sharing information on our games. Standing back, and we'll cover this certainly in the Outlook session, we retain a strong confidence in our pipeline. Now we move to mobile games. And for mobile, we delivered 520 million sec in net sales. And whilst this is a significant drop on the reported basis, so quarter on quarter, it's again a much tighter drop at minus 5%, this time factoring in the divestment of EasyBrain. Listening to teams at DECA and, of course, Crazy Labs, part of the DECA group, I'd use the words smart and careful to describe how they approached Q1. Generally, we face some increased competition, some user acquisition cost headwinds, so decided to lower our Q1 spends, however, generally maintaining margins. Glow, go fashion idol, was our top performing revenue title this quarter. We're really excited it continues to grow and we're confident it will continue to scale over the coming quarters. On entertainment and services, this segment, well, we had a stable quarter and delivered to plan with strong organic growth from PlayOn's partner business. We also had a higher year on year contribution for Middle Earth Enterprises, positively impacting the margin. The team at Middle Earth continues to build a strong pipeline across multiple product verticals. And fandom really is the heart of what we do and what they do in particular, connecting directly with fans and bringing out IP to life across multiple touchpoints. Just last month, Middle Earth, in collaboration with Dark Horse and the OneRing.net, which is the world's most famous Lord of the Rings community, teamed up at the San Diego Comic-Con, creating a fantastic moment to engage fans and celebrate the worlds we create. And with that, I'll hand over to Muge.

Thanks, Phil. Good morning, everyone. As we have seen in recent quarters, the reading of our financials continue to be impacted by divestments affecting comparability with prior periods. So as I take you through the slides, I'll try to provide clarity on the underlying trends and performance on a like-for-like basis. Net sales for the quarter of 3.4 billion SEC were impacted by both the divestments as well as FX translation effects. If we exclude these impacts, as Phil also mentioned, our organic and pro forma growth stands at minus 2%. For context, Q1 last year included 1.2 billion SEC from the divested entities. Our entertainment and services segment led the quarter with plus 52% organic and pro forma growth, driven by a strong performance in Kleon's partner distribution business with the start of a new distribution deal with Sony. This was offset by PC console, which we mentioned, which was down 22% year-on-year pro forma due to lower catalog revenue and no major releases. Mobile was also slightly down year on year, excluding divestments. However, as Phil also said, glove fashion idol continues to grow and is expected to scale further in the coming quarters. Gross margin for the quarter, as you say, was 69%. Divestments and the shift in segment mix had notable impacts here. Divestments resulted in a reduction of 5 percentage points. Excluding divestments, entertainment services represented 36% of total pro forma net sales, which is up from 23% last year. So while PC console and mobile gross margins were stable year on year on a like for like basis, the increased share of entertainment services, which typically generates lower margin, led to a reported gross margin percentage decline of further six percentage points. Looking at marketing. Total marketing spend was 332 million SEC or 10% of net sales down 4.0 on year and two points lower excluding divestments. Non-user acquisition cost marketing decreased by 57 million SEC reported largely due to divestments and was stable on a like for like basis. User acquisition cost investments dropped by 282 million SEC year on year to 222 million SEC, driven by the EasyBrain divestment. EasyBrain accounted for 314 million SEC in Q1 last year. So excluding EasyBrain, user acquisition costs represented 43% of mobile net sales, up from 32% last year. The operating expenses excluding marketing were 1.2 million SEC down, 515 million SEC year on year and representing 35% of net sales in line with last year. Q1 last year included 400 million SEC of OPEX from divested entities. On a like for like basis, OPEX decreased by 115 million sec and remained stable as a percentage of net sales. This remains and will remain a key focus area as we continue to maintain tight control over our cost base. As we've mentioned, Q1 was a quiet quarter with no notable releases, activity delivering adjusted EBIT of 75 million SEC. Last year's Q1 included 331 million SEC from divested entities, Aside from the divestments effect, adjusted EBIT was impacted by the soft PC console top line and the resulting segment mix shift towards entertainment and services, which impacted the margins, as I mentioned earlier. Overall, this led to a 10 point impact in adjusted EBIT margin or minus five points when we exclude the impact of divestments. Turning to cash, this remains a key area of focus. We've seen a step change in trailing 12 months free cash flow after net working capital, as Phil also mentioned, now at 1.2 billion SEC compared to minus 196 million SEC a year ago. Q1 free cash flow after net working capital was minus 223 million SEC versus minus 120 million SEC last year. Excluding the free cash flow contribution from divested entities last year, we see an improvement on a like-for-like basis. This improvement was driven by better networking capital movements with receivables collection post KCD2 launch and lower net investments year on year, partly offset by softer EBITDA performance. Looking below free cash flow, The cash inflow from financing activities of 164 million SEC in Q1 contrasts to the significant outflow of last year, which related primarily to the repayment of loans with the net proceeds from the gearbox divestment. Net cash flow from acquired or divested companies relate to the payment of earnouts and the acquisition of shares in StarBreeze. At 30 June, this results in a net cash position of 4.9 billion SEC and available funds of 12.7 billion SEC. That concludes the overview of the quarter's financial performance, and we turn now to an update of the... As Phil mentioned, this is a transition year as we continue to reshape and transform the group. We've been very happy to see the success of Asthma Day, and we look forward to delivering another successful spin-off with Coffee Stain Group. As we announced in May, the plan is for the spin-off on the Nasdaq First North premiere to happen by the end of calendar 2025. Since then, we've onboarded advisors, held the kickoff meeting with Nasdaq early this month, and we're progressing well with listing preparations. We have good momentum, and the teams are fully mobilized and on track to deliver within that timeline. In parallel, we're also working on the evolution of the group post-spinoff, I think that's a good point to hand back to Phil. We'll speak more about the future, including the immediate priorities of Fellowship Entertainment. Phil, over to you.