Embracer Group AB

Welcome to Embrace a Group Q2 Interim Report 2025-26. During the Q&A, participants on the telco are able to ask questions by dialing pound key five on their telephone keypad. No written comments. Now we'll hand the conference over to CEO, Bill Rogers, and CFO, Mugge Boyan. Please go ahead.

Thank you. And good morning, everyone, and thank you for joining our webcast today to cover our Q2 results. Muge and I are talking to you today from our Stockholm office again. We have a short presentation to cover the main beats for our operating segments and look at our financial performance and then closing on some key steps looking ahead before turning over to Q&A. So with that, we'll get straight in. And this covers really the highlights for Q2. So overall, Q2 results reflect a soft quarter for new PC console releases. Net sales were 3.8 billion sec, which represents a 19% year-over-year decline, but a 6% organic growth when we consider the impact of our divestments and FX. And amongst that, we saw solid performances from two really important IPs. We saw strong merchandising sales within Middle Earth Enterprises. And on Kingdom Come Deliverance, we were delighted to see increased engagement with gamers throughout the quarter. The team had a good plan and delivered it. Our adjusted EBIT was 109 million SEC. Now, this is down from 513 million SEC reported in Q2 last year or down from 247 million SEC when we factor in the divestments. Now, free cash flow generation over the trailing 12 months or TTM stood at 1.3 billion SEC. Our balance sheet remains strong. Muge will, of course, talk more about this shortly now. Looking beyond the data and as we've covered in our Q1 update, the recent AGM and our report this morning, this is a transformative time for our group. CoffeeStain is on track for its separate listing with its digital capital markets event being held on Monday next week. On the strategic side, We've now completed the 500 million sec share buyback programme. We will continue to prioritise the distribution of excess cash to shareholders. Now with the Coffee Stain Group spin-off scheduled for December, our transformation to fellowship entertainment comes into full focus. We will hold one of the most exciting IP portfolios in the industry with globally recognized franchises, including Lord of the Rings, Tomb Raider, Kingdom Come Deliverance, Metro, Dead Island, Darksiders and Remnant. In an IP first organization, one where we will operate with greater share and alignment. It really is now about forging our fellowship. To me, this quarter shows progress, but also shows clearly where focus is still needed. And we're committed to strengthening profitability and unlocking long-term value. Now we'll move into the operating segments and start with PC console, where we saw our Q2 net sales were 1.9 billion sec, which is a 4% organic decline. Now, whilst on this graph, it looks like this is primarily due to the lower back catalogue revenue, operationally, it was really the overall soft or weak performances of new releases this past quarter, which left us in decline. Catalogue held up well against our plan, driven by KCD, Kingdom Come Deliverance 2. The biggest new game this quarter was July's release of Killing Floor 3, and we already noted the softness in that launch when we spoke to you in mid-August. We launched to fan frustration with early performance issues and a game which we now realise have perhaps changed too many core ingredients at once. And we have to learn from this to turn it around. Performance and stability, fan alignment and providing a robust slate of new content and events will be key. Things which contributed to the franchise's significant past success. Tripwire is committed to restoring core fan trust. There is a plan, and we're on it. Kingdom Come Deliverance 2 topped our catalogue performance this quarter. Fans gave a great reaction to the game's Legacy of the Forge DLC, and this helped push our sales. Just yesterday, we announced we've now passed the 4 million unit sales mark, coming a day after the third DLC dropped, Mysteria Ecclesiae. This is great timing for the upcoming holidays and the awards season. We want this to be one of the success stories of the year for players, for the amazing creators at Warhorse and our wider group. Titan Quest 2 also finished Q2 above plan. Titan Quest 2 entered early access on PC, and we're now planning the full release, including consoles. And just quickly beyond the quarter, but a worthy call out is the multiplayer online dungeon adventure game Fellowship, launched in October to positive reception and potential. Just finishing on this slide and to talk to our adjusted margin. Well, our adjusted margin shows the challenges we face with soft new releases. Not shown here, but reported this morning, the finalized value of completed and released games during Q2 was actually at one of the highest levels for quite some quarters. New cap expound was actually the lowest we've seen over that same time, reflecting a new approach to capital allocation and control. But going back to the margin, the value of completed games obviously drives a higher amortization charge in the period. And this hits the margin when overall new sales fall short. And we know this is not a sustainable margin. We know our PC console operations need to improve. And this slide now shows that very same challenge. This quarter's releases are shown on the far left of this graph at 0 quarters since release. We need to and we will work hard to get those titles to break even and beyond. We show this slide for consistency, and the consistent message is we're not happy with how our returns have been trending, and those returns must improve. And to that end, we focus on three key priorities, investing in core IPs, operational discipline, and targeted cost initiatives. Onto the PC console pipeline. And as of today, we've got 32 announced titles. It was great to see gamer reaction to the re-animal demo, gamers exploring some of the opening chapters to the game, enjoying themselves a lot based on what I've read on forum feedback. Now, this is a really busy time for our teams with award events and other industry events, and our teams have more news to share in the coming weeks on upcoming releases, including locking in release dates. We're excited by our near term and our longer term pipeline with a range of major products based on core IPs launching over the coming years. An improved release slate will be one key to drive stronger profit and cash generation ahead. We'll move now to mobile. For mobile, we delivered 535 million sec in net sales, a 1% growth factoring in FX and the divestment of EasyBrain. It is also a positive trend when you look sequentially Q1 to Q2 this fiscal year on this slide. I use the words smart and careful to describe how our teams at Decker and Crazy Labs approached the first quarter. and I'd continue that sentiment today for Q2. We saw some positive, successful scaling of Flophouse, a new hybrid casual game from Crazy Labs, and Glow Fashion Idol was again our top performing revenue title this quarter. However, before pushing for scale, the team is taking some more time for technical fixes and game improvements. Overall, we're confident of future growth. Now we'll look at entertainment and services, where the segment grew 25% organically. The strong top line growth was driven by play on partners. Whilst Middle Earth Enterprises did not have any new product releases, our merchandising and licensing made a solid adjusted EBIT contribution. The Middle Earth team continues to build a strong pipeline across multiple product verticals, and after the quarter entered into a strategic agreement with Asmodee. Under the agreement, Asmodee will manage the tabletop games and accessories category for The Lord of the Rings and The Hobbit. This collaboration builds on our long-term relationship with Asmodee and enhances our ability to reach, engage, and delight fans with the very best tabletop game experiences set in the world of Middle-Earth. And with that, I'll hand over to Muge.

Thanks, Phil. Good morning, everyone. Before I start, once again, I'd like to remind you that the reading of our financials continue to be impacted by divestments affecting comparability with prior periods. As I take you through the results, I'll also provide some clarity on the underlying trends and performance on a like-for-like basis. Looking at net sales, net sales for the quarter of 3.9 billion SEC were impacted by both the divestments and FX translation effects. If we exclude these effects, our organic and pro forma growth stands at plus 6%. For context, Q2 last year included around 800 million SEC from the divested entities, primarily EasyBrain. Our entertainment and services segment led the quarter, with plus 25% organic and performer growth, driven by a strong performance of players, partner distribution business, supported by Sony PlayStation, as well as merchandise sales in free mode. Crazy Labs drew moderate organic growth of 1% year on year in mobile, Well, this was partly offset by PC console, which was down 4% year-on-year pro forma. Gross margin for the quarter was 67%, down 6 points year-on-year. The impact of divestments was the primary driver, accounting for a reduction of 5 points year-on-year. The remaining one-point decline was mainly related to segment mix. While PC console gross margins were up eight points and mobile was largely stable year on year on a like-for-like basis, this was more than offset by the increased share of entertainment services in the segment mix. Looking at marketing, total marketing spent was 406 million SEC or 11% of net sales, down five points year on year, almost entirely driven by the effect of divestments. Non-user acquisition cost marketing of 165 million SEC decreased slightly by 14 million SEC year-on-year, while user acquisition cost investments dropped by 350 million SEC to 241 million SEC, driven by the EasyBrain divestment. EasyBrain accounted for 389 million SEC in Q1 last year. Excluding EasyBrain, user acquisition costs represented 45% of mobile net sales, up from 35% last year, but largely stable sequentially compared to Q1. Looking at operating expenses, operating expenses excluding marketing were 1.2 billion SEC, down 180 million SEC year-on-year, and representing 31% of net sales. Q2 last year included 112 million SEC of OPEX from divested entities. On a like-for-like basis, OPEX decreased by around 70 million SEC and improved slightly by one point as a percentage of net sales. As I've said in previous quarters, this remains a key focus area as we continue to maintain tight control over our cost base. This all delivers an adjusted EBIT for the quarter of 109 million SEC in line with management expectations. Last year's Q2 included 265 million SEC from divested entities. Aside from the divestments effects, adjusted EBIT was impacted by the soft PC consult top line, as we mentioned, and the resulting segment makes shift towards entertainment services, which impacted margins. Overall, this led to an eight point impact in adjusted EBIT margin or minus three points when we exclude the impact of divestments. Turning now to cash, free cash flow after working capital of minus 348 million SEG was slightly better than Q2 last year on a reported basis, but significantly improved on a like-for-like basis considering that divested entities contributed around 225 million SEG of positive free cash flow in Q2 last year. This improvement was driven by a lower net working capital increase compared to last year, mainly related to inventories as well as lower CAPEX. On a trailing 12-month basis, at the end of Q2, free cash flow of generation stood at around 1.3 billion SECs. Looking below free cash flow, the cash flow from financing activities or 180 million SEC in Q2 includes 72 million SEC related to the repurchase of own shares under the 500 million SEC share buyback program announced at the AGM on 18th of September. As Phil also mentioned, as of Friday, November 7th, we have repurchased 480 million of big clusters for a total concentration of 500 million SEG. The program has thus been completed and is now closed. Net cash flow from acquired or divested companies relates to the payment of earners from past acquisitions. The significant inflow in Q2 last year relates to the net proceeds from the divestment of Sabre Interactive. At the end of September, this results in a net cash position of 4.2 billion SEC and available funds of 11.9 billion SEC. Looking ahead, We have reiterated today our forecast provided in Q1. We still expect to deliver at least 1 billion sec of adjusted EBIT for the year, including the contribution of Kaffeestein Group. This forecast reflects a Q2, Q3 performance that is expected to be somewhat stronger than Q2, driven by stronger seasonal performance in the entertainment and services segment, although with continued limited profitability in PC console. We also expect a continued build-up of working capital in the third quarter. We're excited by the reception of the recent demo of ReAnimal, and our teams across the group are working hard to deliver the game to its full potential. Our mid-sized PC console releases, including ReAnimal and Gothic 1 Remake, are weighted towards Q4, This is anticipated to drive a solid free cash flow in the last quarter with some phasing into Q1 next year. I just wanted to note at this point also that following their anticipated listing in December and beginning with our next quarterly report, Coffee Stain Group is planned to be reclassified to discontinued operations and they will be excluded from future financial reports. And talking of Coffee Stain Group, the spin-off process is progressing well and we remain on track with our plans for a listing in December. We recently published Coffee Stain's information brochure and at the GM on 3rd of November, shareholders resolved to distribute all Coffee Stain Group shares held by Embracer. We were also happy this week to receive confirmation from Nasdaq that Coffee Stain Group has been assessed to meet the listing requirements for the first North Premier Growth Market and the application for listing will be approved subject to customary conditions being met ahead of the listing date. We are now very much looking forward to the Digital Capital Markets event which will be held on Monday. There will be presentations from Anton Vesberg, CEO, Eric Sanderdale, CFO, alongside other members of their management team. This will be an important milestone in CoffeeStain's journey to becoming an independently listed company, and we hope you will join us for this exciting event. I will hand back now to Phil for some closing remarks.