Embracer Group AB

Good morning, everyone, and thank you for joining our webcast today covering our Q4 and full year results. Muge and I welcome you today from Stockholm on voice and also on camera. And as usual, we have a short presentation to cover the main updates for our operating segments, a look at the financial performance. And with our news this morning, we will then spend most of our time looking ahead to cover the next step for Embrace a Group before turning over to the Q&A. So with that, let's get going. Overall, our quarterly results reflect another delivery above plan on both the revenue and adjusted EBIT side. Total net sales were 3.9 billion sec, a 10% organic drop year over year, which we'll see comes from PC Console, which had some tough comps to Q4 last year with the launch of Kingdom Come Deliverance 2. Mobile and entertainment services both delivered growth in Q4. Now, as we said in February, we took positivity into Q4, and it shows here. On a core IP theme, Kingdom Come continued to deliver. Overall, Q4 free cash flow was also strong. For the full year, sales totaled 15.9 billion sec, and adjusted EBIT came in at 0.9 billion sec, above our guidance. Again, we talked in February how this was clearly a transformative time for our group, Coffee Stain successfully completing its separate listing in December 2025, and the group working hard to deliver its plan to the full potential. Now, Muge will go deeper on the financial shortly, but from my side, I just emphasise it's good to see the business delivery coming through in these results. It's also good to report here the positivity to the Metro 2039 reveal. That was mid-April, and momentum is strong. And that takes us to today, with the news of a proposed separation into two groups. The separation will be during 2027, so important to convey the focus in the business today. We know the importance of delivering results in parallel with these transformative plans to unlock long-term value. And with that, let's look at the operating segments. And first, PC Console. Our Q4 net sales were 1.6 billion sec for PC Console, a headline 37% organic decline. Again, coming off new release comps. Re-Animal released a strong reception from fans and critics and performed well as a new IP. Tarsier is a talented team, and working with the publishing skills at THQ, well, they really have captured the hearts and minds of players. We have something to build for the long term here. New releases in Screamer and Ride 6 were positively received by critics and players, and the talented team at Milestone is working hard on these games, getting them into the hands of more players. Our adjusted EBIT margin trend was stable quarter on quarter. And I'll keep it simple here and say something similar to how we said in February that 13% is clearly an improvement over Q1 and Q2. But it is not our ambition. We move to ROI. Now, again, for consistency, we share this data, but as we move this group forward over this new fiscal year, we're likely to have a different format for sharing ROI information in the future. You'll see this quarter's releases on the far left at zero quarters. all three new releases on their respective paths to break even and then to push on above, with Re-Animal the best-performing new title in Q4. It's not a surprise today that few games, ours or others, get to break even in the first quarter of release. All games need commercial, brand and studio brains to combine to achieve discoverability, drive gamer engagement, fan service and sales. The PC console segment is more competitive than ever. but it's rewarding too when we do things right. And this ROI chart again shows the importance of our three key priorities, investing in our core IP, operational discipline, and targeted cost initiatives. And to that, also the importance of our announcement today to sharpen our focus further and report as two new business segments and ultimately the proposal to create two clearly defined listed companies. Let's look at pipeline. As of today, we've got 30 announced titles. Gothic dominates our listing here of dated upcoming releases. Gothic 1 Remake is out within a few weeks now. Based on recent previews, it's fair to say that critics really feel what was intended. This is Gothic. The soul of the original game is truly preserved. We're now in that final polish ahead of release on June 5th. Our list of to-be-dated games is longer. Heading into the summer, both Metro 2039 and Tomb Raider, Legacy of Atlantis, have great activity to share with fans. We know that execution discipline will be critical to converting this pipeline into significantly higher profitability and cash generation. Let's move to mobile. For mobile, we delivered 680 million sec in net sales, 2% organic growth year on year, driven by successful and continued scaling of sled surfers. When we look sequentially, we see the continuation of the positive revenue growth with intact margins, even compared to the seasonally strong third quarter. The teams are focused on user acquisition and live ops. Overall, we're confident in the development ahead. Now we switch to entertainment and services. Well, revenue in this segment totaled 1.7 billion sec. That's a 36% organic growth year over year. This came from two strong new releases, physical releases that play on partners. And this also led to the positive bump in adjusted EBIT Q4 to Q4. For Middle Earth, we continue to find meaningful licensing partnerships. The next instalment of Magic the Gathering set, The Hobbit, arrives this August. Expanded creative discussions with internal studios and select external partners continue to build a robust long-term plan for games. Our teams in this segment finish the year with great momentum. And with that... I'll hand over to Muge.

Thanks, Phil. And good morning, everyone. Once again, a reminder before I start that all comparator figures exclude the coffee stain, which is treated as discontinued operations since their spinoff back in December. Net sales for the quarter of 3.9 billion SEG. were above management expectations, and compared to prior year, were impacted by divestments, FX translation effects, and a very strong comparator. The negative year-on-year divestment impact, primarily from EasyBrain and ARC, was approximately 400 million SEG, while the FX impact was also approximately 400 million SEG. Now, if we exclude these impacts, our organic and pro forma net sales growth stands at minus 10%. Now, breaking this down on a segment basis, PC console was down 37% due to the very strong comparator we mentioned earlier. This was offset by entertainment services, which delivered an organic and pro forma growth of 36%, and mobile, which was up 2% year on year. For the full year, net sales of 15.9 billion SEC were down 25% on a reported basis due to the impact of divestments and FX. Excluding these effects, net sales were only slightly below last year at minus 3% on an organic and performer basis. The gross profit percentage for the quarter was 61%, down 14 points year-on-year. while the primary driver is segment mix with a lower proportion of PC console in Q4 compared to last year as a result of the KCD2 release in the comparator. Now, looking at marketing, total marketing spent was 476 million SEC, or 12% of net sales, down 4.0% on the year. Half of this reduction can be attributed to the impact of divestments, while the remainder relates to stronger revenue in mobile relative to UAC spent. Excluding the easy brain impact, user acquisition costs as a percentage of mobile net sales decreased by around 9 points year-on-year to 52%. Operating expenses, excluding marketing, were 876 million SEC, down 363 million SEC year-on-year. This represents 22% of net sales, a reduction of two points year-on-year. Divestments impact the OPEX evolution by 204 million SEC. And on a like-for-like basis, OPEX decreased by around 160 million SEC compared to last year, reflecting our focus on tight cost controls. Well, this all delivers an adjusted debit for the quarter of 360 million SEC. Compared to last year, adjusted debit is impacted by the strong KCD2 comparator I mentioned earlier. The underlying performance was more positive than what we see here, as we also had negative impacts during the quarter of over 200 million SEC from non-cash adjustments in active co-publishing and work for higher projects, as well as impairments of 40 million SEC on non-core IP hitting adjusted EBIT. Divestments had minimal contribution in Q4 last year, but adjusted EBIT was impacted by around 81 million SEC of negative effects in the quarter. The mixed impact on a gross margin level I mentioned previously led to a minus 10 point impact in adjusted EBIT margin, which was 9% for the quarter. On a full-year basis, adjusted EBIT was 905 million SEC, which is ahead of our full-year forecast. Now, turning now to cash. As you can see, we delivered very strong free cash flow after working capital for the quarter of 883 million SEC. This is an increase of 65 million SEC over the same quarter last year, or 155 million when we exclude the contribution from EasyBrain in the prior period. The strong Q4 free cash flow generation was driven by both the P&L performance we discussed earlier and by positive networking capital movements of 730 million SEC. This was mainly related to collections of trade and other receivables during the quarter, and reflects the unwinding of the receivables increase we saw in Q3. We also benefited from some timing effects towards the end of the quarter, partly due to increased royalty payables from partner-published products, which are expected to unwind in Q1. On a full-year basis, we delivered a positive free cash flow of 50 million SEC. The full-year comparator of 745 million SEC includes a free cash flow contribution of 251 million SEC from divested entities. The rest of the year-on-year evolution is primarily driven by the lower full-year P&L contribution, partly offset by reductions in CapEx and improved net working capital movements. Now, looking below free cash flow, the cash outflow from financing activities of 930 million SEC for the quarter relates primarily to net repayments of external bank loans. Cash outflow from acquired or divested companies of 209 million SEG for the quarter relates to the net proceeds from divestments of non-core assets. At 31 March, this results in a net cash position of 3.8 billion SEG and available funds of 6.8 billion SEG. Now, As we close out the full year, let's take a few minutes to look in a bit more detail at the evolution of our net cash position over the 12-month period. Net cash at the beginning of the year amounted to 5.4 billion SEK. As I mentioned on the previous slide, we generated a full year free cash flow after networking capital of 50 million SEC. And the largest part of the net cash evolution during the year was thus driven by a number of key strategic and corporate actions. All these include cash return to shareholders via our share buyback program amounting to 500 million SEC. the net cash impact of the coffee stain spin-off of 495 million SEC, net cash proceeds of 105 million SEC from divested of non-core assets, and the payment of earnouts in the year amounting to 729 million SEC. It's also worth noting that we now have relatively limited cash settled earnout obligations of 464 million SEG spread over the coming five financial years, of which almost three-thirds are due in FY26-27. Net cash at the end of the year does amount to 3.8 billion SEG. After the completion of the key strategic and corporate actions I have just mentioned, we thus maintain a strong financial position. Well, I'll talk more later this morning about our plans for capital allocation and capital distribution going forward. Now, moving on to the adjusted debit bridge. So far this morning, we've discussed the adjusted debit, and I want to walk you through here the difference compared to the reported debit that we have disclosed in our report today. As you can see, compared to adjusted EBIT of 905 million SEG for the full year, we have a reported EBIT of minus 7 billion SEG. Well, the difference is primarily related to non-cash impairment changes which have arisen in Q4. Goodwill has been impaired by approximately 5.8 billion SEC at year-end, while intangible assets, primarily IP rights, have been written down by 1.6 billion SEC. The majority of this total, 7.2 billion SEC, arose in Q4. The assessment of Goodwill takes into account prudent future assumptions on market dynamics, as well as structural changes in the group. In terms of segments, 3.8 billion SEC is allocated to PC console, 1.8 billion SEC to mobile, and around 250 million SEC to entertainment services. We also exclude net gains from divestments of 303 million SEC. The vast majority of these items affecting comparability are non-cash. In addition to the IACs, net cost of 523 million SEG related to specific items arising from historical acquisitions. We are also highlighting today a change to our reporting that we will implement from FY26-27. As of the next quarterly report, we will add cash EBIT as a key performance metric. We believe this provides a better view of the cash economics of game development and avoids the time distortion associated with cost capitalization and subsequent amortization in future periods. From a management perspective, it also better supports our internal capital allocation process by ensuring that investments in game development are balanced with ongoing revenue generation. Cash EBIT, which for FY25-26 amounted to 511 million SEG, is very similar to EBITDOC, which we already disclosed. The only difference is that Cash EBIT also takes into account lease payments, which are considered to be normal operating items. So Cash EBIT will replace EBITDOC as an alternative performance measure in our reporting from Q1. Compared to adjusted EBIT, cash EBIT replaces depreciation and amortization costs with the gross capital expenditure for the relevant period, whereas depreciation and amortization relates to the cost of past investments, gross capex relates to the actual game development spent in current period. While we'll continue to disclose adjusted EBIT, cash EBIT will be a core indicator in measuring our performance going forward. Moving on. Finally, looking ahead to the 26-27 financial year. At this stage, we are providing guidance at a total group level only and will start from now to guide on cash EBIT rather than adjusted EBIT. We expect to generate cash EBIT of at least 1 billion SEC. This compares to a cash EBIT of 511 million SEC in FY25-26 or adjusted EBIT of 905 million SEC. We expect a similar difference in absolute terms between adjusted EBIT and cash EBIT in FY26-27. In Q1, we expect a negative cash EBIT, similar to Q1 last year, with the potential that the catalogue, which is delivering strongly, can offset this. We have provided a quarterly breakdown for FY25-26 fiscal year in the appendix to this presentation. We expect full-year free cash flow to be positive with a heavier rating towards H2, following a similar trend to what we have seen in FY25-26. We will strive throughout the year to deliver upside potential to the forecast, and our ambition is to deliver consistent year-over-year earnings growth going forward. I'll now hand back to Phil.

Thanks, Muge. So that's the full year picture. What we've covered today and in the past few quarters illustrate the progress made over the past year, a year of real change. And what that process of transformation made increasingly clear to us as we work through it was how the next path needs to look. And that's what we want to spend time on now because that's what today is really about, the future. And with that... I would like to warmly welcome Lars to today's presentation. Welcome, Lars. Thank you, Phil.