Fractal Gaming Group AB (publ)

Hi everyone and welcome to today's presentation of Fractal Gaming Group's second quarter 2026 report. As we described after the first quarter, the gaming hardware market went through a rapid and significant slowdown in the beginning of the year, driven by sharply increased memory prices. That environment continued through Q2 and had a clear impact on both end consumer demand and even more significantly on the purchasing behavior across the distribution channel. So today I want to focus on three things. First, what we are seeing in the underlying market and in end consumer demand. Second, how the channel inventory adjustment has affected our reported sales and financial performance, and third, the actions that we are taking to adapt the business to the current environment while continuing to invest in our product portfolio and the long-term market position. Karin and I will take you through the quarter, and as usual, we'll finish off with a session for questions. Let me start with the key developments in the quarter. The slower market that we discussed after Q1 continued where elevated DRAM pricing increasing the overall cost of building PCs and thereby putting pressure on end consumer demand. But it is important here to separate the development in underlying consumer demand from what we have reported as net sales. Our net sales were 75 million SEK, down 65% year-on-year and 64% organically. that is clearly a very significant decline. At the same time, sales out to end consumers declined by 28%. And importantly, we continue to gain share across our key markets. Since February, reported sales out has stabilized, just about $4 million per month. And during summer, we saw some improvements from that level in June and July, partly supported by Prime Day. So while demand remains softer, we do see indications that the decline has leveled out. The other major factor in the quarter was the continued channel inventory adjustment. Reported sales out exceeded our sales in by more than 60%. So in simple terms, our partners sold significantly more Fractal products to consumers than they purchased from us during the quarter. The decline in our reported sales was disproportionately larger because our partners were reducing their inventory of cases that was built significantly higher sales out levels that we saw in Q4 and early Q1. Americas and APAC reached a more balanced position for their inventory during Q2, while we expect EMEA to move towards a similar position during Q3. Looking across our portfolio, we also see opportunities to strengthen our new categories. Performance is below our ambitions and we are taking a number of actions on both the product and commercial side. That includes improving the existing products, accelerating portfolio renewal, increasing channel activation and broadening our retail distribution and exposure. The impact from the lower sales had also significant impact on our profitability in the quarter with EBTA of negative 23 million SEK or negative 20 million excluding restructuring costs. At the same time, product margin improved to over 39%, operating cash flow remained positive and we ended the quarter with net cash position of 18 million SEK. We have also taken significant actions on our cost base. These measures are starting to have an effect and we should progressively improve profitability during the second half. With full effect, we expect our fixed operating cost base in 2027 to be approximately 20% below the levels of 2025. So while we are adapting the business to the current environment, we continue to move forward with our product roadmap and commercial initiatives. And as channel inventories normalize, we expect reported sales to increasingly reflect the underlying end consumer demand. Looking a little more closely at the market, the key issue is the cost of PC hardware. Memory, storage, and part of the GPU market have all become significantly more expensive, which has increased the total cost of building or upgrading a gaming DC. Towards the end of Q2, we started to see some signs of DRAM prices stabilizing, although still at an elevated level. The higher prices are also changing how consumers spend. Interest in gaming, that remains strong, but consumers are becoming more selective in how and when they spend. More users are extending their life in their existing platforms and making individual upgrades rather than replacing a complete system. We also think consumers are gradually adapting to this new price environment. It takes time to get used to a higher component price level, but as these prices become more familiar, we expect purchasing behavior to gradually normalize. And as consumers become more selective, value become increasingly more important. Quality, product experience, and the ability to justify the price matter more. We believe this plays to Fractal Strength as a premium brand. At the same time, the underlying engagement in PC gaming remains very strong. We saw Steam reaching new record levels during this quarter, and this supports our view that the current weakness is primarily about hardware affordability rather than underlying interest in gaming. We expect demand to remain softer in the near term, but as consumers gradually adapt and component prices stabilize, deferred upgrades should support a recovery over time. Against that market backdrop, we continue to execute on our product roadmap. During Q2, one of our key launches was the POP2 vision, our first full vision case. It brings Fractal into significant and growing part of the case market, with our design language, build quality and user experience at a price point below $100. That value proposition is particularly relevant in this current market, and the initial reception has been very positive. We also launched Dynamic 3, our next generation of mainstream fan range, strengthening our cooling offering with a strong price performance proposition. So despite the softer market, we continue to bring new products to the market, refresh the portfolio, and we invest in areas that we see long-term opportunity. And we will keep that momentum up also in H2 with more new offerings coming to our community. So with that, I'll hand over to Karin to take you through the financial development more in detail.

Thank you, Jonas. Let me start with our net sales performance for the second quarter. In Q2 2026, net sales declined by 65.3% to 74.7 million compared with 215.4 million last year. In USD, net sales amounted to 8 million, down from 22.3 million, corresponding to an organic decline of 64.3. The decline in net sales was significantly greater than the reduction in sales out to end consumers. Sales out decreased by 28.2% to $13.1 million, reflecting continued weakness in the gaming hardware market, where elevated memory prices have weighed on consumer demand and PC hardware spending. The main reason for the difference between sales out and net sales was the continued inventory adjustment across the distribution channel. As end consumer demand weakened, our distribution partners reduced purchases from us in order to bring inventory levels more in line with the lower demand. This amplified the impact on reported net sales during the quarter. Importantly, sales out remained materially above sell-in. In other words, more products were sold from the channel to the end consumers than we sold into the channel during the quarter. This supported a continued reduction in channel inventories and a gradual normalization of inventory levels. Despite lower sales out year on year, we strengthened our market share overall across our key markets during the quarter. Let's now look at how this development was reflected across product categories and regions. Starting with cases, cases remained our largest product category accounting for 79% of total net sales compared with 89% in the prior year. Sales of cases declined by 69% year-on-year, reflecting both weaker end consumer demand and continued inventory reductions across the channel. Turning to the other category, sales declined by 32% year-on-year. Several products within the category were affected by the same memory-driven market slowdown as cases. while gaming shares and headsets showed a less pronounced decline. As a result, the overall decline in the other category was considerably smaller than in cases. Moving on to the regional performance, net sales declined across all regions during the quarter. The Americas was our largest region, accounting for 49% of total net sales compared with 35% in the prior year, which is more in line with its typical share of sales. The higher share this quarter mainly reflect less elevated channel inventories, meaning that partner purchases followed underlying sales out more closely. EMEA accounted for 37% of net sales. In this region, more inventory had accumulated during Q4 2025 and Q1 2026, which led to a more pronounced reduction in customer purchases during Q2. APAC represented 14% of net sales, broadly unchanged as a share of sales compared with the prior year. So overall the change in regional mix was mainly driven by differences in channel inventory levels and the pace of inventory normalization across the regions. So let me walk you through the development in our product margin. Product profit amounted to 29.3 million, down from 76.7 million in the prior year quarter, mainly reflecting the significantly lower sales volumes. At the same time, product margin improved to 39.2% compared with 35.6% prior year. The 3.6 percentage point year-on-year improvement was driven by several factors. The largest positive driver was currency, contributing approximately 3.5 percentage points, mainly due to timing differences between purchase costs and sales prices denominated in USD. Lower freight costs contributed approximately 1.2 percentage points, while lower US tariff costs added approximately 0.7 percentage points. Product mix also had a positive impact of approximately 0.5 percentage points. These positive effects were partly offset by higher sales discounts related to campaign activity, Compared with a relatively low level of campaign activity in the prior year, this reduced the margin by approximately 2.3 percentage points. Let's have a look at the profitability performance for the quarter. EBTA amounted to negative 23.4 million, corresponding to an EBTA margin of minus 31.3%. compared with 19.8 million and a margin of 9.2% in the same quarter last year. The main driver behind the decline in EBTA was the significantly lower sales volume. The sales decreased substantially while the cost base could not be reduced at the same pace during the quarter. At the same time, operating expenses declined year on year as a result of implemented cost saving measures and the continued adaption of the cost base. Other external expenses decreased by around 31%. Personnel expenses included restructuring cost of 3.1 million and excluding these costs, personnel expenses were slightly below the prior year level. Adjusted EBTA excluding restructuring cost amounted to negative 20.3 million. Let's move on to cash flow and financial position. Operating cash flow for the quarter amounted to 3.8 million compared with 5.6 million in the same quarter last year. The key positive factor during the quarter was networking capital with a positive cash flow impact of 38.2 million. This was primarily driven by lower inventory, with lower accounts receivable also contributing, partly offset by lower accounts payable. Overall, the positive working capital effect largely offset the negative EBITDA and investment outflows during the quarter. Net tangible and intangible expenditure amounted to 11 million compared with 6.7 million last year, mainly reflecting a higher level of product launches and related spending on tooling and product development. At quarter end, net cash amounted to 18 million compared with 13.9 million at the end of Q1. Looking ahead, liquidity will remain an important focus area during the second half of the year. At the same time, our updated bank terms provide additional financial flexibility as we continue to manage costs, purchasing and working capital closely. With that, I hand over to Jonas.

Thank you, Karin. So let me then finish by bringing the main points together here. Q2 was clearly a challenging quarter financially. The gaming hardware market remained soft and the inventory adjustment in the channel amplified the impact on our reported sales. Net sales declined by 65% while sales out declined by 28%. At the same time, we gained overall market share in our key markets. An important distinction here is that SalesOut exceeded SalesIn by more than 60%, as partners reduced inventory previously billed for the higher SalesOut levels that we saw in Q4 and early Q1. We are now further through that adjustment. Americas and APAC reached a more balanced position during Q2, and we expect EMEA to move towards a similar position during Q3. As that happens, reported sales should increasingly reflect the underlying end consumer demand. On profitability, the low sales level had a substantial impact, but we have taken significant actions. Our cost program has started to deliver savings and further structural changes should strengthen profitability during the second half. At the same time, product margin remained strong at over 39%. Tariff costs remain significantly below the levels that we experienced in 2025, and we expect an approximate $2.5 million AIPA tariff refund during the second half. Looking forward, we expect the market to remain softer in the near term, but we are starting to see some early signs that it might be moving in a better direction. After declining sharply at the beginning of the year, sales out stabilized from February through May, and we've seen some improvement during summer. We're also seeing encouraging performance in some parts of our case portfolio and signs of stabilization in the memory pricing. We believe consumers are gradually also starting to adapt to the higher component price levels, which should also help purchasing behavior normalize over time. The second half of the year will remain challenging, particularly from a profitability perspective, but we expect demand to gradually improve. While we continue to adapt the business to the current market, we are also moving forward with our product roadmap, our commercial activity, and work with system integrators and channel partners. We believe that the actions that we are taking do position Fractal well for when the market gradually normalizes and improves over time. And with that, We conclude the presentation for today and open up for your questions. Thank you.

If you wish to ask a question, please dial pound key 5 on your telephone keypad. To enter the queue, if you wish to withdraw your question, please dial pound key 6 on your telephone keypad. The next question comes from Simon Granath from ABG. Please go ahead.

Hi Jonas and Karin, thank you for the presentation and also thank you for the data around the destocking headwinds. It is useful and while Americas and APAC is already there, when you say that EMEA is expected to reach equilibrium in Q3, does that mean that we should expect a significant in Q3? Any color on that comment would be very useful. Thank you.

Correctly, as you said, we have different channel inventory dynamics across our master regions. Ameren, APAC reach some kind of balance in their sales in sales out dynamics during the quarter here. and we expect that to gradually happen also in EMEA during Q3. The reason why it's slightly later is due to the longer sort of lead time to fill and reset channel inventory in EMEA, essentially due to the distribution model we're having there. As that happens, we see sales in then correlating more to the sales out levels that we're having, which is also clear, and we're looking at the numbers. So that's our expectation that that will happen during Q3.

Okay, thank you. And I am also curious to understand how the product pipeline is looking into H2 in 2027. You make some comments about the establishment of new As we say here in the report, we continue delivering on our product roadmap and the portfolio

Just as normal in that sense, we had a strong H1 with the Pop2Vision launch behind us here in Q2, which has really put us into a new segment within the case market. And we have more to come also during the next quarter or the next two quarters here in H2. So portfolio upgrade is important for us at Fractal and it's a key driver for our growth.

Definitely encouraging stuff and expect just pent up demand starting to eventually be materialized. I'm also looking for other potential triggers for demand recovery and then I see the planned GTA 6 launch as a driver. Do you share that view based on historical patterns or am I reading too much into that?

Well, of course, there are, we believe, just as we have seen in similar situations when there has been component shortages and other situations that affected our consumer demand, that there is a pent-up demand that is building in the market. That will help the recovery, as we also mentioned here during the call today. A key aspect of our view looking at the The sales out and the demand from our consumers is also the normalization. I believe that will happen when people literally start to get more familiar with the component pricing that we have seen happen before as well. Of course, then you have the external factors that are playing in GTA 6. It's always a big thing. But console first and then PC later. But of course, it brings interest to the market. And there are other things happening around which is clearly shown by the interest increasing for gaming. The fact that Steam is breaking new records quarter by quarter is a proof point that the underlying interest for gaming is strong and it continues. People don't choose to go to other hobbies essentially. So yes, your view there is similar to ours.

Hopefully, it materializes in the near future. Thank you for having my questions.

Thank you, Simon.

The next question comes from Ammar Galijasevic from DNB Carnegie. Please go ahead.

Good morning, guys. Just two or four questions from me here. First one being on your cost reduction here. which regions are affected, types of roles, etc. Is there a risk this might affect your go-to market capabilities?

In general, it's similar to what we talked about after the Q1 report and when we introduced the program back in early Q2. The effect on the organization operations is broad and not only in one specific location. We don't believe, however, that it will have a material impact on our go-to-market and the activities that we're doing to support our commercial activities or development. So it's deliberate and well-strategized, the moves that we're taking to improve our cost base.

Okay, great. And maybe one more on the cost side, maybe to Karin. Is there anything on the public margin side we should keep in mind here going forward?

Well, as we said, we had a pretty good margin compared to last year in Q2 and we had several positive factors as currency, freight, tariffs and also product mix. Of course, when it comes to currency, you don't know how that goes, so that can go up and down, but From a margin perspective, we were above 39%, and our current view is that our product margin is around 40%, and that should be a reasonable level over time. So, as we said before, but nothing more than that.

Okay, great. Thank you. And then just finally, you wrote a bit about your new covenant here. Do you mind? telling us a bit more about how they're set up now and what the difference actually is compared to before.

I think about the bank.

Yeah.

Yeah, the new bank terms we talked about. Well, it's just a slightly difference than before. Previously, it was Net Depth EBTA and that we will return to in a couple of quarters to a certain level. Now we have, as we wrote in the report, an isolated EBTA target for the coming quarters. So that is mainly the difference. That gives us more flexibility when it comes to the covenants and the financial situation.

Okay, perfect. That's all for me. Thanks guys.

Thank you. There are no more phone questions at this time. So I hand the conference back to the speakers for any written questions and closing comments.

So at the moment we do not have any written questions.

If there are no questions, then we close the call for today. As usual, we say that we are available if there are follow-up questions or thoughts that you want to discuss. Thank you all for joining today and for listening to this presentation.

Thank you.