SECOND QUARTER, JULY–SEPTEMBER 2023 (COMPARED TO JULY–SEPTEMBER 2022)
FIRST SIX MONTHS, APRIL–SEPTEMBER 2023 (COMPARED TO APRIL–SEPTEMBER 2022)
| Jul–Sep | Jul–Sep | Apr–Sep | Apr–Sep | Apr 2022– | |
| Key performance indicators, Group | 2023 | 2022 | 2023 | 2022 | Mar-23 |
| Net sales, SEK m | 10,831 | 9,569 | 21,281 | 16,687 | 37,665 |
| EBIT1), SEK m | –836 | 461 | –415 | 63 | 194 |
| EBIT margin | –8 % | 5 % | –2 % | 0 % | 1 % |
| Adjusted EBIT, SEK m | 1,814 | 2,121 | 3,487 | 3,442 | 6,366 |
| Adjusted EBIT margin | 17 % | 22 % | 16 % | 21 % | 17 % |
| Cash flow from operating activities, SEK m | 2,250 | 580 | 3,608 | 927 | 5,383 |
| Net investments in intangible assets, SEK m | 1,914 | 1,572 | 3,825 | 2,776 | 5,996 |
| Net sales growth | 13 % | 190 % | 28 % | 148 % | 121 % |
| Total game development projects | 201 | 237 | 201 | 237 | 221 |
| Total game developers | 10,654 | 10,899 | 10,654 | 10,899 | 11,426 |
| Total headcount | 15,701 | 15,731 | 15,701 | 15,731 | 16,601 |
(1) EBIT equals Operating profit in the Consolidated statement of profit or loss.
All figures in brackets refer to the corresponding period of the previous year, unless otherwise stated.
CEO COMMENTS:
STABLE PROGRESS IN Q2 TO SHAPE THE FUTURE
In Q2, we delivered a stable quarter, with Adjusted EBIT of SEK 1.8 billion and we expect to reach the forecasted range for this year. The free cash flow of SEK 0.4 billion shows a clear improvement compared to Q1. Our restructuring program is making good progress, with opex savings ahead of plan and capex savings expected to contribute notably in the second half of the year. We continue to take important steps for the future and I am confident that we will emerge as a stronger company.
Embracer’s Net sales in Q2 grew by 13 % to SEK 10.8 billion. The organic growth amounted to –2 %, a result of solid organic growth within Tabletop and Entertainment & Services, but tough YoY comparisons for PC/Console and Mobile. Adjusted EBIT came in at SEK 1.8 billion, in line with management expectations for the quarter. Free cash flow of around SEK 400 million is a clear improvement compared to Q1, with the effects of the restructuring program still mainly ahead of us. We expect free cash flow to materially improve in H2, driven by stronger seasonality for the Tabletop Games segment as well as notable opex and capex savings.
For FY 2023/24, we reiterate our Adjusted EBIT forecast of SEK 7.0-9.0 billion. We remain confident in our forecast range. The H2 outlook for the PC/Console and Mobile segments has however softened somewhat compared to our assessment in Q1. For PC/Console, it is due to the actual or expected performance of new game releases, as well as minor probable shifts in the pipeline. For Mobile, it relates to a slightly more conservative view on monetization and organic growth.
KEY INTERNAL IPS AND STUDIOS PERFORMING WELL
In the PC/Console Games segment, sales declined by around 5 %, or by 17 % organically. Revenue from new releases amounted to over SEK 1.4 billion in the quarter, one of our strongest quarters for new releases ever. However, this is still a decrease of around 7 % YoY, due to the strong contribution from Saints Row in Q2 last year and a sizeable platform deal. Remnant II, internally developed by Gunfire Games and published by Gearbox Publishing, was successfully released on July 25 and has now sold more than 2 million units and generated more than SEK 700 million in Net Sales in Q2. That said, we have seen a mixed reception and performance for the externally developed game Payday 3 and a few smaller releases in the quarter. The Adjusted EBIT margin of 16 % in Q2 is impacted by these releases and by the soft performance of titles released last year. Payday 3, developed by Starbreeze Studios and released on September 21, had a positive Adjusted EBIT contribution with the investment recouped in Q2. We expect it to contribute positively in FY 2023/24, but below management expectations, due to a softer launch where an unforeseen error relating to external matchmaking software impacted the experience for gamers.
We have had a positive start for our key internal studios and IPs this year, including successful releases of Dead Island 2 and Remnant II. I am happy to also see successful releases in the past week of Risk of Rain Returns, Teardown for console, Satisfactory’s Update 8 and The Awakened King, the first DLC for Remnant II. Looking ahead, several exciting titles are expected in FY 2023/24, including Homeworld 3, SOUTH PARK: SNOW DAY!, Arizona Sunshine 2, Expeditions: A MudRunner Game, Alone in the Dark, Outcast – A New Beginning, Lightyear Frontier and Deep Rock Galactic Survivors. Saber Interactive is also hard at work with Warhammer 40,000: Space Marine 2. The final release date for the game will be communicated by the external publisher Focus Entertainment.
The Tabletop Games segment delivered 15 % organic growth, with Net sales of SEK 4.1 billion. Despite a product mix more geared towards trading card games, Adjusted EBIT grew by 47 % YoY, driven by strong organic sales growth, cost savings and positive currency exchange rate changes. The performance was slightly above management expectations, but mainly driven by a more normalized seasonal pattern in H1 compared to last year. Asmodee’s cash generation improved notably on a YoY basis, driven by a lower inventory build-up, in line with its action plans announced 12 months ago. We are now entering the seasonally strongest quarter for Asmodee and there is also excitement building for the company’s anticipated new trading card game Star Wars™ Unlimited in Q4. The game is expected to be released in early March 2024 and has seen an overwhelmingly positive reception from media and consumers at recent trade fairs.
In the Mobile Games segment, organic growth was –10 %, an improvement compared to Q1, with gradually easing comparisons after a strong first half in the previous financial year. The negative organic growth is partly driven by Crazy Labs shifting its genre focus towards hybrid casual games with an increased focus on profitability and cash flows. Underlying market trends and monetization were largely stable in the quarter. User acquisition investment grew compared to Q1, but were contained compared to our expectations, supporting a strong Adjusted EBIT margin of around 25 % in the quarter, with a solid cash flow contribution. For the full-year, we now expect mid-to-high single-digit organic decline, but slightly higher margins for the segment. It is mainly due to a slightly more conservative view on monetization and user acquisition investments in the second half of the year.
In the quarter, our Entertainment & Services segment again performed above management expectations, growing by 13 % organically with an Adjusted EBIT margin of 16 %. The higher margin is primarily driven by strong licensing revenues to Middle-earth Enterprises for the Magic: The Gathering trading card game The Lord of the Rings: Tales of Middle-earth™. The game was successfully released in late Q1 as part of Middle-earth Enterprises’ long-term partnership with Wizards of the Coast, receiving notable acclaim from fans and critics. Our strong IP portfolio is a key part of our long-term strategy, and we have exciting plans for the Lord of the Rings IP across our segments in the years ahead.
RESTRUCTURING PROGRAM MAKING PROGRESS
The key priority of the restructuring program is to improve efficiency and cash generation, transforming Embracer into a leaner, stronger, more focused and cash self-sufficient company. Our operations within Mobile, Tabletop and Entertainment & Services provide a solid foundation with predictable, profitable and cash-generative businesses. Adjusted EBITDA less capex within these three segments is around SEK 4.2 billion on an LTM basis. Including Coffee Stain it is over SEK 5.0 billion. The soft free cash flow in the past years is more or less only driven by an imbalance between investments into ongoing development and completed development within the PC/Console Games segment, which we are now addressing through the implementation of the restructuring program. Continued execution of the restructuring program will be key to improve efficiency, profitability and cash flows within the PC/Console Games segment. Over the past two years, our internally developed games have had an ROI over twice as high compared to externally developed games. We are striving for a structure which enables us to look at the future and invest in the right games with the right teams. Post the restructuring program, we have increased confidence in our ability to deliver a general improved quality and ROI in the coming years ahead.
We expect to reach our targets of SEK 8 billion in net debt by the end of this financial year, as well as to reduce capex by more than one-third to a run-rate of around SEK 5 billion into FY 2024/25. The capex level implies that we will still be investing more than the value of our released games, laying the foundation for future organic growth in the PC/Console Games segment. Opex savings are ahead of plan, with at least SEK 0.8 billion in savings by FY 2024/25, and we are expecting to see a notable contribution from capex savings in the second half of the year.
As of September 30, 2023, the restructuring program contributed to Embracer’s first ever quarter-over-quarter reduction in headcount of around 900 people, or 5 % of the workforce. In this group-wide effort, we are not only discontinuing a number of studios, we have also made staff reductions and reduced the number of projects in several other studios, with a focus on improving the projected return on investment within PC/Console. It’s never easy to part ways with talented individuals. I would like to put on record a special thanks to the people who have left Embracer in the quarter. These are difficult decisions and we do not take them lightly. For me, personally, it is crucial that the program is carried out with compassion, respect, and integrity.
In the past months, we have accelerated processes to divest assets relative to processes to increase external funding of game development projects. This shift is driven primarily by a notable inbound interest, but also by market dynamics and reduced levels of platform content investments. As a result, we are now running a few structured divestment processes that give us flexibility and optionality to reach our targets. We are focused on maximizing shareholder value and on delivering the targeted run-rate capex levels in the most effective way. Notable capex savings and net debt reduction are expected to materialize post-completion of these processes.
Right now we are in the early stages of our plans to consolidate our businesses, including a review of our operative group structure, which is part of the late stages of the restructuring program. We have a responsibility to use our size and talent in smart ways to develop and scale services and capabilities across Embracer to deliver always better experiences for players. I am confident that we will not only deliver on the targets we set out in June but also maintain our status as one of the global leaders within the gaming industry.
I would also like to take this opportunity to give a warm welcome to Yasmina Brihi, Bernt Ingman and Cecilia Qvist, elected at the annual general meeting, to the board of directors of the parent company.
To conclude, we will continue to take important steps in FY 2023/24 to set the foundation for the years to come and I am confident that we will emerge as a stronger company. I would like to send my thanks to all our shareholders, employees, customers, industry colleagues, and business partners for contributing to the continued prosperity and success of Embracer Group.
November 16, 2023, Karlstad, Värmland, Sweden
Lars Wingefors
Co-founder & Group CEO
For any questions on this report, please contact:
Oscar Erixon, Head of Investor Relations Embracer Group AB (publ)
Tel: + 46 730 24 91 42
Email: oscar.erixon@embracer.com
Beatrice Forsgren, Head of Brand and Communication Embracer Group AB (publ)
Tel: +46 704 52 57 63
E-mail: beatrice.forsgren@embracer.com
About Embracer Group
Embracer Group is a global Group of creative and entrepreneurial businesses in PC, console, mobile and board games and other related media. The Group has an extensive catalog of over 900 owned or controlled franchises. With its head office based in Karlstad, Sweden, Embracer Group has a global presence through its twelve operative groups: THQ Nordic, PLAION, Coffee Stain, Amplifier Game Invest, Saber Interactive, DECA Games, Gearbox Entertainment, Easybrain, Asmodee, Dark Horse, Freemode and Crystal Dynamics – Eidos. The Group has 135 internal game development studios and is engaging more than 15,500 employees in more than 40 countries.
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Embracer Group is a global group of creative and entrepreneurial businesses in PC/console, mobile and tabletop games and other related media. The Group has an extensive catalog of over 900 owned or controlled franchises.
With its head office based in Karlstad, Sweden, Embracer Group has a global presence through its ten operative groups: THQ Nordic, PLAION, Coffee Stain, Amplifier Game Invest, DECA Games, Easybrain, Asmodee Group, Dark Horse Media, Freemode and Crystal Dynamics – Eidos. The Group has 103 internal game development studios and is engaging more than 10,000 employees in more than 40 countries.
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