In Q1, we achieved organic growth of 20 % and Adjusted EBIT of SEK 1.7 billion. In recent months, we have released two successful sequels, Dead Island 2 and Remnant II. We now have increased confidence regarding earnings this year and we are on track to deliver on the restructuring program announced on June 13, 2023, with a series of initial actions now taken. Even though it’s a challenging time for everyone impacted, I am confident we will emerge a stronger company.
Embracer’s Q1 Net sales grew by 47 % to SEK 10.5 billion. Organic growth amounted to 20 %, driven by solid performance for Dead Island 2 in the PC/Console Games segment, as well as solid topline development in the Tabletop Games and Entertainment & Services segments. Adjusted EBIT came in at SEK 1.7 billion, representing a notable improvement sequentially. The Q1 result is also ahead of management expectations for the quarter. The positive sequential margin development in the quarter is a result of how we deliver on our games pipeline, and our Q1 execution builds a strong foundation to further improve the margin during the year after a challenging FY 2022/23. The free cash flow of SEK –0.6 billion in Q1 is largely in line with the plan for the year given the continued imbalance between investments and completed PC/ Console game development (SEK 1,672 million vs SEK 803 million). We expect a significantly improved free cash flow already in Q2, and expect to reach a financial net debt below SEK 8 billion by year-end, as announced on June 13, with notable positive effects from the restructuring program in the second half of the year.
Continuing to execute on key releases will improve PC/Console profitability
In the PC/Console Games segment, sales grew by 38 % organically in Q1 driven by the release of Dead Island 2. Released on April 21, the game reached a sell-through of over two million units in its first month. The Adjusted EBIT margin for the segment remains impacted by games development amortization combined with the soft performance of the previous financial year’s releases, impacting back catalog revenue this year. It is encouraging to see that Crystal Dynamics – Eidos’s turnaround to solid profitability is ahead of plan, driven by cost efficiency improvements, a stable back catalog business and increased external funding for ongoing development. This is a testament to the commitment and focus of Crystal Dynamics – Eidos’s management, and is supportive of our larger PC/Console business.
Developed by Gunfire Games, Remnant II was successfully released on July 25 and sold over one million units in the first four days. Developing and publishing great games is our core business and I would like to highlight the great achievement from the teams behind the recent successes of Dead Island 2 (PLAION and Dambuster Studios), Jagged Alliance 3 (THQ Nordic & Haemimont Games) and Remnant II (Gearbox Publishing SF and Gunfire Games). Looking ahead, several additional large-budget games are expected in FY 2023/24, including Payday 3 and Warhammer 40,000: Space Marine 2, as well as several other exciting titles such as South Park: Snow Day!, Homeworld 3, Hot Wheels Unleashed 2: Turbocharged, Teardown (console), Alone in the Dark, and Outcast – A New Beginning.
In the Tabletop Games segment, Asmodee delivered 9 % organic growth, with Net sales of SEK 3.2 billion. The Adjusted EBIT margin was 6.5 %, a result in line with our expectations during a seasonally weak quarter. The product mix in the segment was more geared towards trading card games, which impacts the margin negatively year-over-year. Operating costs also increased YoY due to inflation and the run rate impact of prior year recruitments. In addition, the comparative quarter last year benefitted from cost phasing into later quarters as a result of a shift of activities during the initial integration phase after transaction closing. These impacts are expected to moderate over the next quarters. We are now entering a period of higher activity for Asmodee, with seasonality expected to be more pronounced this financial year, driven by cost phasing, timing of new releases and product mix. The free cash flow in Q1 was positive and Asmodee is expected to convert above 100 % of its Adjusted EBIT into free cash flow in FY 2023/24, with a positive contribution also in the first half of the financial year.
The Mobile Games segment had a solid performance in profitability which was ahead of management expectations. Net sales show –12 % organic growth, but underlying market trends have improved somewhat sequentially and the organic decline moderated notably compared to Q4. Despite a sequential increase in user acquisition cost, profitability was strong, with an Adjusted EBIT margin of 29 %, driven by systematic investments to balance growth and profitability. The mobile businesses are expected to show positive organic growth for the full-year and continue to add to both earnings and cash flow diversification.
In the quarter, the Entertainment & Services segment also made a notable contribution, growing by 70 % organically with a 15 % Adjusted EBIT margin. The high margin is primarily explained by a strong contribution from Middle-earth Enterprises, driven by strong licensing revenue for The Lord of the Rings. The performance of Middle-earth Enterprises is well ahead of the business plan developed at the time of acquisition a year ago. It is encouraging to see many exciting external projects based on this incredible IP, including the recently successfully released Magic the Gathering trading card game The Lord of the Rings: Tales of Middle-earth™, the upcoming PC/Console survival-crafting game The Lord of the Rings: Return to Moria as well as many other exciting new products that will grow the IP further. Furthermore, PLAION Partner Publishing division had two notable releases from partners in the quarter, also contributing to organic growth in the segment.
For FY 2023/24, we reiterate our Adjusted EBIT forecast of SEK 7.0-9.0 billion. Based on the performance year-to-date, we have increased confidence in our forecast range. Beyond FY 2023/24 and based on the restructuring program outlined in June, we expect to deliver positive organic growth combined with a lower capex run-rate and a more efficient cost structure. We have for several years made strategic investments into accelerated long-term organic growth in PC/Console Games. Ongoing investments into future game releases has outpaced completed development by 2-3x, increasing the value of on-going game development to more than SEK 10 billion by the end of June. Although we now reduce capex and prioritize within our portfolio, completed development should continue to increase as our development pipeline matures. After the program is completed, more focused investments into our highest-ROI titles should drive both growth and profitability.
Restructuring program on track
We are making good progress on the restructuring program. We are tracking towards the targets, including reducing capex by at least SEK 2.9 billion and overhead costs by at least SEK 0.8 billion by FY 2024/25, as well as reaching a financial net debt below SEK 8 billion by the end of this financial year. Initial actions have been taken on closure and other initiatives to reduce the number of projects and studios and overhead savings initiatives have been defined in co-ordination with the Operative Groups. In addition, we have set a high priority on increasing external funding of certain larger projects and potential divestment opportunities.
With a series of initial actions now taken, we expect further savings after the completion of a global review of the existing pipeline, which is currently ongoing. This review will guide our capital allocation to optimize return on investment.
The purpose of the program is to operate with efficiency across the group and to reduce business risk in the short-term. This, in turn, will enable us to continue to grow and to deliver high-quality products in the longterm. A painful consequence of the program is that a number of talented and passionate team members have left us, or will be leaving us before the end of the financial year. We understand and respect that this is a challenging time for everyone impacted. Where we can, we will try to provide opportunities for our colleagues to transition onto other projects. Throughout the program, we are working to ensure that everyone affected receives information first.
Setting the direction for years to come
We continue to prioritize a strong balance sheet and are on track to be well within our leverage target by financial year-end. We raised SEK 2.0 billion through a directed share issue in early July and, as previously communicated, expect to reach a net debt of SEK 8 billion by March 31, 2024.
We will continue to take important steps in FY 2023/24 to set the direction for the years to come and I am confident that we will emerge a stronger company. I want to be clear that our long-term strategy to support and empower entrepreneurs and creators remains unchanged. I would like to send my thanks to all our shareholders, employees, fans, and business partners for contributing to the continued prosperity and success of Embracer Group.
August 17, 2023, Karlstad, Värmland, Sweden
Co-founder & Group CEO