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Embracer’s Net sales in Q3 grew by 4 % to all-time high SEK 12.1 billion. Organic growth amounted to –4 %, a result of positive organic growth within Tabletop, offset by a light release schedule within PC/Console and an increased focus on profitability within Mobile. Adjusted EBIT came in at all-time high SEK 2.2 billion, 7 % growth YoY. Free cash flow reached SEK 1.2 billion. In the last financial year, free cash flow generation was tilted towards Q3, driven by the contribution from a publishing deal for Tomb Raider, while for this year we see a more even distribution in H2, supported by our restructuring program.
As part of the restructuring program, Embracer still has a few larger structured divestment processes ongoing that could strengthen our balance sheet and further reduce capex. Processes are in mature stages. Certain companies might initiate restructuring before any divestment is announced. Our overruling principle is to always maximize shareholder value in any given situation. We are unlikely to reach the restructuring program target of below SEK 8 billion in net debt by March 31. Certain divestments could significantly reduce net debt post March 31, 2024. To be clear, our group leverage target of net debt to Adjusted EBIT of 1.0x on a 12-month forward looking basis remains unchanged.
Cash flow from operations and cash at hand provide sufficient funds to amortize debt in accordance with the existing bank agreement in 2024. In FY 2024/25, we have limited expected cash earnout payments of SEK 0.9 billion, compared to SEK 2.8 billion this financial year, which we now have largely paid. The free cash flow is anticipated to improve going forward driven by both a solid expected performance FY 24/25 and lower capex.
For FY 2023/24, we reiterate our Adjusted EBIT forecast of SEK 7.0-9.0 billion, and now see it as likely that we will reach the low end of the forecast range. This is driven by a somewhat softer outlook for PC/Console in FY 2023/24 compared to our assessment in Q2, due to the performance of recent new game releases, as well as a few additional pipeline shifts out from Q4 and also within the quarter.
Mobile, Tabletop and Entertainment & Services performing strongly
In the PC/Console Games segment, sales declined by 9 % organically. In a quarter with fewer notable new releases, sales were largely driven by back catalog revenue. The quarter included the successful release of new content for several games, including the DLCs The Awakened King for Remnant II and Haus for Dead Island 2, but was impacted by soft performance for our few new releases during the quarter. The 14 % Adjusted EBIT margin remained impacted by games development amortization combined with the soft performance for a range of primarily mid-sized titles across operative groups in FY 2022/23 and FY 2023/24.
The performance of our strongest franchises in PC/ Console is stable. In general we see a more selective consumer and reduced levels of platform content investment. Looking ahead, Q4 will be a quarter with higher activity, with a range of new games including Alone in the Dark, Outcast – A New Beginning, SOUTH PARK: SNOW DAY!, Expeditions: A Mudrunner game, Tomb Raider I–III Remastered, as well as Deep Rock Galactic: Survivor and Lightyear Frontier.
The Tabletop Games segment delivered 1 % organic growth, with Net sales of SEK 4.4 billion in Q3. Year-to-date, the organic growth amounts to 9 %, a testament to Asmodee’s diversified revenue base, solid underlying market and consistent execution. For the calendar year, the tabletop mass market saw a slight growth, confirming the industry’s resilience, with Asmodee’s strong position key to its robust growth. After strong profitability in the preceding quarter, the Adjusted EBIT margin of 19 % in Q3 was somewhat lower YoY, mainly due to a product mix more geared towards trading card games. Asmodee delivered strong free cash flow in the quarter, with a notable inventory reduction in the seasonally strongest quarter of the year. Preparations for the launch of Star Wars™: Unlimited are progressing well with strong pre-orders. We all look forward to the release on March 8, 2024.
The Mobile Games segment saw a record strong Adjusted EBIT, growing by 32 % YoY to SEK 611 million (37 % margin), driven by an improved product mix and optimized user acquisition investment. The organic growth was –10 % due to the shift in business model within DECA. Easybrain showed continued solid performance, with mid-single-digit organic growth, driven by better monetization and strong live operations execution across its key games. Pro forma growth was more stable at –2 %, supported by strong performance for the game Alien Invasion, acquired by CrazyLabs in Q2. The game was our second largest mobile title in Q3 and has notably accelerated CrazyLabs’ shift to the hybrid casual genre. It is encouraging to see the improved performance in Mobile and I am confident that this segment will continue to be an important contributor to earnings and cash flow generation in the quarters and years ahead.
In the quarter, the Entertainment & Services segment saw organic growth of –2 %, but again delivered a strong profitability, with Adjusted EBIT growing by 63 % YoY to SEK 305 million, with a margin of 12 %. The strong earnings growth was driven by stronger-than-expected licensing revenue from The Lord of the Rings IP. The continued solid performance for the Magic the Gathering trading card game, consistent performance of Warner Bros.’ movie catalog, as well as the new PC/Console game The Lord of the Rings: Return to Moria™ were the main drivers. We now look forward to the theatrical release of The Lord of the Rings: The War of the Rohirrim, which has been set for December 2024.
The final stretch of the restructuring program
The key objectives of our ongoing restructuring program are to improve efficiency and cash generation, transforming Embracer into a leaner, stronger, more focused and cash self-sufficient company. While we have seen solid delivery across three out of our four segments throughout the year, there is room for further improvements of our financial performance, primarily within PC/Console. In Q3, EBITDA less capex in the last twelve months was 3.0 billion on a group level. Excluding the four of our operative groups within PC/Console that have a negative contribution, EBITDA less capex would be SEK 5.3 billion. As we are nearing completion of the program, we are tracking well towards our opex and capex targets, improving current and future cash flow generation.
In a group-wide effort, our companies and studios have had to make difficult decisions, particularly on having to part ways with team members. In total, we have reduced our global headcount by 8 % of the workforce since the start of the program. The reductions are managed locally on the operative group level with a focus on informing affected employees first, and then carried out with compassion, respect and integrity towards those affected.
On capex, we are seeing an important shift in the quarter. We are moving from a run-rate of SEK 7.9 billion when the program started, to SEK 6.4 billion in December 2023, tracking towards our capex target of SEK 5 billion for FY 2024/25. Activity level remains high with several additional actions taken in January and February 2024.
Creating a strong foundation for the future
We are excited about the future and have a notable pipeline of sizable new games in the coming two years. In recent years, we have made strategic investments into accelerated organic growth. This has created an imbalance between capex and completed games development, which is now being addressed through our restructuring program. In the past twelve months, we invested SEK 6.5 billion into PC/Console game development while we completed games with a value of less than half of that, at SEK 3.2 billion. As we now continue towards reducing capex to below SEK 5 billion on a group level, we will still be investing more than the value of completed game development, laying the foundation for future organic growth within PC/Console.
Importantly, the structure and content of an updated group-wide capital allocation process is in production. Knowledge gained through the cross-functional and cross-operative group restructuring project forms the base. Business leaders from different areas of the organization are contributing with their vast experience and knowledge, which coupled with a clear and simple game investment greenlighting model lays the foundation for increased future cash flow return on investment.
Our concrete restructuring actions-to-date are also expected to have a positive effect on our return on investment. As of Q3, we have a weighted average ROI of around 2.2x across all our historical game releases. For the games from studios that we have now closed down, combined with third-party publishing games where we have no ownership in the development studio, the ROI is around 1.0x. Meanwhile, for all other games, the ROI is around 3.2x. While we will still do third-party publishing in the future, we will be considerably more selective. Our future games portfolio will be more focused around established, owned IPs and studios which we are confident will generate better predictability as well as increased ROI and profitability going forward.
With the actions that we are now taking, we are creating a strong foundation for the future, with an improved financial profile, and a more streamlined structure, while leveraging the potential of our diversified portfolio. We have great assets and IPs and we aim to demonstrate the earnings power of those assets over time. I would like to send my thanks to all our shareholders, employees and customers for contributing to the continued prosperity and success of Embracer Group.
February 15, 2024, Karlstad, Värmland, Sweden
Lars Wingefors
Co-founder & Group CEO
Our diversity delivers an all-time high
In Q3, we delivered a stable quarter just above management expectations, with Adjusted EBIT of SEK 2.2 billion and free cash flow of SEK 1.2 billion, driven by a strong quarter for Asmodee, Middle-earth Enterprises and our mobile businesses. For FY 2023/24, we reiterate our Adjusted EBIT forecast to SEK 7.0-9.0 billion, and now see it as likely that we will reach the low end of the forecast range. We are tracking well towards the capex and opex targets set out in the restructuring program announced in June 2023, as we approach the final stretch of the program, which is focused on both possible divestments, and consolidation.