Hello, and very warm welcome to the presentation of Embracer Group's fiscal Q3 results. Very happy to be here today with Group CEO and Founder, Lars Wingefors, and Group CFO, Johan Ekström. I also believe we have a distinguished guest from Milano. We have a new head of sustainability, and I also believe we will talk to Denmark and Copenhagen. We have a busy agenda today and a very interesting Q3 report to discuss, as well. We'll start with a presentation of the Q3 results, then I will come back for a Q&A. Without further ado, I will leave it over to you, Lars and Johan. Please go ahead.
Thank you, Oscar, and hello everyone, and very welcome to Värmland. I'm pleased to report another stable quarter. Our net sales grow in the quarter to an all-time high of more than SEK 5 billion, driven by an increase in the games business area, reaching more than SEK 3.7 billion. That was a great performance of the mobile games business, growing on a pro forma basis 34%. A solid performance from all our premium games businesses. Worth noting were the great performance of Koch Media Publishing, driven by the continued success of Hot Wheels from Milestone, and a solid continued performance from Coffee Stain with their titles, Deep Rock Galactic, Satisfactory, and Valheim.
We also had a stable year-over-year growth on the Partner Publishing and film business segment, reaching 67% growth, reaching more than SEK 1.3 billion in sales in the quarter. The profitability came in nicely at SEK 1.1 billion, which is an 86% growth year-over-year. Looking at the organic growth on a constant currency basis, the business area games grow 16%. We're also reporting this morning that 70% of the revenues within Games business area are classified as recurring revenues. Looking at the pipeline, we confirmed this morning that we have more than 25 AAA games in the pipeline scheduled for release latest March 2026. Overall, we have 216 game development projects as of end of December.
We had a record all-time high investment into the games portfolio of SEK 925 million in the quarter. If you compare that to the released games in the quarter, that is two and a half times more. That will drive the organic growth in the future. The mobile businesses had a really strong performance. Daily active users across the businesses were at average 34 million, and the average monthly active users number is close to 300 million users. The key premium games drivers are titles you recognize from previous reports. Standing out are Borderlands 3 from Gearbox, Hot Wheels Unleashed from Milestone, Let's Sing 2022 from Voxler and Koch Media Publishing, Deep Rock Galactic, Insurgency: Sandstorm, and once again, Metro Exodus, now reaching more than 6 million copies sold.
We continue to grow the number of people within the group. Organically, we increased our headcounts 16% year-over-year, reaching more than 9,500 people as of the end of the quarter, engaged through our 88 internal studios and 18 internal publishers. In the quarter, we had a busy schedule, and I would like to highlight the acquisitions and announced acquisitions of Asmodee and Dark Horse that are an important strategic evolution of our group. Upon closing of this transaction, we will have one of the most diverse portfolios of IPs across the games industry. The transactions have been well-received by our employees, business partners, and across the industries, and we feel really confident about the potential synergies in the future of those businesses into the group.
Also announcing this morning, and Johan will talk a lot more about this later, is that the process of the main listing on Nasdaq Stockholm main market are ahead of schedule by with the ambition to be complete by end of 2022. We reiterate the operational EBIT forecast for the financial year now ending March. The forecast is reiterated to between SEK 4.3 billion and SEK 4.7 billion. We also reiterate the previous forecast, and with the addition of the announced acquisitions, we now see that the profitability for the next financial year will be between SEK 9.2 billion and SEK 11.3 billion, and the year ending March 2024 will be between SEK 10.3 billion and SEK 13.6 billion in profitability during that year.
We have a solid outlook to continue our journey on M&A, and post-closing of pending transactions, we estimate to have roughly SEK 6 billion or SEK 8 billion available in the liquid funds. Before jumping into the operational overview, I would like to recap a little bit about the journey the past five years and some key learnings about building this group. One of the critical successes has been to have a long-term mindset, and that really matters. We are on a long journey to build something substantial and sustainable. Out of the 108 entrepreneurs that has joined the group since 2016, 106 remains within the group. Scale matters. I talked a lot about this with the acquisitions of Asmodee and Dark Horse.
The larger and more diverse our ecosystem has become, the more it makes sense to join. The synergies, collaborations, and opportunities we offer are unique. The ecosystem has grown from 370 people to more than 12,000 great people since the IPO. I firmly believe that freedom rocks. Letting leading entrepreneurs, creators, and other management make their own decisions is critical for our success. Diversity to accept and endorse the fact that people are different, and there are many ways to succeed. We are all different, and that is a strength. Culture is important. Endorse and support local company cultures. Show respect for others. Think inclusion rather than exclusion. To create friends and partnerships across the industry is a key element of most of our businesses.
Our strategy is to be a business partner to the industries and work together with leading other companies, brands, and platforms. Manage your risks. Diversification is important. We have grown from 1 to 10 operating groups since 2016. No single IP is estimated to generate more than 5% of group revenues. We should be brave and take more risk in product development. This will pay off over time. Growth, to have fun and enjoy your work. It's fun to grow and to make more and greater things. Reinvesting the cash flows into the business will enable us to have superior growth. I would like to end this saying that we just got started.
I have another two decades to go myself, building this at least, and our ambition is to continue the same strategy over the coming years at the same pace as before, both organically and by adding more great entrepreneurs. Looking at the businesses in the quarter. Our friends in Vienna at THQ Nordic had a stable quarter. It was a quarter without any notable new releases. They did release an expansion of Kingdoms of Amalur: Re-Reckoning. The bulk of the revenues was driven by a strong performance of their back catalog titles, such as SpongeBob, Biomutant, Wreckfest. The quarterly sales was SEK 352 million, and on trailing twelve months basis, they are stable at just about SEK 1.7 billion.
Post-quarter, they had a solid release of a title developed in Denmark, Expeditions: Rome, and I've been pleased to see it's been well-received by the communities, 80% Metascore and 88% positive user reviews on Steam. THQ Nordic has an enormous pipeline for the future. Looking ahead, our friends in Essen will release ELEX II, and ELEX actually was our first big title after the IPO, releasing end of 2017, and I'm super excited to see what ELEX II will bring us. Further on, we have a new SpongeBob game, a new MX vs. ATV. We have the iconic IP of Outcast with a sequel. We have another remake of Destroy All Humans!, the iconic IP we acquired from THQ.
Finally, we are aiming to have a kickass release, sequel to Jagged Alliance made in Bulgaria. Moving to our friends across the world, within Koch Media Publishing. Koch Media Publishing makes up of Deep Silver, the publishers of Deep Silver, Prime Matter, Ravenscourt, Milestone, and Vertigo Games. They had a strong performance in the quarter, reaching SEK 728 million of sales. On trailing twelve months basis, they are about SEK 2.4 billion. New releases in the quarter were solid performance of Let's Sing 2022 from Voxler, their studio in France. Vertigo Games re-released their own developed product, After the Fall. That has been in line with our expectations so far, and we are expecting that title to continue to perform well over the coming years.
Chorus, the title developed at Deep Silver Fishlabs in Hamburg, has been well received by the communities and on Steam with players. However, commercially, that title has not reached the expectations from the management. Catalog drivers were a super strong performance of Hot Wheels Unleashed, a continued great performance of Metro Exodus, and Saints Row: The Third Remastered. The publishers of Koch Media have a huge pipeline for the future, and you can see a few of their titles that they are expecting to release over the coming years here or the coming year. We have talked a lot about Saints Row before, and I think we're all very excited about that release that are scheduled for August this year. Moving over to Coffee Stain. We actually have a friend from Denmark online here. Søren?
Yeah. Hi, Lars. Can you hear me?
Yes, I hear you very well. Welcome to Sweden and this call.
Thank you, Lars.
Why don't you give us a little bit of an update on what's happening at Ghost Ship and how does it feel to be part of the group now after half a year of being at Coffee Stain and Embracer?
It's been great. We know you very well beforehand. Our collaboration with Coffee Stain has just been even better now with the close relationship. We've been hard at work at our big release in November for Deep Rock Galactic, our Season 1: Rival Incursion. Throughout the years of Deep Rock Galactic, it's been out, like, four years now. We've been doing updates after update, and we were coming to update 35, and we were thinking, "That's a little bit boring." "Just call it that." We decided to rephrase everything and frame it as a season.
We built our biggest update since we launched, added a lot of really meaty content that we knew the core players wanted, and then we added a free battle pass for both the new players and existing players. Did everything we could to promote it, and it was a success. We had our best quarter since we started with Ghost Ship, with the Rival Incursion release.
I think all PlayStation players has noticed what happened now in January. Can't you tell us a little bit about that?
Yeah. It was actually the idea with introducing the season and the battle pass was also because we knew we were going out on PlayStation Plus in January, and that turned out great. We had enormous amount of attention in January from the PlayStation Plus crowd. Millions of players flocking in to claim the game and try it out. We now have a very stable and active player base on PlayStation. In general now, with the season one on Steam, we doubled our active player base. With the PlayStation launch, that basically doubled it again. We have extremely strong position with Deep Rock Galactic moving forward.
We just actually released a board game on Kickstarter, which is
I love board games, Søren.
[crosstalk]
No, that's fantastic to see. That board game looked amazing.
Yeah. It's I can't wait to see the finished version, but the prototypes have turned out really great. Lots of excitement from the fans on that one as well.
Nice. I'm super excited about the future with you in the group and, even though we can't disclose this in this call, I know you have some very ambitious plans for the future. I'm-
Yeah. We don't want Deep Rock to be our only thing ever. Right now, the success of Deep Rock is kind of overwhelming. We're a small team still, right? We take our time. We'll do more for sure.
I love your ambition, and please send my best regards to the team.
Thank you, Lars. Thank you.
Thank you so much, Søren. Okay, now we've been hearing Deep Rock Galactic team talking about the performance. Coffee Stain also had a strong, solid performance of Valheim continued and Satisfactory. That also had a major update during the quarter. The sales in the quarter was SEK 175 million, and on trailing twelve months basis, there are about SEK 1.2 billion in sales. We're also excited about that they announced and setting up a new mobile-first game studio, Coffee Stain Malmö, that will focusing purely on mobile to bring iterations of existing key IPs. They having a very excited pipeline. However, it's not a lot of things that... There's just two titles announced, Songs of Conquest from our friends in Gothenburg at Lavapotion, and Midnight Ghost Hunt from Vaulted Sky.
Coffee Stain do have some really interesting stuff that will be hopefully released as soon as it's ready. Moving over to our friends in Stockholm at Amplifier Game Invest. They continue to work on building their organization, and I'm super excited they've been adding some really key talents to their team in Stockholm. They also have a new headquarters that could function as a hub for all their studios. During the quarter, they added a great team founded recently in Skövde, Green Tile Digital. We increase further our presence in Skövde. Commercially, Amplifier is really a, I wouldn't say a startup, but basically they're setting up new studios and investing or acquiring new teams and support them to build for the future. Most of Amplifier's revenues will come in the future.
However, they do have royalties coming in from the success of one of their studios, Tarsier Studios in Malmö, and the success of Little Nightmares. That had a continued solid performance in the quarter. Moving to our friends across the world at Saber Interactive. They had an all-time high of revenues, SEK 476 million in the quarter. A quarter without any significant releases, but a strong performance of the catalog and the work for hire business. On a trailing twelve months basis, they are about SEK 1.5 billion in revenues. Saber has a huge pipeline for the future and I think the business will look very differently also financially looking ahead. For example, they have seven AAA projects in pipeline scheduled for release the latest March 2026.
If you look at the selected pipeline here of announced titles, they had a very well-received announcement of Warhammer 40,000: Space Marine 2, one of the iconic IPs or titles that previously was made by THQ back in the day, and the communities of that title and that IP is super excited about that announcement. That was announced at The Game Awards in December in L.A. Also worth pointing out here, they continue to wrap up the development of Evil Dead: The Game that will be released in May this year. During the quarter, they added two new companies, Shiver Entertainment based out of Florida and DIGIC Pictures based out of Hungary. Both studios are adding a lot of key talents and resources into the Saber universe.
Key titles, back catalog drivers in the quarter was World War Z: Aftermath, Insurgency: Sandstorm on console, and then the continued performance of SnowRunner. On the new releases, we saw releases of Star Wars: Knights of the Old Republic on Nintendo Switch and World War Z on Nintendo Switch. Heading over to Tel Aviv, Israel, and online, we should have Sagi with us.
Hi, I'm here.
Hello, and welcome to Sweden.
How are you, Lars?
Yeah, I'm great. How are you?
Good. It's sunny here in Tel Aviv.
Nice. Like in Karlstad
It's not yeah.
Fantastic. I thought it was a great idea just to bring you here and to you know to hear you out. You know, you've been part of the group for a few months at least, and also to introduce you to our stakeholders, you know, what's CrazyLabs a little bit, and then obviously what's happening and how does the future look?
Yes, it's been great first few months. I can say that for us, it wasn't a surprise, but everything you said when we met is happening. We both keep our independence while getting this really strong support for anything we want to initiate and do more things. We feel it's going to be a significant multiplier for our existing force as we move forward. The company's been around. We founded it in 2010. It's being led today by Guy, my partner who runs the hyper-casual business and he's our COO and myself. We're focusing mainly on great hyper-casual business and growing casual business.
We are one of the biggest publishers on mobile, and we're reaching every month almost 100 million people, which is an amazing number to us to have that breadth. Over 200 million people play with our games every month. Our focus has been on having the best people and processes and technology in order to be able to do repetitive success, which I think it's the hardest thing to have one great game is hard enough, to have a few great games and repetitively is a process which takes a lot of things. This is one focus, and we're developing technologies and the processes and bringing great people for that.
The other thing is around building our casual business. We have Super Stylist, which is one of the most downloaded fashion games. We are now in soft launch with two big titles on the puzzle RPG, Once Upon a Match, and the Ladybug Bubble Shooter together with a great partner, ZAG Animation. These are things that we greatly expect to see how they evolve. Another great program that we have is the hubs. We work with game developers that are recognized as game developers. We help them make a life-changing event by teaching them how to create games in different geographies, like in Turkey, in South Africa, in India, in Israel as well.
We have this program now running in 6 countries. We help people become game developer, publish games with us, and then hopefully go into the game industry while also making their life better. For us, it's something that we are very proud of. We have a significant milestones we reached, and together with Embracer's help, it also rang on the Nasdaq wall in New York City. We reached 5 billion downloads cumulative, which was-
That's a fantastic KPI, Sagi. 5 billion downloads.
Yeah.
That's quite a few games.
Yeah. Very, very proud of that.
So, so-
SEK 5 billion is great.
Looking at the quarter actually ending in December, you know, what kind of new products did you release and how was the performance during the quarter? I know you invested heavily into user acquisition.
Yes. We invested heavily into user acquisition. December was an amazing month, but the whole quarter was really great. We saw growth. We released new games on all of the levels for scale test, for full release. We had Once Upon a Match finishing its soft launch and getting all the right KPIs to go into monetization launch, and also finishing the development of the MVP and being able to soft launch Ladybug. These are game changer titles for us. Also releasing in Super Stylist, the PVP features and other features together with Google that Google and Apple were asking us and seeing that it has a good uptake.
All in all, Q4 has been great and also started very strong, and Q1 also started very strongly in January this quarter.
That sounds encouraging for the future. Thank you so much, Sagi. I can't wait to see you soon again and send my best-
Thank you.
Regards to the team.
Thank you.
Looking at the business unit, DECA, that makes up the DECA Games business, the CrazyLabs, A Thinking Ape, Firescore in India, and IUGO. The overall performance in the quarter was all-time high of SEK 661 million in revenues, and on trailing twelve months basis, they are close to SEK 1.2 billion. Across that group, the daily active users were averaging 20 million, monthly active users of 219 million, and total installs in the quarter was close to 300 million. Moving to our friends in Cyprus, at Easybrain, that also had an all-time high quarter, with a rock solid performance, of SEK 878 million in the quarter. They had more than 14 million daily active users, and I know that number has increased end of the quarter.
Averaging 73 million users on a monthly basis. Accumulatively, they reached 1 billion downloads of all their products. Looking at our group-wide top 25 chart of titles and performance, they have eight of the 25 titles. Moving to Frisco, Texas, and our friends at Gearbox, they had another stable quarter with revenues of SEK 455 million in the quarter. They did release the Godfall: Challenger Edition and a free DLC they brought out for current formats on the Tiny Tina that was previously a DLC for Borderlands 2. Back catalog drivers in the quarter, Borderlands 3 had a rock solid performance in the quarter. Godfall continued to perform as did Risk of Rain 2. Gearbox has very ambitious plans for the future.
Looking into their pipeline, they're having a slate of 10 AAA titles in the pipeline currently planned for release until March 2026. They started the journey as part of the Embracer Group to use the platform for expanding through M&A. During the quarter, they announced the acquisitions of the Western operations of Perfect World Entertainment, the publisher of highly successful MMO game, Star Trek Online and Neverwinter, as well as Remnant that are developed by Gunfire, one of the studios within THQ Nordic and Torchlight. Within Perfect World, they have one studio called Cryptic that is one of the rare handful Western studios that has experience in launching new MMOs.
Looking into the future, again, they have a very busy schedule for the future, and now within a short time period, they will release Tiny Tina's Wonderlands in cooperation with Take-Two. I think we're all very excited about the early reception from the communities about that title. A little bit later, they will have Homeworld 3, a sequel to the iconic game and that is one of their own titles and online piece, but developed with an external team. As well as they're having Homeworld Mobile on their soft launch. Finally, looking at the partner publishing and film business segment that had an all-time record quarter of having revenues of more than SEK 1.3 billion in the quarter, driven by a few or two notable releases.
On the trailing twelve months basis, they are now at SEK 2.7 billion in revenues. Also, the Koch Media film business had a solid quarter, and they also acquired Spotfilm Networx during the quarter based in Berlin. Within the business segment, there is also my original business here in Karlstad, Game Outlet Europe or GOE Distribution, that had a really strong performance driven by a great back catalog business and a number of retro hardware launches across Europe. Also, the team and our friends in Romania at Quantic Lab, one of the leading QA providers in Europe, had a record quarter. Finally, our friends here in Karlstad, Grimfrost, also had a solid performance of the Viking merchandise business.
Finally, from my side here, just a little bit on the market. We are in a growing market. I'm happy to see that the 2021 numbers actually had growth, which was a little bit more than we expected early in the year. The growth, according to Newzoo, was 1.4%. Newzoo are expecting the market to grow year- over- year with 9% until 2024, and the growth expected from Newzoo, the calendar 2022 is 7.4%. With that said, I would like to hand over to Johan.
Thank you, Lars. We take a look at the financial performance, and we start with our P&L. This quarter, net sales surpassed SEK 5 billion, which is up 135% over last year. It's driven by a strong performance within business area games, growing with 175%. We're also happy to see that we had an all-time high quarter in partner publishing film, yielding a growth of 67% in the quarter. Gross profit in the third quarter amounted to approximately SEK 3.4 billion, resulting a gross margin of 67%, up 7% versus last year. Mainly due to the favorable product mix shift with increased sales in business area games.
Operational EBIT arrived at SEK 1.1 billion, yielding an operational EBIT margin of 22%. Compared to last year, the margin is 6% lower in the quarter. This is mainly explained by the all-time high investments into user acquisitions, where the user acquisition costs in the quarter amounted to SEK 881 million, which is 57% of net sales within the mobile segment. We also saw an increase in headcount in the period. So we are strengthening our company, scaling up to support our growing games portfolio and also to increase our capabilities in general. Looking at the cost per FTE in Q3 versus Q2 on the like-for-like basis, there is no notable difference, so it's at the same level. Adjusted EPS for the quarter was 0.76 SEK, up 43% versus last year.
If you adjust for FX gains losses on financial assets and liabilities, and also factor in the discount interest effect on provisions for conditional purchase prices, the growth is 58%. On a full year basis, net sales amount to SEK 14.2 billion, generating operational EBIT of SEK 4.3 billion, with an EBIT margin of 30%, and an adjusted EPS on a full year basis of 3.56 SEK per share. If you take a closer look at the net sales within business area games, we can conclude that the performance of back catalog titles continue to be very strong, reaching 93% in the quarter. We also see that we are maintaining a high share of digital sales in this segment at roughly 90%, specifically 88% in the quarter. We have a diversified revenue base.
If we look at our net sales from April to December, the largest title does not represent more than 5% of sales in business area games. Approximately 70% of our net sales in business area games are recurring. If we compare that with the same period last year, it's double. It was 35% last year. This is mainly driven by the solid performance of our mobile games businesses, as well as a continued strong performance within premium live ops and ongoing games. Cash flow. We generate SEK 370 million in free cash flow before changes in working capital in the quarter. This is driven by our EBITDA reaching close to SEK 1.5 billion in the quarter. We have an increase in working capital in the quarter, SEK 390 million.
This is related to our Partner Publishing film business area due to increased trade receivables as a result of the higher sales. Looking ahead, in this current quarter, we expect to see a positive contribution from changes in working capital. We also had a positive inflow of approximately SEK 6.1 billion from financing activities. This is driven by the share issue that was conducted in December, and also to a smaller extent, increased utilization of credit facilities in Koch Media. After closing the acquisitions that we have announced but are still to close, we estimate that our available funds will be approximately SEK 8 billion. The total capital expenditures in the quarter was more than SEK 1 billion. The vast majority of this is investments into our games portfolio, SEK 925 million.
This is an increase of 77% versus last year. The majority, approximately SEK 600 million of this, is invested through our internal studios, and the remaining 329 is invested with external studios that you're working with. During the quarter, we completed games and released games that had an investment of SEK 377 million, maintaining a high CapEx to completion ratio of 2.5 times, driving or building the foundation for future organic growth. Looking at the business-related KPIs, we see the effects of the investments in terms of number of studios that we are working with. At the end of December, we are working with 154 studios, up 36% versus last year.
If we are looking at the number of developers that are engaged in our project development, it's more than 7,800 at the end of December, growing close to 70% compared to the same period last year. It also shows in the number of projects that we have in our pipeline. At the end of the year, we had 216 projects under development, a growth of 44% versus the year before. Looking at the historical performance of release games, we have a very solid return on investment, on average, they have yielded 3.3 times the invested amount. Currently, we have 45 projects in this chart that we are looking at.
The combined sales contribution from these 45 projects is SEK 11.3 billion. The contribution of the same 45 projects, it's SEK 7.8 billion. The total investment for these projects is SEK 2.4 billion. Here, contribution is defined as the gross profit generated from the project, less also marketing expenses. If you look at the average title performance based on the project data that we have, we note that the average title has contributed SEK 251 million in sales, having a contribution of SEK 172 million, and an average cost of production or investment of SEK 53 million. We have, during the quarter, looked into our financial leverage policy, and the board of directors maintains a prudent financial leverage policy, where we are reiterating the existing financial leverage target.
Leverage can temporarily be allowed to exceed 1x our net debt to operational EBIT. Operational EBIT in this sense is defined as management's pro forma expectations for the coming 12 months. If we exceed 1x net debt to operational EBIT, we should return to below 1x over the medium term. Here we have a slide where we look more closely into organic growth and pro forma growth. On the left-hand side, we have a bridge explaining how we calculate organic growth. In the quarter, it was 16%. When you look at organic growth, we are excluding this year's sales for companies that was not part of the Embracer Group last year.
In this case, we are starting with the SEK 3.7 billion in net sales for the period, and then we are excluding SEK 2.1 billion from that to reach the organic reference net sales number, which is compared down to what we did last year. We also adjust for changes in currencies so that we are able to compare apples and apples. In this case, adjusting for currency, last year's sales in the quarter for Business Area Game was SEK 1.375 billion, and now we have increased that to SEK 290 million, growing with 16%. Looking at what we are excluding, we are excluding sales in Gearbox and Easybrain, as they joined us first of April this fiscal year.
We are also excluding the majority of the sales within DECA. Except for the DECA legacy business, we are also excluding acquired net sales coming from acquired IPs within DECA. Lastly, there are bolt-on acquisitions in Saber and Koch that are excluded. All of these adjustments summing up to SEK 2.1 billion that we are excluding in the graph there. On the right-hand side, we instead have the pro forma growth. There we add last year's net sales of acquisitions made. We start with the reported net sales of last year, which was SEK 1.355 billion, and then we add the historical performance for acquisitions made during the year, which is SEK 1.7 billion.
We also adjust here for changes in currencies, so the base amount that we are comparing with the actual net sales in this year is SEK 3.1 billion. We generated SEK 3.7 billion in the quarter. We are growing SEK 600 million, which is 19%.
Thank you, Johan.
Thank you, Lars.
Should we welcome up our new colleague on stage?
Yes. Please, Emma, our new Head of Sustainability.
Thank you.
Welcome.
Okay. Three on stage. That's good. Thank you very much, Lars and Johan.
leasure having you on the team.
Yeah. Thank you. My name is Emma Ihre, and I'm, since a couple of weeks back, I'm head of sustainability at Embracer, and I'm working closely together with Karin Edner and the rest of the great team. In a way, sustainability is very simple. It is actually about doing what we always have done, but to think and to act a bit broader, a bit more long-term. It is about creating value to stakeholders like our customers, investors, employees, and local community. And values. It's. When I say value, I think about diversity, inclusion, mental health, paying tax. It's a broad perspective, and it's also financial return to give back to society. I think these points seems very obvious. It's hard to not stand behind them. It's really easy to stand behind them.
They are also very difficult, very complex, for us, for the whole industry, and for companies in other sectors as well. Sustainability is about living our values, no matter if it benefit us financially or not. Our values will always be the base for our sustainability work today and in the future. It's very much about risk management as well, to be aware of different risks and to manage these risks. It can be legal risks, financial risks, and other risks linked to or in the area of sustainability. It's also about developing our business, to do good for people and the planet, to earn money and to do good at the same time. It's about values, it's about risks, and it's about business development.
I think you already know that our sustainability strategy is called Smarter Business Framework. As I said earlier, it's all about creating value for our stakeholders and acting in line with our values. The framework is based on three pillars: great people, solid work, our products, and greener planet. We have done lots of great things this quarter, and I will just mention a few. We are having an ongoing dialogue with management in all companies to get a common understanding of what sustainability is for Embracer, for the group, and how we can support each other in these efforts. We have organized a couple of webinars for all employees. Everyone are welcome. That's a way to raise awareness within the group and to learn from each other.
here have been different topics like well-being, accessibility, women in the gaming industry. As well, we have become a member of Global Compact, the world's largest initiative for sustainability in the business sector. That's just a few things what we have done this quarter, and I think that was my time in the limelight for now.
Thank you so much, Emma, and I can't wait to hear more of what will happen in the future within the sustainability segment.
Thank you.
You're welcome on stage again.
Thank you.
Thank you. Yes, onto some deep dives. We start with the change of listing venue that Lars mentioned in the beginning. The project for changing listing venue is progressing ahead of our original time plan. We now have the ambition to be ready for listing at the regulated Nasdaq Stockholm Main Market by the end of this year, provided that certain milestones are reached according to plan. We think it's also worth noting that this is a large project. It is involving 10 operative groups pending the closing of Asmodee and Dark Horse. 300 legal entities in 50 jurisdictions. Currently, the project team involves 22 people at the parent company, including internal resources and external advisors, mainly within finance and the legal area.
At peak, we estimate that the project will involve more than 100 people, including internal resources as well as external resources. We are doing this in a very structured way. We have 7 different work streams where we are moving ahead. The different work streams are highlighted below in the chart. There is an action plan that we are following. It includes 140 activities. There are 53 milestones planned, and the majority of these milestones are scheduled for completion this year, from the current quarter we are in and up until the calendar Q4. To mention a few key milestones that we have in the project, of course, as you all know, the transition to IFRS reporting is a key milestone.
There are also pro forma preparations needed for the finalization of the prospectus. If we look currently, there are 28 entities or acquisitions that currently needs to be taken into account when making the pro forma calculations. To that, we will add any acquisitions being made from now on and until the prospectus is finished.
That could be a few, Johan.
There will be a stock exchange audit. We need to formalize the documentation and monitoring of internal control activities, including IT. We need to make the prospectus itself, and we will also need to issue more steering documents in terms of policies, instructions, and guidelines.
I'm so glad to have you, Johan, managing this.
You are welcome to take work stream number five. Okay. If you look at this quarter, we have also added M&A data into the quarterly report at the KPIs, where we look at the accumulated development within M&A. We can here see that at the end of this fiscal year, we have done in total 71 transactions, seven operative groups and 64 non-operative groups. Looking at this, we can clearly see that we are delivering on the M&A part as part of our growth strategy. It's also interesting to see that we see increased M&A activity as there are new operative groups joining.
I think also important to highlight is that, when you have part of considerations in shares, it's a way of creating common interests. Looking at the maximum considerations and the split between cash and shares at year-end, it's approximately 50-50.
We have out of the 71 deals that we have made since the IPO, 40 has been part of Embracer for more than one year. We think it's then worthwhile to do an evaluation, much like we did in mid-September last year. We have two different categories. The first one is operative units or standalone companies. That's 14. Then we have development studios. That's 26. If we start to look at operative units and the standalone companies, the aggregated day one enterprise value was SEK 4.5 billion, and the likely earn-out related to this is SEK 6 billion. If we look at operational EBIT that these companies had together at the time of acquisition, it amounts to SEK 1.4 billion.
If you then look today at the same companies, excluding any bolt-on acquisitions made, the same companies has an operational EBIT of SEK 2.1 billion, which is SEK 700 million more, or 52%. It's also worth noting when doing this comparison that we have no AAA releases released in the calendar year 2021.
New releases, yeah.
Yes. Another interesting data point is the amount of capabilities that these companies add to the whole ecosystem. At time of acquisition, there were 2,360 people engaged in these companies. Today, the same companies are engaging 3,310 people, which is 40% more. If you look to the studios, the day one enterprise value for the 26 deals was SEK 3.2 billion, the likely earn-out SEK 1.2 billion. For studios there are different studios in terms of maturity. So, you need to look at it on an individual basis to be able to evaluate the performance from a financial perspective.
What can be said is that there are financial benefits from adding a studio, as well, of course. This will be seen in CapEx savings if there is an ongoing games development project or royalty savings, and they will be built up more over time. Of course, very interesting also here to see what kind of development capabilities they are adding. At the time of acquisition, there were 1,350 people engaged in these 26 studios. We are very happy to see that they are able to scale their business, adding talent. At the end of December, the same companies had 1,750 people engaged, which is 30% more.
It's also interesting to see that, or worth highlighting a couple of examples where studios have exceeded our financial expectations. We have Experiment 101, Biomutant, Warhorse, Kingdom Come: Deliverance, Bugbear with Wreckfest, Gunfire with Remnant, NWI with Insurgency: Sandstorm, 4A with Metro. The overall conclusion for these 40 is that they have either met or exceeded management's expectations. There is one exception that we mentioned in September.
Thank you, Johan.
Yeah.
I would like to highlight our publishers across the world. We are talking a lot about all our games development projects, and sometimes I'm getting asked the questions. How do you manage? How do you produce? How do you do the marketing, and so on. We have fantastic, talented colleagues, more than 700 of them that works with all these projects and games, both the upcoming games as well as the current games, across the world. Across the group, we have 18 publishers that are having their different niches and platforms, everything from PC console to VR to movies to different style of live ops and mobile, and now recently MMO. The team sizes of those teams ranging from roughly 10 up to more than 100.
On this slide, you could see an example of titles that these publishing teams are bringing out. This is hopefully answering, because sometimes people are asking, "How could you manage 216 games from Karlstad?" That is not how this is operated. This is, you know, the answer to that question. Obviously now having more than 25 AAA games in the pipeline on top of all other games and all the live operating games, I think this is an absolute key for our success to have these teams. Two and a half years ago, I had the honor to welcome a fantastic company in Italy called Milestone, and I would like to follow up on that acquisition. Today we have the entrepreneur, Luisa.
Welcome on stage, Luisa.
Thank you, Lars.
I would like to hand over this box here for you. If you push the green button, you could change the slides.
Thank you very much, you know, for inviting me and to share a little bit of Milestone and our experience, you know, in the Embracer Group family in these three years. I think we can start with just couple of words of Milestone. Milestone I think is a beautiful company. We are based in the very center of Milan. We are around 260 people working both on development and publishing inside the company. Milestone has a history. This year in October, we celebrate our 25th anniversary birthday. We had a very big party, and it's been fantastic, you know, after the pandemic. In our history, we always worked in racing area, both simulation or arcade, but that's what we normally do. Milestone is a multi-product title. We normally work on 4, 5 titles at the same time.
To do this, we have a lot of focus on process in our company, on planning, you know, and control of what we plan and what we realize. I think thanks to this organization, this year during the pandemic, starting from MotoGP 19, we have been able to release 7 titles with no 1 day of delay. You know, that's something we are proud, and we really work a lot for this. Going on about a couple of words about our structures. Majority of the company is dedicated to development and R&D. For us, R&D department is the area where we have the most senior developers, and they work on the technology, on the future technology that will be in our games in 1-3 years, yeah, from now. About 85% of the company's dev and technology.
We have around 10% is publishing and 5% is IT, administration, finance, and general service. That's our numbers. I even would like to take the privilege to be here to tell that I think Milestone have a beautiful teams. I think we have very talented people. Our style in the company is very open. We share strategy, we share goal, we share results. I think I'm very lucky because I have a first line and a second line that are really able to manage the structure. We really work together with a lot of respect for everybody in the company, and we like a lot what we do. Hot Wheels
Yes.
One of the reasons to be here. Hot Wheels has been a success for us. Consider that the very first day of the launch, the thirteenth of September, with our revenue, we covered the development, marketing and production cost. In the very second day, we were in a profit area. Hot Wheels is not just financial. Hot Wheels has been a beautiful adventure for Milestone in terms of 50 million and more views. That means visibility, partnership, relation with first parties, great relation with Mattel. You know, we learn a lot inside the company producing Hot Wheels because it was something different from our core title that normally is simulation. About Hot Wheels, I think Hot Wheels is even an important story of synergy inside Embracer, inside Koch.
Hot Wheels was something different from what we normally do. We worked very close with all Koch central and territory. That means that we decided to work together since the beginning, since the project, the pitch, the design. We speak a lot to have advice and to share experience. We work a lot with Koch where we feel weaker. For example, they work a lot with us in the art direction in different areas of the development. We work very close in distribution, in marketing, in the local marketing, in partnership. I think that the success of Hot Wheels is Milestone, but it's Koch Embracer as well.
Really happy to hear that, Luisa.
No, yes, that we are. I think it's absolutely true as important. Okay, some results. As you can see, you know, Milestone started to grow year after year, several years ago, even before the acquisition. I can say that after the acquisition, we started to grow more. If we look at the number, our net sales were SEK 299 million in July 2019 through SEK 380 and SEK 586 million, you know, this year. If we look at EBIT, operational EBIT, from SEK 98 to SEK 270 this year. The cash flow improved as well from SEK 75 million to 244.
Some impressive numbers. Well done. Well done.
Thank you very much. Thank you very much. You know, even with my management, we were asking what's happened in these three years that push us so much. You know, for sure, some good luck of Lars and Embracer and Milestone, but for sure that's not enough. I think that on one side, as Milestone, we probably took the correct strategic decision, we worked very, very hard. But I think that being the group has been very important, very important at many level. I give you couple of example. When in 2019 arrived the pandemic, from one day to another, from a company of close to 300 people, we always work inside Milestone, and one day after, we were always at home. It was a shock for me, for many of my team.
It was not panic because we were not alone. We were in a family. We spoke with the other studios, we spoke with Klemens, we spoke with Lars, and so we could manage. Okay? It's not just this. I think being in the group, even being with the autonomy that we have, but it's very important with our licensor. Mattel is more happy to sign with Milestone in Embracer than alone. It's important at level of platform holder. We receive, you know, more attention, more contact. You know, what I saw during these three years is that there are even many not formal synergies. For example, my head of technique team, very often when I ask him about Unreal 5, future technology and so on, he tell me, "Yes, I spoke with Saber about this.
I spoke with Gearbox about this. There are even some, you know, channels of communication that are not formal, but are sharing the experience of all the studios. To close. Oh, sorry.
How is the future looking, Luisa? Now you had-
Yeah
... the Hot Wheels, will you bring out more content and, you know?
Yeah
Without disclosing any new things that you can't do.
I think, you know, I'm very positive for our future. I'm very positive because, you know, on one side with Hot Wheels, we did a step forward. We are looking at the future from a higher perspective. What I see for Milestone, for our future in a concrete way, for sure we will proceed with our annual license, with our simulation. That's where we think we are very good, and it's our experience, very important. Beside this, we want to grow up in the other side, more mass market side. Hot Wheels is not finished. We have lots of DLC that will stay with us, you know, and we will release for all the 2022. We are already working on
The future
you know, on more than one opportunity. I think there is absolutely the space to grow up more, and I think Milestone is solid, much more solid than three years ago, and we can do.
I'm you know, I'm amazed by this you know development and thank you so much for coming here. I think with that said, you are welcome on stage here, and also Emma, and I think Oscar will have a few questions.
Thank you very much. Will we sit there?
Welcome back for the Q&A. A lot of companies today, 4 people to ask questions to. I'm gonna start with you, Lars, on the Q3 results. I think the theme here obviously
Very, very strong top-line development, continued investments into the business, both on the mobile gaming side and on the PC console side. I guess the lead times were a little bit shorter on the mobile side. So what's your first impressions sort of on mobile for 2021 year?
No, you know, they have delivered over my expectations at time of acquisitions. You know, Easybrain is just killing it, and they really are an amazing group of very talented people, data-driven, and they built a factory of you know, creating repetitive successes in their genres and being the leading category leader in the world. It's a very strong concept. They are also you know, delivering you know, the financials and as a company, I know they are very well-respected with Johan's team and so on, very structured. CrazyLabs, it's now we had the first quarter, and I'm super pleased to see the numbers.
At the time of acquisitions, you know, we made a business plan with them that had a lot of ambition and growth. Happy to see that they are delivering on that. They have a lot of ambitions for the future. You know, coming to the point, it's shorter lead times. Yes, on hyper casual there is, and perhaps you can argue also for Easybrain than for the normal premium games. On the casual mobile side, to develop, you know, new titles takes a long time, could take many years. Then you have a long period of time in soft launch. That is quite similar to premium games in terms of investment and development time.
I saw actually, I think it was from App Annie or Sensor Tower, that Embracer Group was actually the third or fourth highest ranked company on downloads i n 2021. I'm not gonna ask you about that, but I am gonna ask you about, I mean, the dynamics in mobile gaming in Q3, in your Q3. There's been a lot of discussions about IDFA. You obviously have an ad-based revenue model. What can you say about the sort of returns on marketing and sort of ROI in Q3 and what that means for the coming quarters?
No, obviously the teams, they saw ROI, and that's why they have invested so aggressively into user acquisitions that will continue to drive the performance going forward. I think 57% investments of net sales is a sizable number. I think both Easybrain and CrazyLabs has been able to manage the IDFA situation well. They work very closely, you know, with their data teams and external companies that are providing services for this. I feel confident about, you know, continued success.
I think we have been, I wouldn't use the word lucky, but, you know, we've been in a position in the mobile games market with the ads-driven business primarily that has been potentially less affected by the IDFA changes than the normal, in-app purchase, whale-driven businesses.
Yep. On the organic side, because obviously the mobile gaming growth is mainly non-organic, should be clear about that. The organic growth 16% in the games business in the quarter, and it seems from Johan’s nice slides there, around SEK 200 million higher organically year-over-year. I guess, I mean, Koch Media publishing is the main driver of that, very strong performance. What would you mention especially on Koch Media side? Is it Metro and Saints Row and of course the fantastic Hot Wheels release as well?
I think Hot Wheels explains a sizable portion of that growth, to be honest. Luisa and the team had fantastic success with Hot Wheels in the quarter. You know, it was a solid performance of the back catalog, you know, including the titles you mentioned, Metro and Saints Row and many others. I think without the success of Hot Wheels, that organic growth would not been the same. I think that explains that outperformance.
Great. Luisa, actually jump in with a few questions for you. I mean, we heard your presentation, and I mean, I watched the Hot Wheels release during the past few months here. Over 1 million units since the thirtieth of September. I think you were nominated as one of the top 5 racing games at The Game Awards. I mean, congratulations and what has been the reaction from your team and Milestone as such?
From our team? We're all very happy for sure. I think that, you know, Hot Wheels has been released in September after difficult period, so, for us has been incredibly important. Even more than this, we, you know, the team understood that we can do something different because, you know, it's very simple to stay in the comfort zone. We produced MotoGP for many years, I think every year is a little bit better, but Hot Wheels was a big challenge, something different. We succeed, and that make the company grow up. That's for sure. We are all very happy.
Yeah. I mean, as you mentioned, I mean, Hot Wheels is a bit different to the rest of your portfolio. What do you see ahead for Milestone in the coming years? Will you try to do more sort of new things without revealing anything secret here?
For sure. Yes, I think Milestone can grow up in both the area because, you know, for us, the simulation is important. I see very good space of growth in simulation. We work on MotoGP, we work on SBK. That is a license we just signed last year, and the first title will be this year in July. We work on MXGP, where we will announce new project, you know, increasing that side of the market that is very popular both in Europe and U.S. The market is big. I see a very good space of growth in this area and a very good space of growth in the arcade area.
That's the area that we touch with Hot Wheels, but there are many other possible licensing that can be interpreted with racing or something similar to racing, you know, title with bigger license or more mass market license.
That sounds really exciting. Just a final question for you for now. You mentioned synergies and Koch Media and so on. I just want to ask, I mean, there are other sort of racing studios in the group. You have Bugbear with Wreckfest, Saber with Dakar, for example, and Rainbow with MX.
Sure.
Are you working anything with them at all, or is it sort of separate business?
Yes. We have several contacts. I make you an example with Rainbow. We work together on some technology related to the online. We work together on some assets because, you know, bikes are very similar. Also, we are sharing, you know, both assets or, again, tools or whatever. We had some good contacts with Saber to understand even for the future what will be in our titles, how we move on the future. Just we with DLC, should we think to virtual currency in racing? What are you doing? We have several chats to understand together. The answer is yes. We can—I think we can do even more, but in the past two years without traveling and so on was a little bit more difficult.
I think that's a big value of being in the group.
I look forward to following the progress. Thank you. Back a bit to Q3 for the group. Saints Row obviously doing well. Big year for the Saints Row franchise. What is your feeling around the interest for the franchise and the upcoming launch here of the Saints Row reboot later this year and the progress of the development team?
No, you know, I'm even more excited or as excited as I was before. I think you could follow the progress with the communities, and they're putting out new trailers. They had a strong trailer at the Game Awards and you know, I think we all feel confident about the release for August. It will be a big title.
Understood. Deep Rock Galactic, we heard from Søren, seems like a very successful launch on PlayStation Plus, PlayStation Now. What can you say about the sort of business model on PlayStation? How does it work?
I think it's a long-term investment to get engaged players and they got to kickstart now on PlayStation and you could hear him. He's saying he's doubling the community of Deep Rock. I think it's just fantastic base for the future of that IP to bring out, you know, more things. Commercially, you know, you make a deal, you know, without specifically talking about this deal, you're getting normally some kind of upfront fee from the platform, which is not, you know, in the overall grand scheme of things, it's not really notable as such. It helps, but I think the more the value is more in the long term.
You get a little bit of sales, obviously, on top of that now, on DLCs and so on. I think they're off to another solid quarter. I'm more excited about the long-term prospects of Deep Rock Galactic and team.
Understood. Jumping into some questions from the audience, f rom the web here as well. Let's start with a question from Jesper Birch-Jensen from SEB, asking about the mobile gaming segments, noting a strong performance. Should we consider the UA spending levels at 57% of mobile gaming sales as sustainable, or was this a case of exceptional marketing conditions in the quarter?
Well, it's a hard, you know, they are tracking this on daily and weekly basis, you know, how they invest. My message to them is to invest as much as they can into the future as they see, you know, profitable return of investment and not to maximize the short-term profits. Where that takes us every quarter, it's hard to predict that number. I hope that number will be still at a very high level. Perhaps then we're making a bit less in absolute numbers in EBIT, but that will generate more profits on the long term. For sure, you know, I think 57%, I hope we'll see perhaps even this quarter a similar number.
I guess, I mean, between CrazyLabs-
Yes
CrazyLabs and Easybrain, what are the dynamics between these two? I guess CrazyLabs has higher spending relative to sales than Easybrain in Q3 specifically.
CrazyLabs has a higher. Well, let's put it this way, you know, CrazyLabs as a hyper-casual publisher, they have a lower EBIT margin over time. You know, if Easybrain is a category leader, and their games are played for a much longer time. You know, they have consumers of Sudoku and other titles that are being played for many, many years. Their EBIT margins over time are higher. With that said, CrazyLabs are profitable. They are in line with the expectations, and I expect them to grow. CrazyLabs have a higher percentage of sales in user acquisitions than Easybrain.
Yeah. I mean, any indications for Q4? Should we expect a similar level here in Q4, strong momentum?
I expect them to continue to invest. You know, don't expect too much in terms of profit on the short term. Expect more on the long term.
Understood. A follow-up question from Jesper here. Any comments on player churn within mobile would also be appreciated. What can you s ay there?
I think it's hard. You know, again, I would like to state in hyper-casual, you have consumers downloading, playing game for a short period of time. Sometimes it could be, you know, months, but sometimes it could be, you know, minutes. So again, different profile from the category of Easybrain. So you need high volume to be successful.
Staying on a similar note here, a question from Rasmus at SHB. How do you structure your UA spend? What kind of sort of payback, break even or other metric do you use, or rather the companies use?
How should we answer that, Johan?
No, I think first, I think it's also important to note that there are separate operative groups, and there will be no sort of Embracer model for it. It's their models. I think that's the color to give on it.
You know, when I'm asking that question, I'm getting a huge spreadsheet with thousands of lines, and it looks amazing. But I'm fully trusting the entrepreneurs to make those decisions. You know, how many days the return on investment and so on, I think it really varies between the companies. There are so many different factors in this, so it's hard to answer that.
Yeah
It's a good deep dive topic in the future.
Yes. Could be.
Two questions from Matti Littunen at Bernstein. First one is, should we expect any short-term impact on the partner publishing contract with Activision Blizzard from a potential acquisition by Microsoft, or are there contractual protection regarding these types of change in control?
No, I think it's too early to say. You know, in general, Microsoft is a great business partner, and so are Activision nowadays. I'm not overly concerned on that front. At the end of the day, they need to be the leading provider of that service in Europe. If they are, I'm confident that Koch Media in general could continue to consolidate that market. Not meaning now M&A, meaning, you know, adding more business partners or increase the business partnerships within each partner. It's in general, I'm confident that, again, Partner Publishing, without being bullish, saying they will have a stable performance.
Understood. The second question I think we've asked already on retention and so on. Two questions, but I think one that we'll ask, and this is for you, Johan. A question from Jacob Edler from Danske asking about cash flows. It's affected by buildup of working capital of some SEK 390 million. I know you talked about it shortly in the presentation, but could you provide some more comments and flavor on that buildup and perhaps also how we should think about it in Q4 now, the final quarter of the year?
I think it is related to the Partner Publishing business, which had a fantastic sales quarter. In terms of as a percentage of sales, it's not unusual. We expect to have the trade receivables, of course, being paid in this quarter. We also expect to have a positive cash flow from changing working capital at a total level for this quarter ending end of March.
Understood. Very good. A question here from Nicolas Langlet at BNP Paribas Exane. The pipeline that you reiterated today, 25 AAA games by full year 2026, implies sort of 6 new AAA games per year. Is that the number we should have in mind for the full year 2023, or can you do better given recent game delays?
I think overall, there is more titles in the end of that four years period, even though Looking at the two years period, there is a good number of things coming out, you know, in the financially forecasted period. There is even more things coming out in the two years that we have not financially forecasted, and that gives me confidence that we will have a continued nice growth in profitability and in the business in the years thereafter the forecasted period. We haven't disclosed color on, you know, specifically on this year or next year, how many titles there is. Overall, we reiterated the financial forecast, and that's the key KPI for us, and to do the business in that range, so yep.
I'm jumping into a few questions from myself on the guidance and the pipeline, starting with this year, actually. You reiterated the guidance still. I wouldn't call it a wide range, but it's not a more narrow range than last time at least, despite time having passed. I mean, solid Q3, I think, was slightly above consensus expectations. You've moved Evil Dead. I think a smaller title, SpellForce, has been moved as well. You've also seen some positive FX changes perhaps. Could you talk a little bit about the dynamics this year? What has changed?
Well, in this current quarter, you know, we are in the games industry, so there is many factors on the mobile side. It's, you know, the profitability and the operation areas fully depends on the amount of user acquisitions they are investing. If they don't see a return on investment, they invest less. We make more money on the short term, but less on the long term. On the premium games business, you know, if you have big titles that are coming out that will be successful, you will be, you know, that could be a nice windfall of profit coming through the P&L. It's really hard to estimate this before the release. Just look at the Hot Wheels. That performance heavily exceeded our expectations.
You know, it makes a huge difference if you sell, you know, another million units of copies. It's just coming through the P&L immediately. With that said, to add further complexity to this, we now have more titles with partners, such as Gearbox with the Tiny Tina's Wonderlands with Take-Two. Obviously, that potential royalty windfall will depend on the performance of that title, and they have, like, a week in the quarter. There is other factors. That's why we're having still, you call it wide range, but a range, because there is many factors, which we don't know today. We feel confident delivering that range.
Great. I have to ask, I mean, this is a small question, but Evil Dead, was that in the previous guidance or not for this year?
I can't disclose what's in the previous guidance or not. Sometimes titles could be, you know, in very end of quarter sometimes, there is a little bit of windfalls, but the bulk of it could be in coming quarters like Hot Wheels. I'm not saying that is the case with Evil Dead, but could be.
Understood. For the coming years here, you upgraded your guidance, mainly as a result of the acquisitions done in December. Is there anything else, any other changes, or is it solely sort of the guidance that you gave for the acquisitions? Great. I mean, looking into your presentation and some further details, I think on the pipeline, you mentioned that Gearbox has 10 AAA titles in the pipeline, Saber, I think 7, and I would guess then Koch Media also 7.
Well, we said this morning at least 25, didn't we?
Interesting. I did miss that, actually. Very interesting. Starting with Gearbox, 10 AAA titles in the next four years. Could you shed some details on sort of how many are internally developed and how many are internally published respectively? I think it's an important question.
I know it's important, and I'd love to have Randy here one day with his team to give a deep dive into the Gearbox business. I hope the pandemic allows that to happen in the future. I think it's a bit premature by me to give color on that specifically. Gearbox are heavily recruiting across their studios. They're setting up new studios in Montreal and they are growing. There is also titles that are externally developed. They also have, of that 10 titles, there is you know, a few that are more in the concept phase or in the pre-production phase. They need to deliver on the business plan to add more resources to deliver all those games.
They seem to be on track on that, but they're having a very ambitious business plan.
Understood. We can expect a rapid scaling up of investments there over a sort of 3-4-year period?
Yes.
Understood. Then Saber also 7, at least 7 AAA titles, of which I think 2 are announced. 1 AAA title and 1 other title. What can you say about the hype, the reception, the interest for Evil Dead and Space Marine 2?
I think it's super strong. You know, Evil Dead is not defined as a AAA because it's not 100 developers, but it looks solid according to Matt. They added a little bit of development time, as you noticed, to the project, so I think they feel confident about the release. You know, they brought out pre-ordering programs, for example, and sold out immediately and then on collector's editions and so on. There is a nice demand of that product. Space Marines, I think we all saw that trailer was the most viewed trailer on The Game Awards. Amazing excitement around that title. That will be a huge game, and they're putting some heavy extra resource into that.
I'm not normally, you know, using that words, but it looks amazing, yeah.
Yeah. That will be exciting. What can you say about the Saber further out in the future, I guess? I think there's been an announcement of the Knights of the Old Republic remake, together with Sony. What can you say about the interest for that game? It seems quite high. I see people-
Yeah
Talking a lot about it. Trailer was well-received.
You could argue it's the most iconic Star Wars games ever made. There is a lot of Star Wars games made. You know, I feel super confident. Obviously, this is not news to us because it was part of the business plan and acquisition of Aspyr. They're putting a lot of resources into development and I think there is a lot of excitement around it. I can't wait to see what they are to announce next on this.
Yeah. We've seen some less favorably received sort of remastered versions of iconic games from other companies in the past couple of months. Would you say for the KOTOR remake, does the ambition sort of match the interest from fans?
Well, they certainly have a lot of development resources into that remake. You know, it's a remake, so it's not a remaster. It's a huge difference. They're building the game up from scratch again. I would prefer having them talking about the specifics of that, but we feel confident that they're able to deliver.
Yeah. Koch Media are publishing finally. I mean, that's the third sort of big AAA entity, I would say in the group, p robably seven or so AAA titles in development. Obviously, you know Koch Media very well or known them for a longer time, so perhaps you can talk more about that. What can you say about their own licensed IP, sort of mix there and own publishing? What's the mix in that pipeline?
No, it's just very sensible to give a lot of color more than I already given Oscar on that. I need to have the publishers talking about, you know, what and developers about the future products that is not announced. I'm excited to look at, you know, the progress that the developing teams are making of these titles they have in pipeline. We talked about Saints Row. There is more things that looks good. Perhaps being more from underdog position is sometimes also nice.
Yeah
on titles.
I mean, we've seen a lot of buzz, or at least some buzz recently for Dead Island 2. People have sort of written off the project, not knowing if it's still alive, but it clearly, very clearly is. I at least expect a release this financial year, or sorry, next financial year, I should say. So I mean, is that reasonable? What can we expect from the title? It's been in development for probably 10 years or so.
Yeah. Again, I can't talk about Dead Island 2 because it's not announced as such from the publisher. What we have just talked about, we have one unannounced AAA title.
That you think is Dead Island 2.
It's hard for me to comment further on that. I'm excited about unannounced titles.
Yeah. Great. I'm excited you're excited. Going back to some questions from the web here. Question here regarding a comment from EA. This is, I would say, related to your sort of transmedia entertainment pivot with the Asmodee and Dark Horse acquisitions. The CEO of EA said that, "Traditionally, the scripted entertainment elements in our industry have not been big revenue drivers in and of themselves. But where they have been of high quality, they've lifted overall engagement of those franchises more deeply." What's your viewpoint on this, and what do you expect transmedia to add to Embracer in the longer term?
Well, you can look at things a bit differently or similarly. I could say that gaming in general are the profitable area of entertainment. That's true. If you do gaming well, you have the highest margins. At the same time, to monetize things through gaming, you need to have strong, you know, IPs and build communities. Doing transmedia project, meaning potentially a Netflix show or could drive a lot of interest into a gaming product. It's a fantastic tool of monetization. It goes hand in hand. I wouldn't define it as marketing, but because our philosophy is to add leading teams, creators, and great entrepreneurs in adjacent areas around gaming, and those businesses are profitable on its own.
Look at Dark Horse, for example. They're having a very nice, profitable business on comics and publishing. You know, that's how I look at things. Okay, Dark Horse will perhaps not have the same profit margins as Coffee Stain, but it's still a nice cash flow generative growing business with an amazing library of IPs that has huge potentials across the group. Just talking about the excitement, for example, around Dark Horse, you know, it's amazing how people are excited across the group, and I can't wait to have this transaction, you know, going. Again, Asmodee, as we, you know, we talked two and a half hours around it, time of acquisition, so, hopefully, most stakeholders understand that business.
Again, that is, on a standalone basis, a very profitable, growing, nice business with a leading market position. Actually, the margins in board games on own board games they have is very similar to video games. Yeah, you know. That's kind of summarizes the thinking, I think, how we think of this transmedia.
Yeah. On that topic, I have a few questions here from regarding Asmodee. First one from me. What's the latest on the acquisition and the sort of consultation approvals needed in France and so on? Should we expect sort of first of April as a base case?
Well, that's the assumption in the operation a bit. I think it's a bit sensible to comment on regulatory filings because it's not really in our hands, but I have no other news on that topic. The assumption is that it will be f irst of April inclusion into the numbers.
Yep. Understood. We had a question on Asmodee on the fiscal Q4. What the momentum is like in Asmodee, if you can say something about that, might be sensitive, but what can you say about the progress in fiscal Q3 and at the start of Q4.
I think we share details how a typical Asmodee year looks like, how the revenues are split between the quarters in the communication of Asmodee. There is a little bit of holiday season effect, but to be fair, there is a stable performance every quarter driven by a number of factors, including the trading card business. How their business right now looks, I think it's premature by me to comment. I think we need to wait until they are included into the group.
Yep. A few questions from Chirag Vadhia at Bank of America. For the acquisition of Asmodee, could you comment on the percent of revenue generated from the trading cards business, and if you believe this revenue is cyclical?
I think we gave a little bit of color on the profitability on the different business segments. Johan, I
In conjunction with the presentation of the
Yes
transaction.
I think there was a pie chart with the split there.
Yeah.
Yes. I think I need to refer back on that. I think the trading card business is, you know, solid and obviously they have two key brands on that. It's a little bit lower profitability, but a very stable business. The absolute majority of their business are their board games business and their own IPs.
A question on Coffee Stain again from Bank of America. For Coffee Stain, could you comment on the focus on mobile publishing and development now that you have formed a new studio in Malmö, Sweden?
No, I think, you know, previously, obviously, they had Goat Simulator Mobile, which I think most players actually have played that game on mobile rather than on consoles or PC historically. There is a huge community or demand on mobile, proven on that IP. I think there is tons of potential on their other IPs on mobile, but it's early days. I think I'm certain about. I've seen a little bit of their ambitions for the future, and mobile is definitely part of it.
Understood. Before going to some questions on M&A, we have a question from Martin Arnell at DNB Markets. Why is the project of listing change to Nasdaq Stockholm Main Market happening sooner than you previously expected? What's changed? I think the timeline that we had communicated earlier was June 23 at the latest. Obviously we are now further into the project, and we are progressing ahead of schedule that we set out in the beginning. We think that it's the right move to increase the ambition in the project and aim for being ready at the end of this year.
Yep. Another question for you, Johan, from me. IFRS expected now from the 1st of April. I've asked you before, but I mean, could you sort of reiterate the largest changes in your sort of P&L? Anything that has sort of changed, anything that you've discovered?
No. We are continuing with the project. It's moving along well. There are no sort of news that we have encountered that we didn't knew about earlier in the project. The main differences will of course then be related to amortizations of goodwill. You will have the IAS 17 or IFRS 16 with the leasing accounting. Looking at our operationally a bit, we still have the expectation that will be on the same levels that we have currently. No material changes.
Segment reporting.
Segment, yeah.
That excites you, Oscar.
Yeah, I guess so.
Yeah, that's a nice one.
More segments.
Great. Thanks, Johan Ekström. Actually on this topic, turning over to Emma Ihre for some questions.
For segments.
Exactly.
Looking forward to this, yeah? Thanks.
I mean, you just started as the Embracer Group Head of Sustainability. I think you've been at the job for three or four weeks. I mean, first of all, why did you decide to leave a quite attractive job at a well-respected law firm for the gaming industry? Could you talk a little bit about your inspiration and sort of drivers behind that decision?
Yeah. I think that's a very good question, how I ended up in this studio. I don't have a background from the sector, and I'm not a well-known gamer. I met with the chairwoman, Kicki Wallje-Lund, and with Johan Ekström and Lars Wingefors, and talked about Embracer, about the sector. I realized at once they have really strong and good values, and that's really important for me. They brought up that this is difficult, and there are huge risks in the industry, of course, for Embracer, but for the whole sector, and that they wanted to be part of the solution. It's really complex, it's really difficult.
That's, you know, to be part of a team that want to, you know, manage these kind of risks and do something about it together with the rest of the industry. I think that's an opportunity you can't miss. That's why I left the law firm.
Great. Three weeks at the job, what are your sort of main impressions so far?
That I was right. You know, they wouldn't go just good, you know, marketing people. It's really great people working for Embracer Group, the people I met so far. As well, I really liked the decentralized business model, because we at the parent company, we focus on policies, compliance, risk, coordinating everything. We do the boring stuff. Then the actual work happen in the companies. They have the great initiative in the area of sustainability, diversity, mental health, content in games, accessibility to games. So our role is more to facilitate this cooperation within the group. I think that's a really, you know, good way of working.
Perfect. Thank you very much, Emma. I'm sure we'll come back to some more in-depth questions when you've been at your job for a few weeks longer, at least.
Yeah. When I get into my fourth week.
Exactly.
Thanks.
Exactly. Thank you. We do have quite a few more questions. I think we have at least a few more minutes, perhaps. Some questions from Benjamin May at Barclays. Question number 1 is, "To clarify, does the uplift in operational EBIT achieved in the 14 standalone acquired companies include the benefits gained from the 26 studios acquired and the resulting royalty and other cost savings?" I guess that's a question for you, Johan, with Lars perhaps supporting.
Again.
I think to paraphrase the question, and you showed in the presentation the operational EBIT for the 14 standalone companies.
Yep.
in that number, is it also benefits or royalty savings and so on from the studio acquisitions that you didn't disclose numbers for?
We know that some of the standalone companies, operative units, have made bolt-on acquisitions on their own, and that has been excluded in the calculation.
There is no additions from the 26 companies into the 14 companies in that calculation?
No.
Okay. Great. Then a question on user acquisition costs, which I think we've discussed. Great. Then I think we have a question on M&A as well, if I can find it. Yeah. Question from Neil Campling at Mirabaud Securities. "Is it more difficult to find valuable IP and acquisition targets because of the wave of M&A in the industry? Does this make prices more unattractive? And how critical is further M&A to achieve long-term plans?
No. We are focusing on adding great entrepreneurs and, you know, finding companies we could scale and then organically build. That's the key focus. We don't see any, you know, change in that. We have more ongoing dialogues, processes, ongoing due diligence processes than we have available resources in terms of manpower, I would say. In terms of transformative, meaning, you know, financially billion-dollar or big transactions, well, there is not as many transactions, but there is still a few out there that, you know, are run by great entrepreneurs. Whether any of them will be part of Embracer remains to be seen. Our principle is always to, you know, to be fair and to pay a fair price.
It's not only about the day one, it's about the mixture of, you know, how much equity, meaning, how much stake do they take in Embracer and being aligned with everyone else. Especially how long-term are they in terms of the earn-out structure. I want especially, you know, such entrepreneurs to be aligned with everyone. I think for those discussions, unless they have, you know, financial owners that just care about cash on day one, if they're owned by the operators and founders, that is the question, you know. Most of those companies have made more money than they possibly could consume privately anyhow, so it's more about their future ambitions and where they would like to end up. Yeah.
Yep. Understood. A follow-up question there, is M&A likely to be in adjacent markets, distribution, board games, et cetera, building out mobile gaming or buying in back catalog for the core gaming business?
Yeah. I think you will see transactions all across the place. The most you will see in games development in premium games. The core is gaming, and we're focusing on bringing more premium games companies into the group. On top of that, we are excited about mobile, but it's a bit sometimes more difficult to find the right entrepreneurs. There is plenty of opportunities in all areas. As well as, I'm sure Asmodee as well as Dark Horse to a certain degree will continue doing bolt-on, adding more great IPs and companies into their groups. Historically, I think less than 1% of our capital allocation has been to distribution companies and such. Well, if the right opportunity, we are open-minded. I'm always open-minded for the right teams and transactions, but...
Understood. Then, I mean, we've seen a flurry of acquisitions and M&A in the sector at the start of 2022, which you touched upon in the report, I believe. I think you previously said, you know, that you wouldn't do public market M&A. But I mean, given valuations having come down quite a bit, seeing other companies do it now, has your view changed on that, or does it remain the same?
I think the core is to do private transactions. Again, I'm always open-minded. We are always in dialogue with most public companies across the world. You know, we do business, we know them and so let's see.
Let's see. Okay. I think we've touched upon most of the questions from the web. I think we've touched upon most of my questions. Thank you very much.
Thank you also.
Good answers, everyone.
Thank you.