Status update

Apr 6, 2020

Hello, and welcome to the Embracer Group call. Throughout the call, all participants will be in a listen-only mode, and afterwards, there will be a question and answer session. Today, I am pleased to present the CEO, Lars Wingefors. Please begin your meeting. Hello, and welcome everyone to this call in regards to the impact of the COVID-19 situation, along with the management update for the business. Thank you for taking the time. Turning to page 2, I would like to start with saying that I am very proud of the Embracer organization in these difficult times. I think our employees have risen to the occasion, and this situation has underlined the strength of our decentralized business model. Obviously, the health of our employees are the number one priority. But I know that you would like to also understand how the situation is impacting the business, and I would say that the overall impact on the group business are limited. If we talk about the work done by the employees, most employees are now working from home. This goes for both developers and publishers. In general, I would like to say that the development productivity are good. During the move from office to home, there has been obviously some new workflows that needs to be built up, but what I am hearing now from the organization is that in general, the productivity in development are good. Obviously, it really depends on the studio, the size of the studio, and their experience of working on distance or distributed. But I do not foresee any major delays coming out from this change from working from office to home. Obviously, that could, for specific studios or titles, be different. But in general, that is the situation. Looking at the business segment games, the digital sales has been up, and the engagement of our titles, especially looking at countries where they are under quarantine, there has been an uptick in the digital sales and engagement. Looking at our partner publishing business segment, the business has been affected by the temporary closure of certain retail chains, especially across Europe. But part of that business has been moved to e-tailers, and most retailers across Europe, they do have their own e-commerce business. So we are still shipping to those business centers. I would like to state that this is the current situation. Obviously, it is very hard to look into the future in this situation, and if this situation becomes very long-term, it could be different impacts of the business. But this is the current status. Now turning to page 3. We gave this morning a press release, and we decided to give top-line sales numbers, net sales numbers for our business segments. So looking at the games business segment, the games business segment being THQ Nordic, Deep Silver, Amplifier, and Coffee Stain. We now expect in the quarter ending in March 31st that the revenues will be between 810-850 million SEK. I would like to say that the margins in the business segment games are, in general, much higher than the margins in the partner publishing business segments. I think the sales were stronger than we expected in the segment, and it was partly driven by increased digital sales performance during the most recent weeks. I have to say it's notable because we did not have any significant releases or promotions activities during the March period. I would like to give some color on this because it's important to understand that we have everyday digital sales of all our products. However, normally our sales are driven by either new releases or digital promotions. If you have a general sales increase because of higher usage, that is from a lower level. In order to have a very high sales increase, you need to have new releases or substantial digital promotions. Looking at the partner publishing segment, we now expect the revenues in that business to be between 450-500 million SEK. This was a weaker performance than we expected previously, and this is mainly driven by the temporary closure of quite a few retail chains across Europe. We still see the actual demand for the physical products are there, and the demand are partly moving to e-commerce retailers or the chain stores' e-commerce operations. During the quarter, we shipped a number of products. In the end of the quarter, we had some shipments of a notable release that are to be released to the end consumer this week. We also had a stable performance of the partner publishing film business segment. The award-winning film "Parasite" that we are distributing in Germany had some notable downloading sales numbers. Also looking at the physical business, we have all our logistics centers still are fully operative across Europe, and we're also shipping in America. To give you some more color on the actual performance in the quarter, looking at the various business segment games, the various publishers, THQ Nordic had a stable performance driven by a few new releases. We had the "Darksiders Genesis" that has been performing to the management expectation. We still had our own IP Remnant that are published by another third-party publisher, still performing. In the end of the quarter, in the last days in the quarter actually, we had Titan Quest add-on release for consoles. Moving on to the Coffee Stain publishing, they had a strong performance of "Satisfactory" and "Deep Rock Galactic," especially in the end of the quarter. "Deep Rock Galactic" were also released on the NetEase platform in China. There is still no date for the release on "Satisfactory" on Steam. The performance on "Satisfactory" are still entirely on Epic Games Store. Moving on to Amplifier, they still have good request or good business request for their business model, and they have a lot of ongoing discussions with various senior development teams. For the Koch Media business, looking first at Deep Silver, they continue to have a stable back catalog performance. On the new release segments, they had the release of "Hunt: Showdown" that had a solid performance, both physically but also digitally. They released "Metro Redux" on Switch that had good reviews. They released "Saints Row 4" on Switch. Looking at the Milestone business, had the release of Supercross in February. That had a solid digital performance, but the physical numbers were a bit down. Looking at the Warhorse, they continued to having a very solid performance of the Kingdom Come: Deliverance. Also, we're happy to have last week the announcement that we closed the transaction with Saber Interactive. I think the integration process goes well. There is already very good discussions internally within the group how both parties could support each other. I'm quite positive or bullish about these potential synergies in the future. We will now account for the Saber Interactive revenues starting from 1st of April. They're still planning through the focus, having the release of SnowRunner. I think the early impression of SnowRunner on April 28th is that it looks very solid, and there is good pre-order number for that title compared to the peers. I'm really excited for April 28th. Then, I think moving on, or the last point I would like to make on the business that, I stated that in the press release this morning, that I'm happy that we have a very solid cash position within the group. That takes it to the next slide, to page 4, to the strategy M&A and pipeline. We stated this morning that we are still committed to the current strategy for both organic and inorganic growth. We believe that our wide pipeline of games development projects, more than 100, will drive the future organic growth in revenues, profitability and cash flows. Our intention is still that we will continue to allocate more capital to new development projects to drive the organic growth in the future. Within the M&A acquisitions, you see a high activity. Currently, we have several ongoing discussions regarding acquisitions, and we've seen more discussions or a high demand to join our group post the Saber Interactive announcement on February 19. I would like to give some color on this, that these discussions are for all sizes of businesses, both fantastic creative development studios as well as new publishers that potentially could become new operating units in the future, as well as minor transaction regarding IPs. I think now more than ever, it's attractive to become part of a larger group that has a stability and a diversified business. Unfortunately it's hard to travel, but I think the efficiency during the M&A work are still good. Obviously we know a lot of people already and know a lot of companies already, and we could engage with people through online and then telephone and so on. That was the update, and I would now welcome for you to have questions. Much. If you would like to ask a question, please press 01 on your telephone keypads. If you wish to withdraw your question, you may do so by pressing 02 to cancel. Our first question comes from the line of Oscar Erixon of Carnegie. Please go ahead. Your line is now open. Thank you. Good morning, Lars. Two questions from me to start things off here. Given the situation with the retail chains, do you foresee a negative long-term impact on partner publishing from these troubled game retail chains which are under pressure previously? Thank you. Well, I think first of all, it's important to understand that the demand for the physical products are still there. It's more a matter of taking this demand to the consumer. Obviously, if the situation with the quarantine and the closure of retail chain will continue for very long time period, it could have negative effects, such as that it could be closure of retail chain stores or, I think more likely that a lot of the demand from the consumers will move from the physical retail outlets to their online source. In general, I would say I'm confident about the physical business. The reason I'm confident is because there is a demand for it. There is a demand for having the physical copy, to have the collector's editions. So I'm sure we could meet that demand in various ways in the future. I don't want to speculate, how long this closure would be, because I don't know. Next question. Got it. Thank you. Next question would be, we've all seen from data from Steam and other digital platforms that engagement is clearly going up quite a lot. Do you feel that the correlation between engagement and actual consumer spending is still as high as it was before? People are spending as much as they play? Well, there is an increased spending. I don't know if that is 100% correlation between the increased engagement and spending, but there is definitely an increased spending. I don't really have a percentage or something to give you, but there is an increased spending. How that correlates to the increased engagement, I'm sorry, I don't have data on this for you. Got it. The final question from me. Square Enix will release Final Fantasy VII remake this week, but has had some problems with different dates between different countries. We've also seen Sony delay several titles last week. Do you foresee more delays of releases given these advanced distribution issues across the world? There could be logistical challenges in physical. So far, I think our team has done a fantastic job to ship products. I think it's too early to give any further input whether there will be further delays or change release dates because of the situation at retail. Yes. Next question. Great. Thank you. That is it from me. Our next question comes from the line of Lars-Ola Hellström of Pareto Securities. Please go ahead. Your line is now open. Hi, Lars. Can you repeat the business update on partner publishing and film? I understood it that film had a stable to another strong Q1. Is that correct? I would say it had a stable performance. I prefer the word stable over strong, but I came out from a call with the CEO and I think I am reassured about their film business, and I think especially in Germany, it has been driven by the performance of "Parasite. But also a continued performance of KSM. But obviously the film revenues numbers are included when we are talking of the partner publishing SEK 450 million to SEK 500 million. Yeah. Okay. Also the question, you said that there had not been any digital promotions during Q4. No. Well, no. I said that during March, we did not have any notable releases during the March window. As well, we did not have a lot of digital promotions. We always have digital promotions running every day, I would say. But we did not have any significant digital promotions during the recent weeks. Okay, crystal clear. Finally, E3 is canceled, I think, and possibly Gamescom will be canceled as well. How will that affect the project pipeline? How important is those events for being able to release the major titles in terms of marketing? No. Yeah, I think in general, I like to have the physical meeting and for business and business development. I think it's over time important to have these trade shows. But I'm sure our publishing teams will find ways how to market and communicate their new products efficiently. I know there is various initiatives to digitally promote things in the future. So I think we just need to wait and see how this turns out. I have to give a note that the Gamescom, what I understand, is not confirmed canceled. I think they're still waiting. Thank you. Our next question comes from the line of Matthew Walker of Credit Suisse. Please go ahead. Your line is now open. Thanks a lot. I've got two questions if that's okay. The first is, can you give us a percentage transfer from physical to digital? So what percentage of your physical sales you expected to make have you lost effectively because of the shutdown of physical stores, and what percentage has made a successful transition onto digital downloads? Second question is obviously a difficult one, but looking forward, clearly there's going to be reduced consumer spending, higher unemployment. What impact do you think that that will have on the business, and will it offset the increased engagement, et cetera, that you're seeing at the moment? I think coming back to your first question, I think you are right. There is a shift from physical to digital. But I am sorry, I cannot give you a percentage how that shift looks like because it is just too early. But I can just confirm there is a shift. On the second question, could you repeat that one? Sorry. Yeah. It is just that so far we have seen the benefit for video games companies from Yeah the lockdown. What we have not seen is the impact of lower consumer spending, which is going to come from I think in general, it is hard to say, and I do not want to speculate whether it becomes high employment or recessions across the world, but in general, gaming is a fantastic entertainment and it is a cheap entertainment by the hour compared to, I would say, all other entertainments. So what the data or the historical numbers I have seen, that gaming has been quite stable during difficult times, and I do not expect it to be different in these times. And whether any decreased spending because of unemployment will offset the increase, I think it is just speculating because we would not know that. But I do not think that is something I would expect. In general, I think gaming is a fantastic entertainment, and it definitely is worth its dollars and to keep people at home. So I am confident about gaming and our products in general. Okay. Thanks a lot. Appreciate it. Our next question comes from the line of Eric Lindholm Rosvall of Nordea. Please go ahead. Your line is now open. Yes. Thank you. Two questions from me. You said that you had a few shipments of a notable product during the end of the quarter in partner publishing, which I would guess is Final Fantasy VII. Should we still expect the majority of sales from this product to be in the next quarter? I think you should. I do not want to comment specifically, but if that would be the case, I think you could expect shipments to be in both quarters. That, I think is the answer. I will give you a better update when we are reporting our financial year-end on May 20. Yeah. Thank you. With regards from the work-from-home productivity, do you still expect at least two AAA game releases during 2020, 2021? I think I want to comment in general that some studios are actually telling me that they've, for quite a few places, see an increased productivity and obviously some see some less productivity, at least in the beginning. I don't expect any major delays out of this situation. However, I'm in general always expecting delays because that's the historical outcome of development. But I'm looking forward to give a bit better update on the development situation on the next reporting on May 20. Okay, great. Thank you. Our next question comes from the line of Kristoffer Lindström of Redeye. Please go ahead. Your line is open. Hi, Lars. Just a question regarding the work from home. A lot of companies are discussing and communicating and seeing some of the benefits actually with working from home, as you said, some increased productivity even. Do you think this could trigger a more long-term change in how you do operations with less offices and more work from home, or just very- I think it's a very interesting question, and we have discussed it across the management a bit. Just coming back to myself, I would say I would see an increased workflow. There is more calls, there is more things going on than ever to be very efficient. I know there is various new structures being set up that seems to be working very well, how to manage a workflow and a daily management and a weekly management and so on. So I'm sure we will definitely have some very interesting outcomes out of this crisis. I think it's too early to say whether we will partly change from office to home. But for most right now, I'm happy to see the hard work everyone are putting in to actually keep the productivity and the business running. Okay, great. Thank you. Our next question comes from the line of Benjamin May of Berenberg. Please go ahead. Your line is now open. Hi, Lars. Just a couple of questions from me. Firstly, I know that you have a lot of internal studio capacity, but you also do use outsourcing companies as well. Some of those have flagged some difficulties in shifting their staff from in the office to at home. Has that impacted you at all with those outsourcing businesses. Secondly, just on Saber Interactive, you mentioned some synergies a little bit more bullish on these synergies than perhaps before. Are those cost or revenue-based synergies. Lastly, you talked about the pipeline, how many projects are in your pipeline. We have seen some companies who have delayed releases as a result of them being linked to movies. I just wanted to check, not that I know of or could see anything, but that there are no major release links to movies that were expected for the next 12 months. Well, I can start with the last question. We actually have one title that are linked to a movie that you will see being actually released in the current quarter ending June. I wouldn't say it's financially very important, but it's a notable release for us and it's a fantastic game. So stay tuned on that one. Okay. Still on track. It's still on track, yes. First question, outsourcing. I would say there has been some where you need to have outsourcers that are in office. There has been some difficulties, and the demand for outsourcing services, what I understand, has increased. I know one studio had some difficulties with outsourcing in China earlier in the quarter, but they were able to move that to another outsourcer. If we are talking about not external game development teams, because I would say those in general are the same as our internal game development team, but if we're talking outsourcing, there is sometimes specific rules and security rules and so on, and that's why I think people need to be in office to do certain things sometimes. But for us, I wouldn't say this is a very big issue. We have a lot of various outsourcing services, both internal and external, so I'm confident they will manage this. Secondly, on Saber Interactive, I just wanted to give some color. I think I were quite bullish on synergies, commercial synergies, when presenting on February 19. I would rather say I'm as confident today that I were in February regarding the acquisition. I would say those discussions are mainly on the revenue side, that what potential projects could they do together with on various IPs or studios that you're having. It's early discussions, though, and it will take time for this to become a reality. But there is some very concrete discussions. Yeah. Okay. All right. Thanks very much. Just to remind everyone, if you would like to ask a question, please press 01 on your telephone keypad. You can press 02 to cancel. There will now be a further pause while any questions are being registered. There are no further questions at this time. Please go ahead. Okay. Thank you very much for taking the time to listen to this telco, and stay safe. Stay home, stay safe. Thank you very much. This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.