Embracer Group AB (publ) (EMBRACB) Earnings Call Transcript & Summary

Hello, and welcome to the Embracer Group call. [Operator Instructions] Today, I'm pleased to present the CEO, Lars Wingefors. Please begin your meeting.

Hello, and welcome, everyone. So this call, 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 -- to say that I'm 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 model, business model. Obviously, the health of our employees are the #1 priority. But I know that you would like to also understand how the situation are impacting the business. And I would say that the overall impact of the group business are limited. If we talk about the work done by the employees, it -- most employees are now working from home, this goes for both developers and publishers. And in general, I would like to say that the product or the development productivity are good. It has been during the move from office to home, there has been, obviously, some new workflows that needs to be built up. But what I'm 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 don't 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's 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're 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's very hard to look into the future in this situation. And could 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 31, that the revenues will be between SEK 810 million to SEK 850 million. 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 segment. 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. And I have to say it's notable because we did not have any significant releases or promotions activities during the March period. And yes, 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 business are driven by either new releases or digital promotions. So if you have a general sales increase because of higher usage, that is from a lower level. So in order to kind of have a very high sales increase, you need to have new releases or digital promotion, substantial digital promotions. Looking at the Partner Publishing segment. We now expect the revenues in that business to be between SEK 450 million to SEK 500 million. And we -- 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. And also looking at the business of -- 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 with -- driven by 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. And 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. We still don't have -- there is still no date for the release on Satisfactory on Steam. So the performance of Satisfactory are still entirely on Epic Game Store. Moving on to Amplifier. They still have good request or good business request for their business model and there have a lot of ongoing discussions with various senior development teams. And 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 IV on Switch. And 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. And looking at the Warhorse, they continued 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 we could -- both parties could support each other. And I'm quite positive or bullish about this potential synergies in the future. We will now account for the Saber Interactive revenues starting from first of April. They're still planning, through the focus, having the release of SnowRunner. And I think the early impression of SnowRunner on April 28 is that it looks very solid. And there is good preorder numbers for that title compared to the peers. So I'm really excited for April 28. Then I think moving on -- or the last point I would like to make on the business that -- and I stated that in the press release this morning that I'm happy that we have a very solid cash position within the group. And that takes it to the next slide to Page 4, so the strategy, M&A and pipeline. So 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, so new development projects to drive the organic growth in the future. Within the M&A, acquisitions, you see high activity. Currently, we have several ongoing discussions regarding acquisitions. And we've seen more discussions or a high demand for our -- to join our group post the Saber Interactive announcement on February 19. And 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. And I think now more than ever, it's attractive to become part of a larger group that has a stability in a diversified business. So unfortunately, it's hard to travel, but I think the efficiency during the M&A work are still good. And obviously, we know a lot of people already and know a lot of companies already, and we could engage with people through online and telephone. So that was the update. And I would now welcome to -- for you to have questions.

[Operator Instructions] And our first question comes from the line of Oscar Erixon of Carnegie.

2 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?

Well, I think, first of all, it's important to understand that the demand for the physical products are still there. So it's more a matter of taking this demand to the consumer. And obviously, if the situation with quarantine and the closure of retail chain will continue for a very long time period, it could have negative effects such as that it could be a closure of retail chain stores. Or where -- I think, more likely that a lot of the demand from the consumers will move from the physical retail outlets to their online stores. So in general, I would say I'm confident about the physical business. And it's -- and 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 will find -- we could meet that demand through -- 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. The next question would be I mean, we've all seen from data from Steam and other digital platforms, that engagement is clearly going up quite a lot. We feel that it's -- the correlation between engagement and actual consumer spending is still as high as it was before, people are spending as much as they may?

Yes. Well, there is an increased spending. I don't know if that -- it's 100% correlation between the increased engagement and spending, but there is definitely an increased spending. So I don't really have like a percentage or something to give you, but there is an increased spending, but how that correlates to the increased engagement, I'm sorry, I don't have data on this for you.

Got it. And the final question for me. Square Enix released Final Fantasy, or will release Final Fantasy Remake VII this week. But it's had some problems with different dates between different countries. We've also seen Sony delayed several titles last week. Do you foresee more delays of releases, given these apparent distribution issues across the world?

There is -- 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 changed release dates because of the situation at retail.

Our next question comes from the line of Lars-Ola Hellstrom of Pareto Securities.

Lars, can you repeat the business update on Partner Publishing/Film? I understood it that Film had a stable to another strong Q1, is that correct? Or...

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'm reassured about the Film business. And I think, especially in Germany, it has been driven by the performance of Parasite. But with continued performance of KSM. But obviously, the film revenues numbers are included when we're talking of the Partner Publishing SEK 450 million to SEK 500 million.

Okay. And also, the question, you said that none had -- there hadn't been any digital promotions during Q4.

No, no, no. I said that during March, we didn't have any notable releases during the March window. As well we didn't have any -- 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. Okay. And 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 event for being able to release the major titles in terms of marketing?

No. 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. But obviously, that is later than E3.

Our next question comes from the line of Matthew Walker of Crédit Suisse.

I've got 2 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 if 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're right. There is a shift from physical to digital. But I'm sorry, I can't give you a percentage how that shift looks like because it's just too early. But I can just confirm there is a shift. On the second question. Could you repeat that one, sorry? The...

Yes, it's just that so far, we've seen the benefit for video games companies from the lock down, what we haven't seen is the impact of lower consumer spending, which is going to come from...

I think in general -- I think it's hard to say, but and I don't want to speculate whether it becomes high employment recessions across the world. But in general, gaming is a fantastic entertainment, and it's cheap entertainment by the hour compared to, I would say, all other entertainments. So -- and what the data or the historical numbers are you seeing that gaming has been quite stable during difficult times, and I don't expect it to be different in these times. And whether that -- whether any decreased spending because of unemployment will offset the increase, I think it's just speculating because we don't -- we would not know that. But I don't think that is a -- I don't think that is something I would expect. In general, I think gaming is a fantastic entertainment, and it's definitely worth its dollars and to keep people at home. So I'm confident about gaming and our products in general.

Our next question comes from the line of Erik Lindholm-Rojestal of Nordea.

Yes, 2 questions from me. You had a few -- 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 don't want to comment specifically, but if that would be the case, I think you could expect shipments to be in both quarters. So that, I think, is the answer. I will give you a better update when we are reporting our financial year-end on May 20.

Yes. And with regards from the work from home productivity, do you still expect at least 2 AAA game releases during 2020, '21?

I think I want to comment in general that some studios are actually telling me that there were quite a few employees that 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.

Our next question comes from the line of Kristoffer Lindström of Redeye.

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 there -- this could trigger a more long-term like change in how you do operations, less offices and more work from home? Or yes...

I think it's a very interesting question. And we have discussed it across the management a bit. And just coming back to myself, I see, I would say, I would see an increased workflow. There is more calls. There is more things going on than ever. So people still seem to be very efficient. And I know there is various new structures being set up that seems to be working very well how to manage workflow and daily management and weekly management and so on. So there is -- 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.

Our next question comes from the line of Benjamin May of Berenberg.

Lars, yes, just a couple of questions for 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, so 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? And then 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 linked 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, so still on track?

So 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. And I know once you had some difficulties with outsourcing in China earlier in the quarter, but they were able to move that to another outsourcer. So 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 you some color. I think I were quite bullish on synergies -- commercial synergies when presenting on February 19. And 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 we are having. It's early discussions, though, and it will take time to -- for this to become a reality. But there is some very concrete discussions.

[Operator Instructions] And there are no further questions at this time. Please go ahead.

Okay. So thank you very much for taking the time to listen to this tele-co, 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.