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

Hello, everyone, and welcome back. So we will show a few slides and have a few people visiting us here. Johan.

Yes. So we're continuing to build scalable corporate capabilities at the parent company. If we look back 5 years earlier or from now, we were 9 people at the parent company, and now we are 55. Looking at the parent company team and the functions that the team provides, it's focus on corporate support, I would say, the majority of the people or the employees are within the Corporate Finance and Accounting team. So that's approximately 50% of the employees in the parent company. 25% is within the legal team as well as ESG and Cybersecurity. And the remaining part is focused on M&A and business development and also Communication and Investor Relations. If we also zoom out and take a look at the Global Finance team within the Embracer Group, we have the 26 people in Karlstad, and we also have senior CFOs, 12 of them, one for each of the operative groups, and an additional close to 480 people working within finance and accounting globally. So in total, slightly above 500 people. We are very happy to welcome new hires. And joining us this quarter is [indiscernible]. So super excited about that. And last but not least, we are also very excited to welcome Careen Yapp, Embracer's Chief Strategic Partnerships Officer. And Careen, you are with us here today. So very nice to have you here, and welcome.

Yes. Thank you, Johan. I'm so thrilled to be part of the Embracer Group team. I joined the video game industry in 1999 at THQ. So it feels like I've come home, although the family has grown quite a bit and has grown quite impressively. Over the course of my 22-year career, I've met with, worked with and/or have negotiated with a majority of the teams across the Embracer's operating groups. I am now lucky to get to work alongside some of the best people I've met in this industry. I'm excited to lead business development at the group level and to work together with the group executive management team and each operating group to help shape strategic partnerships. Our goal is to create sustainable organic synergies across the group's ecosystem and to drive group-wide results, all while maintaining the culture of the decentralized operating model. And finally, I look forward to continuing to support the individuals who shape the future of the video game industry through my work here at Embracer through my work as Chairman of the Board of Women in Games International, and as a Board member of the Entertainment Software Association Foundation. Back to you, Johan.

Thank you very much, Careen, and very much welcome on board.

Thank you, Careen. Speak soon. Let's head over to the pipeline. I want to share a bit more color on the future games pipeline as well as our pipeline of AAA games. It's a refresher from our AAA pipeline deep dive around 15 months ago. First of all, I would like to highlight that the release timings is based on local management latest estimates. When doing group financial forecasts, we would assume a notable number of games moving out from these 94 games and potentially a handful moving in. As of 31st of December 2022, we had 224 games in our PC/Console pipeline, an increase compared to 216 in Q3 last year. Looking at the split between different categories of games, we have 31 AAA games in the pipeline and around 150 AA, A and [indiscernible]. Of those, around half have a development budget of more than SEK 40 million. In addition, we have a number of major DLCs and porting projects. Gearbox, Plaion, Saber, and THQ Nordic stands for majority of the projects helmed. Note that the size of the game projects can vary significantly between operative groups. Worth noting, this is only PC/Console. We have decided to take out any mobile games from this KPI. And also the closure of the Mobile business in Montreal reduced a number of games. Looking at the 94 games we have in the pipeline for next financial year, I would like to give some more color. For example, we have 4 AAA games scheduled for release next year, and they have a median number of developers of around 150 people. The AAA titles next year includes Dead Island 2, now planned for April 21. It also includes Space Marine 2, Payday 3, and one unannounced AAA title. Apart from this, we also have large budget titles not classified as AAA, such as Remnant 2 and a range of small and mid-sized titles expected to be released during the year. Now let's turn to our pipeline of AAA games. I would like to start with the definition, because it's very interesting to talk about AAA games in the industry, and there is no clear definition, but everyone has their own opinion, what is a AAA game. But for Embracer, when reporting, we have the following. It has to have all 3 of these different criteria, about 100 full-time game developers at peak of development phase. It should have a notable or significant marketing budget and expected to become a minimum of 2 million units seller. And if development work is paid by an external partner, Embracer should have a notable economic upside. So any pure work-for-hire projects are not included, even though they might be developed within the group. So we have 31 AAA games to be released until fiscal year '27, '28, of which 4 next year. Thereafter, we expect to bring to the market around 7 to 8 AAA games per year in the following 3 years. Of the 31 AAA games, 17 are in full production, 9 in preproduction and 5 in concept phase. The majority of the projects are from 4 operating groups: Gearbox, Plaion, Saber, and Crystal Dynamics/Eidos. Just to give you some more color, 24 of the games are published internally, 28 are developed internally and 23 are based on owned IPs. 24 are based on established IPs and 7 on new IPs. And only 6 of the AAA games are announced so far. To conclude, over the coming years, we see a notably strengthening pipeline of AAA releases, which provides a solid base for organic growth and improved free cash flow. The project ROI, the average ROI increased slightly over the second quarter to 2.44. We released 6 games that fulfill the criteria to be included in the quarter. Two of those reached a clearly positive ROI already in the release quarter. In particular, Goat Simulator 3 had a positive contribution to ROI in the quarter, while Lets Sing 2023 also performed well. The average remains weighed down by the substantial release of the Saints Row reboot in the most recent quarter. As stated in my initial remarks, we need to be humble and acknowledge the overall ROI performance of our PC/Console games that's released this financial year has underperformed management expectations. That said, we are confident in clearly improved ROI on new products compared to the last quarters. Again, Asmodee. We wanted to give some additional color on Asmodee in this deep dive section. We have received some questions from shareholders on Asmodee's performance and historical figures, which we are happy to share about. First of all, we are happy with Asmodee's stable performance in third quarter, both in terms of sales, profits, and cash flows. I'm excited to have Stephane, Müge and the team on board and look forward to see the company continuing to execute on its strategy, including pursuing inorganic growth opportunities. In many ways, Asmodee has had a similar strategy to Embracer over the years, by combining organic and inorganic growth and onboarding great entrepreneurs and creators. Asmodee did 40 acquisitions in 2014 until 2022, including 5 acquisitions in 2021, until the time of announcement of joining Embracer Group. Many of these acquisitions are pertained to board game publishers and digital platforms with high margins as opposed to local distribution companies. Asmodee's strong publishing and distribution capacity can be used to leverage these assets, and it's a core part of the company's strategy. Although we, as a group, have become more selective on M&A in the past 6 to 12 months, I'm sure the pace of acquisitions also for Asmodee will again gather pace in the coming years. Asmodee's business is diverse across activities and geographies, and even with the evolution in the market that we have seen recently with the strong growth in trading card games at the end of third quarter board games represent around 46% of total net sales, of which 70% are owned IPs. TCGs collectibles and other distributed products represent around 41%, with the remaining 13% coming from Asmodee's emerging platforms in digital and direct-to-consumer sales. I will now hand over to Johan for some comments on Asmodee's financial performance.

Thank you. So if we look at Asmodee and we compare the reported numbers for 2021 to the adjusted pro forma numbers that was announced at the time of the deal announcement, we can see that on the slide here. The objective of the data provided during the acquisition announcement in December '21 was to provide the best representation of the current trading of Asmodee at the time of acquisition. And as such, the financial information provided was on a pro forma basis, where you take into account the full 12 months contribution from closed M&A done in the period and also adjusted for nonrecurring items. If we take a closer look to the pro forma adjustments made, there were EUR 109 million and EUR 38 million at the EBITDA level related to pro forma for M&A closed. These are the 2021 performance of the acquisitions of Board Game Arena, Plan B, Miniature Market, The Island, and Exploding Kittens. Jointly, they had a pro forma adjusted EBITDA of 35% in 2021. It's also an adjustment for personnel costs related to acquisitions, which is primarily related to provisions for earnouts on past acquisitions amounting to EUR 13 million. We adjusted another EUR 16 million to reflect the impact of the suspension of additional custom duties on imports into the EU of a number of products, including trading cards originating in the U.S. This amounted to EUR 60 million. So to sum up, the pro forma adjusted EBITDA of 2021 for Asmodee was SEK 240 million. And we believe that in order to appreciate the underlying performance of the business that was acquired, it is more appropriate to use pro forma adjusted financials where you include the full 12 months performance of companies acquired.

Thank you, Johan. And moving from pro forma numbers to Denmark, and very welcome here to Stockholm, Søren, online.

Thank you, Lars. Happy to join this. Let's just dive straight into it. So next slide, please. So 1.5 years ago, we traveled to Karlstad to meet up with Lars in sealing the deal in the acquisition of Ghost Ship. We went there alongside Anton, CEO of Coffee Stain, who we have worked together with all these years and are still working together with, and entered into a new constellation now as a sister company to Coffee Stain under the Embracer Group, and we feel extremely happy with this setup and relationship. We have been developing Deep Rock Galactic for many years and released so many updates that at this point we were also changing our strategy towards a season release instead. We worked on Season 1 for quite a while and announced it as our biggest update ever, alongside a free battle pass. Can we take the next slide? Thank you. And it worked really, really well when we released it. As you can see in the graph below, we broke all our records on player numbers and revenue. It surpassed our 1.0 release and paved the way for where we are today with Deep Rock. Already, 2 months later, we took advantage of this, on PlayStation Plus deal. We entered into PlayStation Plus and very, very fast, 10 million players claimed the game, started playing, enjoying the new season content, buying the cosmetic DLCs and just had a really good time together. And this propelled the Deep Rock Galactic IP even further into closing into mainstream. One month later, we released Kickstarter on a board game for Deep Rock Galactic. And this board game, Kickstarter, it reached almost 20,000 backers and EUR 2.5 million, which we later found out was actually -- is still the biggest Kickstarter in the Nordics, not just board games, but of course, all things. The board game has now been produced and is in the hands of fans all over the world rolling out right now as we peak and it's been really well received. To us, this has proven that we can transcend the IP. We can take it to other medias. In this case, the partnership was with MOOD, a visual arts studio from Copenhagen that we know really well. And we'll look into more of these partnerships in the future. So next slide, please. So on this one, in April, we released Season 2 for Deep Rock Galactic. We revisited the robot theme. And it didn't go just as well as the first one, and we were, of course, a bit disappointed in the numbers. So maybe Deep Rock was going downhill now. But then we'll look more into the details. And the robot theme was initially in the first season, maybe not the most popular. We also missed out on some promotions on Steam and a few other things. So we said, let's pull our act together. Let's do it better. And we did. So next slide, please. We released Plaguefall, a new theme for Season 3 in November last year. We timed it very well with a promotion on Steam and hyped it in the community. And it broke all our records once again, placing us now squarely in the top 100 most played games on steam where we are still at. And it definitely told us now that as long as we are putting in the effort and are doing the right things with Deep Rock Galactic, this brand can still grow and still has a lot of potential in the future. Take the next slide, please. So in January, 1 month ago, we released this infographics to the fans. It was an update to one we did 2 years ago. And as you can see in the graph up in the top left on daily active users, the user base of Deep Rock Galactic just keeps growing. The recognition as a brand, it's slowly going into mainstream. We've crossed 5.5 million units sold across all platforms. Our social media channels are still growing really well. We are 1 of the 10 most active discord servers in the world. Our TikTok channel is exploding, and there's a lot of fun, and we see a lot of user engagement on the social media channels. Next slide, please. So meanwhile developing and releasing and promoting Deep Rock Galactic, we've been investing. And this is a very different way of investing than the normal Embracer way of acquiring. These are all investments back into the Danish gaming ecosystem, smaller start-ups or companies that need some seed funding to get moving. They are very different, as you can see as well. One is into the ed tech sector, one is more in the games with Steam and Switch, and the latest one is specializing in VR games. So we're spreading out and helping these teams as good as we can, both with the investment, but also with advice and support as much as we can. The goal here is, of course, for them to grow into mature companies. And eventually, if possible, they could be acquired. But we'll see where that goes. We'll continue with this strategy moving forward. And then final slide, we have an announcement, if you can take the next one. So today, we are announcing Ghost Ship Publishing. We are really proud of what we have accomplished with Deep Rock Galactic, and we feel we can share this experience. We need to share this experience with other developers. We want to help other game developers take the same journey as we have taken. This is not a publishing setup where we will publish every game out there. We have set up some specific pillars of focus. So we will seek out game developers that embrace open development, that are community-driven, and really want to bring their passion products in a personal and real way to the market. And these are often Steam early access games like we had ourselves with Deep Rock Galactic. The games themselves need to be flexible in game design, so that they are endlessly expandable. The focus here is more on world building than narrative. We want them to be, yes, flexible and open, so we can form them, or the developer can form them as they go along the journey of working together with the community. And they need some deep gameplay systems, so there will be a lot of play time in these games. We believe in games that are played, our games that sell. This is exactly what we see with the Deep Rock Galactic. And this leads into the final part, the solid business, and the consumer-friendly business models, where we will support and encourage these developers to pursue the same type of model that we have been successful with, where the fans feel us being extremely generous with content, and then they are very generous by playing the game and talking about it and making their friends buy the game and everybody is just happy when you get into this positive loop. We'll also work towards having equal partnerships and full transparency with the developers just as we've been experiencing with both Coffee Stain Publishing throughout the years. So that was our deep dive into Ghost Ship, where we are today and what we're going to do moving forward. We're still working on Deep Rock Galactic. There will be more announcement, both on Deep Rock Galactic and on the titles for Ghost Ship Publishing in 2 weeks when we have our 5-year anniversary stream live from the office here, and we will make sure to send out press releases and communications about that event as well. Thank you.

Thank you, Søren. I think we are all super excited and very happy to have you within Embracer Group. And the success you have created with Deep Rock is just amazing. So thank you so much. Thank you for sharing this with us today. So with that said, that was the deep dive session we had for today. I hope Simon, you have some few remaining Q&A questions perhaps.

Welcome back to the second Q&A session. Thank you, Careen and Søren as well. I want to start off with listening to Careen here. Can we view this as Embracer entering a phase where you try to achieve some more synergies? And can you maybe elaborate a bit more on her position in general?

I would like to highlight -- or to start with, Careen is one of the smartest business persons I know in the industry, and I've been waiting for her, a few years, to actually join this position. Now she wanted to have a good ending at Google, and they closed down and now it was time to join. Super excited to have her. And she knows the CEOs and many of our games developers, which obviously being very efficient to now join the group. Now it's been a critical part of the strategy of the group in the belief of aggregating or adding a lot of fantastic games developers within PC/Console segment. And I believe there is a value for many business partners and industry players within -- globally, a higher value on an aggregated basis than you necessarily have from each and every game. And this is what we're trying to achieve with Careen. Obviously, there are many other things. We could have other kind of business relationships with industry players, increasing margins and improve marketing and just build a better way of communication into the group and the other way around. As you know, I've been against any kind of centralization and I believe firmly in a decentralized model. But I would like to see Careen here as a middle point on more an operational daily level, on the absolute highest level, working aside myself, Johan, Ian, together with the CEOs to make this, I would say, quite notable relationships and agreements going forward.

Interesting. Could you give us like any kind of indications or hints of what kind of things or synergies or partnerships internally or externally that you could derive from having this group of companies?

But obviously, talking with platforms, if we are able to strengthen our content together against them, we could improve business terms. And there are any different kind of business terms with the industry players. So that's a very clear synergy. But there is also -- over the years, there's been a number of reach out from very big media companies, tech companies, Asian companies, Chinese companies wanting to do business with the overall Embracer Group. And I've been giving them the number to the CEOs or the local sales teams. But now we actually have a coordinating function where there is an interface to do something substantial across all our 11,000 games developers. It's an enormous opportunity. But it requires a lot of respect for a decentralized model and for the local management. We need to work together with them to have this working. We will never struck deals with partners that are not aligned with our management teams. You need to dance together.

Sounds good. I should also mention that in a few minutes, we will open up for questions from the telephone conference. So if you have any questions, stay tuned for that. But one more question for me here before. Turning to the pipeline. Before, you had 25 games scheduled for release -- AAA games scheduled for release before March of '26. Now it's 19, could you elaborate a bit on what has changed in the pipeline?

Mainly classifications, I would say, in that number moving, but there is also some or a few moving into -- in the coming financial year after March 2026, because we had a number of titles in that financial year. And now with what I stated earlier this morning, we need to make sure we have the right quality and planning and everything. So there is a combination of definitions. And for example, a title like Remnant 2, which I think looks amazing, I don't want to say how gamers or the industry will look, whether it's a AAA game or not. But for definition reasons, it's super close to be 100. They are not. So kind of bad luck when you define this here.

All right. So some of those 6 games could still be in the pipeline and scheduled for release in the same period, but not classified as AAA. Is that correct?

Exactly.

All right.

And hopefully, the sales could be as good as well. So...

Yes.

So this is very much a KPI driven from interest from financial markets to give color on the pipeline. Internally, we don't talk AAA or not, we talk games.

I guess people got worried that you had canceled some projects or proposed all of them. So it's good to get some clarification. And on the games in full production, I believe you stated 17, was that correct? Or could -- is that the current run rate of games in full production, AAA games in full production? Is that run rate sufficient enough to support the release schedule you have? Or do you think you need to up the number of AAA in full production to deliver on the pipeline in the coming 2 to 3 years?

Obviously, there is a very long cycle. You either have a longer time period and have a smaller team or you scale up and down. It really depends on what studio there is and how much external resources. So it's a very hard question to answer. Then we need to do a deep dive on a very detailed forecast on headcounts and CapEx and other things. Perhaps one day, Simon, not today.

All right. Not even if we simplify it to the CapEx. If the CapEx is sufficient to fund what you have currently or should we expect CapEx to slightly increase?

Well, I want to be clear. Due to our partnership and licensing deals and funding that we expect to close, I think it's a fair assumption that our CapEx will significantly be lower. I'll leave it to the analyst to read into that.

Yes. All right. Let's see if we have any questions from the telephone conference this time.

We have 2 analysts on the line. So I'll just open the lines and check if they want to ask any questions. Rasmus and Nick, do you want to ask any questions?

It's Nick Dempsey. Can I ask a couple of questions?

Yes.

Brilliant. So the first one. When we look at recent performance from Ubisoft, perhaps the performance of EA outside of a couple of their very largest franchises, it seems that recently, regardless of how well the games are received critically, the small to midsized AAAs are really suffering in terms of the number of units sold, whereas the very largest games, Call of Duty, God of War, are winning share. Those companies I referred to have suggested that relates to the squeezed consumer, but is that something that you recognize in the market? And do you think it relates to this particular moment? Or do you think it is a big picture multiyear structural trend that potentially presents some risks to yourselves? That's the first question. Second question...

Let's start with that question, Nick, because I will forget the first question, otherwise. I had too much in my head this morning. So I think I wouldn't say it's a structural shift. We actually have been looking into that particular question in detail. And there is a marginal difference if you look on the performance of small and mid-sized titles versus big titles in the third quarter. But I think potentially, and without having full science, because it's quite hard to have full science in PC/Console because there are so many factors. But one data point we can look at is obviously Destroy All Humans! that were very successful for us during pandemic. And now the second game came last year. The game is as good or not even better, but it did not perform as good. But there is many factors to that. This release window, how many other games is coming in a similar genre. So I wouldn't say it's a big structural shift. We don't see that. But I think there is more an effect from a very, at least early in the pandemic, aggressive consumption of every game you can get hold of.

Okay. That's helpful. If I could just go to my second question. Inside Asmodee, you mentioned that trading card games have continued to perform pretty well against a very tough comp, a very strong period last year. When we look forward for Pokemon in particular, is it not inevitable that we have to come off the top of the current spike of interest. And if so, can we expect that in the next couple of quarters?

You mentioned one very valuable business partners, and we have many valuable business partners. And in the respect of them, we are happy to support their distribution and publishing of their products in different markets. But I will leave the assumption of their business and IPs to them, and we are supporting that. So obviously, we had been excited to see a very good performance in that business segment of TCG last year. And I have not heard anything from Paris that there is a trend going in a different direction at the moment.

There are no more questions at this time, but maybe we should unmute Rasmus to make sure that he doesn't have any questions. Rasmus, do you have any questions?

No thanks.

Okay. Okay. Then I hand it over back to you, Lars.

Yes. Thank you, Simon. Perhaps the audience doesn't mind to leave early today unless you have some final questions from your side, Simon.

No. I could just highlight that from the web, we have a lot of questions surrounding the special review. If there's any update on that, if a potential spin-off could create any value, that you have assets that could be valued higher separately? Is that something you have any comments on?

No, we don't really have any new -- I think I gave quite extensive color on the special review in the last quarterly. But I want to be clear, the strategy remains the same to back entrepreneurs, now looking at myself as a shareholder, a long-term shareholder, and the promise I've given to people, it's still the same to back entrepreneurs and creators on the long term. I would leave it to the market to do their own analysis on valuations on assets.

All right. We may finish with seeing if there's any questions from anyone in the audience before we leave off here. Please raise your hand if that is the case, we'll give you the mic. No questions at this point. With that said, I think it's time to round off. So thank you so much, Lars and Johan and all other presenters and the audience for coming as well.

Thank you, Simon.

Thank you.