Embracer Group AB (publ) publishes Interim Report Q2, July-September 2019: OPERATIONAL EBIT INCREASED 133% TO SEK 241 MILLION

SECOND QUARTER, JULY–SEPTEMBER 2019 (COMPARED TO JULY–SEPTEMBER 2018)

• Net sales were SEK 1,259.7 million (1,272.7). Net sales of the Games business area increased 117% to SEK 816.0 million (376.0), whereas the Partner Publishing/Film business area decreased 51% to SEK 443.6 million (896.6) due to the absence of larger releases to match those in the same period last year. Last year’s Partner Publishing revenues included two titles that account for more than the difference to this year’s revenue.
• EBITDA increased 95% to SEK 418.1 million (214.8), corresponding to an EBITDA margin of 33%.
• Operational EBIT rose 133% to SEK 240.7 million (103.4) corresponding to an Operational EBIT margin of 19%.
• The increase in EBITDA and Operational EBIT is mainly attributed to the sales growth in the Games business area.
• Cash flow from operating activities amounted to SEK 284.8 million (–740.1).
• Earnings per share was SEK 0.21 (0.25).
• Adjusted earnings per share was SEK 0.65 (0.28).

All figures in brackets refer to the corresponding period of the previous year.

CEO Comments: OPERATIONAL EBIT INCREASED 133% TO SEK 241 Million

The Group had another stable quarter with growing profitability. Consolidated net sales were SEK 1,259.7 million (1,272.7). Our Games business area, which is comprised of Deep  Silver, THQ Nordic and Coffee Stain, grew revenue by 117%, generating net sales of SEK 816.1 million (376.1) in the quarter, representing 65% of our total net sales. Key drivers for this top line performance in the quarter were the successful release of Wreckfest as well as strong catalog sales. Sales in the Partner Publishing/Film business area decreased 51% to SEK 443.6 million (896.6) due to the absence of larger releases in the quarter as compared to last year.  Last year’s Partner Publishing revenues included two titles that account for more than the difference to this year’s revenue.

EBITDA grew 95% to SEK 418.1 million (214.8), corresponding to an EBITDA margin of 33% (17). Operational EBIT grew 133% to SEK 241 million, raising the Operational EBIT margin to 19% (8). The improved profitability was due to strong Gross Margins, which increased to 50% (30) due to the sales mix shift to the Games business area, further boosted by the year over year growth in digital sales. All three operating groups contributed to the Group’s Operational EBIT in the quarter.

Cash flow from operating activities was SEK 284.8 million (–740.1); and we had close to SEK 2.9 billion in cash and cash equivalents at the end of the quarter. Net cash was SEK 1.1 billion.

During the quarter we signed additional deals relating to our upcoming game titles on digital subscription and streaming services on various platforms. Revenue recognition will begin when the games are released. These deals will enable a wider group of consumers to play our products, while also providing us with more predictable revenues when releasing our new titles.

ACQUISITIONS

In August, I was excited to welcome five acquisitions to the group: Milestone, Gunfire Games, Goodbye Kansas Game Invest, Game Outlet Europe and KSM. Gunfire’s Remnant: From the Ashes, published by Perfect World was released shortly after we closed the acquisition. This game, which is an internally developed and owned IP, has exceeded our expectations at the time of the acquisition and contributed to the Group’s performance in the quarter through royalties.

Goodbye Kansas Game Invest has made two investments since the quarter ended. The company, which focuses on early stage investments, invested for a 45% stake in the Norwegian fishing-simulator developer, Misc Games, based in Stavanger. In addition, Goodbye Kansas Game Invest also founded a wholly owned new studio with a senior game development team departing from a large AAA developer. Details of this team and their project will be announced in due course.

We continue to execute our strategy and currently have a number of ongoing discussions with companies to join our Group, including a few sizable businesses that could form a new operating group. However, we do not depend on acquisitions to grow our business. Our acquisition strategy is to add publishers, studios and IP’s to accelerate our growth and achieve further diversification, provided we find the right companies that share our values and ambitions, and of course that the terms are reasonable. We acquire businesses to make them more valuable by enabling them to achieve their best work through developing more and better games, growing faster, becoming more profitable and generating more cash flow.

LOOKING AHEAD

I’m excited about the way we are positioned for the future. We have a strong pipeline of 86 titles in development across the Group, of which 49 are yet to be announced. I would like to emphasize the importance that quality comes first. Across all our development projects I’m sending the message that we need to take time to build outstanding experiences for our fans. This will not only create more happy gamers but also create a higher return on investment that in turn will enable us to build even better games. The downside of the principle ”quality comes first” is investors becoming impatient if some games will launch later than they had expected. The upside for long term investors is that the return will become even greater when the games are released.

We will continue to grow our business for the long term. Our objective is to use our cash flow from operations to fund additional internal and external game development projects, in order to propel future profitable growth in the years ahead. For trailing twelve month periods from Q2 18/19 to Q2 19/20 the ratio of gross profit the Games business area to amortization Games has averaged 3.5x. For the same time period the ratio of net sales Games to amortization Games has averaged 5.0x. Across the Group’s publishing entities we evaluate over a thousand external projects each year, but only some meet our quality requirements. During the quarter we released games with a total development cost of SEK 101 million (50), and now have SEK 393 million (175) finished games on our balance sheet. We depreciated SEK 144 million (80) during the quarter. Investments in game development were SEK 343 million (234) in the quarter and now we have close to SEK 1.6 billion in ongoing game development on our balance sheet.

Looking into the quarter ending in December we are all enthusiastic about both Shenmue III and Darksiders Genesis, being published by Deep Silver and THQ Nordic, respectively.

Looking ahead to the next financial year ending March 2021 we expect at least two AAA titles. But it’s not only about AAA, during the next financial year we expect several amazing products such as Desperados 3, Destroy All Humans, Spongebob Squarepants Battle for Bikini Bottom - Rehydrated, Wasteland 3, Iron Harvest amongst many many others. The highly anticipated Biomutant is in the final stages of polishing at our studio Experiment 101. I expect the release date to be announced as soon as they are confident about achieving their high ambition.

The Partner Publishing/Film business area will have a December quarter without any significant AAA releases. We expect this to change during the first half of calendar 2020 driven by a few significant AAA releases we expect to be released during that period. We have made a thorough analysis of the physical market for the coming 3-4 years. While the market share for physical is declining due to the growth of digital, we anticipate the dollar value of physical sales to remain fairly stable for at least the coming 3-4 years, fueled by the launch of the next generation of consoles.

We continue to build the parent company in order to improve our capabilities. The board has decided to evaluate a potential future transition to the reporting standard IFRS. I’m also happy to see that our ongoing work within sustainability is progressing well. Since the last report we have added new positions and we are looking to open a sub-office in Stockholm in early 2020. But our HQ will of course, remain in Karlstad.

To conclude, I would like to send my thanks to all of our customers, colleagues and business partners for contributing to the prosperity and success of our growing family. We now have close to 3,000 people that make it all happen every day. I’m looking forward to our most exciting years ever ahead of us. I hope to see you soon.

All the best from Värmland.

November 14, 2019, Karlstad, Sweden

Lars Wingefors,
Founder & CEO

For additional information, please contact:

Lars Wingefors, Founder and CEO

Tel: +46 708 471 978

E-mail: lars.wingefors@embracer.com

This Interim Report is information that is mandatory for Embracer Group AB to make public pursuant to the EU Market Abuse Regulation. The information was submitted for publication, through the agency of the contact person set out above, at 06:00 CET on November 14, 2019.

About Embracer Group

Embracer Group is the parent company of businesses developing and publishing PC and console games for the global games market.

The Group has an extensive catalogue of over 130 owned franchises, such as Saints Row, Goat Simulator, Dead Island, Darksiders, Metro, MX vs ATV, Kingdoms of Amalur, TimeSplitters, Satisfactory and Wreckfest amongst many others. With its head office based in Karlstad, Sweden, Embracer Group has a global presence through its three operative groups: Koch Media GmbH, THQ Nordic GmbH, and Coffee Stain AB. The group has eighteen internal game development studios and are engaging more than 2,900 employees and contracted employers in more than 40 countries.

Embracer Group's shares are publicly listed on Nasdaq First North Stockholm under the ticker EMBRAC B with FNCA Sweden AB as its Certified Adviser; info@fnca.se +46-8-528 00 399.

For more information, please visit: http://www.embracer.com