Embracer Group AB (publ) (OTCPK:THQQF) Q1 2023 Earnings Conference Call August 18, 2022 3:00 AM ET
Company Participants
Lars Wingefors – Chief Executive Officer and Founder
Müge Bouillon – Chief Financial Officer, Asmodee Group
Johan Ekstrom – Chief Financial Officer
Emma Ihre – Head, Sustainability
Lee Guinchard – Chief Executive Officer, Embracer Freemode
Martin Lindell – Senior Advisor
Josh Fairhurst – Co-founder and Chief Executive Officer, Limited Run Games
Douglas Bogart – Chief Operating Officer, Limited Run Games
Andy Jones – Senior Vice President of Strategic Products at Asmodee
Fredrica Drotos – Business Affairs, Chief Brand and Licensing Officer, Middle-earth Enterprises
Thomas Koegler – Head, Strategy, Asmodee Group
Alan Wilson – Chief Executive Officer, Tripwire Interactive
Matthew Karch – Chief Executive Officer, Saber Interactive
Marcus Dawson – Chief Executive Officer, Tuxedo Labs
Dennis Gustafsson – Founder and CTO, Tuxedo Labs
Conference Call Participants
Martin Arnell – DNB Markets
Martin Arnell
Good morning, and welcome to Embraiser Group’s Fiscal Q1 Presentation. My name is Martin Arnell and I’m Equity Analyst with DNB Markets in Stockholm, and I’m here to moderate the Q&A session after management’s presentation. And today’s presentation will be first wrap up of the quarter followed by Q&A, and then management will go through the acquisitions that was announced this morning followed by a second Q&A.
With that, I want to hand over to the CEO and Founder, Lars Wingefors of Embracer and Johan Ekstrom, the CFO.
Lars Wingefors
Thank you, Martin. Hello, everyone, and welcome to Karlstad, Sweden. I’m glad to report another stable quarter alongside some of our most exciting acquisitions ever. As anticipated, the first quarter was quiet, albeit a record quarter for the group in financial terms. Net sales in Q1 grew 107% year-over-year to 7.1 billion that is minus 12% organic growth. Adjusted EBIT grow 3% to 1.3 billion with an adjusted EBIT margin of 19%.
The operational performance was largely in-line with management expectations. The PC/Console games segment had a low release activity and tough comparisons from the release of Biomutant last year and back catalog sales was the main driver. The only new release with a notable financial contribution was Evil Dead: The Game. The mobile games segment performed strongly growing by 20% organically. The Tabletop games segment grew 6% pro forma, taking market share.
We today reiterate our adjusted EBIT forecast for fiscal year 2022-2023 and next fiscal year 2023-2024. In this fiscal year, we expect an adjusted EBIT of between SEK9.2 billion to SEK11.3 billion And next fiscal year, we expect the adjusted EBIT of 10.3 billion to 13.6 billion. This excludes pending acquisitions of Eidos, Crystal Dynamics, Beamdog, and these deals announced this morning.
Looking into adjusted EBIT breakdown of the year, we expect Q2 and Q3 to be clearly stronger than Q1, somewhat in Q3’s favor, driven by both new releases and seasonality. Q2 is supported by the reboot of Saints Row and other notable platform deals. Further, we expect Q4 to be the clearly strongest quarter of the financial year driven by a few strong releases including a long-awaited AAA title, now expected in Q4 and to be announced soon.
For the remainder of the year, we expect to notably outgrow the rest of the market with the overall organic growth of 20% to 35% for the full financial year for the full group. I’m very proud and thankful to our finance team led by Johan and advisors for finalizing the largest IFRS conversion projects ever in Sweden, ahead of original timeline. This is an important milestone in constantly improving corporate governance in our group.
The process to change the listing value to the main market at NASDAQ Stockholm by the end of the calendar year remains on-track. We are also introducing new sustainability goals today. After an extended period, without major releases in PC/Console games, we are now entering a new phase of higher release activity. The reboot of Saints Row hitting physical and digital stores on August 23 will be one of the most important releases in this financial year. Excitement for the game among fans is building up and we will hear more about that very soon in this presentation.
THQ held a well-received Digital Showcase last Friday, announcing a reboot of the iconic horror franchise Alone in the Dark and more than 10 other titles. Next week, there is Gamescom and we expect the strong lineup of both new products and the very business development schedule.
In total, we have 222 games in games development pipeline, including at least 25 AAA projects planned for release until March 2026. Looking at our financial position, we have a total of 20 billion in cash and credit facilities as of this morning. We continue to have conversations with several industry players about supporting our long-term strategy either through investments or partnership.
We continue to grow our organic investments into our games development pipeline with a record of 1.1 billion invested into game development. That will drive the organic growth of the company for many years to come. On the short-term, this however contributes to the negative free cash flow in the quarter. We do expect a strong free cash flow for the full fiscal year, reducing the leverage of our balance sheet.
This morning, I was excited to report five acquisitions, including the IP rights for Lord of the Rings and The Hobbit. On an aggregated basis, the transactions will have a material impact on Embracer and fulfill financial and strategic objectives. From a financial perspective, the transactions on a combined basis will be accretive to earnings growth to adjusted EBIT margin, to cash conversion, as well as to earnings per share and free cash flow per share.
Strategically, the transactions further strengthen and diversify Embracer’s portfolio with profitable IPs and franchises. In particular, The Lord of the Rings, one of the most iconic IPs around the globe and the entire middle Earth Universe offers a significant growth opportunity with the PC/Console, mobile, and tabletop games.
Finally, with summarizing all this information this morning, I’m pleased to announce a new operating group Freemode and we will soon welcome or in a while in this presentation welcome the CEO, Lee Guinchard on stage. And finally, I would like to send the congratulations to Koch Media, that finally changed their name to Plaion.
So, with that said, I would like to show a slide for you that shows our continued growth ambitions. So, now looking on the left hand side, we could see the financial growth on a trailing 12-month basis. The group has shown a strong growth in the past four years, both operationally and financially. The headcount has increased from 1,700 four years ago to almost 14,000 as the end of June.
In the same period, the number of studios has increased from 10 to 120. The pipeline of new releases from 51 games to 222, while also growing in average project size. Financially, in the same period, sales has grown notably, and on trailing 12-months basis, we have been reporting now sales of more than 20 billion, and adjusted EBIT of more than 4.5 billion.
For us, it’s full speed ahead. We believe that we are well-positioned to continue outpace the market growth in all of our four business segments. Due to the investments we have made into our pipeline, and the growth potential for our existing products and services.
So, let’s dig into the segments. And before I’m digging into the segments. I would like to inform you that we actually are reporting under the segments as of this morning. So, we have four business segments. So, this is operating groups by segment. PC/Console games. We have Mobile Games, made up of DECA, Easybrain. We have Tabletop Games, that is made up of Asmodee. And then finally Entertainment & Services that is made up of Plaion, and Plaion Pictures, Dark Horse, Freemode, and a number of other businesses.
So, let’s dig into PC/Console Games segment. The PC/Console Games segment had a low release activity and tough comparisons from the release of Biomutant last year. And back catalog sales was the main driver. Again, the only new release that had a notable financial contribution was Evil Dead: The Game.
Other notable releases in the quarter were Songs of Conquest, which received a lot of positive attention from fans and critics. We had MotoGP22, from our Italian studio Milestone that got very positive feedback, as well as MX vs ATV Legends, developed by Rainbow Studios. The revenue contribution of MX vs ATV Legends is expected to be long-term. This reporting quarter, it’s only included two days of sales since the release. However, that performance was below our management expectations.
Looking at the adjusted EBIT for segment, it didn’t grow year-over-year. It declined because of the comparison quarter of Biomutant. And the lower margin is due to lower – sorry, the lower margin is mainly due to product mix with lower margin development revenue in a higher share of publishing titles.
Finally, Tiny Tina’s Wonderlands are a success and we are expecting to receive royalties as the financial year progresses. And if you look at this slide, I think it’s very interesting to look at the Top 10 back catalog titles of share of sales, meaning our catalog titles are widening constantly. And the wide catalog above the Top 10 back catalog titles are now representing 67% of the back catalog sales in the quarter.
If you look at the titles, the Top 10 titles, you recognize a lot of names we have been talking around on these quarterly presentations before Star Trek Online, Borderlands, Wreckfest, Risk of Rain 2, to the enormous success of Hot Wheels Unleashed, Deep Rock Galactic, Neverwinter Online, Insurgency: Sandstorm, Valheim [deriving] [ph] success from last year and Metro Exodus.
So, without further ado, I’m very happy to welcome [Paul Nichols] [ph].
Unidentified Company Representative
Hey guys. How are you?
Lars Wingefors
I’m great. How are you?
Unidentified Company Representative
I’m very well. Thank you. Thank you for inviting me and to tell you a little bit about [Saints Row] [ph]. There we are glorious launch [indiscernible] up there that we’re very proud to show you today. We can’t believe that we’re actually only 5 days until we’re unleashing Saints on the world and preparing for the biggest and most ambitious Saints Row is ready and it’s primed for take-off.
So, I’ll run through a little bit of what we’re up to over this launch period. If you’d like to go to the next slide, that’d be great. Thanks. So, we’ve been busy over the last couple of months, as you can imagine. We’ve successfully launched the Boss Factory, which is our best-in-class customization demo that allows you to create your own boss and have it ready in the game for a day of release.
We had a fantastic response We had 1.3 million downloads of the demo. And with social media sharing at the center of the demo, we generated an amazing 374 million impressions. And through social media, and we had 63,000 mentions across all of social media channels. It was a great result. The amount of bosses that we saw, the community in our [fans pray] [ph] was fantastic and they were really diverse in every single way, so we can’t wait to see some of these bosses in the game.
There was also a few [indiscernible] in there that were created. I don’t mind telling you. I would have shown them today, but it might have risked my future career prospects if I had done, but I may share with you offline someday, Lars. We then had our hands on preview. We held local previews worldwide. London, Sydney, Paris, Milan, of course, Vegas. The response was really positive. It was great to witness the press at last getting hands on and playing it and experiencing Saints Row in a full Saints Row style, and we had some really great quotes that we got from that event.
The activity to date, and that’s just a bit of it. There was lots more about the trailers that we released over that period of time, but it’s really put our pre-orders in a strong position. Two weeks after launch, we’re 118% of our track to date pre-orders. So, that’s giving us a lot of confidence as we come into this final two weeks of launch from this period. So, we’ve now kicked off our global marketing campaigns.
If you can go to the next slide, please. So, we have our – we’re putting all of our big marketing levers across social media, digital media, partners, trade marketing, first party, We’ve activated our full lifestyle and gaming influencer campaigns, as well as our big out of home as you’re seeing here, and premium underground in the UK, primary billboard sites in the U.S. [trams] [ph] in Sydney.
We’ve got Saints Row influenced Food Trucks touring many select cities around the world, doing the most amazing food. Our final review copies have gone out, and we can’t wait to hear what the press are going to say about the game come when the embargo lifts. So, I thought I’d take the opportunity. We’ve got a really robust TV and VOD campaign worldwide. And so, we’ve got a couple of TV slots to show you now, a full gameplay and a live action. So, I’ll let those roll now. Enjoy them. It’s about a minute, and I will see you on the of the side.
Lars Wingefors
Thank you, Paul.
[Video Presentation]
Okay. Thank you, Paul and I think we’re all super excited for the feedback from everyone when a game is releasing next Tuesday.
Unidentified Company Representative
Yeah. We can’t wait. We’re super prepped ready to go and we just can’t wait for the games to be in the hands of the gamers and hear what they’re going to say, see their videos, see what they’re up to. It’s going to be a wild ride.
Lars Wingefors
Thanks, Paul. Well done.
Unidentified Company Representative
Thank you.
Lars Wingefors
So, let’s move on to Stockholm and the team from Coffee Stain, North.
Unidentified Company Representative
Hello, Lars. And thank you for having us.
Lars Wingefors
Hello. Welcome to Karlstad.
Unidentified Company Representative
Thank you so much. So, I heard you were going to run a trailer from [indiscernible] before we get to talk a little bit more about it.
Lars Wingefors
Sure. Let’s see if we can get this trailer up and running.
[Video Presentation]
Yeah. There you have it. So, Pilgor the Goat is coming back finally. We released the original game in 2014 and we’re still supporting that and continuing to supporting that, but fans are fairly glad to wait almost 10 years for a sequel of the game, but it’s coming now in November 17, exclusively to PC on [EPIC game] [ph] store and on PS5 and on Xbox Series X and S. And we’re really, really excited to very soon be able to share gameplay from the game on the Gamescom Opening Night Live on the 23rd of August. That’s going to be really exciting. And press and gamers will also get their first hands on with the game.
So, we’re really looking forward to that. And even though we announced the game only in the beginning of June this year, our social media channels have been exploding with people coming to them or TikTok, for example, has more than 0.5 million followers already with 4.7 million likes. So, people seem to be excited still about Goats in general, I guess.
And I’ll let our Creative Director, [indiscernible] tell you a little bit more about the game, hopefully on slide for us that we can show at the same time.
Unidentified Company Representative
Sure. Yeah. So just like a quick overview of what Goats in other three years. The big new feature is online multiplayer. So you can play up the four players and the wreak havoc in this big sandbox world and just have fun together or ignore each other. It’s all up you basically. And one unique feature for the multiplayer is what we call Minigames, which is unique rule based games that you can start from wherever in the world. And we have like hoof ball, which is basically soccer, but with goats; floor is lava, king of the hill and so on. And you really put your goat skills to the test and have fun.
In classic Goat Simulator style, the world is just a big open Sandbox and there’s a lot of destruction, lot of secrets, quests. And yes, just a lot of things to get you sidetrack and just play around with. And this time, we’re really focused on building a fragile world with a lot of destruction and chaos. We’ve added different elements like fire, electricity, oil that changes the way the world and how you play and interact with this world.
And lastly, we’ve fully revamped the customization system to let you fully express yourself as a Goat. So, this time around, we have seven different slots that you can change like the head, the back your feet and so on. And all these [gears] [ph] can have different abilities or just cosmetic, and the abilities can also combine with each other and create these weird, unique combinations, which, again, enhances the creativity and chaos and all that kind of fun stuff. And of course, you can change the types of goats.
So, if you’re tired of the regular goats, you can be a tall goat or as some people call giraffes. And we have 11 different types of these types of goats. And yes, we’re super excited to show more and release the game and see what people do with the game. So, yes.
Lars Wingefors
Thank you so much. I think we’re all super excited. I can’t wait. I can’t wait for the opening show at Gamescom next week. Thank you so much for joining us.
Unidentified Company Representative
Thank you.
Lars Wingefors
Thank you
Unidentified Company Representative
Thank you.
Lars Wingefors
So, let’s move on to the segment of Mobile Games. So, the Mobile Games segment reported strongly year-over-year growing 20% organically. The growth was lower compared to the previous quarter, partly due to the platform deal we made in the previous quarter and moderating market growth, but mainly in-line with management expectations.
Operational EBIT amounted to 277 million, yielding a 19% adjusted EBIT margin. The decrease in adjusted EBIT margin, compared to last year is mainly explained by higher user acquisition costs in relation to 59% of net sales, as well as the addition of CrazyLabs, which has a lower margin profile.
The Mobile Games segment is expected to continue its growth through investments in live operated games, improvement of current titles, user acquisitions and most importantly, through upcoming releases. It’s too early to draw any conclusions based on Google’s forthcoming policy and restrictions for ad placements in Android apps.
However, the policy will be effective as of September 30 this year. These developments will be monitored closely, and by both DECA Games and Easybrain are working proactively to mitigate this topic. So, without further ado, I would like to move over to Paris. I think Paris Müge. Welcome to Sweden.
Müge Bouillon
Thank you, Lars. Good morning, everyone. It’s my pleasure to report on Asmodee sales performance and business highlights for Q1. As a point of reference, let’s just please bear in mind that the reported sales for Asmodee in Q4 2021, 2022, only took margin to account as Asmodee joined the Embracer Group at that time. So, starting with sales performance. Net sales amounted to 2.7 million. That represents 6% growth during the quarter on a pro forma basis, compared to the corresponding quarter last year.
Our sales had a strong momentum driven by high demand, especially for trading cards in spite of the periods typically being seasonably weaker. Our sales group, both in Europe, I should say, particularly in France and the U.K., and North America. Our online board games and video games also contributed to growth.
On an operating EBIT level, the adjusted EBIT amounted to SEK445 million that yields a 17% adjusted EBIT margin. The growth of profitability versus last year is primarily driven by the timing of investments in people and structures. As you know, whilst Q1 has been dedicated to the successful integration of Asmodee into the group, we’ve been able to reorganize some internal projects across upcoming periods.
The Q1 sales performance was supported by our bestseller lines and also the quality of our most recent releases. Let me give you some examples. So, Clover from our Repos Prod studio, was named Party Game of 2021 at Board Game Geek’s Annual Awards. StellaDixit Universe from Libellud studio was runner up in the same category. While 7 Wonders Architects came third in the Light Game of the Year category.
We also saw major developments in Q1 towards interactive gaming with the digital version of the bestselling Exploding Kittens card game launched on Netflix gaming platform, as well as the release of our bestseller [indiscernible], on Board Game Arena, you might recall our global online board gaming platform. That’s ranked Number 1 overnight in a number of hours played actually.
Speaking of transmedia developments, during the integration of Asmodee in Embracer Group, a total of 15 projects have been identified whereby, Asmodee’s IPs are being evaluated for collaboration and development with other operating units. We are thrilled. To conclude on this first full quarter as part of Embracer, Asmodee announced in May a new studio named Access+.
The studio is one of Asmodee’s ECG initiatives that aims at studying and promoting the benefits of board games to all members of society. Working with health care professionals, the Access+ teams are developing a line of inclusive games accessible to a wide spectrum of people, including those living with cognitive disorders. The first games will actually hit shelves in late Q2.
Transitioning to the current quarter Q2, we’ve been delighted to welcome our fans back in-person at Gen Con, a leading U.S. board game consumer show that gathered around 50,000 consumers this year. Consumers particularly enjoyed Twilight Inscription from our Fantasy Flight Games studio with early copies sold out in less than 1 hour during the show, as well as our Netflix series of games such as Squid Game, Stranger Things, and so on.
Also in July, our global online board gaming platform, Board Game Arena, engaged hundreds of thousands of players around the Summer of Games, an event that sold one new game released each day in July on the platform, so 31 in total.
Finally, in Q2, six novels will be released by Aconyte. Aconyte is Asmodee’s fictional arm, including two Marvel IPs and two Asmodee owned IPs. I think with that said, that’s about it for now on Asmodee’s news. Hope you stay tuned. Back to you, Lars. Thank you.
Lars Wingefors
Thank you, [indiscernible]. Again, we are so excited to have you on board and can’t wait to see you soon again.
Müge Bouillon
Thank you so much.
Lars Wingefors
So moving to Entertainment & Services, our last segment of the day. The segment grew 44% year-over-year, driven by the acquisition of Dark Horse, which performed in-line with management expectations. Pro forma growth was minus 12%, while margins declined year-over-year. It’s mainly explained by lower activity in terms of third-party games released within Plaion Publishing, the previous Koch Media, physical distribution arm.
During the quarter, the Umbrella Academy Season 3, based on Dark Horse’s comic book series made its debut on Netflix. After the quarter, Dark Horse Entertainment announced that its partnership with Netflix has been extended for several years, giving Netflix options on filming rights based on Dark Horse IPs.
Finally, Plaion Pictures won two of the main awards at the Cannes Film Festival. Looking little bit more into the market. The global games market is predicted to generate $197 billion in 2022, a growth of 2% year-over-year. This represent a slight downward revision of previous 2022 forecast that were 5% year-over-year, mainly driven by a lower forecast for console games.
The market has somewhat headwinds from inflation, pressure on consumer spending and remaining pandemic effects like hardware shortages and new release delays. That said, there are several factors currently adding momentum and stability to the games market. It’s both accessible and affordable with increasing revenue from platform deals, subscription models, and the high-growth areas such as [VR] [ph].
According to data from IDG, the games market is expected to gain share versus other entertainment sectors 2022. The long-term growth prospects remain strong. The games market is predicted to continuous growth in subsequent years, reaching $226 billion in 2025, which is a 5% CAGR between 2020 and 2025.
With that said, I would like to give over to Johan.
Johan Ekstrom
Thank you, Lars. Yes. So, if you look to our P&L for the period, it’s now split by segments. As said, we have a record high net sales in the quarter, SEK7.1 billion, growing with more than 107% versus last year. The main drivers of the nominal growth is the addition of Asmodee, Dark Horse, and CrazyLabs and also a favorable effect from a weaker SEK versus U.S. dollar and euro.
If you look at the profitability in the period, adjusted EBIT 1.3 billion, yielding a 19% EBIT margin. It’s lower than the same period last year, mainly explained by segment mix shift from PC/Console to Tabletop and Mobile Games. If we look at the individual segments, and start with PC/Console, we noticed that the EBIT margin is 26% in the quarter, lower than last year.
The main reason for this is that last year, we had the release of Biomutant, which was very successful. This year, there was one notable release in the quarter in Evil Dead. And as said earlier here, MX versus ATV only contributed a couple of days in the quarter. We can also note that there is a higher share of publishing revenue or publishing titles in the quarter, compared to last year.
Mobile Games, solid growth in the quarter, growing with 20% organically. The lower EBIT margin in the segment is mainly explained by a higher share of user acquisition costs in relation to net sales in the quarter. Solid performance of Asmodee as we heard Müge talk about, growing with 6% in a flat market, generating an operational or adjusted EBIT of 445 million in the quarter.
For Entertainment & Services, profitability is lower compared to last year. And the main reason is that there were no larger releases in the quarter for Plaion Publishing part of the segment. Adjusted EPS on a fully diluted basis was SEK0.96 per share in the quarter. And on an undiluted basis, it was SEK1.04 in the quarter.
Yes. So, we are very happy to release a report that is under IFRS. And it’s been a large project. And we just like to take a moment to thank everyone that has been part of the project, both here in Karlstad and also out in the organization, internal, as well as external resources. The transition to IFRS is a key milestone in the project of changing listing value to Nasdaq Stockholm.
It doesn’t change the way we conduct our business nor the way that we follow up on our underlying business performance. The best way to understand the underlying operational performance of Embracer is through adjusted EBIT, which was previously called operational EBIT. And the transition to IFRS has only had an immaterial effect on adjusted EBIT.
The definition is a bit different as we will see later when we go through the bridge. Due to accounting treatments of earnouts in IFRS, we have added a new APM to the report called adjusted EBITDA to get the relevant measure of the underlying cash flow generation of the business. As you have seen throughout the presentation, we are also glad to report net sales and adjusted EBIT by segment. And in the report, we also have additional information relevant for the specific segments to understand performance as well.
It’s a big quarterly report that was released today. There’s a lot of information in it. And I would say that we have an overview of what the transition to IFRS has meant on Page 5. And then there are a lot of details further on in the report showing bridges taking you step-by-step from K3 to IFRS. Should there be any questions related to this, or anything else, you are more than welcome to reach out to our ir@embracer.com email address.
Looking at the bridges. So, we have adjusted EBIT and adjusted EBITDA. And one important thing is that within IFRS, if there is an explicit or implicit condition that the sellers should remain employed during the earnout period, it will not be part of the contingent consideration or part of the purchase price under IFRS. Instead, it’s expensed as it is being earned and treated as a personnel cost within the P&L.
We definitely believe and think that this is an acquisition-related item, which is why it is excluded when establishing the adjusted EBIT and EBITDA. When it comes to transaction costs, such as due diligence, financial tax, commercial, legal, under IFRS, these are expense as they occur. And this is also an acquisition-related item that is added back when calculating adjusted EBITDA and adjusted EBIT.
Worth noting is that it’s only the transaction costs that are being added back to adjusted EBITDA only consists of transaction costs for deals that have been closed. Looking at the amortizations, they are 7 billion lower in IFRS than it was in Q3, looking at the previous fiscal year. And the reason for this is that there are no goodwill amortizations on IFRS.
There still are acquisition-related amortizations within IFRS related to acquired surplus values such as IP rights and brand names, trade names, which is excluded when calculating adjusted EBIT. So, at the end, the adjusted EBIT for last fiscal year on IFRS, as you can see, is approximately SEK4.5 billion, and it’s the difference, compared to K3’s immaterial.
It’s a bit higher, mainly related to the implementation of IFRS 16 for leasing and also relating to revenue recognition for durables for certain mobile games. And just to elaborate a bit more on the 4.2 billion relating to contingent considerations that’s not classified as part of the purchase price, this is related to the three largest acquisitions that we made within PC and Mobile over the last two years.
Moving ahead to the balance sheet and looking at earnouts, number of shares, and adjusted earnings per share. The considerations that are to be settled in cash and not treated as part of the purchase price is excluded from the financial liability under IFRS. So, under IFRS, the financial liability would be 4.8 or is 4.8. On the K3, you include them all. So they would have 8.2.
If you look at the obligations that are to be settled with shares, either shares already issued or shares to be issued in the future, the amount of shares is lower under IFRS, compared to K3, mainly related to that part of the purchase price under IFRS or will be excluded from part of the purchase price, but under K3, you would include all shares in the share count as they are part of equity when they are issued and as a provision when they are to be issued.
Finally, looking into the average share count. The average number of shares diluted under IFRS for last fiscal year will be 921 million. Under K3, it will be 1,086 million. So, a lot or higher on the K3. And the reason for this is that earnouts that are not considered to be part of the purchase price under IFRS are earned over time. And also that you will need to look at each individual earnout agreement to see if it should be classified as a part of equity or as a financial liability, depending on, if the fixed or fixed criteria’s are met or not.
Finally, looking into how we calculate adjusted earnings per share. We start with the net profit for the period, which is 1.1 billion for last fiscal year. Then we add back acquisition-related items that we described under the establishment of adjusted EBIT. Then we remove any acquisition-related items that are part of the financial net. And last year, they were positive. So they would be removed, that’s [2.5 billion] [ph]. Then we also need to consider taxes on the adjustments, which is the 276 million.
Important to note is that not all adjustments are taxable, hence, the tax effect is only calculated on the adjustments that are taxable or as a tax effect. This would then result in an adjusted net profit for the period of SEK3.9 billion. We used a higher share count under or where you include all shares that are outstanding and also the maximum amount of shares that need to be issued or could be issued in the future to settle the obligations. So, the adjusted EPS on a fully diluted basis for last fiscal year under IFRS is 3.61. Okay.
Looking into the cash flow for the period, we continue to invest into organic growth opportunities. So, in total, 1.2 billion invested into intangible assets. The vast majority, 1.1 billion of this is related to investments going into the games development portfolio. Looking at free cash flow generation, pre-changes in net working capital, it’s positive, close to 500 million for the period. We have an increased working capital in the period of 1.2 billion.
So, free cash flow after changes in working capital is negative minus 800 million. The change in working capital is mainly related to the buildup of inventory within the Tabletop segment before they enter into their peak season, which is K3, that was approximately 0.8 billion. And then the remaining amount of 0.4 billion is related to an increase in net of the other operating receivables and liabilities, mainly related to payments of trade payables, but also deals that we have had that was not cash in June, but where cash was received in July instead.
At the end of June, the net debt amounted to SEK11.5 billion. Available funds, as Lars shared today is SEK20 billion. Looking ahead, we expect to generate a strong cash flow for the remaining part of the year, driven by a higher expected adjusted EBIT. And we feel confident that we will reach the financial leverage targets that we have of 1x to adjusted EBIT when we – or at the end of this fiscal year.
Also very, very happy to welcome HSBC and Svensk Exportkredit to Embracer’s Group of relationship banks. They joined at the end of June, joining or extending the group of Nordea, SEB and Swedbank. So, now they are five. And they joined as we entered into an amendment agreement at unchanged terms for two unsecured long-term credit loan facilities that matures in 2024 and 2026, increasing the facilities with 5 billion, replacing the 4 billion facility that we communicated in May.
Project ROI. Looking ahead, we still see or looking back, I should say, we still see a solid return on investment for our games development projects. So, 3x the investment amount in average. We should bear in mind that this is done on a cash flow basis. So the chart is a bit harsh on titles that are released late in the quarter as you would only have a couple of days of contribution, but you would have the full investment cost in the denominator.
Now, the sample is 54 projects. And the basis for selection is sales above SEK40 million or investments above SEK40 million. As said in the beginning, we reiterate the guidance for this fiscal year and the next fiscal year. And for this year, the guidance is between 9.2 billion and 11.3 billion. Next year, 10.3 billion to 13.6 billion at the adjusted EBIT level.
The market growth that we saw in May was 5%. Now, we are looking at 2% straight. And looking at the different segments, PC/Console, we expect to have a strong organic growth in the year, driven by releases and in terms of accumulated investment values, we expect to have at least 3x more investment value released this year, compared to last year. Also – or containing [2 AAA] [ph] releases, and in addition, we have several AA, A and indie titles on the slate for this fiscal year.
Platform deals drives profitability, also adds predictability to profits. Mobile, we expect an organic growth well above the market, driven by the increased utilization of existing platforms fueled by current and future funds going into user acquisition, as well as planned releases of new titles. And within Tabletop, we expect to grow our adjusted EBIT with, at least 10% over last year.
Looking into the phasing to sum it up, we expect notable seasonality to affect the phasing of board game segment, mobile segment and the back catalog part of the PC/Console segment. Q2 and Q3 will be clearly stronger than Q1 and in favor of Q3. So, Q3 will be higher than Q2. It’s driven by seasonality and release slates. Super excited about the reboot of Saints Row in Q2, as well as notable platform deals.
Last, but not least, we expect Q4 to be the clearly strongest quarter of the financial year, driven by a few strong releases, including a long-awaited AAA title now expected in Q4 and to be announced soon.
Lars Wingefors
Thank you, Johan. And now let’s head over to sustainability before we’re moving into the Q&A. So, let’s welcome Emma Ihre on stage.
Emma Ihre
Thank you. Thank you, Lars. So, my name is Emma Ihre, and I’m Head of Sustainability, working together with Karin Edner and the rest of the team at the head office. So, in Karlstad and in Stockholm. So, why is sustainability important for Embracer? Why do we care about sustainability, or if you like to call it, ESG? We care about it because we are human beings, and we have a responsibility for other people, for the planet and for the future.
That’s the first reason why we care about sustainability. But as well, we invest quite a lot in sustainability and ESG because there is no lack of legal requirements. And of course, it’s kind of a minimum standard to follow the law, and it can be very costly to breach laws. And we don’t want to waste our money and we don’t want to waste your money.
We want to invest them in our business and in new companies, not in paying fines. And as well, we have high expectations from our stakeholders, and that’s stakeholders like our employees, customers, and investors.
So, to summarize, it’s about values. We want to act in-line with our values, but it’s also very much about risk management to map our risk and to manage them in an excellent way. And it’s also about business development to develop our business. So, we do good for people, the planet and earn money at the same time.
Embracer Group is providing the market with great games, great entertainment. And that’s our business, and that’s where sustainability – our sustainability work starts. But to be successful in the long run, where to think and act broader, more long-term, so we can provide the world with even more entertainment and great games and to create even more value to our stakeholders and to give back to society. That’s our way of looking at sustainability and our strategy.
And these are some of the most material sustainability issues for our industry and for Embracer Group, it’s diversity and inclusion, responsible content and as well healthy gaming. And our Board has, based on our centralized business model, our sustainability framework and the most material sustainability issues, set three sustainability goals. So, the first one is to double the number of female studio heads by 2025.
And the second one is to reduce carbon emissions by 45% by 2030. And the third one is that all operative groups will set their own sustainability goals. They know their market, their business, so they’re going to set their own goals during the coming year. And to set sustainability goals is a way to communicate to show our ambition and direction, but it’s – that’s just one of many tools, as well, we have partnerships with different NGOs like with Global Compact and other NGOs.
We have collaboration within our industry and with other private companies. And as well, we have tons of ambitious policies that we are implementing, and many of them is about ESG or sustainability. So, that was it from me.
Lars Wingefors
Thank you, Emma. Thank you so much. So, without further ado, let’s head over to just a very, very short M&A update. I know we’re running a little bit over time here, but there is many important topics today. But we believe it’s important to continue expanding and investing into the ecosystem that attracts and retain talents. Great synergies, enables great people to realize their high ambitions. And if you look at this slide, you can see our current pending acquisitions and this morning announced acquisitions.
So, we are expecting to close the notable acquisition of Crystal Dynamics, Eidos Montreal, Square Enix Montreal very soon, as well as Beamdog in Canada. And if you’re including the announced acquisitions this morning, post-closing, we will be up to 120 game development studios and taking the total headcounts engaged to more than 15,000.
We continue to have a strong funnel of M&A opportunities to support our long-term growth ambitions. There’s a lot of bolt-on opportunities, adding fantastic Ips, and game development studios, for example, into the group, and we will continue to execute on that strategy.
So, let’s head over to Martin before we will…
Martin Arnell
Okay. Thank you, Lars, and Johan for that presentation, and we’ll kick off the Q&A now. And then I think there’s maybe some more presentations coming followed by a short Q&A after that as well. But to start with questions on the quarter, just you mentioned that this is another stable quarter. Is this the final time you’re going to say that when we’re moving into the second quarter, do you think?
Lars Wingefors
No. I think looking at the word stable, it’s relating to our expectations, and our expectations are wide. But I think in general, more or less all companies are delivering according to our expectations. So that’s why we had a stable quarter.
Martin Arnell
And then you added that Q2 will be significantly above. You changed a little bit in the phasing of the coming quarters and expect a very strong end to your fiscal year with the Q4. That’s correct?
Lars Wingefors
Yes, that’s mainly driven by the movement of one significant release that previously was scheduled to be in the third quarter, moving to the fourth quarter.
Martin Arnell
We’ll come back to those big releases in just a while. In the quarter, there’s notably high UA spending in mobile. I think it was 59% of your sales. And it seems sales growth is slowing a bit there in the mobile segment. How confident are you with investment initiatives in the mobile business?
Lars Wingefors
First of all, I’m confident that we have a world top-class management team that are able to understand the dynamics of their businesses and how the user acquisitions. And they have the green light to invest as much as they can for the maximum long-term organic growth rather than creating short-term profits. So the alternative we would have to slow down the user acquisition to generate more cash flows and profit on the short-term, but that will hurt the business on the long-term. And that’s not how we operate our business.
Martin Arnell
And a large share, correct me if I’m wrong, in your mobile business is driven by advertising. And given where we are today in the macroeconomic environment, you commented a bit in the report that the market has slowed. What are your views here in the current environment and going into the fall regarding that?
Lars Wingefors
I think we have seen major brands and some kind of other advertising players being more cautious on the market. And that is somewhat hitting the prices paid for advertisement. At the same time, it’s a bit lower user acquisition spend. So, it’s basically the difference between them that generates the profit. So, it’s a quite complex material to understand. I would like to look at this as a positive, that there is opportunities to take market share and to invest more into the long-term growth.
Martin Arnell
And on that topic, the macro climate, if you look at it in a wider perspective, incorporating the PC/Console into this and the lower market forecast that we’re seeing out there, despite all of that, you reiterated your guidance. And sort of how confident can you be that – in that reiteration sort of, if you understand what I mean?
Lars Wingefors
Yes, I understand your point. Obviously, we are also affected by the general market. But again, we need to remember that the absolute bulk of our growth is driven by the execution of our new releases in the PC/Console segment. And we are confident about that release slate and the performance of those titles. And that’s why we are able to reiterate even though there is a little bit slower consumer spending.
Martin Arnell
Okay. Fair enough. And I remember from the last presentations, you mentioned that in this EBIT guidance range you are incorporating potential risk for delays. Did you also incorporate potential market weakness and economic turmoil in that guidance?
Lars Wingefors
There is always a wide range of performances and somewhat you discount various forecasts and budgets you are getting from your various companies. Some people are always sandbagging and you know there’s quite upside. And some are somewhat always, no matter the economic climate, very positive. So, I think that is the critical point for us to understand.
So, I’m not overly concerned about this slower spending. It’s marginal effect. Gaming is a fantastic market. I am bullish on the long-term prospects of the gaming market. And I think it’s a superior way of entertainment. So, I think looking into our business, we are still continue building on the long-term again. And I think the return of investment continue to reinvest into organic growth as much as we can. Hence, the lower cash flow generation we had this quarter.
Martin Arnell
And in PC/Console, if you could help us understand changing margin dynamics a bit over last year, there was quite a big change in the margin. If you could just help us elaborate of the most important drivers of that?
Lars Wingefors
Well, I think Biomutant was actually, according to management experience, a great success last year. And it was owned IP with a fairly low development cost that generated a lot of EBIT. If you look at EBITDA, it generated okay revenues. It was a success, but it had a lower margin profile, both royalties, as well as the development spend. That’s one difference that made actually a significant difference in the margin.
Martin Arnell
Okay. So there’s no other major…
Lars Wingefors
There’s other titles. You look at last quarter, we had Valheim continue performing with a number of other titles that were hot – or more hot than today.
Martin Arnell
Yes. Okay. And before we just a couple of questions on the big games pipeline. Johan, the IFRS project, are you happy that it’s over?
Johan Ekstrom
Yes, it is really good. So super happy that we have released the report and that the implementation phase is done and that we will – obviously, it’s a continuous process to uphold it and continue with IFRS, but it was a massive or very large project and a lot of internal external resources spent to get it done. So, yes, I’m happy.
Martin Arnell
What was the main challenge, if you have to mention one?
Johan Ekstrom
I think the main challenge is really – there’s a lot of – you’re looking into – it’s a big group of companies. I don’t think it’s overall, I mean, 300 legal entities worldwide. And what you are doing is that you need to do a very thorough job of gathering data and information from each of the separate entities and then evaluate it and interpret how IFRS rules will affect this.
Even if it won’t affect it, you still need to do it, document it and have a process for continuing to gather it. I think that’s a big part. And then also there are more information that is gathered and presented externally. So, that’s also – I mean, the size of the external reporting is larger, which means that we are disclosing more information and you need to process that information.
Martin Arnell
And there were no main big expectations, and when you summarize the cash flow at the end of the day?
Johan Ekstrom
Sorry?
Martin Arnell
There were no main surprises when you summarized the free cash flow at the end of the day?
Johan Ekstrom
No, no. So, I mean the important KPIs for understanding Embracer remains the same. On a reported basis, I think there was a surprise that part of the earnouts or contingent considerations should flow through the reported P&L but nevertheless, it’s an acquisition-related expense, and it doesn’t affect adjusted EBIT.
Lars Wingefors
And that was very complex and we have done a lot of acquisitions. And each acquisition you negotiate, invest to have an agreement, and they all are different. It’s a very complex material. And as Johan said, it was 2, 3 companies that had specific terms that gave this effect now under IFRS.
Martin Arnell
Okay. We have a lot of incoming questions here as well. I’m going to have a look in the iPad for those in just a minute. But I want to ask you first on the big games pipeline. Saints Row, obviously, you’re excited. There’s only 5 days left for this very hyped game. There have been some other media talks during the quarter about another of your big games that you have transitioned between your studios. Are you okay to comment and give us a bit more flavor on that one?
Lars Wingefors
No. I think it’s always things happening in our AAA pipeline and one project has been moved from one studio to another, but we expect that game to hold the quality bars. Overall, the pipeline is, not talking about that game, but talking about the overall pipeline is obviously 4 years ahead. So, there’s still movements within that pipeline, but we feel confident about those projects.
Martin Arnell
Can you confirm that, that game I was referring to is not – was not part of your full-year guidance this fiscal year?
Lars Wingefors
I can’t confirm whether, but I don’t think this is totally wrong assumption you’re making that, but I can’t really give you too much color on that.
Martin Arnell
But you haven’t clarified that you have two AAA releases in the guidance for this year? First, obviously, being Saints Row and then the second one is the one that you don’t mention the name, but we think we all know what it is? And I expect is it fair to assume that, that’s part of your comments on the phasing with the significant increase in Q4?
Lars Wingefors
Yes. I think that’s a good assumption. And I’m excited about that game. It’s being developed from a very long time, but it looks very good.
Martin Arnell
Okay. Tiny Tina’s Wonderland, we’re waiting for the royalties. I guess you are as well. Can you comment anything more about the timing of this? Is that…
Lars Wingefors
I think, in general Tiny Tina is a great success for both Gearbox and Take-Two. They had now established a new IP and continues to have a great engagement from gamers. And I’m confident that Gearbox will have royalties coming through rather sooner than later.
Martin Arnell
Okay. Before I let in the questions from the iPad here, maybe, I would like to turn to the audience here in Karlstad. We have maybe 30, 40 people here. And is there anyone that would like to ask a question? Please raise your hand. I think we have a microphone, so we will hear you.
Okay. We’ll go into the questions from the iPad then. I’ll start off with the question from Simon Jönsson with ABG, he’s asking, you expect 2 AAA releases this year. And you said that one of the group’s AAA games have transitioned to another studio. Is that one of these two games expected this year or when…
Lars Wingefors
No. It’s not one of those two games. I think it’s kind of the same question you’ve said.
Martin Arnell
Yes. On Asmodee, this is also from Simon Jönsson, could you please comment on the seasonal pattern for working capital in Asmodee? We saw buildup in inventory this quarter. What’s behind that buildup? And when can we see inventories reducing?
Johan Ekstrom
Yes. So, for Tabletop segment or Asmodee, the seasonal pattern is that our fiscal Q3 is definitely the strongest over the year and that the cash flow will follow that as well. So, we expect strong cash flows in the second half of the year, so Q3, maybe beginning Q4. And where we are now, we are building up going into this period. So less – or more investments going into working capital, where we are now, and we expect to get the benefits in Q3 and Q4.
Lars Wingefors
It was absolute bulk of that inventory buildup – our working capital buildup.
Johan Ekstrom
It was a large amount, 800 million.
Martin Arnell
Our next question is from [indiscernible]. He’s asking, could you please explain the PC/Console margin drop? You mentioned higher customer acquisition costs. Is that the reason? Or does it also come from Saber having to shift its cost base out of Russia, Ukraine, Belarus?
Lars Wingefors
On the PC/Console, the margin shift is driven by the mix of the products in the quarter. Again, Biomutant had a very high margin and a high contribution last year. So, basically, if you have more titles with higher development spend and more royalties, you will have a lower margin. So, the margins will vary over the quarters. So hopefully, when you have margins or titles with your own IP, such as Biomutant or Saints Row or other titles you would have a lot higher margins basically, if the development spend are reasonable. So, it’s not really relating to any of the other questions he had.
Martin Arnell
Next question I have is from Lucas [indiscernible]. He’s asking, you reiterate the guidance for the coming years, while at the same time, made acquisitions that are expected to add material to adjusted EBITDA in the coming years. How should we interpret this in terms of organic guidance? Has that been lowered since a year ago?
Lars Wingefors
I think it’s two separate things. The acquisitions announced will be added to the financial guidance on top of the existing guidance. So, it’s not relating to that.
Martin Arnell
Thanks for clarifying. And another question from Lucas is, how should analysts think of the mobile revenues in terms of steady state growth and UACs?
Lars Wingefors
So, how we should think about the steady state of?
Martin Arnell
Growth in the mobile revenue, long-term mobile growth revenue and UAC spending?
Lars Wingefors
Yes. So, when I look at the business plan, I see growing revenues and profitability from both or from all our mobile businesses, mainly driven by Easybrain and – but, as well as CrazyLabs. And I’m confident they’re able to deliver. There will always be quarters with variances, but I’m confident about the ability to outgrow the market.
Martin Arnell
Okay.
Lars Wingefors
I know, Martin, we have a lot of people from America waiting and I love having this Q&A session, but perhaps we should wrap this up to have some Americans. It’s the middle of the night there and…
Martin Arnell
Sure. Maybe we should just kick off with that right now. And I know there’s time for some questions after that presentation as well.
Lars Wingefors
Great. So, let’s jump on to the acquisitions. Thank you. So, let’s jump on to the presentation of Freemode and a number of M&A activities this morning. And I’d like to start to say that we are disclosing the financial impact and purchase prices as a combined information this morning. So, looking at the financial impact from acquisitions, on a pro forma basis, the acquired companies would have – between 1.8 billion and 2.1 billion net sales contributed this year and between 550 million and 750 million in adjusted EBIT contribution on a pro forma basis.
Now, we’re expecting – the bulk of the transactions expected to be closed in the end of this quarter, end of September or early next quarter. Next year, we’re expecting growth. Net sales of 2.1 million to 2.4 million and contribution of adjusted EBIT of 750 million to 950 million. And in the year of 2024/2025, we see a significant uplift on – from these businesses that they are able to generate between 3 billion to 3.5 billion net sales with adjusted EBIT of 1 billion to 1.5 billion.
Also worth pointing out in these acquisitions this morning, they have a strong free cash flow generation before funding cost is expected to be in the range of 70% to 80% next year, and to be in the range of 85% to 95% in the future years. So, looking at the transaction details. The aggregated upfront purchase price amounts to 6 billion of which 4.2 billion is paid in cash at closing. 1.3 billion in cash is paid in 12 months. And 500 million is paid with Embracer B shares.
The likely total deferred consideration linked to achievement of financial and operational targets over up to 7 years amounts to 2.2 billion, of which 1.5 billion will be paid in cash and 700 million will be paid with shares. The likely total consideration for the acquired businesses amounts to 8.2 billion. The size of the upfront considerations for the five announced acquisitions is in descending order, Middle-earth Enterprises, Tripwire, Limited Run Games, Tuxedo Labs, and Singtrix.
In addition to the five announced acquisitions today, Embracer has entered into agreement to acquire another company within PC/Console gaming. The purchase price for this is undisclosed, acquisition is in the range of being among either for the third or fourth largest of the transactions.
Right. So, let’s welcome Lee Guinchard and [Martin Lindell] [ph] on stage. Gentlemen. I hope you slept a little bit now, Lee. Regardless, you are on stage and here is the pointer.
Lee Guinchard
Okay. All right. So, I’m Lee Guinchard, the CEO of Embracer Freemode. And next to me here is my partner in crime, Martin Lindell. He’ll be helping me with the presentation today. So Freemode, is a global ecosystem of independent operating companies exploring broader opportunities in gaming and entertainment.
As you can see from the slide, we’ve hit the deck. So, I hit the ground running with a very global ecosystem. After our three new additional transactions, which are announced today, close, we’ll have 580 employees, 3 studios, 14 companies, of which 11 are independently operated over 6 countries. I just got to get some water.
Okay. So, to understand Freemode and how broad it is, we kind of have to look at the operating areas that the companies – the 11 operating companies operate in. So, we’ll start with the new area of classic and retro, one of Martin’s favorite topics. As you can see today, with the Limited Run Games news, that will be a pillar within that area. Ecommerce & Community is also something that’s core to a lot of our businesses going forward.
We have two world-class e-commerce companies that are very, very, very heavy in the community space that drive those e-commerce businesses. Devices and gear, an area very close to my heart, of which I probably spent two-thirds of my working life in. That means many things, of course, devices, game focused experiences, the old Guitar Hero days, those kinds of experiences. And then just general devices, you can never digital or download a device to play a game, not yet, but maybe in 20 years, who knows.
Game development, you’re not going to really have a gaming company that doesn’t have a focus in game development. So, we have three studios there, of which two of them are heavily involved in retro classic services. So again, we have businesses in the service sector that are servicing the video game business in general. And then the last mode is new idea and tech incubation. And that’s a small group that sit with us in Livermore, California.
So basically, I – just prototype, look at things. We hope that some of those ideas turn into real businesses. If they don’t, they may turn into tools that help the rest of the business. And I also think talent from that group could actually be a group feeder system for us here at Freemode. So, from the areas of operation, this is kind of like our roster of companies and then for ease of digestion as it were, you can kind of see what areas these companies operate in right now.
So, that’s important for us because as we’re supporting these companies, we, of course, need to support them with the right resources as well and we need to understand every part of the business. So, I think that’s a nice clean overview of that.
So, what does Freemode do? Of course, we believe that we’ve got an ideal balance of independence and empowerment for our independently operated businesses. We supply them with world-class operating support. And we are – we’re there for the companies through the challenges and also for scaling as well.
A lot of the businesses that you’ll see are kind of small to medium-sized. And sometimes when you need to scale, you need help. And we’re there to help these businesses scale and grow in a sense. And of course, the ecosystem, we are now the 11th operating group in the wider ecosystem of Embracer. So, we’re proud to be there. So, now I’m going to hand over to Martin.
Martin Lindell
Thank you, Lee. So, one of the core tenets in Freemode is retro and classics. I would like to start to say, maybe for us here, it’s obvious, but games are culture. And preserving that culture is very important. It’s part of building the heritage for us as an industry. But also nurturing these classics is also an opportunity. So that is why we built this strategy around retro and classics. And formulating that vision is preserving the past to build a bridge to the future of games culture and lifestyle.
So, what makes retro and classic special? As gamers get older, they want to re-live the experiences that they once played. Today, it’s 30 years ago since the Super Nintendo launched in Europe. It’s 40 years ago since the Commodore 64 saw the day of light in North America. This means we have several generations of gamers that have grew up with games, and they still continue to play games today.
And they have fond memories of a lot of these games, and they are waiting for some of the games to come back to be revived in new versions or just being accessible again because maybe you don’t have that old Commodore 64 anymore. This is another aspect. Over time, players also love to embrace the uniqueness of classic games. We’re talking about pixel art graphics, [indiscernible] music and this is something that also new modern games are embracing.
An example is Wunderling from Bitwave or Huntdown on Easy Trigger. So, games are inspired by classic games, but four new platforms. We see a genuine interest. That is shown through an increasing amount of podcasts, documentaries, books, and videos about classic games and their origin. It’s also a bustling diverse scene. The audience is made up of everything from, you can see U.S. generation X, female gamers that are like that like classic arcade games as a category of games.
We also see young emerging retro players that are growing up watching classic games on YouTube or even getting their parents passing on the interest to them. So, this is the core business areas we’re operating in. Worth to point out this Toaplan is an iconic arcade games developer that is managed by Tatsujin. We are looking at a number of areas of opportunities. It could be through partnership or collaborations or by acquisitions.
So, there are many games that players are asking to come back or be reintroduced and there are many ways to do it. The first one is simply republishing a classic game. It still requires a lot of work, getting a good representation of the original game, curation with qualitative life updates, such as quick saves or adapting to modern controller standards, remastered graphics all new features.
The bigger investment is in remakes. That’s when you make a major overhaul of a game. You take an original game, it’s story or characters, but you rebuild it from the ground up with new graphics, new gameplay, like a modern interpretation. Then we have sequels, which are direct continuation of a classic game. This could be in the shape of a remake, meaning a bigger budget, or actually staying more true to the original game. This is a matter of player expectations, what are their expectations and what do they think about the games.
And there are many ways to experience classic games today. There’s the convenience of mini consoles as you hook up with building games. There are services where you get instant access to games. So, to mention the Toaplan example, a lot of these games are now republished on modern platforms. They are available as collectible cartridges to classical consoles. You can actually buy them, for example, Toaplan games from Mega Drive.
They are in mini arcades or mini consoles like upcoming Mega Drive 2 Mini, the [indiscernible]. And they’re also coming to PC via Bitwave. So, all these paths they have in common, but we are making fan favorites available again and carry on that heritage into the future.
Lars Wingefors
Thank you, Martin. Lee, I know you had a video, a very short one, and I think we should see that about Freemode before jumping into the first acquisition this morning.
Lee Guinchard
Sure.
[Video Presentation]
Lars Wingefors
So, Lee, we have some American friends waiting.
Lee Guinchard
Yes.
Lars Wingefors
Quite a few actually.
Lee Guinchard
I know, look at them. They’re all lined up there. Where are we going first? Are we going to Apex, North Carolina?
Lars Wingefors
I think we are.
Lee Guinchard
Yes. Here we go.
Lars Wingefors
Josh, Douglas, are you online, or asleep?
Douglas Bogart
We are here.
Lars Wingefors
Fantastic. I’m so glad to finally be with you here today. We have been talking for – is it 3 years now?
Douglas Bogart
It’s 3 years.
Lee Guinchard
Yes. He’s been stocking you for 3 years.
Douglas Bogart
Good.
Lars Wingefors
So, welcome to the group, guys. So, let’s jump into the presentation.
Josh Fairhurst
Awesome. So, we’re Limited Run Games. We were established in October 2015, and we’re based in North Carolina in the United States. We’re kind of right near Epic, that’s our big gaming land mark. We’re a team of 69 people, and we are a collector-focused publisher of physical video games. We’ve been manufacturing and distributing physical games for the last 7 years, and we’ve published over 1,000 physical games. And that’s the unique games, we’ve done far more actual physical SKUs.
We’ve done enough physical SKUs to have released a new product basically once every 2 days for our entire existence, which is a pretty crazy pace. We have worked with pretty much companies of every size, small, and large publishers and developers alike. We have worked with huge IPs. We’ve worked with small games. I mean everything in between. We have a strong brand with a big following online.
We’ve got 400,000 unique paying customers. We’ve got a social media following of about – of over 200,000 people. We have a retail store called Limited Run Retail that we opened recently and our grand opening attracted over 1,000 people, and they were lining up for multiple days waiting to get in. Our sales channels are mostly direct-to-consumer through our own website, but we also have recently started doing some distribution into full retail.
Lars Wingefors
Douglas?
Douglas Bogart
Sorry, my screen delayed and…
Lars Wingefors
You are [partly asleep over] [ph] there.
Douglas Bogart
I thought you got muted and I was like, oh, what happened. Anyway. Some of Limited Run’s biggest hits have included Shantae and Teenage Mutant Ninja Turtles: Shredder’s Revenge. With Shantae, it was one of our rereleases of the original Shantae game on Game Boy Color, which with us had sold about 13,000 units, which is 3,000 units more than the game had sold when it originally released in 1998. So that clearly showed there’s still demand for retro games, as well as just bringing back some old IP like Shantae in its original form.
With Teenage Mutant Ninja Turtles: Shredder’s Revenge, this has been our top-selling game. It was also one of the bestselling games on Amazon for several days. We released this on Switch and PlayStation 4. And it’s been one of the top first-party Nintendo releases, and it’s been astronomical to see how well it’s done.
Josh Fairhurst
Technically…
Douglas Bogart
The next slide…
Josh Fairhurst
Go ahead. Go ahead.
Douglas Bogart
The next slide that we’ll wait for that to kind of catch up on my screen. But our next slide is a list of our popular titles. It kind of shows a lot of the big games that we’ve worked on over the years, and this is just kind of a small fraction of the releases we’ve put out. We’ve done things like Command & Conquer, Castlevania, Streets of Rage, Psychonauts, Star Wars, Stranger Things, Contra, Turok, Scott Pilgrim, Doom, Power Rangers, Metal Slug. So, we’ve worked on the whole range of titles in the industry and released a whole lot of games.
And it’s been a pretty incredible journey to be able to get to interact with these IPs that were very meaningful to me growing up like Star Wars. I mean, that was a dream come true. So, getting to do these things has been incredible and getting to make these physical packages for collectors and fans has been a really great experience for me, and I’ve loved doing it every step of the way.
Josh Fairhurst
So, with Limited Run, we have started a global expansion and, obviously, some retail initiatives. One of the ones that we started in Japan recently was Super Deluxe Games, and it’s a joint venture between Limited Run and our good friends 84 in Japan, who are considered one of the top localization companies in Japan. And they’ve been in the industry for a very long time, and they’re good friends of ours.
Another partnership we’re starting to explore and makes it even greater to be part of the Embracer Group, now is with Clear River Games, we’re looking to expand into Europe, which will allow us to have further distribution in Europe, and that will include direct-to-consumer and retail options and hopefully provide better opportunities for our European customers.
And then a pet project of ours that we’re extremely excited about that we launched earlier this year was our Limited Run Games retail store. We opened that on April 30, 2022, in Cary, North Carolina, which is local to us. And it serves as a great community building space in showcase. We’re going to hold plenty of events throughout the year and also sell a lot of our releases, as well as a lot of retro stuff. And it’s something I encourage everybody to check out at least once if they can.
Douglas Bogart
So, Carbon Engine is an in-house emulation engine that we’ve been building over the last two years that is an ultra-accurate emulation engine that allows us to rerelease classic games on modern platforms. So, this is super Nintendo, Nintendo, Sega Genesis, plenty of others. And we’re able to take those very quickly and rapidly develop high-quality, ultra-accurate ports to modern consoles like Switch, Xbox, PlayStation, and PC.
So far, we’ve done a few games. On the market right now is Shantae and River City Girls Zero, but we have three more that are coming soon. We sold Bill and Ted’s Excellent retro collection recently. And we’ve also announced, back at our E3 showcase, A Boy and His Blob, a retro collection for that, and Extreme Sports, which is another game from WayForward, who are good partners of ours. But we’ve got plenty more in development, and some of them are with very big companies. So, we’re excited to reveal those over the next year or so.
Josh Fairhurst
Okay. So that’s back to me now. So, the acquisition rationale. So, of course, this aligns perfectly with our ambitions in retro, classic, and heritage. As I said earlier, it’s a concrete pillar, slap bang in the middle of it. The Carbon Engine as well unlocks vast historic catalogs for the Embracer Group IP, as well as the wider industry. I said, these guys do it from the engine right the way through to in the customers’ hands, so every step of the way.
I think also the worldwide expansion of Limited Run Games. We’ve got our – as Douglas said, we have our Clear River Games. We also have some great synergies with other areas of the group as well. I mean, there’s already work going on with Game Outlet as well. And the guys at Bitwave.
So, I think from me, I just want to welcome you guys to the group. I spent a couple of days out with you, a number of months ago, and I was just blown away with the team, the way you operate together. It’s like – I described it as like some family of like 30 to 35 year old’s, just sort of hanging out and working on this crazy, kind of time line of bringing these games out. It was absolutely insane. And I love [my team] [ph]
Lee Guinchard
We all love what we do. We’re all big collectors. You can see behind me, I’ve got tons of stuff, so you can see collecting is just in my nature. So, same thing with Douglas. He’s got statues behind him and loaded stuff. These are our offices. So, just imagine what our homes look like. We love what we do, and we’re super excited to embrace and get to work with the IP that you have and bring our games and collectors additions to more people throughout the world. It’s going to be an awesome journey.
Josh Fairhurst
Thank you. Thank you for this opportunity, Lars and Lee and everyone else at Embracer. It was a pleasure having you here, Lee, and we hope to see you more often.
Lee Guinchard
Are you sure?
Lars Wingefors
Thank you, gentlemen.
Josh Fairhurst
Thank you.
Lars Wingefors
Right. So, let’s move on to the next one that we announced this morning that we are super excited about.
Martin Arnell
Yes. So, I’d like to introduce Andy Jones, who is SVP of Strategic Products at Asmodee. Asmodee have been kind of central and pivotal in actually bringing this to fruition. So, I’d just like to thank everybody at Asmodee, including Andy, Steve, and Andrea. Again, unbelievable, and Tom and Frederica from the Saul Zaentz Company, who live, breathe all things Middle-earth. So, we are proud…
[Video Presentation]
Okay. Embracer Group is proud to acquire the IP rights to one of the largest, most enduring iconic fantasy properties in the world, the Lord of the Rings and Hobbit.
Andy Jones
Could I jump in just to say personally, hi, everybody. And I’m absolutely delighted and over the moon to take part today on behalf of Asmodee as part of the Embracer Group. And as well as being proud to acquire the IP rights, I am, and we all are just absolutely delighted, you know [indiscernible] out on it, to be honest. It’s a dream come true. And Fredrica and I, we’ve known and worked each other, gosh, we’ve worked in for about must be 20 years now.
And we discuss life, universe, and everything Middle-earth in offices, shows, restaurants and bars from Nottingham and San Francisco and just about everywhere in between. And I’d like to say that I’d really always look forward to visiting Berkeley or whether that’s meeting Fred and Tom and the rest of the Middle-earth Enterprises team. And I’ve always, always felt welcome.
So, many, many thanks for that over the years. And, as well as the people, you know as business partners, I found the Middle-earth Enterprise is always open to suggestions, totally knowledgeable around the worlds and the IPs, the works. And of course, being very firm, but very fair. Every time we’ve come up with some crazy new ideas. So, I would say my history is that you guys have been ideal licensed stores and partners, to be honest, especially because of your obvious passion for all things Middle-earth as well.
The fact that the team of great people who are really into what they do really helps. It really, really does. Personally, the chance for me to work with Middle-earth, both on my history is working with Middle-earth, both on the literary and movie characters, it was a dream come true. 22 years ago now, and it remains so for me today.
In fact, I could say that discovering The Hobbit and The Lord of the Rings in my school library, together with the love of Modern Soldiers and games is largely responsible for my career to date, to be honest. And of course, sitting at Asmodee day with our living card game and the Journeys in the Middle-earth board game, Asmodee is a strong and established partner already for Middle-earth with over 100 releases to date.
So, now the opportunity is to welcome you, Fred, and the team, me into the Embracer family is perfect. I just could not be happier today.
Fredrica Drotos
Thank you, Andy. The feeling is mutual. We’ve had a great friendship and a great working relationship. And I was really pleased to be able to tell the team, the small team that we are, that we would be joining you all. Games workshop and then as Fantasy Flight and then Asmodee have been some of our favorite licensees to work with. And the feeling is mutual. You are like family in the best way. And you all have a great passion too for the property and so with the prospect of being sold, many of us were concerned and really thrilled.
So, I’m thrilled to be here, even though it’s – I thought I was going to fall asleep, but I didn’t. And we’re just – we’re excited to join you all.
Martin Arnell
Great. I’d like to bring in Tom now to kind of go through the summary of rights because, you know it all.
Thomas Koegler
Hello everyone. I’m also delighted to be here. I’ve worked with Middle-earth Enterprises for a very long time, and it’s really heartening to see this transaction on the verge of closing because it really as you can tell from Fredrica, where – the team is so excited about it, and it’s nice to see such a nice outcome for them. I’m here to give you a quick overview of the rights held by Middle-earth Enterprises in case you’re not already aware of it.
I should say, because we get a lot of questions about this, that Middle-earth Enterprise is not the Tolkien Estate. The Tolkien Estate controls the book publication rights for the Lord of the Rings and The Hobbit and the other Tolkien works. The rights that Middle-earth Enterprises has include, most relevant for this group, video games, and board games, tabletop games, et cetera.
We have film rights, including having licensed the New Line Cinema Lord of the Rings and Hobbit films, a wide array of merchandising rights, including for hotels, restaurants, other services, clothing, all manner of products and services with limited exceptions. We jointly control with the Tolkien Estate the right to develop theme parks based on the works.
We also have the right to adapt The Lord of the Rings and The Hobbit for stage productions. And while our current rights are limited to the Lord of the Rings and The Hobbit, we do have matching rights with respect to Tolkien’s other works that relate to Middle-earth, including most notably The Silmarillion, Unfinished Tales.
How did we get here? We’re happy to walk you through, sort of how the Saul Zaentz company came to what we’ve done with them over the last 50 years or so. Fred, do you want to kick it off?
Fredrica Drotos
Sure. It was really a lucky happenstance when Saul Zaentz worked with Michael Douglas to make One Flew Over the Cuckoo’s Nest. And it was so successful. It was distributed by United Artists and won a number of Academy Awards. And United Artists was excited to work with Saul again, and said, ‘What’s your next film?’ And he said, ‘I don’t know.’ But it’s going to be based on a book, I’m sure. And because he is an avid reader. And they said, ‘Well, you know we have these books, The Lord of the Rings and The Hobbit.
Have you heard of these?’ And he’s like, yes. Do you want to buy the rights, the film rights, and he said, ‘Yes.’ And so the company acquired those film rights in 1976, UA had acquired them in [1969] [ph] from Professor Tolkien. And it was thrilling. The rights came with Ralph Bakshi, who was already working on the animated feature. And we released the animated feature in 1978.
It didn’t receive the, kind of economic commercial success that everyone had hoped for. And so the second part of it was never released. But that’s another – that’s something else to consider. And then years go by and things happen and we release a film called The English Patient, which was distributed by Miramax. And those have been all of a sudden, there’s more interest in these rights to the Lord of the Rings and The Hobbit.
And New Line enters the picture with Peter Jackson and Mark Ordesky. And the tremendous success of those films really changed up the world for all of us once again. These books, as you know, have had an ebb and flow, but always, the interest in them always increases. And when they were written, the author never thought he would – he didn’t think that he was going to have the success you did and his publisher didn’t either. But this, I think we’re second in the world to the Bible. And there’s just – there are fans everywhere.
We’re in 75 – the books, I should say, are in 75 languages. I want to distinguish between us and the Estate who own the publishing to the books. But all the great adaptations of the books, whether it’s the films or things not film related like the Lord of the Rings Online, where the stage plays or some of the games that will be coming out in the next few months are all from the literary works rather than from the film assets.
Lee Guinchard
And then most recently, we have the Amazon series, which is about to launch in just a couple of weeks, which is based on both the New Line Cinema films and the books – the underlying books. So, it’s a combination project of sorts.
Fredrica Drotos
Okay. September 1. And now we’re with you guys.
Lee Guinchard
Yes. And we are so excited. And I’m only 35 minutes from you when I’m home. So, I can come and visit you whenever I want or whenever you want.
Fredrica Drotos
Yes.
Lee Guinchard
Yes, Exactly. Okay. So again, the rationale for us here. I mean, again, this is totally in line with the Embracer’s IP driven transmedia strategy. I mean, if it’s, again, straight bang in the middle of this, Middle-earth Enterprises will be part of Freemode and will continue to be operated by the team in California. So, that’s fun. From my perspective, coming obviously from gaming, I think this is huge, huge, huge, huge for us. As a company, of course, we have our existing licensees doing existing projects, but I think if you look the talents we have here at Embracer Group with the other operating groups and just the most diverse development talent, I think when we start looking in the medium and the long-term here, I think this is where this starts to get very interesting for us.
And again, I think this is, you’ve had the rights for [indiscernible] for 50 – have been 50 years. If you think what can we do with it in the next 50 years? Yes. Your mind starts to boggle and we all go crazy when we think about that. So, I think from my perspective, to build new experiences and stories that delight fans for the next 50 years. And hopefully, as much of that can be Embracer talent. But of course, we are – we also respect our other partners in the wider industry who, again, have also got many talents and do this property justice as well.
So, Andy, I’d like you to just go through some of the rationale there in Asmodee and maybe the last two points because you know more about games than I do on that sense.
Andy Jones
Thank you. I’m not so sure about that. I mean, actually, yes, the acquisition rationale – I’d kick off by saying, actually, I’ve got a bit of a confession, and I think it kind of goes to the import of what we’re talking about here. And it’s just I struggle a little bit actually when describing Middle-earth as a property or a franchise. I know it is, but it feels – that feels a little like describing Shakespeare as someone who wrote plays.
These works, they’re the original giants of fantasy, continuing to inspire generations. And opportunities like this are really, really rare. So, I just wanted to get that off my chest. I couldn’t be more excited. I remember a while ago when Lars asked me, what do I think about the idea of acquiring these rights? And the summary on the page, you can see that across all areas of the Embracer Group, there are many, many great fit opportunities from interactive games, as Lee has described, into tabletop games where one of our watchwords at Asmodee is, we have a game for every gamer.
And from board games to card games to role-paying games, to dice games, every form of tabletop games. And you can see that The Lord of the Rings and The Hobbit would just fit right in. It’s absolutely perfect. And we’re already an established longstanding partner with board games and card games and many, many more to come, but then the opportunities are there for further media projects, whether live action or animated together with a very wide variety of consumer products, location-based entertainment, theatre productions, many, many more great fair products and experiences that we’re sure are going to thrill and delight Middle-earth fans of all ages, the world over.
And when I look at this list, I actually honestly believe, I don’t think there is another group that can cover all of that. I really don’t. The Embracer is the perfect home. I really do believe that. And it’s worth emphasizing that we know that Middle-earth Enterprises has some very strong and well-established partners already. And at the Embracer Group, we have a long history of strategic partnerships, and long may all of that continue.
So, moreover, back to Lars asking me, I kind of felt a bit put on the spot, but my initial reaction was, you know what, Embracer is a business about fostering worlds of imagination and creativity in whatever we do. And fundamentally, that will fall down into two camps, I would say, of science fiction or fantasy. And Middle-earth – let’s be honest, Middle-earth is the biggest, oldest, most enduring and influential fantasy world, by none. So, yes, of course, we should seize this opportunity. Because anybody who’s interested in fantasy will touch The Lord of the Rings and The Hobbit at some point on their journey.
I believe that’s absolutely inevitable. So, talking about the acquisition rationale, the world of Middle-earth, the Lord of the Rings, The Hobbit, is vast both in its legacy and in the future potential for the Embracer Group. So, I do think the strategic rationale is very clear. It’s compelling and it’s very, very, very exciting. And our journey in Middle-earth is just beginning. So, yes, absolutely fabulous, and I’m just delighted to be here and part of this.
Lee Guinchard
Okay. Well, thanks for that, Andy. I think we are done now. So, I’d like to say good bye for now, and I’ll be out to see the Berkeley folks when I get back, and we’ll be talking more about the future and how much fun we’re going to have together.
Fredrica Drotos
Look forward to it, Lee. Thank you.
Andy Jones
Thank you. Welcome to the group.
Lars Wingefors
Thank you. So, let’s head over to some other parts of America, I hope they are awake. It’s a bit early in the morning, I imagine. So, Alan?
Alan Wilson
Yes, I’m awake.
Lars Wingefors
Fantastic. Matt, are you there as well?
Matthew Karch
I am here. I should have slept a little longer. Not that it wasn’t exciting and interesting, obviously, it has been, but I can always watch the reruns.
Lars Wingefors
Well, I’m glad that you’re staying wake and could share the news with us from this morning. So, let’s – why don’t we jump into the presentation and…
Matthew Karch
Sure. We’ll make sure that we’re as quick as we could possibly be. So, those that want to sleep can sleep and those that want to work can work depending on where you are in the world. So, I just want to say a brief welcome to Tripwire. This is a deal, which has been in the making since before I joined Embracer, and Tripwire played a huge role in Saber’s success. And really, in many respects, set us up for our own acquisition through our partnerships and through the relationships that I have had with the founders.
It’s an absolutely fantastic company. I like to think of it as one of the remaining great independent developers in the world. And I’m just super excited to have Alan and his team as part of our group at Saber and part of the larger Embracer Group. And you have my word, as you know, that I preach synergies more than anybody.
We’ll be attacking that Lord of the Rings license funding opportunities there. Probably, yes, there’s probably gears already turning in Alan’s head about the things that he would like to do here. And between that and their own IP, such as Killing Floor and Man Eater and Red Orchestra and Rising Storm, which I think I finally got right because normally I say Rising Storm, the Rising Orchestra and Red Storm, but, so it’s good that even at 5 in the morning, I can finally get something right.
I’m going to just turn it over to Alan and let him talk a little bit about Tripwire. I know he’s got to be exhausted too. I don’t know if you’re in England or in Atlanta right now, but you’re probably jet lagged if you are. So, I’ll let you get to it, and we’ll move on to the next one.
Alan Wilson
Thanks, Lars. Thanks guys. Thanks for those kind words, really appreciate it. Yes, I’m in Atlanta this morning. I’ll be in some other place tomorrow. So, let’s crack through before we all collapse in a heap. This is a company that was formed the best part of 20 years ago out of a mod team. It’s the mod team that won the first Make Something Unreal contest, bootstrapped in 2005, and went on to be one of the very first non-valve IPs on steam with Red Orchestra, the first Red Orchestra game.
That team now you’ll see it listed here. Probably about 120 years of experience in the video game industry between that team listed there. And for those concerned about diversity, I’ll just point out that a full 50% of the C team is female. But looking at the IP and everything we’ve generated there, everything we’ve done has been with our own money, the profit we made going, just getting turned back into new titles.
There’s been, as Matt said, the original Red Orchestra, went on to Killing Floor, which was a breakout hit back in 2009. Red Orchestra 2 in 2011, Rising Storm, breaking out from the Red Orchestra franchise. Killing Floor 2. And let’s be clear, Killing floor 2 is a title now with over 30 million owners across all platforms. And breaking out into a different direction with Man Eater for a change, we decided we’re not going to shoot people, we’re going to eat the people who shoot people. So, that’s all been great fun. And we now produce our titles across all major platforms. Let’s skip forward, Matt, or whoever’s got the controller.
Lars Wingefors
He skipped forward. He’s skipping forward. Are you skipping over me? Because we can do that too. I’m good. Whatever makes you happy.
Alan Wilson
That’s okay.
Lars Wingefors Okay.
Alan Wilson
Are we on strategic rationale? Or are we…
Lars Wingefors
No. We are not.
Alan Wilson
Okay, go ahead
Lars Wingefors
Pay attention. I know it’s late or early or whichever it is. Okay. 2, 3 years ago, we spun out our own publishing division. That started off with some smaller titles, but really hit its stride recently with Chivalry 2. The whole rationale for this publishing division is to really support those who follow in our footsteps, independent developers with great IP, those who will be best served by a publisher with a very developer centric mentality. Someone like us who has all those years of experience that can use that experience to help developers make the very best title they can possibly make for all our benefit.
Espire 1 out on VR a couple of years ago. Top 10 seller on the Quest in its launch year. But look at Chivalry 2, 1 million units in 5 weeks flat from launch. These are great games, there’s more to come. We’re doing the sequel to Espire, which launches later this year to see [indiscernible] launching early next year.
Now, we’re really looking forward, especially working with Saber and with Embracer on both of these on our own internal IP, the opportunity to really change up the cadence that we’ve done over the years. Bootstrapping and self-funding limits you dramatically. And we’re really looking forward to the opportunity to accelerate on the cadence of producing our own IP and cranking that out the door, as well as adding new IP to that stable.
Similarly, with the publishing division, the opportunity to dramatically accelerate rather than doing one title a year, we need to be getting up to many titles a year, 5, 6 titles a year of the caliber of Chivalry 2, Espire, and Deceive. And I make the point there, it says at the bottom there, our style of publishing is particularly geared up to make sure that we have long-term partnerships with those developers.
Espire is a perfect example. Did the first game with them, they came back wanting to do the second one. The first one was so good. We had no qualms about doing the second one. Okay. Skip on to the third slide, please. Just to talk briefly there, I mean, the headline has been continued growth for sustained a relentless pace. We have, if you look at the cadence, we managed purely of our own battle over all these years. Also keep in mind, we somewhat pioneered doing seasonal content updates all the way back in 2009.
What today is looked at as being either Games as a Service or live-ops. There’s a whole other area where we can get massive synergies with the Saber Group, the opportunity to really turn the handle more and more effectively on doing live ops for all our titles and for published titles. We just want to see ourselves accelerate. We have all the properties, and we have the opportunity to create more properties. We can bring a lot more into the publishing division. I’m really looking forward to doing that. So, we can just now really get our foot on the gas. I think it’s everything I need to say, Matt. Over to you for the [indiscernible].
Matthew Karch
Well, look, I always find it hard to talk after somebody with the British accent because I just sound so stupid with [American accent] [ph]. But I’m going to try my best to follow that up with some relevant information. And look, I can tell you that this is a no-brainer, the strategic rationale on this one.
I mean, this is the type of acquisition that Saber has done and that Embracer did with an acquired safe. This is all about taking one of the best and most talented groups in the world and giving them the freedom to, basically, we’re taking the handcuffs off. I mean when you’re an independent developer, what do you do
You run on that treadmill, you try to keep the legs on, right. And you focus on what’s going to happen at the end of the year and how much money do we have left in our account. What can we do, and you’re always limited in that capacity. I mean Tripwire has proven time and again, they can create fantastic IP. If you look at a game like Killing Floor, which I would imagine would have a future treatment of some kind or another that may or may not happen.
Alan Wilson
No comment
Matthew Karch
And if you can look at Maneater, which was a fantastic game and actually it was a great partnership with Plaion, it’s – I pronounced that right, that one I should know. So, it was [indiscernible] or however you were supposed to pronounce it, that I won’t say. They were – he’s [indiscernible], okay. They were – I mean, we’ve had some great partnerships and it’s great internal synergies already with some of the groups within Embracer. And so, we’ll be able to expand on those things.
And really, we also – it’s worth mentioning that we – our plan is with Alan to help in his ambitions to acquire studios that he’s already worked with, and that I’ll be working with in the future. And I think we’re probably going to have that conversation. Well, we still need to do what we signed. We still need to close, but look, there’s a reason that it took so long to get Tripwire signed and done. And it’s because Tripwire didn’t really, it was doing amazingly well on their own.
And so, this was finding the right time and the right place and the right figure to make this deal done and to get it done. And we’re very excited about the prospects in the future. I don’t want to bore everybody. So, and we have one more acquisition to announce. And so I’m just super excited to be, you know to have a team that’s basically – that I can fly down on my own plane to visit any time I want. That’s fantastic.
Lars Wingefors
Thanks, Matt, and very welcome to the group, Alan. Looking forward to meet you finally one day. Okay. So Matt, let’s jump over to the acquisition of Tuxedo Labs, a bit closer to call start.
Matthew Karch
A bit closer. Yes, this will be Saber’s actually second studio in Sweden. I know that Dennis is a humble guy. And so, the PowerPoint calling him a technical genius might make him blush and the Swedes are known for being very modest unlike the Americans, but I think in this particular case, we can make the statement with all certainty that Dennis is a unique talent in the game space.
Saber has and 3D Realms, which we all have experience working with Dennis, when he was doing MECON back in 2005, I don’t know remember when it was, but it was a long time ago. I had more hair and less gray hair and no money in the bank account. So, I would never – so I’ve never been able to have done what we’re doing today, which is fantastic that we’re doing it now. But Dennis has been a pioneer in the area of game physics and he’s building a team with Marcus in Malmo to basically exploit that very unique capability that, I mean, I would be – I don’t know – once again, I know the Swedes always don’t like it, but he’s like a unicorn, Dennis is.
There’s something special about what he does. I think what he’s built with as a technology foundation has Minecraft like potential in terms of the way we can expand this thing or Roblox, whatever you would use for it. We think it could be a real platform. And I think this is one of those companies, which is a hidden gem. And frankly, I’m pinching myself that we were able to get these guys to agree to join us.
I’m sure it was Lars’ charm when they came and visited us in Karlstad, and I had a little to do with it, but at least I could take credit for pointing out the opportunity and trying to make that happen. So, anyway, welcome to both of you guys. And just a little brief background, I know about what you do, and I think I’ve already given the rationale. So…
Lars Wingefors
Dennis and Marcus, are you online?
Marcus Dawson
Yes.
Lars Wingefors
Fantastic. Welcome.
Dennis Gustafsson
Well, thank you very much, and thanks a lot for having us here today. So, just a little background. I’m the founder of Tuxedo Labs, and it started as a solo project actually many years ago. And over time, it’s been growing to a team of 6 people, and we are – we’re a very technology-focused company. We want to let technology be like the centerpiece and kind of build the game around that instead of the other way around.
We also make all technology in-house, which I think is quite unusual these days for a company this size. And Teardown, which is, sort of sandbox heist scheme based around this destructible voxel technology. It came out almost 2 years ago in early access on Steam, and we hit the 1.0 release in April this year.
It’s done very well on Steam with 96% positive reviews and sold 1.2 million copies so far. And what excites me really the most about Teardown is that the modding community, we have a very active modding community. And we took that decision pretty early on to add – actively add and support the modding to the game. And it’s just amazing to see all the new content that comes out every day that people add.
We also see a lot of people coming to the game and playing the game just for the user generated content and it’s almost become like a platform of source for voxel-based games and experimentation around voxel-based games. It’s really fun to see all the creativity that goes into that. It’s definitely a direction we want to explore further. And I’m really happy to be part of Saber and Embracer.
Saber, has been huge fans of the game for a long-time. And I think we share a lot of the same vision both for physics-based gameplay and voxel technology. And I’m also personally very happy to finally be able to focus on technology, again, which is what I love the most and having over the business side to Marcus, who has been with us since the beginning of the year as a project manager, and he has a lot of experience running a game studio and the studio that we’re building up here in Malmo.
And I think together with Saber and their expertise in a lot of things on the resources they bring in, it’s going to be really fun to see where this will take us.
Marcus Dawson
Yes. And I think Dennis has summarized it very well. But the enormous potential we have with our – with our tech and our voxel lending is, kind of amazing. And I think we shared this with Saber and Embracer. And I think together, we can reach new audiences that would never be able to on our own. And we can create amazing new stuff that I think will be groundbreaking. So, I’m very eager to get started and see what we can create in the future.
Matthew Karch
We already are. So, I think it’s amazing what you’ve been able to do to sell the number of units that you’ve sold with no marketing whatsoever with a small team. And we’re just salivating at the prospects for what we can do with Teardown because literally, Teardown is just on one platform right now, and there’s huge opportunity to move that. There’s no multiplayer, right? I mean I’m not going to announce all of our plans, but the point is, there’s tremendous potential even to take your existing product and to monetize it in crazy ways at huge margins.
And then there’s what comes next. And what comes next? There’s a lot of – I’m trying to see through Dennis’ mind right now as I’m looking at the Zoom to try to figure out what he’s got in there, but I know whatever it is, it’s going to be revolutionary. And I can tell you, I’ve spoken to some of our biggest partners and they’ve expressed tremendous excitement about the possibilities for what we want to do.
And I know this is a very American thing to do to mention games like Minecraft, the roadblocks in the same sentence, but that’s the [indiscernible] have what we can do and the platform that we can build. And the user generated content is a massive component of that. And so, I’m super excited. And I think that’s the only rationale we need, probably that, but I’m in Sweden a lot.
So, I get – it’s an easy trip to see you guys, and I’m happy to do it, and I’m looking forward to it. So, welcome, yes.
Lars Wingefors
Dennis, Marcus, very welcome to Embracer Group and Saber and Matt. Thank you so much for staying awake. We are a bit over time and sorry I run, but I think it was relevant. It was a lot of information this morning for you all to understand and listen to the information given. So, I think we will leave America and Malmo and head over to the final bit of this and had a bit of Q&A on the M&A side.
Matthew Karch
You need me Lars for this?
Lars Wingefors
That’s fine, Matt. Now you can take the sleep. This will be a quite short Q&A on the M&A side because…
Matthew Karch
I know what is [indiscernible] you just don’t want me to say anything inappropriate. So, you want to get me off the call.
Lars Wingefors
You never do, Matt. You never do. Have a good sleep. Thank you.
Matthew Karch
Thank you. Thanks.
[Video Presentation]
Question-and-Answer Session
A – Martin Arnell
Okay. Welcome back to the final part of this presentation, the final Q&A. I know we’re running a bit over time, but maybe we can spend some 5, 10 minutes before we wrap it up. How excited are you about all of this? I mean there are so many questions that we could ask. How long have you have eyes on the Tolkien rights, for example, to start with?
Lars Wingefors
Well, I think we all know Tolkien and I think we all have been playing the games, reading books and watching the movies, but this opportunity came about, I think, like half a year ago. It’s been a complex process. I think we wouldn’t be able to do it. And, but it was a complex situation, and I can’t go into details that actually made, I think, Embracer the perfect buyer of this and also to integrate, I mean, into this group rather than this ended up elsewhere.
So, I think with the strategy of Embracer, we are sometimes, I wouldn’t call it a preferred buyer, but I would say, it’s a bit easier to make transactions because there’s a lot of other relationships that could be very complex sometimes.
Martin Arnell
There have been a lot of incoming questions about how is it structured? Can you clarify what are the rights? Can you share any more sort of …
Lars Wingefors
I think the rights is quite fairly clear in the presentation and in the press release, there is 50 – close to 50 years of work and contracts and trademarks and there’s thousands of trademarks filed. So, there is a lot of obviously, legal history of this. There is a lot of external business partners, both existing products on the market and upcoming products, including gaming. And I would like to highlight this will be a standalone business, and it’s important that we’re keeping those great relationships and are very professional.
And this is including, obviously, all other gaming companies that have or are making projects. And hopefully, we’ve been showing the industry that we’re able to keep our own business separate from external relationships. Because if you look at Embracer, we are part of the industry in a way in a bit different than other gaming companies. So, for us, it’s just critical to have that relationship. So that’s important to highlight.
Martin Arnell
Is it possible for you to share any sort of concrete plans? What product you’re going to be able to do from this from a transmedia perspective?
Lars Wingefors
I think it’s too early. Obviously, there is tons of ideas. In the respect of the property and our teams and everyone, I think if you do something on this property, you need to be world-class, long-term. You need to have an amazing plan. So that is not something you do over a few weeks. We can just see there’s enormous interest, there’s tons of opportunity. And I think one other thing I would like to highlight is having such an iconic brand open up a lot of other opportunities for the group, for people, obviously, recognizing that we have this IP and would like to work with us and including both internal and external developers, but also to work on something on the long-term.
As Lee said here, what could we do over the next 50 years on this property. Because games are – it takes a long time to make, they’re expensive, you put all your energy into – and you want to be able to use that asset for a very long time. And that is obviously easier if you own [controlled IP] [ph].
Martin Arnell
And maybe a question to you, Johan, in all of this. You have a couple of deals now that you are yet to close. And how much of this contribution that you commented on this morning, the number do you think will be able to consolidate in this year?
Johan Ekstrom
I think we gave – there was some color on that in the press release. So, obviously, it depends on when closing actually occurs, but the kind of on the press release is about half, I think.
Lars Wingefors
Yes. So, we’re expecting it to close roughly end of this quarter, early next quarter. It’s filings, so you can’t really know exactly, but roughly half potential of the pro forma will actually legally be accounted for.
Martin Arnell
I noted that Freemode also included Embracer’s first study in Japan. Is that a market that you would like to expand in further out in the future?
Lars Wingefors
Well, I love Japan and the Japanese culture and games development. So, you could argue they are like the foundation of many of the most iconic IPs in the world, but in the respect of the culture, it takes time to understand, build relationship, build trust and Karlstad is also a bit distance from Tokyo. So, you need to have the time to actually spend time there.
Now, we’re having a number of people from the group working there, but still, there is enormous potential. We will take this slow step-by-step. And hopefully, we can show the – what the people and the industry like to see. And with that respect, we can hopefully bring more developers into the group.
Martin Arnell
There was one acquisition that was not yet disclosed, but you still commented on it. And I just wanted to know, is that undisclosed acquisition part of the numbers that you provided?
Lars Wingefors
Yes. So, they’re included in the purchase price and the financial impacts.
Martin Arnell
And I guess you hope to be able to announce it in the near term or…
Lars Wingefors
Let’s see, but at the moment, we will not specifically announce that acquisition of commercial reasons and fantastic people, company, but there is various commercial reasons that you might one day just understand.
Martin Arnell
Yes. I know we should close it here shortly, but just some final ones. I think I read in the report this morning that you mentioned that, sort of sellers’ expectations in general have actually been revised now. If you would like to share some more color on that and what you expect going forward?
Lars Wingefors
There is a lower activity. I think for quality companies that have strong cash flows, strong IPs, there is still a strong market, I would say, with the competition. Perhaps there is a slight decrease in expectations. But on companies that are not that core for many and doesn’t really have an edge or they have a need for capital or I think it’s much lower valuations.
At the same time, we are not acquiring EBIT. We are acquiring great companies, Ips, and so on. So, we are mainly interested in the first category. So, for example, in mobile, there is quite a lot of assets available.
Martin Arnell
So, is it fair to say that you will – you view this as an opportunity and you will try to grasp that opportunity. And I know you have a leverage target that, you know could you go above that temporarily? For how long could you do that, Johan?
Johan Ekstrom
Yes. So, the financial target we have is that you should be at be at 1x the forward-looking adjusted EBIT. And for the right inorganic growth opportunity, we can go above that, but then we need to see that we are able to reach the target in the medium-term. So – and I said during the presentation, the free cash flow and the cash flow generation that we expect this year, we expect a strong cash flow generation.
So, with the deal or excluding the deals that we just announced this year, we expect to be at the target for the end of this year. And then obviously, we also disclosed that these are cash flow generating companies coming in, also bringing EBIT, of course.
Martin Arnell
Okay. Thanks. And just finally, the next step here in the consolidation trend in the overall market space. Any trends that you would like to share that you think will happen here going forward?
Lars Wingefors
Well, trends. We are in so many segments. So, I think it’s – obviously, I’m PC/Console is close to my heart. And I think it’s an enormous excitement around the new consoles. So, I think the whole industry is going to Gamescom next week. There is an enormous amount of business development activity across the industry. I think people are excited about subscription programs, streaming, as well as the more traditional channels.
So, I think in general, I think a bit back to basic, I would say, let’s talk about blockchain and NFTs, Thank God. I’d preferably talk about the real games and gaming experiences. So…
Martin Arnell
On your real games, your games has a lot of following and fans. And one of the questions that we have received tons of is your game Avengers, Marvel’s Avengers. So, I just want have to ask that question. So, there’s so many sending that in. And can you talk about the future for that game?
Lars Wingefors
Yes. It’s one of the things with external licensing partners, without commenting on that game in particular, it’s sometimes hard to talk around external license IPs. And in the respect of the licensing partners, we need to keep that that way. So, I’m sure whoever it is within our group or externally from our group will share information when relevant. I’m looking forward to close the acquisition of Eidos Montreal, Crystal Dynamics soon. Hopefully, very soon.
Martin Arnell
Yes. Okay. Thanks and my final question before you can wrap it up is just, I noted in the report, you wrote that you continue to have conversations with potential partners and investors, and sort of what are you looking for? And…
Lars Wingefors
No, we are in a journey and we need long-term supporting shareholders. And as I’ve been stating before, we’ve been having conversations with number of strategic industry players for a number of years. There is a number of active dialogues. If there is a relationship, whether it’s a partnership or partnership and equity remains to be seen, but I’m confident that we, one day, will bring in some more sizable partnerships or shareholders. So, it’s hard to give a time line on that, but there is an increasing interest of working with Embracer.
Martin Arnell
Okay. Thank you, both Lars and Johan, and thank you all for sending in good questions. I’m sorry we couldn’t ask all of them, but maybe you can reach out to the IR team and Oscar to follow up. So, thanks for today, and good luck.
Lars Wingefors
Thank you, Martin.
Johan Ekstrom
Thank you.
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