Embracer Group AB

STO:EMBRAC B

Earnings Call Transcript 2020-Q4

[Oscar Erixon, Financial Analyst]

Hello, and welcome to this Q4 presentation of Embracer Group's results from Karlstad today, and I am on the link from Stockholm, given the extreme circumstances here today. It will be very interesting to hear more about the sales mix in Q4 with a very strong digital game sales while physical is struggling a bit more. Also interesting, of course, to hear more about the pipeline for the current fiscal year and the potential delays here to play titles. So without further ado, I'll leave it over to CEO and Founder, Lars Wingefors; and also CFO, Johan Ekström. Please go ahead.

[Lars Wingefors, Founder, CEO & Director]

Hello. Thank you, Oscar, and hello, and welcome, everyone, to a very sunny Karlstad. I'm happy to report another stable quarter of Embracer Group. Looking at the full year numbers that we were ending in March, we had a milestone of achieving profit or operational EBIT of about SEK 1 billion. That's a 35% growth year-on-year. Looking at the quarter, it was a tough comparable quarter due to the AAA release of Metro Exodus in the same quarter last year. And taking those Metro numbers away, we had a very strong performance of the overall Games segment in the quarter. Digital sales were at all-time high at 78% in the quarter. We didn't have any major release in the quarter, but we had a number of key sales drivers mentioned here, for example, the continued performance of back catalog games such as Wreckfest, our own IP from the developers of Bugbear in Finland. We had a continued strong performance of Kingdom Come: Deliverance from our own studio in Prague, Warhorse. We had a new release of Darksiders: Genesis performing according to management expectations. We had the Steam release of Metro Exodus and the DLC content drop of Sam's Story during the quarter, and Metro Exodus contributed very well into the quarter. And finally, mentioned here, we had a content update 3 of Satisfactory. And that gave a significant boost to the engagement and sales of the Games and Epic Games Store, and that progress are continuing up until as of this morning. We announced this morning that we have a record of 118 games under development, spread across more than 3,000 engaged game developers. As a comparable KPI, we invested last year SEK 1.5 billion into the pipeline that will generate organic growth in the future. And you can compare that to SEK 589 million of the games we were releasing during last year. So we have a significant higher investment into the pipeline than we are -- than we released last year. We disclosed this morning that we are expecting to release more than double the amount of games or double the value for the current financial year, increasing from the SEK 589 million to -- in the range of SEK 1.2 billion to SEK 1.4 billion in the financial year ending in March. We are expecting our first AAA releases since Metro Exodus to be released in the financial year ending in March 2022. Also in the quarter, we had the major acquisition of Saber Interactive that were announced at February 19 that we're legally closing April 1. I'm really happy to have them onboard, and they had, I would say, a flying start of joining the Embracer Group with 2 releases in the current quarter. They had SnowRunner on PC or Epic Games Store, PlayStation 4 and Xbox One. And I'm happy to announce that game are -- has been selling more than the management expectations. It's a quite equal sell-through in all 3 formats. It has very good retention and a lot of played hours from the players, and there is a high percentage of sales of premium version and DLC content. And we expect the game to sold nearly 1 million units in the first 3 weeks. They also had the World War Z Game of the Year Edition released a few weeks ago, and that is also performing above the expectations we had when acquiring Saber Interactive. A few days ago, we were -- or Coffee Stain were finally releasing Deep Rock Galactic, the full game version, and I'm happy to see that it's performing well. They also had the fantastic retro release of Huntdown that had some raving reviews from critics, and especially proud to say it's a game made very close environment actually in Trollhattan. And finally, mentioned here, we had the release of MotoGP 20 from our own studio, Milano Milestone. That also has performed according to the management expectations. Finally, we raised earlier in April SEK 1.6 billion for further acquisitions. That still are to be allocated. We have a lot of ongoing discussions both in early and late stages with small-, mid-sized and significant-sized acquisition targets. Now leaving over to CFO, Johan, here.

[Johan Ekström, Chief Financial Officer]

Thank you, Lars. So we start with looking at our P&L for the period. As said, during the quarter, net sales reached SEK 1.3 billion, which is 18% lower than the corresponding period last year. But when comparing the periods, it's key that we consider that last year, we had the release of Metro Exodus, our most successful release ever in that quarter. Our EBITDA came in at SEK 495 million for the quarter, which is 20% lower than the EBITDA for the same period last year and mainly related to the lower sales amount. Operational EBIT reached SEK 286 million in the quarter, yielding an operational EBIT margin of 21%. Adjusted earnings per share for the quarter is SEK 0.97, which is 3% below the same period last year. Looking at the full year numbers, we see top line growth of 3%, growing it from SEK 5.1 billion to SEK 5.2 billion. Growth over the year is mainly driven by business area games, which has contributed positively to the profitability, hence the higher growth in EBITDA with 33%, from SEK 1.3 billion to SEK 1.8 billion. And as Lars mentioned, our operational EBIT for the fiscal year is above SEK 1 billion, which is 35% more than we had last year. Also, operational EBIT for the year is 20%, which is 5 percentage points better than the 15% we had last year. Adjusted earnings per share for the full year reached SEK 2.81, which is 33% more than what we had same period last year. Looking into our depreciations and amortizations, we divide them into operational amortizations and depreciations, which is SEK 209 million in the quarter; and acquisition-related amortizations, which is SEK 189 million in the quarter. The operational amortizations and depreciations are mainly related to our Games business area where we depreciate completed games. Another note to make is that we depreciate other intangible assets with SEK 53 million in the quarter, which is mainly driven by our Film business. On the acquisition-related side, it's IP rights and goodwill that accounts for the majority of the acquisition-related amortizations. We had a strong cash flow in the quarter driven by our operating profit and also a significant contribution from a reduced working capital. And looking at the working capital, all 3 components of working capital added positively to the cash flow, where we saw a reduction in inventory, operational receivables as well as an increase in operational liabilities. There was no forfaiting in the quarter. Last year, forfaiting was decreased with SEK 56 million in the corresponding quarter. We invested into intangible assets SEK 464 million during the quarter, and this is mainly -- or the significant portion of this is into organic growth investments. We have a negative cash flow from financing activities, which is explained by lower utilization of credit facilities in Koch Media. We have paid corporate income tax in the quarter of SEK 30 million, and for the full year, it's SEK 152 million. As said, we are investing into our pipeline of Games. This quarter, we invested SEK 417 million into our Games portfolio. Out of this, SEK 224 million was internal investments and SEK 193 million was external investments. And then we also invest into other intangible assets, which is mainly our Film business, another SEK 40 million in the period, adding up to a total investment into intangible assets of SEK 465 million in the quarter. And during the same period, we finalized and completed Games development of SEK 165 million. We continue to increase the investments we make in our pipeline. So if you compare the investments this quarter with last year, you are increasing it with 37%, so from SEK 305 million to SEK 470 million (sic) [ SEK 417 million ]. Our balance sheet, total assets amount to SEK 10.6 billion. The majority or more than 50% of the balance sheet is related to intangible assets, which is SEK 5.8 billion. 48% of the total intangible assets are related to our operations, 52% are acquisition-related. The operational intangible assets mainly consists of finish games that are currently being depreciated and are generating revenues and which is SEK 439 million at the end of the year, and then the value of our ongoing game development projects, which is SEK 2.1 billion at the end of the year. Acquisition-related intangible assets is mainly -- mainly consists of IP rights and goodwill. As mentioned earlier, we completed the transaction of our acquisition of Saber on 1st of April, and we are currently working in the integration and with the preliminary purchase price analysis or allocation that will be presented in the Q1 report. Where we see -- where we are now, we see that we estimate that the surplus values from taking on Saber into Embracer is around SEK 6 billion to SEK 6.25 billion. And as you know, we have a 5-year straight-line amortization rate on surplus values so this will add approximately SEK 300 million to SEK 313 million in acquisition-related amortizations going forward starting 1st of April. The strong cash flow in the quarter can also be seen in that we are increasing our net cash position from SEK 838 million to more than SEK 1 billion at the end of March. Also, we provided an update on our liquidity situation as well as our financial strategy in the report. And after the end of the quarter, we have extended our credit facilities with another EUR 27 million. Our credit facilities are long term mainly, and the interest rates at utilization is between 0.5% and 1%. During the last quarter, in Q4, the interest on utilized credit facilities was 0.8%. Today, our credit facilities is amount to approximately SEK 3.5 billion. And also the available liquidity for the group is today approximately SEK 5 billion. Looking at our financial strategy, and we have historically, prudently and intentionally, we have had a low leverage, not to add financial risk. As the pipeline of games are being released going forward, we expect to have a notable improvement in free cash flow. The first priority is to use this operational cash flow to invest back into our business in generating organic growth through, of course, investing into our Games portfolio. A second priority will be here to allow for financing smaller bolt-on acquisitions in the underlying businesses with our operative cash flow. In the general term, this means that looking ahead, the game development costs will be self-funded with operating cash flow, meaning that leverage capacity will mainly be allocated for larger acquisitions or big net working capital swings. The ambition is still to have a positive net cash position as it allows us to have strategic flexibility and to pursue our strategy. However, if the right inorganic growth opportunity arises, financial leverage could be temporary up to 1x net debt to operational EBIT. In such circumstances, we should, during a medium term, at least make sure or see to it that the leverage is returned to below 1 point net debt to operational EBIT, either by retaining operational cash or by raising additional equity.

[Lars Wingefors, Founder, CEO & Director]

Thank you very much, Johan. I will take you through the Games or the business areas, and starting at looking at a bit of the KPIs of the Games business area. So looking at the trailing 12 months basis, we had a 31% growth year-on-year, achieving SEK 3.2 billion in sales. As mentioned, it was a 13% quarterly decline in the quarter due to the comparable period had Metro Exodus releasing in February 2019. Looking at the trailing for the digital share of the sales, it's at the 73% currently on a trailing 12 months basis compared to the starting point of 53% in the beginning of the year. The share of owned titles on a trailing basis are reaching 76% compared to 67% when starting the year. And the new release share are currently at 38%. The rest is back catalog. And as all shareholder has noted, the back catalog sales has driving a lot of the revenues during the last financial year, including this quarter. So going into each business area, looking at Deep Silver, they had a quarterly sales of SEK 515 million. That were one of the strongest quarter ever. And on a trailing 12 months basis, they are at SEK 1.8 billion. Looking at individual titles in the quarter, Metro franchise was a major -- or Metro Exodus specifically was a major key driver. And during the quarter, it had sales of approximately EUR 14 million comparing to SEK 58 million in the release quarter. Also in the quarter, we had the Switch releases of Metro Redux generating some sales. Also in the quarter, we had a continued performance on the Saints Row franchise driven by the 2 release -- the 2 Switch releases of Saints Row the Third and Saints Row IV. And worth noting is that the Kingdom Come: Deliverance game, now 2 years after release, still are generating notable revenues. That has been a good key driver for the catalog sales all year for Deep Silver. And this quarter, it was the second biggest IP in the back catalog after Metro Exodus. During the quarter, worth pointing out, releases was a good release of Monster Energy Supercross 3 from our own studio in France and Milano Milestone releasing in February. That did perform according to expectations, notably driven by the digital performance and the release of -- again, with the Metro franchise of Sam's Story DLC in the middle of the quarter. Looking at the upcoming releases, we're having Saints Row the Third Remastered coming out on Friday this week on PC, Epic Games Store exclusive and PlayStation 4 and Xbox One. That would be one notable -- the most notable release during the Deep Silver current quarter. Then they have, I would say, a substantial pipeline of games coming out in the coming year and coming years, pointing out here Wasteland 3, Iron Harvest, Dead Island 2, Ride 4 from Milestone, MotoGP 20 that's just released a few weeks ago. They're having the next game from our own studio in France at Warhorse; the next game from our own studio, Volition, in the Saints Row franchise; and the final game mentioned in this presentation, the -- again, something from 4A Games. Going over to THQ Nordic. They had in the -- compared to last year, they had a fairly strong quarter, increasing their sales with 115% year-over-year, reaching SEK 307 million in the quarter, and on a trailing 12 months basis, they are now about SEK 1.1 billion. The key release for the quarter were Darksiders: Genesis on console. That did perform according to expectations and had a good Metacritic. On the back catalog sales, they continued to have a very good performance of the Wreckfest. And I'm happy to say that Wreckfest have sold way about 1 million units only on digital platforms. And it continues to perform as of today, and they are bringing out more content. Gunfire, having their original IP to continue performing, they just had a new DLC package dropping a few days ago on Steam. That game is published through Perfect World, but we do have a notable share of the gross profits coming in as royalty income in our P&L. During the quarter, they set up 2 studios. They set up a studio in Barcelona that are currently working on a Gothic remake. And finally, they have the -- set up a studio in Bratislava, Nine Rock Games, that are currently working on unannounced new IP. Looking ahead, they have a significant pipeline of new releases. And here, we're just mentioning 4 of them. In the current quarter, they are expected to release Spongebob: Battle for Bikini Bottom - Rehydrated as well as Desperados 3. And I'm happy to say that we see some very strong preorders, especially on the Spongebob game coming out in June. In the next quarter, they announced that they will be releasing Destroy all Humans!. And then later in the year, we are expecting a number of other releases, including Biomutant. Moving to Coffee Stain. They had one of the strongest quarter ever. Satisfactory and Deep Rock Galactic as well as Goat -- the original Goat Simulator was key drivers, and that all 3 of them are -- did exceed the management expectations during the quarter. The total revenues in the quarter were SEK 82 million. Comparing to the same quarter last year, it was SEK 98 million. However, that quarter included the full new release of the early access of Satisfactory. So if you compare SEK 82 million with the last quarter, the quarter before, this reporting quarter, SEK 36 million, I would like to point out a strong performance. As mentioned earlier in this presentation, they had a content drop of Satisfactory in February, and it was very well received by the audience, and the game are reaching a new level of sell-through every day. Deep Rock Galactic showed a solid performance with a combination of new content during the quarter. And after the quarter end, they released a full version just a few days ago. And as mentioning, it's -- it has been having some strong sales on Steam. Also worth pointing out is, again, the Huntdown game to raving reviews from critics. Looking into next year, I would say they have a very selected but very, very interesting pipeline of new games coming up in the coming year and years. Here, it's mentioned the Songs of Conquest from Lavapotion in Gothenburg and Midnight Ghost Hunt to release in PC, but they're having a number of other titles in the pipeline. So the new business area, Amplifier Game Invest, we're reporting this morning that they made the first investment in Italy. They acquired 100% of the studio called DESTINYbit that has an upcoming game called Dice Legacy. I'm very happy to have that team on board. So very welcome to the group. Also during the quarter, they increased their stake in Misc Games in Stavanger from 45% to 55%, and they set up, as previously announced, the River End Games studio in Gothenburg. In general, Amplifier Game Invest are having a strong inflow of potential business cases, and I'm very happy to have the whole business area within the group. Moving over to Partner Publishing and Film. They had a quarter that were significantly affected by the COVID-19 effects across Europe. Retailers were more or less closing in Europe during March. And partly -- part of that revenues were moving to e-tailers such as Amazon and many others. However, that could not fully be replaced. So we had a 27% drop in revenues year-over-year to SEK 436 million in the quarter. And on a trailing 12 months basis, they are just about SEK 2 billion in revenues. The biggest contributor in the quarter was Final Fantasy VII from Square Enix, a fantastic game that shipped partly in the quarter. I'm happy to say that all our logistics hubs across Europe remained operational during the quarter through a significant effort from all people in the warehouses, making sure we could ship the games still. The Film business had another solid quarter, I would say, in line with the management expectations. Worth pointing out, it had a continued performance just days or weeks before the closure of the cinemas in Germany, having the movie, Parasite, and -- Academy award-winning Parasite. That game -- or sorry, that film also shift to physical retail. Other titles worth pointing out in the quarter were Doom Eternal from Bethesda. That shipped within a few territories where we have the distribution. We shipped Persona 5 Royal from Atlus and Yakuza Remastered Collection from Atlus during the quarter. In the current quarter, they do have, I would say, a significant pipeline of releases. However, there is no major release during the current quarter ending in June. We still see a strong demand from consumers for physical goods, so -- and we could see a bit of pickup the last week and weeks when retailers are opening up across Europe. Okay. So going into M&A. As I told you in the previous reporting, don't expect too much too soon. I'm getting lots of emails. Are you announcing acquisition this morning, Lars? Well, no, I didn't this morning, but we're working very hard, but we don't have to acquire companies to grow the business. And there is no stress. We need to make the right transactions. Here, you're seeing a slide, obviously, of the biggest acquisitions we've done to date, and that's the acquisition of Saber Interactive that we announced on February 19, and that we closed legally on April 1. Really happy to have the whole team on board led by the CEO and Founder, Matthew Karch, and Andrey leading the operations. They -- as stated earlier in the presentation, they had a flying start in the group, releasing SnowRunner and the Game of the Year Edition of World War Z. Again, also stating SnowRunner had a very good first 3 weeks of sales. And the game is not published by Embracer Group's publishers, it's published by another publisher that are doing a great job. However, obviously, they are capturing -- I would say, most of the business of the SnowRunner game is coming into our books later on. And over time, obviously, is the strategy for Saber to capture as much value as possible, and they have clearly proven that by financing and making some amazing products before joining the Embracer Group. Happy to see that they announced another title, also published by another publisher at our friends at 2K. They announced the development of WWE2K Battlegrounds that are to be released later in the year. I leave that Saber slide here and then moving over to more a general slide about the group and then M&A. And I think the Saber acquisition has been driven even more, I would say, contacts and entrepreneurs that are interested to join the group. And I would like to just clarify why entrepreneurs and creators are interested to join the Embracer Group. And we truly have a decentralized business. And we empowered the entrepreneurs to continue running their businesses. So founded by entrepreneurs, run by entrepreneurs. And we are offering the benefits of a larger structures, such as access to growth capital, but also a range of possible but never forced synergies, sharing knowledge, IPs, distribution, marketing, resources across the group. And I truly believe this is the model for the future, and it's been working very well. And I would like to welcome more fantastic entrepreneurs joining the group. We are actively looking to onboard more entrepreneurs. We have a very long list of active dialogues. So we are looking for new operating units under the parent company that has a very sizable business or a business model that are new to the group as well as bolt-on acquisitions, mainly of fantastic development studios that are becoming part of the groups such as Saber and THQ, Koch Media, et cetera. And in order to finance these acquisitions, we decided to raise more capital earlier in April. And I was really happy to see that we had a strong demand from our existing long-term shareholders as well as a number of new long-term shareholders joining the list of shareholders. In total, we raised SEK 1.6 billion, and we had demand from more than 100 Swedish and international institutional investors. Now leaving over to Johan for the finance line here.

[Johan Ekström, Chief Financial Officer]

Yes. So we have an update on the work we do within sustainability, and we are glad to report that we are advancing in the area. Through the ambassador program that we have described earlier, we are rolling out the sustainability ideas throughout the organization and engaging and supporting all the entities in the group. During the quarter, we also launched a whistleblowing service, which is in line with the compliance code that we adopted for last year. And also a benchmark achievement in our sustainability work will be -- this is a sustainability report that will be part of this year's annual report, which will be made publicly available at the latest on 26th of August. We are also a partner to the organization Safe In Our World, who provide tools for dealing with mental health issues and are working to raising awareness in the industry on this important matters.

[Lars Wingefors, Founder, CEO & Director]

Thank you, Johan. And finally, I would like to send my dear thank you to all employees that has been very -- I would say, swiftly been able to move from work from office to their home across the world. It's been amazing to see how people are taking actions in order to make sure that the operation continues to operate on basically the same level. And I'm truly impressed by all the efforts by all colleagues and all local managers making this happen. And I know it's been very difficult times, and this still is very difficult times across the world. So thank you very much. Now leaving over to Oscar. You might have a few questions.

[Oscar Erixon, Financial Analyst]

Yes. Thank you. I do have a few questions. So I'll start with a few quick questions from myself and then also read questions from the web and finally open up also from the telephone, I believe. So first of all, talking a little bit about the Q4 results. Clearly, some unique circumstances at the end of the quarter, especially with digital sales performing really strongly, which we saw in the above guidance sales for the Games segment, while Partner Publishing performed below guidance. So can you talk a little bit about -- more about the unusual circumstances and also how that has evolved now in Q1?

[Lars Wingefors, Founder, CEO & Director]

I think the whole industry showed or have seen a significant increase in usage and -- of games. Play games hours has increased significantly across the world, basically, and that is also true for us. However, our business are partly dependent on visibility and releases -- new releases. And during the March period, we didn't really have any significant releases to kind of capture this trend. We saw an uptick on all digital areas but from quite a low level because our back catalog requires either promotions, digital sales promotions to increase their sales significantly or new releases again, and we didn't really have that during this period. However, what we've seen now in April and up until today in May that we both had a bit of more releases performing well. I think the game itself are no matter the COVID-19 situation would have been performing very well. But I think we have been able to capture a bit of that increased usage of games. We also had a number of notable digital promotions of the back catalog sales, especially now in April. So that's -- I hopefully answered that question, Oscar.

[Oscar Erixon, Financial Analyst]

Absolutely, absolutely. A strong start to Q1. Could you also elaborate a bit on Partner Publishing now? What do you expect in Q1 given that physical retail has been closed down to large parts of the quarter, and you did ship Final Fantasy partly in Q4?

[Lars Wingefors, Founder, CEO & Director]

Yes. I think we need to be realistic. And I think what's -- the most important for us is to work with our long-standing customers in order to help them to get the business up and running again. And this customer base across Europe, we've been working with for many, many years, up to 30 years. And it's very important for us that we continue having this retail distribution landscaping in Europe. I think that is the most important thing for us. In the quarter, there is no major -- significant major release. So there is a range of other releases, including films in the quarter. But I think in terms of revenues, I don't think we wouldn't have a significant quarter. I think it would be just a quarter.

[Oscar Erixon, Financial Analyst]

Got it. Got it. And going through the segment a bit. First of all, THQ Nordic, which I think surprised positively [ go from here ] at least in Q4, you mentioned that Darksiders: Genesis also performed in line with management expectations. Can you also talk a bit about how the game has performed compared to its budget, and also what you see for the IP going forward given now that Gunfire Games is an in-house label for you?

[Lars Wingefors, Founder, CEO & Director]

Yes. Well, Darksiders: Genesis was not developed by Gunfire Games. It was developed by Airship Syndicate. That is another friends and studio in Austin, Texas, but it's -- there is 2 Darksiders studios in Texas. Well, I think the game had a much lower budget. So the value of the completed game is much less than Darksiders III. Darksiders III did cost a lot of more money to make. So I think on the profitability side, we are happy with Darksiders: Genesis. I think it will continue to perform, especially on digital promotions. It's really found its fan base on Nintendo Switch as well. So I think that is kind of the level of details I can give you right now, Oscar, on Darksiders: Genesis.I think in general, THQ Nordic, it was Darksiders: Genesis. It was a strong performance, continued performance on Wreckfest. And then THQ have hundreds of catalog titles, always generating back catalog sales. But they also had a number of smaller releases in the quarter. I didn't point out really any of them in this presentation. But obviously, it's generating revenue, those smaller releases, but they also have an invested amount as well. So -- but over time, I'm confident about the return of investment of these smaller titles.

[Oscar Erixon, Financial Analyst]

Great. And Coffee Stain, you also seem very content with, which is understandable. I always want a little bit more detail on the releases here after the quarter. So Deep Rock Galactic, now fully released on PC and on Xbox, I believe. How has that performed? Some more detail there. And also when we can expect the PlayStation release to come? I know there's some sort of lockup there, exclusivity with Xbox.

[Lars Wingefors, Founder, CEO & Director]

Whether that game is coming to other formats, I can't confirm. That is something that the publisher will communicate to their fans. And also regarding the sales numbers up from the release, I don't -- I can't give you disclosure on that. I can just note that the game has performed well on Steam in the past week, and it has constantly been a title performing the past year for Coffee Stain. And I would expect that to continue. It's a fantastic game for most and a very competent studio in Copenhagen.

[Oscar Erixon, Financial Analyst]

Great. And turning towards more questions here on 2020, 2021. Obviously, there's been some news here on the pipeline for this current fiscal year. And if I interpreted the report correctly, the 2 AAA titles supposed to come out this year will not come out.

[Lars Wingefors, Founder, CEO & Director]

Well, as I wrote in the report, we confirmed the report that we will have the first AAA releases in the next financial year ending March 2022. And that is the first AAA releases since Metro Exodus.

[Oscar Erixon, Financial Analyst]

Great. And we have -- I'll come in with a question here from Benjamin May at Berenberg as well on the same topic. He thinks it's somewhat unclear on the AAA pipeline. So just to clarify, should we expect it to be multiple AAA titles in next year and no AAA title this year?

[Lars Wingefors, Founder, CEO & Director]

Well, if we don't have a AAA title from the release of Metro Exodus until the next financial year, I would guess that answer is correct -- or the question is correct. I think AAA titles are important, but I think we -- I would like to just point out that we're having an increasing number of titles perhaps not defined as AAA but are -- that are performing very well, both on a recurring basis, such as Satisfactory and many others, but also notable, great content as Spongebob and Destroy all Humans! and, et cetera. So for us, it's more about the value. The invested capital is one important KPI for us, and that will more than double the current year from last year. So kind of from a management perspective, we're actually reaching the goal we had in the amount of content we're releasing in the current year. Then I stated regarding AAA that starting from next financial year, we will have AAA releases every year. Whether that is 1 or 2 or more is not defined, and I will not confirm either of it in this Q&A. But I can just confirm that we're having a number of AAA releases under development.

[Oscar Erixon, Financial Analyst]

Great. Very clear. So a follow-up here. I mean now in 2019, '20, you had finalized development of around SEK 600 million, and you're guiding for SEK 1.2 billion to SEK 1.4 billion in this fiscal year. And looking at sales of -- from new releases, the last year was around SEK 1 billion. So should we expect more than double the net sales from new games in this current fiscal year?

[Lars Wingefors, Founder, CEO & Director]

Yes. We are not giving a financial forecast, especially not on the revenue side or operational EBIT side. The return of investment varies. And if you just look at the KPI of, for example, the overall sales or gross profit in the business area relating to finalized games, it's obviously depending on how much back catalog sales would you have in the period and how much is the value of the game you're releasing. Some games could have a very high return of investment, especially if the game over time are recurring and selling like every day for many years. AAA games and large, big, more like single-player experiences in general having a lower return of investment than small kind of indie titles. So what this return of investment relating to the finalized games in the year is that is something that I'm very glad to leave over to you, Oscar, because I don't know how much the games will sell. I'm just confident overall we will have a good, profitable, growing business. But this is games industry. Games could sell 1 million, but it could also sell 3 million, and it makes a very big difference in the return of investment.

[Oscar Erixon, Financial Analyst]

Very good. Interesting to hear your thoughts there. And I will take a look at it myself as well, of course. So I think very interesting as well here is the what you call the financial strategy updates where you open up for going to above net debt to operating EBIT of above 1x on forward-looking estimates. Is that correct, that there's forward-looking estimates, management estimates?

[Johan Ekström, Chief Financial Officer]

Yes. So it's forward looking. Yes.

[Lars Wingefors, Founder, CEO & Director]

But that would be only for bank's eyes only.

[Oscar Erixon, Financial Analyst]

Got it. But in that case, if that were to happen, would it make sense to perhaps guide the markets on your earnings expectations?

[Lars Wingefors, Founder, CEO & Director]

No.

[Oscar Erixon, Financial Analyst]

Okay. Great. And one thing that, I think, given the structure of the Saber Interactive deal now in last quarter where you also included quite some earn-outs, could you perhaps talk a little bit about the level of earn-out commitments following the deal, and also how -- what the rough splits between maturity years looks like following the acquisition?

[Lars Wingefors, Founder, CEO & Director]

I think we went through that fairly well on February 19.

[Oscar Erixon, Financial Analyst]

But just to include...

[Lars Wingefors, Founder, CEO & Director]

Total purchase price is $525 million. Adjusted for the share price for day of closing and currency exchanges, that is also the value we put to the company in our balance sheet, meaning that we are kind of expecting that amount to somehow be paid out when they are reaching these earn-outs that we think they will. If not, we wouldn't put them into the balance sheet. The earn-out are a number of other factors during a number of years, and the last earn-out are paid year 6. I think you need to ask more direct questions here, Oscar, if I am to answer them further.

[Oscar Erixon, Financial Analyst]

Got it. I'll settle with that for now. Also a question here from the web on the transition from K3 accounting to IFRS, which you initiated, I think, 2 quarters ago. How is that transition going? And what implications will it have on accounting of both operational D&A but also acquisition-related amortization?

[Johan Ekström, Chief Financial Officer]

Yes. So we are in the pre-study of the conversion project. And I think we described in the last quarterly report, we kicked it off in December. Of course, also, we need to balance priorities. So a key initiative for us is, of course, to integrate Saber properly into our current accounting standards since we need to include them from 1st of April. So that being said, there are a couple of differences mainly related to goodwill amortizations that -- I mean, if you look at IFRS, those are different. But it's also a difficult matter, and we would like to conclude the pre-study before going into any answer. So what it might look like. It's difficult.

[Oscar Erixon, Financial Analyst]

Understood. We have another question from the web before we wrap it up here. A few questions more. No M&A in the quarter. Does COVID-19 have an impact on the ability to travel and to close deal -- close deals? And also, what does the pipeline look like, which I think you touched upon?

[Lars Wingefors, Founder, CEO & Director]

I think the pipeline has increased since last quarter. We're having an increasing number of great companies that we are talking to. But as stated before, some people are talking to -- over years until it actually happens. I think the pipeline is with people that we already have met and know and sometimes do business with. And I deem that we are able to make transactions with those, if needed, companies without too much of traveling because of -- we're having a global setup of advisers, and our own offices are in more than 40 countries already. And even though I prefer to have a physical meeting with people and actually making the deal, I have to agree to some degree do work, to use the phone and Zoom or Teams and other programs. Obviously, over time, if the lockdown would globally be extended like over another year or so or perhaps half year or a year, at least, then it will be harder to find new great companies because I don't want to make any significant acquisitions without actually meeting someone eye to eye. So -- but for a moment, that is not really an issue to make transactions, and I have efficient logistics ways how to operate. So I'm sure I will be able to get out to the companies across the world when the local governments are opening up.

[Oscar Erixon, Financial Analyst]

Great. And I have 2 more questions from the web, but let's open up for some questions from the telephone for now.

[Operator]

Ken Rumph from Jefferies.

[Kenneth Charles Rumph, Equity Analyst]

Lars, I had a -- okay. I have a couple of questions, if you hear me okay?

[Lars Wingefors, Founder, CEO & Director]

We hear you.

[Kenneth Charles Rumph, Equity Analyst]

Firstly -- okay. Firstly, regarding sales during the COVID experience, could you comment on the extent to which you believe that they are kind of a one-off or that they will generate, say, for instance, base game sales where there's a potential for follow-on sales from DLCs in future years? So is it a one-off effect? Or does it have a longer-term benefit? And secondly, again, there's a shift to digital at the moment, but how do you feel that the effect of the sort of depression of physical is going to apply when we get new game sales, particularly new console sales, which have always been quite physically orientated? Do you feel -- how much do you feel digital has grown at the expense of physical in a long-term way?

[Lars Wingefors, Founder, CEO & Director]

I think the long-term effects are definitely there. The increased spent hours in games will benefit the usage of games going forward. How much that is, it's impossible for me to speculate in. I think in general, I'm just encouraged by seeing a lot of new players coming into our games, and I'm sure they will, even though the lockdown is over, continue to play these games. On the second question, physical. I think physical are -- it's already somehow a niche market. However, customers comes first, and there is still a significant amount of customers willing to buy physical. They like the physical products, as I do myself, buying these collector's editions, buying these substantial big releases at release, especially when there is new potential concepts coming out. So I'm a firm believer that the physical market, even though it's a niche, will be here to stay for many, many years to come. So we are staying in this market. And I see the -- rather the opportunity to contribute to the consolidation in order to make our operations efficient. So how much this shift will be after lockdown, it's very hard to speculate on.

[Operator]

[Operator Instructions] The next question comes from Lars-Ola Hellstrom from Pareto Securities.

[Lars-Ola Hellstrom]

I have a couple of questions. We can start with the M&A. And given the organization that you have built over the last year and following the acquisition of Saber Interactive, would you say that you are having discussions with a potential target that you even wouldn't have been able to imagine that you will have a discussion with just a couple of years ago at present?

[Lars Wingefors, Founder, CEO & Director]

Well, it's best couple of years ago, yes, definitely. I think our size in terms of, obviously, ability to -- both from a financial perspective but also market cap perspective because I'd like to give part of the considerations to entrepreneurs in shares, so they can take part of the overall group. And it has definitely helped, obviously, that we're having a larger market cap today than we had a few years ago. Saber Interactive has specifically contributed to a number of new conversations that we didn't have before they entered the group. So I think, over time, the more great companies you add, the more great companies could potentially join going forward. Obviously, we need to be not careful, but I think we need to be -- we need to make sure that we are able to manage and integrate these companies also from a parent company perspective. And that's why we have been building more organization here in Karlstad but also Stockholm and across the world in order to operate the whole group.

[Lars-Ola Hellstrom]

So it would be fair to say that the overall quality of the M&A pipeline has increased?

[Lars Wingefors, Founder, CEO & Director]

I think it's -- over time, I think it has been a good strategy to onboard fantastic companies because fantastic companies will continue to be fantastic in the future. That is a quite efficient way how to operate such a group as Embracer. And my ambition is definitely to continue to add the leading or top-ranking players, whether it's in droners or geographical restrictions or business models over time. For me, it's important that there is someone there, there is an entrepreneur, there's a team of people that founded and still operate the business, whether they are creators or businessmen or women. That is one key factor to success because I would like to have someone to talk to that are incentivized to continue operating their business. So I think that strategy have partly changed from the time we made the IPO 3 years ago.

[Lars-Ola Hellstrom]

Perfect. I got it. A final question for me. On the project delays for Dead Island 2 and Saints Row project, can you explain how much is related to the current COVID-19 situation and how much is related to the new consoles versus coming up? And even that is sizable project, that is sizable complex project. Can you give some more...

[Lars Wingefors, Founder, CEO & Director]

I haven't talked about those 2 titles today. And as I've been stating before, I would like my fantastic developers and publishers to communicate their products. I think in general, on the question, is there delays regarding -- because of the COVID-19 situation, I think in general, I think I don't see any significant or delays in our development pipeline. Obviously, that varies across all our 118 projects and 31 owned studios. Some studios are actually reporting an increased efficiency in order to develop and make the games, and some other studios, especially the first week, had some challenges to switching and moving like computers and structures from office to home. But I think in general, now, what I hear, it's working very well.

[Operator]

There appear to be no further questions. I'll return the conference back to you.

[Lars Wingefors, Founder, CEO & Director]

Okay. Oscar, are you still on the line?

[Oscar Erixon, Financial Analyst]

I'm still on the line, and let's wrap it up here quickly. But 2 questions that I have to ask from the web as well, which I think are interesting here. First one from [ Nicky Manrup ]. It is, to be 100% sure, is Dead Island 2 and Saints Row 5 categorized as AAA games?

[Lars Wingefors, Founder, CEO & Director]

I haven't given any definition of AAA regarding our titles today, except the definition of Metro Exodus were a AAA.

[Oscar Erixon, Financial Analyst]

Got it. And then the last question. Can you say something about Biomutant? Will it be out this year? And what do you think of the game quality?

[Lars Wingefors, Founder, CEO & Director]

I love Biomutant, the team and what I see. But for me, it's kind of -- I wouldn't say pet project, but it's like a project that I just want to -- or I want, but I think we want to make sure it's reaching the expectation and ambition they're having. And as I stated before, it's a quite small team, so it takes a bit longer for them to finalize the game. And for me, they could continue for -- until the game is what it has to be. I expect the game in the current financial year, though.

[Oscar Erixon, Financial Analyst]

All right. Thank you very much. That was it for me, and I hope to see you next time in a more regular circumstance in Stockholm perhaps. Thank you.

[Lars Wingefors, Founder, CEO & Director]

Or sunny Karlstad. Thank you, Oscar.