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Embracer Group AB
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Hello, welcome to Embracer Group's Q1 report. In a quarter of focus on opening up effects and IDFA, the company reports a solid organic growth of 10% and also a solid release for Biomutant, which was profitable within 1 week. So I think we have a lot to discuss today. We will start with the presentation by CEO and Founder, Lars Wingefors; and CFO, Johan Ekstrom. Then we will have some guests from the U.S., I believe, and then I will be back for a Q&A session. So without further ado, I will leave it over to Lars Wingefors and Johan Ekstrom. Please go ahead, guys.
Thank you very much, Oscar, and hello, everyone. And once again, very welcome to Karlstad and Varmland. I'm glad to report another stable quarter. We had record revenues of SEK 3.4 billion and the Games business area segment growing 83% to close to SEK 3 billion in the quarter with underlying organic growth of 10% on a constant currency basis. The profitability came in nice at a record new of close to SEK 1.3 billion, which is a 79% growth in the quarter. We did have a negative free cash flow driven by increased working capital and increased CapEx into the future Games pipeline. The key drivers in the quarter was the success of Biomutant, selling more than 1 million units as well as a great performance of the recently acquired Easybrain's titled Sudoku.com as well as continued performance of Valheim. Overall, we have more than 180 projects in the pipeline. And looking to the second half of the year, we have a very wide range of titles in all sizes to be released. And we are expecting to our publishers and developers to announce these titles starting quite soon or very soon up until Christmas for titles coming in the current year as well as in the future years.Looking at the KPIs again. We did make 8 acquisitions a few weeks ago. I was really happy to welcome Ghost Ship Games, Easy Trigger, 3D Realms, Forcefield, CrazyLabs, Grimfrost, Slipgate and DigixArt into the group. And this morning, we also announced further 3 acquisition: SmartPhone Labs, Fractured Byte and Demiurge, all within -- all 3 within the Saber Interactive vertical. Overall, including the 8 acquisitions but not this morning's acquisitions, we are 77 game development studios internally and are about 8,000 in engaged headcounts across the world. Pleased to see that we are able to increase our investments into the game pipeline. We had a record of SEK 770 million invested in the quarter, up from just above SEK 500 million. And if you compare that to the completion value in the quarter reported of SEK 300 million, there is a significant difference. I wouldn't define it as growth CapEx, but there is a difference that will the drive organic growth in the coming years. And if you read the report this morning, we are expecting accelerated organic growth driven in the second half of this current financial year as well as stable or great growth ahead of the general gaming markets in the years to come. We're expecting to complete Games in the current quarter ending September of between SEK 225 million and SEK 275 million. That's the value of the new releases in the quarter ending now in September. For the full financial year ending in March, we are expecting to complete Games of a value of between SEK 2.9 billion and SEK 3.3 billion. We have started our journey within mobile games a year ago with the acquisition and welcoming DECA and Ken Go as entrepreneur into the family. And since then, we have acquired a number of businesses, including Easybrain in February and now recently CrazyLabs that are expecting to close in the end of this current quarter. And I'm really pleased this morning to announce that the KPIs in the combined business on a pro forma basis looks solid. We have 33 million players playing our games on a daily basis during the quarter or we have 286 million active players of all the games during the quarter.The mobile business had IDFA change in the end of the quarter ending June. Now that is widely implemented. And during the past weeks, we had seen an improved return of investment on user acquisition. And in line with our strategy, we are now investing to drive as much value-enhancing growth in the future as possible. Our balance sheet is fully loaded for more acquisitions and welcoming more entrepreneurs and creators into the family. With the closing and payment of the current acquisitions, we are expecting or roughly estimate to have about SEK 8 billion in net cash and SEK 17 billion available, including credit facilities. And we have a large number of ongoing discussions to join the family, including large and transformative acquisitions. But we're being prudent. And these processes take time, sometimes years, at least a notable period of time, and it's important that we make our homework, the due diligence, get to know the entrepreneurs, feel the culture and obviously having the right terms to welcome them into the family. But if you combine all ongoing discussions, those companies, enterprise values way exceeding the available funds, including the upcoming mandate for share issue. So we need to pick the right companies and being very prudent in our approach to do M&A.So with that said, I would like to welcome our CFO, Johan Ekstrom.
Thank you, Lars. Yes. So let's start by looking at our P&L for the period. We can conclude that net sales reached SEK 3.4 billion in the quarter, up 66% versus last year. Our EBITDA grew 59% to SEK 1.5 billion and operational EBIT reached almost SEK 1.3 billion in the quarter, growing with 79% over last year and yielding an operational EBIT margin of 37% for the period.The growth in net sales is driven by the solid performance in business area Games, where we had a growth rate of 83%. Growth in Partner Publishing/Film was 4%, and the healthy growth in business area Games has a favorable product mix impact on our gross margins. So gross margins in the period are up from 63% to 76% in the quarter. We also see a positive effect within business area Games with the inclusion of Gearbox and Easybrain. Adjusted EPS for the period is SEK 2.3 per share, up 52% versus last year. Looking at the trailing 12 months, we see that we surpassed SEK 10 million -- or SEK 10 billion in net sales on a 12-month basis, reaching an operational EBIT of SEK 3.4 billion, yielding an operational EBIT margin of 33% and an adjusted EPS of SEK 7.23.If you take a closer look at our amortizations in the quarter, we have operational amortizations of SEK 261 million. These are mainly related to our game development or finalized games that are being amortized. If you look at our acquisition-related amortizations in the period, they were SEK 1,796 million, which is about SEK 126 million above the forecast that was given last quarter. And the reason for that is that when you build the forecast, you use the volume-weighted share price in the share purchase agreement. But then when you look at closing, share price can be different and also exchange rates is different, which explains the gap. The majority of the acquisition-related amortization is related to goodwill. Looking at the cash flow statement. We are growing our free cash flow before changes in working capital with 36% over last year, reaching SEK 466 million in the quarter. This is despite the fact or in addition to us having an all-time high investments into our Games portfolio of SEK 770 million, and the increase in the investments into our Games portfolio can be explained by the addition of aspiring Gearbox in the period and also increased organic investments into new game development. We also see a shift from co-publishing projects towards internal development, mainly in Saber Interactive.We had a negative effect from changes in working capital in the quarter, minus SEK 726 million in the quarter. This is explained by royalty payments of SEK 464 million in the quarter and also seasonal variances in trade payables that were reduced with SEK 372 million. Net cash flow effect from acquisitions closed in the quarter amounted to almost SEK 2.3 billion.If we take a closer look at our investments into intangible assets, that was SEK 829 million in total in the quarter. SEK 770 million of those are related to investments into our Games portfolio, where the majority SEK 469 million is investments through our internal studios. We also have other -- or investments into other intangibles of SEK 43 million in the quarter, which is mainly related to our Film segment. The value of finalized and completed games was, as Lars said earlier, approximately SEK 300 million in the quarter. Looking at the development of investments into our Games portfolio, we are growing with 69% compared to the first quarter of last year. And you can also see here that the share is increasing in terms of internal development.The increased investments into our Games portfolio also shows in our pipeline and development capacity. At the end of the quarter, we had 136 studios engaged in project development, 69 of those are internal and 67 external. We have almost doubled the amount of developers and games in project development, reaching almost 6,400 people at the end of Q1. And the pipeline of projects amounts to 180 at the end of Q1 as opposed to 125 a year ago.If you look at the value of finalized game development over the year, we expect to, during this fiscal year ending March '22, complete more than 90 game development projects with a total completion value in the range of SEK 2,875 million to SEK 3,325 million. For this second quarter, the value of completed and released games is estimated in the range of SEK 225 million to SEK 275 million. So the level of completion is expected to be back-end loaded towards the later part of the year, mainly in the fourth quarter.Looking at our balance sheet. Total assets amount to SEK 52 billion at the end of June. A big portion of that is related to intangible assets. That's about SEK 35 billion. And if we look at intangible assets, we can divide them into acquisition-related intangible assets and operational intangible assets, where the operational intangible assets amount to approximately SEK 4.7 billion. And the majority of that is related to investments into our ongoing game development projects, SEK 3.8 billion. The value of completed games at the end of June was approximately SEK 700 million. Of the acquisition-related intangible assets, goodwill is the majority. It's SEK 27 billion. We continue to have a strong balance sheet with a healthy liquidity. At the end of the quarter, available funds were SEK 19.8 billion. And as per today, it's approximately SEK 17 billion in available funds. Net cash at the end of June was SEK 10.3 billion. And today, it's approximately SEK 8 billion.If we look at the outlook for nonoperational amortizations, we estimate that they will amount to SEK 1.9 billion (sic) [ SEK 1.9 million ] for this second quarter ending September, and for the full fiscal year, amounting to SEK 7.7 billion. This includes transactions closed as per the end of June and also the transactions that was communicated in the beginning of August with now from the expected closing dates. So it's important to note that the forecasts are based on the average exchange rates for the period April to June, and that is based on the purchase price allocations that we have available today, which includes both preliminary and finalized purchase price allocations. Also important to note is that consideration shares related to transactions that were not closed for the end of June are valued at price set forth in the relevant share purchase price agreement. But then when you look at post closing, when you do the PPA, they will be valued at price at that point in time.Business areas?
Thank you so much, Johan. So let's look a bit into the business. So in the Games business area, we have had a solid performance year-over-year. And the Games business area is now trailing at SEK 7.8 billion in revenues. If you look at the share of new releases versus the back catalog defined, in the quarter, we had 29% of the revenues coming from new releases and the balance coming from back-catalog titles. The share of digital sales are in the quarter at 87%. And on a trailing basis, it's 84%. And also, if you look at the share of owned titles this quarter driven by, for example, Biomutant, the share is 79% in the quarter.So moving over to Vienna and THQ Nordic, and the original company that I was part of funding, 2010, '11, they actually have a 10 years anniversary coming up and the best quarter ever in June by the release of Biomutant, selling more than 1 million units. And we stated in the report this morning that the full investments in development, marketing as well as the acquisitions cost for Experiment 101 and IP was recouped within a week after launch. And we expect the title to be a solid contributor in our catalog for the years to come. They also released the Switch version of Destroy All Humans! in the quarter as well as the next-gen version of Wreckfest performing well in the quarter.Looking ahead, they're having a very wide pipeline of new games coming out. They have 57 titles or game development projects in the pipeline, whereof 43 of them is not announced yet. But looking here, they, for example, have announced titles such as ELEX II, Expeditions: Rome and expansion of Kingdoms of Amalur; Re-Reckoning - Fatesworn. The business is now generating close to SEK 2 billion in revenues on a trailing 12-month basis. The Koch Media Publishing business. Now we renamed the business area Deep Silver to Koch Media Publishing because Koch Media Publishing consists of not only Deep Silver, but a range of other publishers such as Milestone in Italy; Vertigo Games, the VR Publishers in Holland; the recently launched publishing label out from Munich, Prime Matter; as well as Ravenscourt. Those are the publishers currently within Koch Media. In the quarter, they had new releases of primarily MotorGP 21 performing well as well as the next-gen version of Saints Row - The Third remastered on PS5 and Xbox Series X. Catalog was strong as usual, driven by Metro Exodus primarily as well as Kingdom Come: Deliverance and Saints Row and many, many other titles. A few weeks ago, they announced acquisitions of 2 new companies: Force Field in Amsterdam that will be renamed Vertigo Games Amsterdam and will be part of the VR vertical within Koch Media, driven out of the acquisition of Vertigo Games; as well as DigixArt, the leading or great French indie development studio. And I've been really pleased with the recent days to follow their new release of Road 96 performing well on Steam. Koch Media has a huge pipeline of notable titles coming up this year and the coming years. And here we mentioned a few titles such as Chorus, Hot Wheels Unleashed, Dead Island 2, Kings Bounty II, Payday 3, After The Fall, and the project at volition, Saints Row. On a trailing 12-month basis, they are at just about SEK 2 billion in revenues. And on a quarterly basis, they had revenues of SEK 638 million.Moving to Florida and New York or Jersey. We have had a stable performance from Saber Interactive. They came in exactly a year ago into the group, and the comps was a bit tough with a fantastic performance of SnowRunner. But SnowRunner continues to perform well as well as World War Z and other titles. On a trailing 12-month basis, they are stable at SEK 1.1 billion in sales. And in the quarter, it was just about SEK 300 million. But Saber is growing fast both organically, but also by M&A, as you saw this morning. And we set a goal when Saber joined the group a year ago to grow from 600 to 1,500 developers over time. And I'm really pleased to see that they've actually been able to grow from 656 to 1,567 end of the quarter, and that is not obviously including the acquisitions announced a few weeks ago and this morning. And a few weeks ago, glad to have the Scandinavian companies, Slipgate and 3D Realms, joining from [indiscernible]. And 3D Realms has a fantastic heritage within the industry going way back and already the publishers of the cult games series Duke Nukem that also the group owns through Gearbox. Looking into the pipeline, Saber also has a significant pipeline. I would say primarily, that will be released in the coming years. But announced titles, that is not that many right now but looks strong is, for example, Evil Dead, the Insurgency; Sandstorm on console, the World War Z: Aftermath as well as Zen Pinball Party from our friends in Budapest. Also worth noting on the Saber, I was glad to see that they have been starting capitalizing some development within their resources, meaning they will have own projects of titles coming out in the future. So Saber has a very diverse mix of revenues coming from work-for-hire, from co-development or publishing as well as own titles. And I'm always supporting the companies if they would like to take some business risk and try to leverage our capacities as a publisher within the group. So moving over to Amplifier. They continue to develop as a company. Amplifier still has very small revenues because more or less all their studios are still working on their games, and that will be released in the coming years. But they have a strong growth model and a model how they cooperate with the industry, attracting senior talents to set up new companies that -- and with strong incentives, they're becoming part of the group. When we made the acquisition of Amplifier under a different name, like 2 years ago, they had a portfolio of minority-owned game studios. And we have been pleased and very proud to see one of the Swedish investments in studios, Neon Giant, to have their first release set to perform very well on Stream with a strong meta critic and feedback from users. So congratulations to that team. Amplifier currently owns 20 -- roughly 29% of the studio. They've been building organically to also set up new services within Amplifier, mainly publishing services that would support the studios within that group.Moving to Coffee Stain. They continue to develop as a group and a company. They had a solid -- comparing to last year, they had a solid performance, close to SEK 200 million in revenues in the quarter. And on a trailing 12-month basis, SEK 1.2 billion. Main revenue drivers were the old Goat Simulator, Satisfactory, Deep Rock Galactic as well as Valheim. Valheim is selling 1.1 million copies during the quarter. And the team at Iron Gate, that we own to a minority, are adding more talent to that team, and they are building more content for the game in the future. Also, I'm pleased to see that Anton and the team are -- start doing and allocating some capital into M&A. I'm happy to welcome Easy Trigger from Trollhättan, the developers behind Huntdown, into the group as well as us finally being able to welcome Ghost Ship Games, one of the absolute leading in the games developers in the world with a community-driven co-op, Deep Rock Galactic, from Denmark as a sister company to Coffee Stain. And Anton and Søren and the rest of the management has some great ideas how to develop this group in the future, so stay tuned. Coffee Stain has a strong pipeline. It's not that many titles announced and -- but they are very keen to develop the absolute highest quality and together with the communities. So I'm confident about their growth in the future. Right now, they announced Midnight Ghost Hunt and Songs of Conquest to be released. Gearbox. I was pleased to welcome them into the group in closing 1st of April. Gearbox is a fantastic company with -- as all companies with -- in a positive way, a different culture and a bit different business and through AAA development studio, and obviously, the makers and creators behind Borderlands. And during the quarter, they had the Borderlands 3 Director's Cut released together with our partners at 2K as well as they continue to work with the external publishing title, Risk of Rain 2. After the quarter end, they released Tribes of Midgard and other viking game, and happy to see that sold more than 250,000 copies just within 3 days. During the quarter, they had revenues just above SEK 400 million. And Gearbox has a strong organic business plan for the future and are building a number of projects. One of their projects were announced with their partner, 2K, Tiny Tina's Wonderlands, that will to be released in the future as well as they have the title Homeworld 3, our own IP under development within external, the games development studio. They're also wrapping up the principal photography in Budapest for the Borderlands movie that was completed now in June this year. So moving over to Cyprus and Easybrain. So Easybrain had a very strong organic growth and a solid performance exceeding the management expectations of Easybrain. The main revenue contributors was Sudoku, Nonogram and BlockuDoku. Revenues in the quarter was SEK 576 million. And the effect of IDFA was lighter than we -- they expected. That helps outperform our initial plans of Easybrain. They see existing opportunities now to scale up the user acquisitions and will do so in this quarter and onwards. They also have a number of promising titles in soft launch as well as in development pipeline that further will grow their business. User acquisition spend for Easybrain in the quarter was SEK 289 million. And in general, I'm super pleased to have them on board. I think the onboarding process with Easybrain as well as Gearbox and Aspyr has been very good. And they have a solid -- very solid management team both in finance and operation.DECA Games also had a solid quarter with revenues of SEK 146 million at an all-time high in the quarter. And on a trailing 12 months basis, they are at SEK 355 million. Party in my Dorm, Realms of the Mad God and Kingdoms of Heckfire has been the main contributor to the revenues in the quarter. But the management of DECA led by Ken Go is very ambitious. So they have multiple IP deals in the works with their core business model of DECA as well as a substantial M&A list. So I was really pleased to welcome the management and CrazyLabs into the group to become a sister company of DECA and forming like a new unit. And within mobile, there is more synergies you can have at once. And I'm really pleased to see the cooperation between DECA and CrazyLabs. CrazyLabs is one of the leading hyper-casual publishers of the world. They released 11 new titles worldwide last year, of which 8 of them really had more than 20 million downloads within the first 12 months. In total, they have had 4.5 billion downloads of their games since inception, which of 1 billion was last year. And they have 110 million unique monthly active users. As well as being hybrid cash flow, they also has a strong cash flow business. And the leading title currently is SuperStylist, but they also have a number of other titles under development. We're expecting the CrazyLabs acquisition to close in the end of this quarter. And Koch Media or the Partner Publishing business segment, led of the Koch Media distribution business but as well as the business within game outlets, an original company here from Karlstad as well as our friends at Quantic Labs in Romania, forming this financially business units -- or business unit. Revenue was SEK 466 million in the quarter. And on a trailing 12-month basis, it's actually all-time high to SEK 2.6 billion. No notable key drivers in revenues from our titles, but worth mentioning is obviously Resident Evil Village and NieR Replicant being released in certain territories across Europe. The Film business continues to have a solid profitability and performance. And really excited to see the success at the Cannes Film festival, and they have the exclusive German rights for horror movie, TITANE, that won Golden Palm awards. If you remember, last year, they had a Golden Palm winner, Parasite, as well. Overall, Koch Media, including the publishing business, now has more than 2,000 employees: 1,300 in development, 650 people within publishing and distribution and about 80 people within the film segment.So looking a bit on the M&A, an outlook for that. And before I comment on that, we can just recap a bit on the KPIs on the M&A side. And perhaps, Johan, you could help me to get this KPI slide.
Yes. So what we can see is that we -- during this calendar year 2021, we have done 15 deals, and 14 of those within business area Games and one within Partner Publishing/Film. You can also see on the left-hand side here that the absolute majority of capital allocated to M&A is towards business area Games. Further, if you look at the type of companies that has been joining the group, we can see that we have had 2 new operative groups in Easybrain and Gearbox during this calendar year and then 13 bolt-on transactions has been made. And if you look at the capital allocation of M&A spend, you'll see that approximately 18 is towards new operative groups and the remaining 8 towards bolt-on transactions.
I prefer to say mergers or/and acquisitions or bolt-on, but -- because that's what it's all about, to merge with the industry and to bring new fantastic talents and people onboard. But financially, I guess, acquisitions and bolt-ons is the right definition. So talking a bit on the M&A and the coming periods here and what we're building, I would like to state again that I'm a firm believer in the ecosystem we are building, the independent ecosystem, not running our own and consumer platforms and complementing the industry, working with the industry leaders to leverage our businesses. And I think -- and I'm a firm believer of the larger our ecosystem becomes, the greater our output will have over the long term in terms of synergies and what we are able to achieve and create.And I'm humbled by the interest among creators and entrepreneurs to join the family. I think it's stronger than ever. And we continue to have a large number of ongoing discussions, including large and transformative acquisitions that could create new operating groups. And I must stress, we stay prudent. We need to do our homework. Again, we need to understand the culture. We need to see. We're bringing companies with the right mindset onboard and preferably with long-term incentives with management and entrepreneurs and the sellers to be in the same boat with them for up to 10 years preferably. And if you combine the ongoing discussions we have, it's exceeding the available funds we have including the upcoming mandate for share issue. I'm just saying this because that -- it's important that -- to say, one, we have many alternatives; two, that we need to stay -- perhaps not to use the word picky, but to really pick the right companies out there to form the Embracer of tomorrow. And so I'm positive. And currently, again, stated, we have SEK 17 billion available cash plus the potential mandate we will have at next week's extra general meeting. So the sustainability. So before I hand over to you, Johan, I would like just to state a few things. So COVID-19 is one of today's biggest challenges that we must face. At recent times have shown there is also other challenges in the society and in our industry. It is important that we, as an industry but also as individual companies and as a parent company, each take our responsibility to change these social structures and discrimination. For Embracer as a parent company, our common foundation is our code of compliance, which aims to support inclusion, diversity and gender equality. Furthermore, we trust that each company in our group listen, discuss and act. A way to measure and follow up our employees is done via a global survey that allows each employee to answer several questions anonymously.So with that said, Johan, do you have some more sustainability update here?
Yes. So if you look at activities or initiatives for the quarter, we have sorted them into our 4 pillars that we have in the sustainability framework: the business sense, the solid work, the great people and the greener planet. Looking at business sense, we -- governance is a part of that. So as Embracer Group evolves and grows, it's important that we continuously monitor and develop our internal control system and governing documents. What has been done especially during the quarters is that we have updated our compliance code to include more elaborate guidance on areas such as social media and political activity. We also launched a elaborate insider Q&A document in the quarter. We think that Embracer stories is a great way to share stories across the world from our employees. And the quarter -- this focus -- the focus of this quarter has been on mental health awareness, corporate culture and the heritage of games within the Embracer stories. As you mentioned, Lars, we do our annual global employee survey. It was conducted previous quarter. And this quarter, it has been presented to the respective operative groups. We're also pleased to note that we scored an eNPS of plus 29, which according to the scale is good. And we also realized that it's always important to strive for continuous improvement within the area. Looking at greener planet, we have compensated for our measured emissions by a factor of 1.5x through supporting 2 projects: Prony wind power and Solvatten. They are focused on health, diversity and generating sustainable energy. And for the year, we are setting a climate strategy, and that will include reduction targets that are in alignment with the Paris Agreement. We also feel that it's important to support local communities globally and locally, and here is a flavor of what we currently are supporting as some examples.
Yes. So thanks, Johan, talking about the heritage and games culture. It's one of the Embracer parent company focuses. And we are building this games archive, and there’s something always happening in each quarter. And we now found a head of the archive. And he's recruited, starting in September, David Boström, one of the leading experts on retro gaming in Sweden and also the founder of a leading YouTube show called GamingGrannar. And he will recruit a further team on this. So if you're interested, please reach out on this e-mail address. We also made a number of fantastic purchases that I've been happy to look at that I think will contribute to the archive very well. Archive is, I think, 40,000, 50,000 different games. But obviously, we just got started, and there is hundreds of thousands of different games, we believe, in the world. So please reach out if you want to contribute to this. Deep dive, nonrecurring information, Johan?
Yes. So let's have a look at preliminary PPAs for the quarter. There were significant completion of transactions during the quarter, and this is a summarized view of how they have impacted our financials from a PPA perspective. First, it's important to note that SEK 329 million is recognized as ongoing game development and finished game development in the opening balances. Further, it's important that during the PPA process, we have identified notable projects to be co-publishing projects or classified as co-publishing projects. This means that they will be accounted for under the percentage of completion method, and that means that revenues are recognized as a percentage of total project income as work is being performed in the project and you incur expenses. So there is no recognition of intangible assets for co-publishing projects.
So there is no capitalization of those projects. And then there will be potentially further income on royalties in the future of those projects, such as Borderlands being one example.
Yes.
Worth mentioning here on the SEK 325 million, that is primarily a value that was not in the balance sheet of the companies we acquired. So we added this to the balance sheet. And this will then be amortized and deducted before we account the operational EBIT.
Yes.
Just to be clear.
Yes. If we look at the surplus values, regulatory transactions, it's in total SEK 20 billion. The majority is allocated to goodwill, and there is a SEK 1.8 billion allocation towards IP-rights, Trademarks and Other. We also provide information in our quarterly on how the consideration is split. So if you look at this, we have upfront consideration paid by shares issued. There is also shares issued under clawback to cover for earn-outs and also provisions made for conditional purchase prices earn-outs that can be settled either in cash or in shares in the future. Talking about conditional purchase prices. We have extended information in the quarterly report to show longer time periods for provisions, but also to include clawback shares. And if we start with looking at provisions, they amount to SEK 9.8 billion at the end of June. Out of this, approximately 5 needs to be settled with the issuance of shares in the future and the remaining part to be settled through cash payments. If we look at the maximum earn-out consideration, this -- or there is a cap on the amount of shares that could be issued, and that cap is 26 million shares. If we look at clawback shares, we have out of our 500 million outstanding shares as of end of June, and there are approximately 56 million shares issued under clawback rights. Important to note is that these shares have already been issued, so you have the full dilution effect at day 1. So there will be no further dilution or effects of clawback shares. What we have provided is the release of the clawback shares over time if certain performance criteria are met.
The clawback shares are released when the earn-out target is met.
Yes.
Then the shares are free, so to say. There could be a minor lock-up post the clawback date. But normally, it's that date or just a minor period of time.
Yes. An update on our IFRS conversion and the regulated market project. We are happy to see a solid progress during the quarter. Within the IFRS project, we have conducted or collected supplemental data to be able to do the analysis and identify possible differences that need to be documented and covered in the IFRS conversion. So it's progressing well. We want to complete the Phase 1 before we communicate any more solid time frames than what we have communicated earlier, and that we also expect to complete Phase 1 of the conversion project during this quarter and will be back with the date in the next quarterly report.Looking at the regulated market project, we have signed an agreement with an external partner to provide us support, expertise through that process. We have also started with key activities in the quarter such as conducting a regulated market gap analysis.
But we also look at factors such as the potential dual listing or similar.
Yes.
So there's a lot of activity here.
And then finally, we have updated our Project ROI slide, where we look at the contribution from released games and relate that to the investment. And this is done based on the reported information as per the end of June. The sample includes projects that has either sold more than SEK 40 million or cost more than SEK 40 million. Currently, it's 37 projects. And contribution is calculated as gross profit earned, reduced with marketing expenses for that relevant title. And also in -- if relevant, also including profit from associated companies related to the specific title. And investment is, of course, then the capitalized development expenses including any follow-on investments and investments in associated companies. So we are happy to see that we have a weighted average return of 3.2x for the total sample. And of course, that's an attractive return profile and also one of the main reasons why we focus and prioritize investments into organic growth.
Thank you, Johan. And let's now welcome our friends from America. Matt? I can't hear you, Matt. I hope…
I think I was on mute. I think you can probably hear me now.
Okay. Now I hear you. Great.
I didn't want to disturb your presentation. So good morning. I don't know if you can see me, but I hope you can hear me.
Good morning. What's the time?
I have Andrey. It's 4 in the morning here, so yes. So fortunately, your presentation has been riveting so far, so I'm fully awake now. Thank you for that.
4:00, that was about the European time we closed the last deal this morning.
Yes. Yes, it was. Yes, it was.
So do we have Andrey here as well or…
We do. Andrey is here. I think he's sitting in a lobby in a hotel in Madrid. That's what it looks like. Am I right? Close?
Exactly what it was. Yes.
Okay. I think I've sat in that lobby, too.
I'm sure you have.
So it's -- well, god, it's been, I guess, the first time I stood up there was in February of last year, and a lot has happened since then. A lot of unexpected things have happened since then, but a lot has happened generally. And so we just wanted to go over some of Saber's latest activity and a couple of the acquisitions that we've been fortunate enough to sign over the last -- actually, I should say, last couple of weeks, but really, I guess, you would say it's the last 12 hours because everything always seems to wait until the last possible minute, so we can get as little sleep as possible. But…
Should we start with presenting the 3 companies?
Sure.
And then we could sum it up with a more -- some general shots before entering the Q&A.
Sure. Sure. Sure.
So we made the 3 acquisitions, and we are welcoming 220 new colleagues. And I will try to flip slides here while you and Andrey are presenting the companies. And sorry, Andrey, for not being on picture here -- having you on picture. But I'm super excited to hear you present the Demiurge.
Well, so Demiurge is a great acquisition for Saber, and they're a perfect fit. So we kind of have a similar history with Demiurge starting in the work for hire space. Demiurge is close to 70 employees. They're based out of Boston, Massachusetts. And they've been doing this for 2 decades now and have established relationships with all of the leading industry players and have worked on a tremendous number of successful titles over the years, including Marvel Puzzle Quest, and Rocket League, and Medal of Honor, and Mass Effect, and Gears of War, our own Borderlands and a tremendous number of other titles. At the moment, they are solidly growing their studio. They were part of Sega, but purchased their interest back and have grown the company significantly since then. And we look at Demiurge on a go-forward basis as kind of the hub of our efforts to significantly expand our work-for-hire business within Saber in the future. We have a desire, and we see a tremendous market opportunity to create tremendous cash flow with a highly decreased risk by continuing to work on the work-for-hire sector. We've done that successfully at Saber, and it's been our bread and butter for so many years that we are going to be continuing and growing that business because it's highly profitable and because the demand for resources, especially in light of the absolutely incredible number of acquisitions that have taken place not only by our company, but our competitors. And peers over the past couple of years has really created a demand for high-quality resources that are managed by companies that have significant experience doing that. And so I should state that we're super excited about the prospects of this business. Obviously, Saber has a tremendous number of our own projects that we are working on. That number is growing. And over the coming months, we'll be sharing more about some of these great products that we're working on internally. But we feel that the work for hire space is solid, it's steady, it generates significant cash flow, and we know how to do it better than anybody. And so there are a few companies that are out there in the market that are successfully doing this and that are trading at high multiples and that are qualified and capable, but there's way too much work for the small number of companies that are out there in the market. And so Demiurge is a perfect complement to Saber and is -- that's exactly what we've done. They have great contracts in place with some of the leading industry peers. Those contracts will continue, and we'll grow and we'll grow that. I mean the one thing I can say about Demiurge, which is super interesting, and the one thing I could say about Embracer generally is that we are one of the few game companies in the world that although we're sizable and we have a tremendous number of great IP and great projects, no one views us as a competitor. Everyone views us as a partner and a peer. And that's our advantage, is that we're considered to be complementary to many of the other companies in the industry. And therefore, it makes it easy for us to…
And it's part of that strategy, Matt, to be complementary to be complementary. We have many complementary businesses, distribution, work for hire and many other businesses.
You're absolutely right. Well, I think it's just because everybody likes you, Lars. I mean, I think, that's why we're able to continue to do that. I think it's inspite of me, I think it's because they all like you.
Oh, yes.
But the reality is there are companies out there that say, hey, we're not going to work with this other company because they consider to be a competitor. But nobody considers Embracer to be a competitor because we're an open company, because of our structure and the way we operate. We talk to -- we will work with all of our peers, and they will work with us. And that -- we were a little bit concerned when we initially signed our deal to join, whether or not some of our work-for-hire partners will continue to work with us. But frankly, it's just accelerating. And so we see this as a major opportunity, and it's just growing, especially with the latest round of consoles and the new platforms that have come out. The demand for content and competent people that can create that content has just exploded. And really, that opportunity is almost endless at the moment, and we're going to be taking advantage of it. And Demiurge, with Kurt and Al and Bart sitting at the top of the company, we've done this for 20 years and know everybody in the industry, are really the perfect people to help lead us towards becoming a world leader in the work-for-hire space as well. We're already one of the leading companies doing it, even within Saber, but this is just another step in that direction.
Thank you, Matt. Should we leave over to Andrey a bit here talking about the 2 complementary acquisitions this morning as well? SmartPhone Labs, Andrey, why did we bring these talents on board?
Yes, absolutely. I'm super excited to welcome 2 more companies to Saber's and Embracer family today. One of those is SmartPhone Labs, SPL. It's a company based in [ Moscow ], about 2 hours drive from our main Saint Petersburg office.We started working with those guys a few years ago, started working on smaller mobile projects, but over time, that relationship grew, and SPL grew with us. They have a quite a few competent developers, engineers who were able to help us with some of the most challenging projects. The most recent one was putting World War Z on Switch. They did a very good job handling that project, which is a massive technology challenge, maybe to the level of putting Witcher III on Switch. So those guys showed their capability. They speak the language -- same languages many of our Russian developers speak and I like that they are geographically close to where we are. We know it's a very strong team, and they will help feed the beast. I can't agree we're more of a smart, but there's a huge demand for content. Many successful games require they generate business ideas by putting them on various platforms such as, for example, this World War Z. It's a successful game. And looking at [ World War Z ] generating additional revenues as well in the future. But somebody has to do the job. So I'm very excited to have SPL on board, and they will help with many of those opportunities moving forward.
Exciting. I know we talked about -- you talked highly about that team when we acquired Saber. And I'm really pleased to see they've become part of the family, Andrey.
That's a directly -- that's directly true. I remember talking about it a year ago when we were working on our deal, and we were thinking about this, about how we can expand. SPL was on the list. And I'm excited that a year later, SPL is part of the team.
Well, look, it's the one thing, Lars, that's happened since we joined. We -- everything that you said we would be able to do -- we've been able to do to grow our business. And the results are showing, and they're going to continue to show. So it's fantastic that we're able to have the ability to go out and acquire the resources that we need, not only for our internal projects, but also to move outside and continue to find new partners and new opportunities with both of these acquisitions. And that, I guess, can lead us on to our third acquisition as well.
Andrey, so please tell us a little bit more about our friends here in Estonia and Ukraine.
And so -- yes, we identified this team a while ago, and we're super impressed by what those guys can do. We're actually working putting Borderlands on Switch, and they did a fantastic job. So I have a long history of working with our brothers and sisters in the family of Gearbox. And we've been working directly with those guys for a very long time. They did other high-profile projects such as -- they did a lot of work on remakes of Tony Hawk 1 and 2. The company has about 50, 60 employees in Ukraine. The company -- comprised of multiple offices in the territory. And I feel like, together, we'll be able to grow this team quite substantially. We're already working on a number of games with Saber. And those games haven't been announced yet, but they will be in a short amount of time. Well, that's, I think, [ it will be done ].
And it's part -- yes. Well, it's probably worth mentioning here that one of the things that we've done over the last 18 months is to utilize our resources in combination with the other divisions within Embracer to exploit products that we've seen opportunity internally. And so when you have a studio that's capable of putting a game like Borderlands, there are other games as well within the group that require porting. We're doing a lot of that with the other divisions within Embracer, to bring those products to life. And adding these resources is not only for the work-for-hire business, but it's also so that we can take existing Embracer IP or existing product that's basically -- that has the opportunity to generate significant revenues on new platforms and bringing them over to those platforms as well.
Great. So thank you, gentlemen. Before we're finishing this call, how is business? And are you busy in terms of M&A? And what's happening? Or have you slowed down your…
I'm going to slow down after this phone call. I'm going to try to go to sleep for a couple of hours, but then we're going to start up again. It never ends. And Lars, even if I wanted it to end, you wouldn't let me let it end. So it's good. Everything has been great. We have -- I don't even know how many projects we have in the pipeline now with Saber. Andrey tells me. And every time he does, I fall off my chair. So not only are we doing a lot of amazing things internally that we're going to be announcing over the coming months that I'm super excited about. I would say, some of the best work Saber has ever done is certainly ahead of us, including some projects that we'll be announcing in the next months, without revealing more, because I know that you don't like me to talk too much, Lars, and I can't help myself. But also on the M&A side, we're very active. We've gotten disciplined, I mean, not like we weren't from the start, but we look at a lot of companies, and we try to find the companies that have the best cultural fit. We find -- try to find the companies that can achieve certain objectives like we have such -- we have now such as we want to add to our cash flow and add to our cash flow significantly. And Demiurge is a perfect example of a company that will help us to do that because we have a plan for growing that very, very rapidly. But we're balancing that. This is the way Saber has always operated. We've always done a mix of our own IP, our own projects and [ new ] projects that are funded by external parties that are profitable, basically, on a monthly basis. And by doing that, we hedge our risks a little bit, but we still give ourselves all the upside from those new projects that are coming in. And our acquisition strategy is in place primarily to affect that particular type of business. Although we are open to any transaction which makes sense and that we think will add benefit to us and to the group.
Well, great. I think you have a fantastic machinery for that, and you're also forwarding opportunities to the group and other companies. So I think it's great. So running out of time here, I would like to thank you guys for joining us this morning. And once again, very welcome to these 3 new fantastic companies into the group.
Thanks for having us, Lars, as usual. I can't wait to give you a big hug in Sweden without a mask on.
Okay. Thanks, Matt. See you soon.
All right. Thanks.
Okay. So with all this said, I would like to leave over to Oscar.
Thank you for that, Lars. So let's dig into the Q&A session. And I think, as always, a lot to discuss here today. And first of all, nice to see Matt and Andrey happy and doing well. So -- but let's dig into the Q1 report first. And I mean there's been a lot of talk here about opening up effects possibly affecting the performance of companies in the industry and also about IDFA [ active ] changes to its marketing ecosystem having an impact. So I mean 10% organic growth despite very tough comparisons from last year, what can you say about that performance? Are you happy? And after that, I want to break it down a bit.
Well, I think, looking in the general markets, I think the market is as stable at the same, roughly, stable level as last year, which was a significant growth from the year before. So I'm glad to see that people are still consuming a lot of games and our games, and we expect this stable situation in industry this year. And then we're expecting a continued nice growth in the industry. Looking at our business is obviously hard to measure premium games business on a daily basis in the same way. Many of our titles is premium, and you pay to play, so our revenues in that segment is driven by new releases and the performance of the back catalog. I think, obviously, we had Biomutant driving organic growth, but we also had a wide catalog of products did contribute. It was a mixed bag of that performance of the back catalog titles that we had content updates for or brought in next-gen and so on. Obviously had more revenues and -- but I think we're having a growing wide catalog of titles adding to the revenues every quarter. Looking at the mobile business, I think, driven by Easybrain and CrazyLabs, on a pro forma basis, had a fantastic growth of 37% in the quarter, which is a fantastic achievement if you compare it to last year. So they both had the underlying growth in their business, adding more titles, higher performance and a solid process how to grow their business faster, I would say, than many others in mobile.
Yes. I mean just breaking down the organic growth performance here despite tough comparisons. Of course, it's been driven long term about investments that are, I mean, accelerating as you acquire companies and invest in them. But in this quarter, I mean, Biomutant, as you say, probably a main driver. How about -- Deep Silver seems quite stable along with Coffee Stain, whilst Saber a bit lower year-on-year, if you could just break it down a little bit.
No. I think Deep Silver or the Koch Media Publishing, as we defined it today, had a solid performance especially driven by the wide catalog. For example, they had a next-gen update on the Metro Exodus on PS5 and Xbox Series X. That was driving both physical and digital revenues in the quarter. They had a good performance on the MotoGP 21 new release. And obviously, they also made a number of acquisitions, adding Vertigo and many others over the year. Looking at Saber, they came in a year ago, and I'm super happy to have them on board. But look, having like an organic growth case, they had a fantastic first quarter with the SnowRunner. So it was tough comps on that. And I think we saw that in the numbers that was a bit down from last year. And also, the acquired companies is mainly resource companies, not really driving revenue today, is more driving revenue tomorrow. They're having a huge pipeline of things coming out, but it's not coming out like this quarter. So that's the thing with Saber. Also, on the revenue side, they put some resources that they've been kind of defined as selling. as revenues, to work on their own projects. So that work is capitalized and will drive further revenues and growth and higher margins in the future. So that's -- when you transition a bit of resources within work for hire to own projects, that's obviously on the short term, lowering the revenues a bit. But on the high -- on the long term, it will drive margins and revenues. But as Matt stated, we will continue -- or they will continue complementing the industry with work-for-hire projects, co-owned development, publishing projects as well as totally owned publishing projects.
Yes. I mean this is really interesting with Saber. So I mean a really strong pipeline, apparently, both from you and from the team. What can you say about the pipeline for this year? I mean we know that Evil Dead is coming in fiscal Q4, I believe, and that it's self-published, as I understand. Is the pipeline strong for this year? Or should we be seeing beyond this year especially strong?
I would say, if you take a higher-level view on Saber and look in pipeline, they will have years ahead, like next financial year and the years after that. There is a significant difference in management expectations, revenues on those years than this year. But in the respect of the team and all the titles that are planned for this year, I'm sure it's fantastic and great titles. But looking at actual expected revenues, it's a huge difference. So I think that is the color I would like to give you on that.
Great. And then we have to touch upon Biomutant. I remember last time I was here, we were here, it was 5 days until release. Then it came out with, I mean, very high expectations. And I mean it seems to have performed quite strongly despite ratings that were -- I would say they were, I mean, decent, but perhaps not the slam dunk that one would have perhaps hoped for. So what is your view here after 3 months later? And what do you see ahead?
Well, I think the team and [ Tish ] here made a fantastic achievement of building this product and shipping it. A 20-people team, built 2 or 5, 6 years. And to create this enormous game of that small team, it's just a hell of an achievement in this industry. And they nailed it. They delivered the game according to my expectations, especially financially. We recouped the investments, both for the acquisition and the investment into the game and marketing, and we made profit. What else could you expect? Obviously, there could have been some wrong expectations, and you can debate pricing and other things on the title. But I know there is a lot of fans out there loving it. And there is some other fans out there or gamers having a more difficult time in the beginning playing the game. But in the end of the day, I'm confident the game will find a lot of new players over the coming years and decades, both on the current generations, but potentially, also, on more platforms in the future.
Great. And then I think your question that many will ask themselves here in the ROI graph, where we saw one game having, I think, if I saw it correctly, 2x ROI and one game having 3x ROI in the past quarter. So which one is Biomutant? Or are you willing to shed some hints of that, at least?
No, I think this is the work of you, Oscar, and I think you know the title. So I don't want to give too much color on that. I'm glad they made profit. I think that's the first KPI, making the money back and then a healthy return. Both releases in this plotter here made it. So…
Great. And then looking ahead for Biomutant, we're halfway into Q2 now. We haven't seen discounted sales, as far as I know, yet. So can we expect that in Q2? I expect that to probably be a sales driver, given the high initial price?
Yes, let's see. I think we need to -- I think, obviously, big promotions will be a good revenue driver in the future of the product. The question is, what price points? To be honest, I -- remain to be seen. But as usual, I want you to be realistic and not expect too much too soon of everything. And I guess confident Biomutant will bring good revenues in the future and especially on potentially other platforms as well.
Great. And then Valheim, we'll have to talk a little bit about. It came in bang in line with the guidance, I think, 1.1 million units in Q1. As far as I saw, no guidance for Q2, Q3, Q4. What can we expect here ahead? Obviously, it had an initial very strong performance.
No, no. It's still performing good and it's a fantastic game. And -- but as you noticed on -- it's been declining a bit in terms of concurrent users and sell-through, but still being in one of the top items. I would say, on -- so I'm confident it will continue to perform but perhaps continue to slow down until they are able to create more content and ship more content whenever -- now we'll let that team to -- and the publisher to communicate that when they are ready, but they're obviously working on it.
Yes. And then Deep Silver, Metro being a strong performer in the quarter, with quite strong performance, I would say, for Deep Silver compared to previous quarters. Are there any notable sort of platform deals in Q1? Or is it driven mainly by game sales? Anything we should be aware of?
Well, there is a bit of platform deals on one of the titles that we highlighted here in the presentation as well.
Okay.
So I wouldn't say exceeding Metro, but some money was accounted for according to accounting rules on that platform deal.
Yes. And also just had to check. Chivalry 2, which seems to have been quite a success, I mean, mainly digital title, and you have the physical side. Is that a meaningful contributor at all?
I care of all dollars or krona, so it's always a meaningful contribution. But financially, it was not a significant contributor, and especially not in gross margin or EBIT contribution. But everything counts, and it's a fantastic title. It's a hell of an achievement of the title, of the team at Tripwire and their developer of the title. So I'm happy to see the success of it.
Great. And then a few more questions on Q1, then we'll go to some guidance questions or outlook questions. But I mean, 2 or arguably 3 notable companies or acquisitions consolidated now in Q1: Easybrain and Gearbox, separate segments, and then Aspyr. So starting with Easybrain, I mean, quite a remarkable performance in Q1, given the guidance. And there, I think, I mean, the interesting question is regarding IDFA here, the impact here. Because you spoke in late May about limited impact, but it was very early at that time. Since then, we have seen peers report some issues with regards to Facebook, for example, and lower Q3 guidance. So what -- I mean how has the impact been felt?
I think the IDFA is -- it's now widely implemented. So that happened during the summer. But obviously, that will continue. But also, Easybrain is a different business. They are one of the leading companies in their genre. And they have been advertisement-driven business. And I'm super impressed with the team, how they're able to understand the business and prepare for changes and then finding the opportunities. And now able to actually invest back into marketing again, our U.S. acquisition, that will drive -- might put down the profitability in terms of EBIT on the short term, but obviously will drive a lot more profitability and growth on the long term.
So you mentioned in the report that you're seeing increased return on ad spend in the past couple of weeks. Does that mean you -- Easybrain had some, I mean, issues or saw in July…
Yes. But if you spend the money on marketing or use acquisition, you need to believe that you will have a return of investment. I think, without commenting too much, and it's not really my background in mobile gaming, but obviously, you need to believe you get the money back you spent to drive new customers. And they -- I think a lot of potential industry peers struggling with that because they need to find some whales or certain customers. Easybrain's business is different. They don't have this in-app purchase to the same degree.
Understood. And cost for that -- for advertising has been relatively stable. So is it reasonable to expect sort of growth sequentially from Q1 levels? Or is it -- any seasonal effects to take into account?
I stated we're expecting a growth on the Easybrain business this year, overall, from last year's numbers. And we saw growth this quarter. Potentially, it could be top line revenue growth this quarter and the coming quarters. The profitability will be depending on the user acquisition, so it's quite important. And right now, I would say, then -- perhaps we're entering an investment phase to drive further growth. They will still make good money, but they made a lot of money in Q1. So I'm sure that will make even more money in the future. But I leave that to the management to decide how -- what -- all companies in the group should always invest for the long-term best outcome.
That seems wise. And it's possible to get -- just because it's mentioned specifically, could you give some indication on sort of the margins in Q1 and the margins in Q2? I mean how big can the difference be? And what can the U.S. acquisition and investments differ?
No, but I think it could be quite a significant difference. I need to remember if we disclosed their margins in the acquisition of them. We did. I think it was 40%, roughly, if I remember correctly. Easybrain is a highly profitable company, about 40% EBIT margins, with a fantastic cash conversion. But over time, they -- so top quarters could be about 40, potentially down and perhaps a bit more about roughly that. And then investment quarters could be lower. Would that be 20 or between 20 and 40? But it's hard. It's a new business for us. But obviously, it doesn't matter for a long term, but I want them to do is just to invest as much as possible to drive their business forward. But I understand your model, Oscar, for the current quarter ending September is important, so I want to be stating that they are investing.
Yes. And then Gearbox, I mean, clearly above my expectations, at least, in Q1 here. What can you say about the drivers? Is it mainly the Borderlands franchise? Anything else? No major releases as far as I know.
No, I think it's a mixture of royalties and then ongoing projects, and as Johan stated, is a percentage of completion accounting. So they have most of their teams working on a number of projects, and then they could account for it.
Yes.
So I think, Gearbox, in general, they have a stable year, but this is not the year they have -- no, this is a starting point for Gearbox. They are investing aggressively into various different sort of things that would drive the long-term growth of Gearbox. But I think the quarters over this year on the financial will be roughly stable or a bit up and down. But I think you should look at the years ahead if you value or define Gearbox, rather than looking at the quarters this year. And it's also a bit complex accounting. Now percentage of completion is not complex because now it's implemented. But these royalty things is a bit complex. When is those revenues coming in, not necessarily always the same quarter as the game is released because it could be depending on specific agreements and definitions.
Yes. And then 2 final questions from me, for now, before heading over to some questions that I've received here from the stream. But I just want to touch on the sort of cost structure. And I think we discussed this a little bit earlier. But obviously, really, really strong gross margins in this quarter and really high other operating costs in a quarter where these 2 companies, Easybrain and Gearbox, were consolidated. So is it correct to assume that the high gross margins is driven mainly by Easybrain, which has high degree of advertising revenue?
Yes. That's true, but also driven by Gearbox. They have a high gross margin, but they also -- both companies are high, but there's a sizable cost structure added as well. And then we have the marketing investments.
Yes. And mark that the user acquisition cost is within the operating expenses and disclosed separately, the 289, so that's not part of our gross margins. So.
Great. And will you be reporting these acquisition costs separately or mention it by quarter ahead, given it's an increasing share of the cost and strategy?
We are defining how we are ought to report our mobile business. But right now, I think we will continue reporting user acquisition costs because I think it's a relevant KPI in the mobile business. We want to be transparent. We want to show the business. At the same time, we don't want to disclose too much for the fierce competition that is out there. So there is a balance. And we need to learn as well, as a parent company, on how to report this. And I'm super confident talking about retro gaming and Biomutant and things, but there are some very complex data-driven stuff here on mobile gaming.
Yes, understood. And then final question for me. You wrote in the report about limited releases here in fiscal Q2. And we know that the comparisons are, again, quite tough. Is this an indication that organic growth will be limited or even slightly negative in Q2?
I think you need to put realistic expectations on the quarter ending now in September. There is not really any significant releases. There is a good number of fantastic games coming out the end of the quarter, Hot Wheels and World War Z. But there is just a few days, and obviously, those are not significant investments as well. So I think the business will be driven by the back catalog. So whether it will be a negative organic growth or just stable or -- but I think puts a realistic expectation in the current quarter. I think on long term and just looking at the financial year, we will have a great year, and with a much higher organic growth than we were reporting this morning on a constant currency basis for the year. That's definitely my expectation. So -- but that's driven by Q3 and especially Q4.
Yes. Great. And then some questions here from the stream. And let's start with the questions from Martin Arnell from DNB Markets. So regarding your comments about Q4 to become even busier than previously expected, should we interpret this mainly as a slight shift of pipeline from Q2, Q3 to Q4? And could you say something about trends so far in Q2 in addition to the comments about improved ROI in mobile advertising?
No. I think in premium gaming, it's hard to see its trend. You have new releases, you have some performing well like Tribes of Midgard and a few other titles. But I think it's hard to give a lot more color on that. I think we see a fair stability of the performance now during the summer. Looking at Q4, obviously, we have titles, yes, moving from Q2 to Q4 or Q2 to Q3 and then -- yes, so basically polishing more and making sure we're hitting the right release spot. And again, we put quality first, and we want to maximize the potential of each and every IP we have in the pipeline.
Yes, fair enough. And then a question from Nick Dempsey of Barclays. And I think this is -- we talked a little bit about it before, but I'll read it here. You have commented that Easybrain is seeing less of an impact from IDFA than you were expecting. Is that a comment that includes what they have been seeing in July and August? Or just up to the end of June? And also, how is the change impacting CrazyLabs, which will be consolidated here from start of October, I suppose?
I think that comment includes the business up until today. At the same time, you can say the management team is very realistic, very data-driven, and they had perhaps a base case that was very conservative, and they're now exceeding that significantly. And I love that management style, overdeliver, underpromise. In terms of CrazyLabs, I'm hearing positive things. And what I see or hear is they've also been tackling the IDFA in a good way. I think it's a bit early to comment that deeper, though. Obviously, we would like to onboard them now and to close the transaction and then look closer into that business. But they have a significant growth, on a pro forma basis, expected this year compared to last year. And obviously, a business plan is coming 7, 8 years that we have been buying into.
Yes. And I mean, I think, when you announced just on CrazyLabs here, because I think certain people may have been out when that -- those deals happened. Could you talk a little bit about the growth outlook for CrazyLabs compared to the sort of last 12 months' performance? What do you expect for this fiscal year? And also the phasing between quarters here, is it any seasonality? Or I mean strong sequential growth that one should factor in?
Well, we gave a bit of color on that. We gave a financial range of all the acquisitions made 2 weeks ago, SEK 2 billion to SEK 3 billion, then we said in the low range taken for this financial year, meaning close to SEK 2 billion, roughly, divided by 4 quarters. So obviously, then roughly down SEK 500 million. How much of that is CrazyLabs? I would say the absolute majority of that is CrazyLabs.
So 80%, 85% or so-ish? Okay. That's enough for me. Thank you. And then we have another question from Nick Dempsey of Barclays here. Given the waiting of releases to Q4, how important is it for you to get all of these releases out there within this financial year? If a number of releases slipped into next year, would that matter to you, provided those games met your expectations eventually?
I'm running a business, and at the end of the day, I want to complete as good great games as soon as possible and have that revenues coming in. At the same time, it would not come at the cost of releasing a bad game or releasing it too early because that would not be wise for all the shareholders and return of investment. So there is a balance, but that is one of the operational freedoms that my companies have. They should maximize the potential of each and every IP. I know everyone is working very hard to make all these fantastic games, and I'll let them decide when to release and how to really release it. So with that said, it's really hard to give more color on that. On the long term, a few weeks or a month or a few months or quarter's difference doesn't really matter so much, especially if you've been working on a game and invested for a number of years. At the same time, I always want to deliver.
Yes, it's an interesting topic. And I mean, I actually looked at the list of notable game delays just during this year. I think it was approaching 40 notable game delays. So I mean you have a policy of, I mean, letting the developers, the publishers announce news about the releases and potential delays as well, I suppose. So I mean the fact that there are no delays announced today, you reiterate the guidance. Should we read into that? What should we read into that? Would you have announced a delay if there was…
No. I think the forecast we give is based on the information I have at hand. We collect all data. We talk to the teams, "What titles do you have on hand? And when do you expect to release them?" And that's the guidance we provide.
Yes. And looking ahead here, we have a couple of interesting game events coming up in the coming weeks.
Sure.
So I mean, in general terms, what events -- what type of events do you consider sort of good to announce new titles?
The way I think -- I don't want to put too much color on that. I think we will be on a lot different events. So stay tuned.
Stay tuned, indeed. Great. And then, yes, I'll save that question for later. But Johan, a question for you. And I mean some context, I mean, cash flow is relatively weak -- or I mean, quite weak in Q1 here. So the question is from Martin Arnell at DNB markets. Could you elaborate on the negative change from working capital? Is it mainly Koch Media seasonal swings and royalties to Iron Gate's? And also, do you expect it to swing back in coming quarters? And what do you expect in terms of dividend from associates -- associated companies?
I think that, well, the explanations that he mentioned is what we have said. So if you look at seasonal swings in trade payables, they are seasonal swings, so they can swing both ways. When it comes to payments of royalties, well, that's not a seasonal swing. But on the other hand, during this quarter, it was an exceptional one -- exceptional amount, yes. So we don't expect to have the same exceptional amount looking ahead. Then the final part, when it comes to dividends for -- from Iron Gate, basically. Yes, I guess, first, they need to close the year before they can do it. And yes, so I wouldn't expect to have that in the coming 2 quarters, at least.
Obviously, we love to pay a lot of royalties in the future to Iron Gate because that would mean we're selling a lot of Valheim, driving revenues and profitability. At the current level, obviously, it's been a decline in that compared to February, March, and that's driving this. It remains to be seen how Valheim will develop in the future. I'm sure there will be a lot of -- or I hope there will be a lot of players returning when they bring out more content. And I'm sure it's an IP that's -- there is the potential to work on that on a very long-term basis.
Yes. So I guess you should be seen in the light of a very strong free cash flow in fiscal Q4 last year. And then sort of the royalty has been paid now, so it should be seen perhaps over 2 quarters.
Yes. And I think it's hard to see. The performance was fantastic. It continues to be, and then it's been declining a bit. And it's worthwhile to estimate this. Obviously, if the performance of Valheim would have been continuing during the quarter, we would not have seen this big change over time. But…
And I think you're right also there, Oscar, that we should predominantly look at cash flows over more than 1 time period.
Yes.
So I think that's absolutely correct. And that's why we're also presenting it on the TTM basis. And although we are investing more than ever into our Games portfolio, it's the positive free cash flow on a trailing 12-month basis.
But I would like to state that perhaps we got a bit not carried away, but the free cash flow is obviously someone that -- something that shareholders and analysts have been asking us about all the time and, "Why don't you have it?" And now when we had it, we start reporting it and talk about it. But to be honest, it's not really a KPI we're driving the business for. To be honest, I'm happy to see we have a negative free cash flow in a way because then, meaning -- part of that, at least, meaning that we are investing more into organic growth for the future. So it's not really -- it's not like we are chasing the cash flows as such because then we would stop all the growth CapEx like investments and focusing just on the evergreen titles and maximizing the margins in percentage and all that what many of the peers are doing. But that's not how we operate.
Yes. And a question on the investments, which were quite high in the quarter. So we expect high organic growth here, how to raise investments, I think. No, just kidding. But the investments were slightly -- I think, just slightly higher than what I had expected and, primarily, as it seems, driven by external investments. And obviously, the mix is now different to the previous quarter with Gearbox and other things. So could you talk through a little bit of that stuff?
Yes. It's driven -- inclusion of Gearbox as their publishing investments. They have a lot of external developers that's added. There is also a significant increase of investments within, especially, I would say, Koch Media Publishing segment. We have a number of big titles that we are now investing into, with partners such as Starbreeze, for example, Payday and many others. And then, obviously, with the inclusion of Aspyr, they have a number of projects, but they have one significant project that has a sizable investment. That's the internal.
Yes. And then the other effect Lars mentioned is when we see a shift from co-publishing agreements towards internal development agreements, as we can see in Saber as well.
Yes. Excellent. Excellent. And I mean I want to touch also -- yes, actually, we have a question from Jesper Birch-Jensen here as well. We've seen quite a few game delays from several of your peers this year. Do you see this affecting any of your titles in Q4, with them being shifted into the next financial year?
No. As stated, with the information at hand, we don't see that -- those significant titles. They are still scheduled. What we have seen is that there's been a number of titles shifting from Q2 to Q3, Q4. But -- so I feel good about the pipeline.
Great. And I have a number of questions here which I will run through quick. Could you give us an update on the outlook for Partner Publishing for the rest of the year, new releases, what to expect with the reopening of cinemas, et cetera?
Yes. I think the Koch Media Film business has been able to convert revenues from physical distribution and cinemas to digital platforms in a good way, especially on a profitability level. So I think, perhaps, it would be about -- if cinema is stocking up and physical retail, it could be a bounce back, but I think that's a stable business. Look at the Partner Publishing business at Koch Media, it's -- as usual, there is a base business, but then a significant growth in those revenues is driven by big AAA titles. And they have one sizable title that I know is scheduled for our Q3 coming out. At the same time, they have this new cooperation with a major American publisher for Europe. I think that is still in the transition period to be implemented across Europe, and to have a significant revenues of that this year and the quarter remains to be seen, but I know there's a long-term relationship on that. And obviously, that publisher also have big titles coming out also. And they had another American publisher, indirectly, that internalized one of the labels of Koch Media, which would now disappear from the Koch Media lineup, as we talked about last quarter. So I see a stable business.
So Codemasters out and Activision Blizzard in, I think, that's been known since before. And I presume, I think as well some hints about Call of Duty: Vanguard, I suppose that could be an interesting Q3, fiscal Q3 title?
With respect to all our business partners, I don't like to comment on that.
Yes. And then I have a really interesting question here from the stream, which I'll be interested to get the answer, too. It's regarding how a sentence in the report should be interpreted. A strong pipeline of new launches during the second half of the year should drive an increasing organic growth for the entire year. Should this be read as the organic growth for this year to be higher than last year's 70% organic growth?
I think, as I stated before, it should be seen out of the organic growth in this current quarter and what the organic growth will be for the full financial year.
I suspected as much. Let's see if we have some more questions here. So here's another one. My impression from following the news is that competition for Embracer on M&A is much more fierce than it was 2 years ago. Has there been a change in how potential acquirees approach folks with Embracer? How long it takes from first talk to signature, price expectations and such compared to 2 years ago, for example?
Yes. Well, it's more competition. There are more players out there. There is -- again, all the bankers of the world are engaged in gaming and specs. And I think the main competitors is significantly larger companies to Embracer, and especially one company being very active in pushing a lot. And I love that competition, and that keeps me awake every morning. And I love to see that we are winning most cases we want to win and having fantastic competence. So I think we have a competitive offering at the same time. We don't need to -- we work with the industry. We don't need to buy all or every company that is available. And people that want to maximize cash exits and -- all the respect of that, but that is not the way to go with Embracer. Embracer or something else is starting point of a long journey together and how we could grow their business together. So that appeals to a good number of creators and entrepreneurs out there. And I think that offering is stronger today than it was 2 years ago. And as stated, the larger our ecosystem becomes, the better we become and the greater output we will have. And I think, when I talk to creators and entrepreneurs, they could see the benefit of becoming part of the ecosystem. All these great companies, IPs, abilities, we have within this ecosystem. And that's why they would like to join, aside of we being whatever, OCR, based in Europe, independent, not running our own end consumer business, not being controlled by anyone. It's owned by the management to the majority. So…
Yes. Great answer. And then we have a question on Tribes of Midgard. What's the percentage cut Gearbox gets from each sale of Tribes of Midgard? And if you can't answer that, smart addition there, can you provide me with a ballpark estimate in percentages and order percentages aligned with the rest of the publishing industry?
I think it's a very good question, and I'm happy to see the performance of Tribes of Midgard. I can't really talk for the actual margins in that. And to be honest, I don't really have that exact number. Even if I had it, I can't disclose it. I know that Gearbox has a good publishing business. I'm sure they're having a margin in line with what you should expect from such a cooperation, but I can't really give you color because I don't have it in front of me. We made a lot of work when we brought them on board, and I'm happy to see one of the first publishing titles performing well.
And I suppose the typical arrangement, I mean, correct me if I'm wrong, maybe 70% to 80% -- or sorry, I mean paying out 20% to 30% royalties after the investment is recouped, is that the sort of standard deal, would you say?
Yes. Well, it ranges from 15% to 50%, so depending on manufacturers. But considering if they are financing the development, it should be in that range.
Yes. I mean the presentation now is nearing 2 hours, but I think maybe 5 more minutes, if that's fine?
Yes.
I have an interesting question here on the VR side, which I think is interesting and getting more interesting perhaps throughout the year as well. So regarding the acquisition of Force Field, this is strengthening Embracer within the VR segment. And I'm wondering, first, how much in percentage of Embracer's revenue will the VR segment now stand for? What's your view on VR in general? And is it a growing segment? Would you say what is the potential? And how prioritized is the VR segment going forward for Embracer, mostly regarding the M&A side? So now…
There's a lot of questions. I think on the revenue side, talking about overall Embracer, it's not significant today. Where to go, we disclosed a bit numbers. Obviously, Force Field will add to that a bit, but that's -- it's a work-for-hire business that we are -- will, I think, to a higher degree, use their resources to produce more on content. That will drive revenues in the coming years, but obviously not on the short term. There is a number of other -- we are development across the group, both within Saber and other group members. I'm a firm believer, and we are, I think it's a fantastic experience. It's a true immersive experience. And I know there is a strong platforms investing into the future in this. There is a viable commercial basis now to make your games and make profit. And if it's successful, like Arizona Sunshine, the actual margin is really good if you create a leading IP. And I think now, in the early years of VR, you are able to establish new IPs. So yes, it's -- I would say, it's a prioritized area of investment. And the relative development costs for VR games is -- comparing to traditional premium games is much lower and shorter development lead times, I would say, than big premium games. So from that perspective, it's also quite interesting. This doesn't mean that we will go out and buy. There is thousands of VR developers in the world, I would say, good number of hundreds of VR games development studios out there. I'm sure we will add a lot of more in the future, but we need to bring the best talents with the right mindsets on board. I think Vertigo built a fantastic experience, reputation, knowledge, how to grow Vertigo, both publishing and through own IPs. And I hope they will make more acquisitions in the future as well. But it's really up to Kimara and Richard and the team of Koch to support that.
And then on the topic After the Fall, it was supposed to come out during the summer. That's now been delayed. We don't have a release date as far as I know, but when should we expect it?
No, I don't think it's delayed too long.
Okay.
So it's a complex game. It's a big game. It's a AAA VR game, and it's multi-platform cross-play. So it's coming.
Stay tuned.
Stay tuned.
And then, finally, let's end this with some questions also on the latest acquisitions here today. I mean Demiurge seems to have, I mean, a really long and strong track record and seems to have been a coveted asset, is my impression, among competitors. So could you talk a little bit about their shift from AAA to free-to-play, and what they're doing now and what will they scale up for ahead?
Well, they're working on -- you saw a few IPs on the screen today. And there is a few -- at least one major other IP they're working on with a major peer, which, in the same category, free-to-play-ish, but like real gaming products, I would say. So they will continue doing that. They will continue working with those business partners. But obviously, as you're hearing Matt, they will scale up their capacity to make more projects and better games. And -- so I just love the heritage of them. 20 years going back and IPs they've been working on is fantastic. And I think I don't know them personally myself, but I've been hearing fantastic things from Matt and Andrey about their abilities on a technical level as well. And it's a rare asset, in that sense. There is not that many companies in the world that are able to do what they are building, doing. And I think, especially on that high level AAA-ish free-to-play, there is -- it's a rare asset.
Yes. And is it cross-platform as well? I think I read.
I can't comment further on that. I need to refer to your presentation.
Yes. And then the M&A outlook, as the final question here, SEK 8 billion in net cash, I mean, currently, and SEK 17 billion including…
Currently, it's a bit more, but we haven't closed the transaction of CrazyLabs, for example, yet. But when that is closed, it's expected to be roughly SEK 8 billion, depending on cash flow.
Yes. And SEK 17 billion, including credit facilities. So I mean there was really nothing new with regards to your comments on discussions. But compared to the previous quarter, when you were perhaps more explicit, would you say discussions with larger potential acquisitions has accelerated?
Well, I gave a bit of a number of -- I don't think it has really changed a lot. I would say, if it's changed, I think it's more in a way or more mature dialogues and I would say a few more sizable. I don't want to put a number out there because it's creating headlines, and I don't want to be seen as this big thing just buying for the sense of buying. It's not what it's all about. So it's about finding the right partners. So we are busy. We have more opportunities than we have time to allocate to them. That's the problem, yes? So every day is -- time allocation is the biggest challenge.
Great. And I think that's a good spot to wrap this up. You're busy and stay tuned.
Yes.
So thank you very much, Lars. Thank you very much, Johan. And thank you very much, everyone, for listening in. That's it for today.
Thank you.
Thank you.