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Embracer Group AB
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Hello and welcome to Embracer Group's Q3 presentation. Today, we have CEO and Founder, Lars Wingefors presenting together with CFO, Johan. Very solid report, I think. But I think the focus today will be on a very large and very interesting acquisition of Saber Interactive, U.S.-based publisher. So I'll come back with Q&A later in the morning. Without further ado, I'll hand over to you Lars. Go ahead.
Thank you. Thank you, Oscar, and good morning, everyone. I'm really happy and pleased to see you all here, and it's been a very long night to get things signed. And I think everyone is very interested to find out more about Saber Interactive, but we will, as usual, start with our interim report and try to run through that as quickly as possible, and then we will move over to Saber Interactive. And then finally, Oscar will lead the Q&A session, if there is any questions. So I'm glad to say we had another stable quarter with a 9% growth in net sales to SEK 1.5 billion. The games segment, Deep Silver, THQ Nordic, Coffee Stain had a year-on-year growth of 51% to SEK 836 million. And our operational EBIT growth, 54% to SEK 302 million. And the reason for the increased profitability was driven by a number of releases. Darksiders Genesis performed well on PC and Stadia. We had also, as usual, now had a strong back-catalog sales. Worth mentioning are, obviously, the Metro franchise, the Wreckfest and continued performance on Satisfactory. And the increased share of the digital sales and the share of sales from our own IPs was driving the margins in the quarter. We continued to invest into new games. So that will deliver the organic growth in the future. On a year-on-year basis, we increased our investments 47% to SEK 373 million. Currently or at the end of the quarter, we had 96 games under development. Post quarter end, we had a number of releases. I will talk you through them later on, but worth mentioning here is the Metro Exodus release on Steam, the Satisfactory Update III, the Darksiders Genesis on consoles and others. We also added 6 new studio after the quarter end, taking the total studio count from 20 to 26. In the quarter, we acquired the amazing team [ Malmö ] at the Tarsier Studios. We set up C77 in Seattle. After the quarter, we set up River End Games in Gothenburg. We increased our share in Misc Games in Stavanger to minority stake, we set up Nine Rocks Studios in Bratislava. And this morning right before the report, we acquired Voxler in France. Furthermore, THQ Nordic this morning, after the quarter, announced their setup of a studio in Barcelona that will make a Gothic remake. And finally, we had another studio setting up that is not announced yet. With that said, I'm leaving the numbers over to Johan.
Thank you, Lars. So let's have a look at our financial performance in the quarter. And we start with our P&L metrics. Whereas said, we have a net sales of SEK 1.5 billion, growing 9% over last year. Growth is mainly driven by a strong performance in business area, Games, 51% growth. In business area, our Partner Publishing, we have a decrease with 19% in the quarter versus last year. The main reason for that being that there were no new large releases in the quarter. Last year, we had 2 large releases in the corresponding quarter. The growth in top line fell through to EBITDA and operational EBIT, growing EBITDA with 59%, and our operational EBIT with 54%. I think the main driver of profitability in the period is the improved gross margins, where the favorable mix shift from Partner Publishing to business area, Games, is the main driver, but also within business area, Games, we see a higher degree of digital sales and owned content.All in all, our EBIT margin for the period was 20% and adjusted EPS, SEK 0.68. On a trailing 12-month basis, we are turning SEK 5.5 billion, which is 34% above last year. EBITDA rose with more than -- with 100% reaching SEK 1.9 billion. Operational EBIT at 1.1% and an operational EBIT margin of 21% versus 12% a year ago. Continuing with depreciations and amortizations. We divide them in operational amortizations and acquisition-related amortizations. Starting with our EBITDA of SEK 518 million for the quarter, we deduct operational amortizations of SEK 216 million, reaching our operational EBIT of SEK 302 million. The main drivers of our operational amortizations are completed games as well as other intangible assets, mainly film. Acquisition-related amortization in the quarter amounted to SEK 211 million, and they are mainly related to IP rights and goodwill. During the quarter, we finalized the PPA for Bugbear, which resulted in an increase of surplus values, goodwill and IP rights. This was due to a remeasurement on the variable conditional purchase price of SEK 95 million and resulted in additional acquisition-related amortizations of SEK 22 million year-to-date, or in full, of which SEK 17 million relates to previous quarters. Turning to our cash flow. Cash flow from operations before changes in working capital amounts to SEK 552 million, which is 53% above last year. Working capital increased during the period with SEK 312 million. This is related to a reduction of trade payables in the period. Operating receivables and inventories were slightly lower than they were at the end of September. And the trade payable reduction is heavily influenced by release schedules for larger titles, especially within the physical side of our business. There were no forfeiting in the period. In the corresponding period last year, we had a positive effect of SEK 43 million from forfeiting. We continue to invest into our business. As mentioned earlier, we invested into Tarsier at the end of December. This had an impact of SEK 88 million from acquired companies. We also continue to pursue our strategy, investing into our games portfolio, investments into intangible assets were SEK 419 million in the quarter, and we will have a specification of that on the next slide. Cash flow from financing was positive SEK 229 million in the period related to increased utilization of credit facilities in Koch. There were no material cash tax payments in the quarter. On a year-to-date basis, we have paid SEK 122 million in cash tax.
I think it's important to -- I already got some questions on the cash flow, to point out that the trade payables, meaning if you have a physical Christmas business, you are buying the goods early in the quarter and you pay the suppliers and then you invoice the customers. That is the main reason for the difference here. Yes.
Looking deeper into the investments into intangible assets of SEK 419 million. The vast majority is related to investments within games, SEK 373 million in the quarter. And then we also invest SEK 46 million into other intangible assets, where the vast majority is related to film. During the quarter, we completed game development projects to a -- at a combined value of SEK 146 million. Looking at the trends. We see that we are increasing our investments into game development, increasing 37% in the quarter and the share of the internal investments is also increasing, reaching SEK 221 million, which is more than half of the investments into games. The balance sheet. One big portion of the balance sheet are the intangible assets. At the end of December, the value of our intangible assets totaled SEK 5.6 billion. They are split in acquisition-related intangible assets and operational intangible assets. The acquisition-related intangible assets consisted of SEK 3.2 billion and are mainly split between goodwill and IP rights. The operational intangible assets was SEK 2.4 billion, where ongoing game development is the biggest one, reaching SEK 1.7 billion. Finished completed games that generate cash flow now is valued at SEK 410 million. We also have cash at bank at the end of the year totaled SEK 2.8 billion. And another unutilized credit facilities of roughly SEK 600 million, adding up to a total of EUR 3.4 billion in available funds. Net cash at the end of the year was SEK 838 million. Business areas.
Thank you very much, Johan. I will talk you through the business areas. Start first of all, I would like to just look at the -- some KPIs here on the net sales. Trailing 12 months basis, we are up to SEK 3.3 billion in net sales in the business areas, THQ Nordic, Deep Silver and Coffee Stain. Looking at the digital share of the business. On a trailing 12-month basis, it's up to 68%, and looking a year back, it was 45%. So the shift is ongoing. Owned titles are also increasing partly because of acquisitions, partly because of organic investments, and that is increasing to 80% on a trailing basis from 50% a year ago. And well, the new lease share is currently at 35%, meaning we have a strong catalog business. So looking at the business area, Deep Silver. They had a significant increase in business with 150%, mainly driven by the strong catalog. And the strong catalog exceeded our expectations, both digitally and physically. During the quarter, they didn't have a lot of releases. They had Shenmue III, and I was happy to see that the core fans of Shenmue was happy. But it's also clear that Shenmue is not a AAA mass market product. It's a product for the fans, and I'm happy that we pleased them. In total, they had 4 releases in the quarter. Looking ahead, they have, obviously, a strong pipeline of releases. Worth pointing out here in the current quarter is, I'm glad they succeeded porting the first Metro Games, Metro Exodus to Switch coming out in a week or 2. They just released, what I have seen a fantastic last DLC for Metro Exodus, Sam's Story. And furthermore, they released Metro Exodus on Steam this last week and on Saturday morning. And I was happy to see it's been performing well, selling about 200,000 copies already. And what is surprising to see that 1 big country in Asia was the biggest country buying the product, very close to America. Furthermore, just commenting on other things. Milestone just recently, 2 weeks ago, released Monster Energy Supercross 3 and they're looking forward to have very soon or soon, a MotoGP20, and a bit later down the line Ride 4. Moving over to THQ Nordic. They -- in the comparable period, it was a tough quarter to compare with because they had the Darksiders III in the same quarter last year. So that had a negative 5% growth to SEK 343 million in revenues. While I was really glad to see that, they put a lot of new energy into the Darksiders IP with releasing Genesis and that's been very well received by fans and it's performing well and continue to perform well on Steam and Stadia. And we had a good continued performance on Wreckfest, the engagement in that game is very good. Also, the Remnant developed by Gunfire Games that we acquired in August continued to perform well, that is published by Perfect World, but it did contribute to the numbers.And HandyGames, they released a great title called Little Big Workshop developed in Varmland, first product ever released from Varmland. I'm very proud. And as stated earlier, they started up a new studio Nine Rocks Games in Bratislava that will be working on a survival shooter/shooter. And this morning, they announced setup of a new studio in Barcelona doing a Gothic remake and they also published the rationale for doing the Gothic remake. So if you're a Gothic fans, and there is a lot of them out there, they kind of voted to make it or not. So I think 94% voted for. So looking in the current quarter. We have Darksiders Genesis just releasing last week on console, on PS4, Xbox 1 and Switch. And so far, so good. I think it's well received by fans. And so I think it just continues the performance on PC. I also mentioned -- pointed out in the report this morning about Biomutant, that they still continue polishing and finishing that product. And I've been very clear in my reporting that quality comes first, and we need to give all teams and IP the time to make the game as good as it could be. And it obviously goes as well for Biomutant, and this is a new IP, and it's a small team here in Stockholm. So I will -- they have the time they need to complete this. So that will be announced. The release date will be announced by the publisher when they are ready. And Coffee Stain, they had a quarter without really any new releases. They were planning to update on Satisfactory Update III, but they delayed it until last week. But they're performance was stable on Satisfactory as well as the publishing title Deep Rock Galactic and their own old Goat Simulator game, still performing well, taking the revenues to SEK 46 million. But I was really encouraged to see the Update III on Satisfactory last week. It -- obviously, it was very well received by the fans. And I'm pleased and I'm excited to see what that product will become in the future. And I will let the team speak for it. So I will be quite. But I know they announced the release or Satisfactory on Steam, but they will, in due course, announce that date. Overall, I'm -- I am excited for the lineup at Coffee Stain. They have really a good lineup that they are to announce when they are ready to announce it for the coming year and years. And this morning, we announced a new business area, Amplifier Game Invest. We acquired Goodbye Kansas Game Invest in August, and it's now rebranded to Amplifier Game Invest, headed up by Piranha here. And they have been active. I was already pointing out the acquisition of Tarsier. The setup of new studio in Seattle with C77 entertainment, and River End Games in Gothenburg and Misc Games. And overall the -- overall Amplifier will be part of driving the organic growth of our own products in the future and creating new IPS. And they set up studios around very senior game developers. This will be an operating group, but they will not be reported in the business area segment because they are obviously developing games, they're not ready yet. So there is no significant revenue to report about yet. Finally, Partner Publishing and Film. They had a solid quarter, but without any significant releases. And that's why the revenues decreased 19%. However, I would like to point out, especially now the release of Parasite, the film that got a number of Oscars that really have taken that film to the next level, and it was already good. They got the Golden Palme in Cannes last year, and it performed well in the quarter. Q3 quarter, but it continues to perform well now on cinemas in Germany, Switzerland, Austria, where Koch Media has the distribution rights. But it's not only about Parasite in films. They had the best quarter ever. The integration and the business performance from KSM acquisition in August is doing very well as well as the overall Koch film catalog in -- especially in Germany. Looking at the current quarter, worth pointing out in a few territories, they are releasing this -- no, distributing Doom Eternal and Persona 5 Royal Edition from Atlus. They are distributing in parts of Europe, Final Fantasy 7 and the release date is 10th of April meaning not this quarter. M&A well, first of all, Tarsier again, I gave you a few slides here. And I'm happy to have him on board. We paid SEK 88 million, plus 10 years earn-out for the 5 sellers that remain in the business. They have a strong track record of creating successful original IPs, and critically acclaimed, million selling fan favorite Little Nightmares. That game and IP is owned by Bandai Namco and they are a very important business partners to Tarsier and to us, and they will continue that relationship regarding Little Nightmares 2 under development. But on a very long-term basis, the ambition is, obviously, to create new own IPs within the studio. And this morning, we are now -- well, wrote in the report about the acquisition of Voxler, a French music games studio behind the million selling Let's Sing game series. Let's Sing is a game series that Koch Media has been distributing for a number of years. Studio was founded in 2005. They currently have 14 people in Paris and Marseille. And I would say, overall, the business is stable year-on-year, they put out these new products. And now we are able to invest for the next-generation of consoles. The purchase price was EUR 1.9 million for 100%. And their founder Nicolas and his team remain committed to stay on board. I'm really happy to have them on board. Furthermore, we decided to commit to an investment of up to $6 million in London Venture Partners foundry over 10 years. London Venture Partners is founded and led by 3 veterans in the business, where 1 being David Gardner that will join the board that we decided just a few minutes before this quarterly report. I'm really glad to have David Gardner on board Embracer Group. I've known David for many years, and he already contributed well with his network to the business. M&A outlook. Well, we continue working from all angles from the headquarter in Karlstad to Vienna, [ München ], Amplifier and Coffee Stain. Obviously, the acquisition we will talk about in a few minutes, has been taking most of my time and the team's time, especially the past month, I would say, and a lot of other processes has been put on hold. But M&A is part of our strategy, both by adding new pillars or operating units to the mother -- parent company or acquiring businesses under each operating unit, operating group. So we had a number of discussions during the past quarter. And -- but right now, I would like to say that, obviously, we will make sure that this acquisition get closed and well integrated into the group. It's the biggest 1 ever. So I would like Johan, before finishing this report, just have a few words about the most important -- or the important topic about sustainability.
Yes, so 1 of the key strategic initiatives that we have in our group running is the work we do within sustainability and ESG that we call smarter business. We are making progress on a daily basis in the area. And as you know, we launched an Ambassador Program during the fall, where we work cross-functionally and cross-border involving everyone throughout the organization to participate in this. Currently, we have 20 people in the Ambassador Program, and it's an important link to spread awareness and also continue to work with sustainability throughout our organization. We have -- we are working with KPIs according to the GRI standards that will be an integral part of our annual report later this year. We have also launched a compliance call, which was rolled out during the fall. One key remaining initiative there is to make a more a popular version of it a more accessible version, which will facilitate to spread the knowledge and the awareness of the compliance code throughout the organization. Also, we have conducted site visits. And on the picture here, you see at corner end, visiting our friends in Italy, in Milan at Milestone, describing the work we do within ESG and sustainability. And also sustainability or ESG is also about governance and the importance of data security, which is also a topic that we are addressing and working with continuously throughout the group.
Thank you, Johan. That was the last slide of the Q3 reporting. I would like then to start the presentation about the acquisition of Saber Interactive. And before welcoming Matt on stage, I will start off presenting the transaction. And then I -- you will soon hear the gentleman that founded the business and the Creative Officer. So Saber Interactive is a company that we've been doing business with for -- known, I would say, for many years, especially I know Koch Media and you had a long-standing relationship, even though you haven't actually produced any games together, what I'm aware of. We got to know each other like a year ago, and it's been a process now to get to know each other and to get you into the group. And I'm really glad today. It's been a very long night. I had advisers at 2:30 discussing the number of things in the agreement. So -- and we signed 6:30 this morning. So -- and I'm sorry, the press release was a bit late, but it was long and a bit complex to distribute. So Saber Interactive at a glance. Saber is a U.S.-based game developer. It's founded by 2 entrepreneurs, Matthew and Andrey that has been organically growing this business for most from 3 people up to the 600 people today. They have 500 studios. Their games have sold more than 30 million copies, 5 studios, sorry.
Long night.
Long night. And they have been turning this business from -- for most of work-for-hire business to a self-publishing business, and that's why they're financial performance has been impressive. Last year, they made $105 million in revenues and $62 million in EBIT. And we see a stability in the business for the coming years. Pointing out here, they made last year release of World War Z, that's been a great success. They previously released MudRunner and the year before -- last year they've released NBA 2K Playgrounds 2, that's also been a great success. And over the years, they have developed technology that we've been very impressed with, and Andrey will talk more about it very soon. Looking at the combined group to give you overall picture. We've got 26 studios. They have 5, so we're getting 31 studios across the group. And we're working at -- currently at Embracer with 58 studios, and they have 3 external studios. So we've got 61 in our network of studios. They are adding to a number of IPs, taking our total number to 163. And taking the number of projects under development from 96, adding 12 from Saber, taking it to 108. And the number of developers that we are engaging on a daily basis are now more or less 3,000 people. And revenue-wise, the combined group, this is based on the management numbers, their numbers for 2019, taking the total revenues for the group on a very high-level pro forma basis to SEK 6.5 billion and adjusted EBIT to SEK 1.7 billion. And I would like to give you a few highlights, why I believe in this acquisition. Now talking out of my heart. I really have a deep respect for the management, Matthew, Tim, Andrey, but also the rest of the management I met across this process. And they are and their teams, they are very highly regarded developers and very efficient, and they have been creating some, I would say very, well, fantastic games. I'm very impressed of it. It's not that easy. Business-wise, they have a very strong profitability with a high cash conversion. So basically, the profit that we're making is being converted to cash. For the group, they are adding stable and recurring revenue stream from work-for-hire, they will continue working with their business partners, and they will continue working having this royalty-based projects. And they have a portfolio of titles with recurring revenues. And looking ahead for the current year and the years ahead, we see a solid and growing pipeline. Obviously, within the group, I see a lot of opportunities and synergies within publishing, development, IPs. In general, I think it's just a great platform to generate further organic growth as well as potential acquisitions. So looking at the actual deal, it's an asset deal. So we are setting up new entities for most across the countries, and we are then transferring the assets to those entities and we'll operate from these new entities. They will receive a lot of shares that are priced at a 40 days weighted average price coming to SEK 78.45 per share. And the founders are becoming the second biggest shareholder in the group combined 11% of capital and 15% of the votes. And I committed to welcome Matt. Myself and [ Erik ] are committed to welcome Matt to the supervisory vote, to the board of the group. And as to employees, and they will continue operating group, they will receive the fixed salary, but they will have incentives that is part of the package that they will have 10% profit, about SEK 76 million per year in EBIT, that's accumulated year-on-year. Expect the transaction to close in the second quarter. And in the quarter, so we expect to close during our first financial quarter in the next financial year. So the purchase price is $150 million upfront. It's $100 million cash and $50 million in shares, and then there is $375 million in earn-out payment over 6 years whereof $100 million is in cash on the 2 years and the rest in equity, I mean shares linked to various operational goals. All right. So gentlemen's, welcome on stage.
I'll stop pacing. All right. Well, I'm on already, I have to watch what I say now, right? It's just new for me. So never sold a company before. So I just want to introduce myself. I'm -- I guess I'm standing out of my picture. So Andrey you should move so you're standing in your picture.
I'm in the middle.
No, he does this. Tim's the -- Tim's the presentation guy. So I just want to introduce myself rather quickly. My name is Matthew Karch. If I speak quickly, I apologize. I live in New York City, originally from South Florida, and we don't know how to speak slowly. So I apologize in advance for that. This is super, super exciting for us. I mean, honestly, I would have done this deal, just so I can work with Lars for the rest of my life, which is what's going to happen. So I'm a 20-year veteran of the video game space. Andrey and I started Saber when Andrey still didn't have hair. But I mean, seriously -- but we've been doing this a long time. We've been building up the business organically. And we figured, in our case, it was about time that we found a partner who could help us take it to the next level. And so I know this is technically an acquisition, but we feel this is more of a merger. I know you're my boss. I get it. I get it, and I get it.
I agree. I agree. With both statements.
Yes. But we're super excited about this because we think this is the most exciting video game, I would say it's group, more than a publisher, a group in the industry that's reinventing the way things are done in our space, very new school in its approach, and we really wanted to be part of this. So I'll let my partner, Andrey and our newest partner and game celeb, Tim, introduce themselves as well.
So I'm Andrey Iones. I started Saber with Matt. I think 20 years ago when he started on this adventure with me. We started with a very small team, just a few guys in New York and we grew this team to over 600 people. And we're happy to be part of a larger organization.
And hello, my name is Tim Willits. I'm the new Chief Creative Officer with Saber. I started my career 24 years ago as a designer at id Software. I just -- I worked on designing all the great id software IPs like Doom and Quake and Wolfenstein and Rage. I was the Studio Director at id Software from 2013 until recently when I joined these guys. I really loved what they were doing. I loved the energy that the teams had across all their studios. And I loved the fact that, at Saber, we can work on so many cool games. So for me it's been, it's going to be [Audio Gap] be with the team.
Okay. So I think some of this has already been addressed. I'd have to look at it to see what it says, not like I don't know about my own company. But oh, it's not my company anymore, I'm sorry. So we haven't closed it yet.
It's our company now.
So -- well a lot of this has already been mentioned, and some of the games have been mentioned as well. So I'll just basically go over real quickly, who we are and what we do. We started in Russia, like Andrey mentioned, just a few of us, and we've grown over the years, some of our most esteemed Russian developers are here right now, along with the Head of our Portuguese studio and our Sundsvall studio. We have a studio in Sundsvall and our studio in Madrid. I don't see [indiscernible] but he's somewhere. Oh, there he is, hi. So we...
Minsk. Forgot about Minsk?
And Minsk. Where is Minsk? Oh, there he is. Okay. Leave it to the Russian to remember the Russian studios -- Belarusian studio. So this is basically the timeline. We, for many years were a work-for-hire studio, working on some prestigious titles that we'll talk about a little bit later. We've done many of our own titles. We did a game called TimeShift, which was great. And sold a couple of million units back in the day, which is now owned by Activision. I'd love to get it back, but try getting something back from Activision, I shouldn't say that, should I? So -- and we eventually grew the studio to a multiple team shop because it's very difficult when you're a 1 team studio to make money because you're constantly depending on the whim of the publisher, and we didn't want to be in a position where we were depending on the whim of publisher for all of our income. And so we split off into multiple teams. And when we did that, we started to develop some of our own IP and then we started to work on larger properties such as the Halo Franchise, we had a great relationship, which we still do and is still ongoing, with Microsoft, working on multiple Halo properties. And we released, what I believe, are the 2 most successful Halo games of the last decade in Combat Evolved Anniversary and the Master Chief Collection. A matter of fact, I would say that we were responsible for kind of reinventing the HD remake genre with our Halo products, which have collectively sold, I don't know, 7 million, 8 million, 10 million copies and Master Chief Collection was just released on Steam, and it's been the #1 game since basically it released, and we've been involved in that as well. So if I'm saying anything wrong, you're supposed to hit me or? I was supposed to have a shock color on. He told me that I need to have something on to stop me if I said something wrong. So 1 of the things that's interesting about Saber is -- you're laughing. It's a comedy routine. It's better than reading numbers, isn't it? So one of the things that's interesting about Saber is that we combine both original IP that we've created over the years with a strong IP with partners, and we have great relationships with our partners. Obviously, we worked with Microsoft on Halo. We worked with ZeniMax on Quake, and then we stole their best employee. We worked with CD Projekt on The Witcher. And if you look online, and people will tell you that the most impressive Switch port in the history of Switch ports to date because we still have more to do, thanks to the guys sitting right there, is The Witcher 3. And then we've created an original IP like MudRunner. We have an exciting sequel the MudRunner coming out called SnowRunner, which is getting rave, rave early reviews, and we're super excited to get that to the market. And then we negotiated a deal with NBA and then eventually with 2K to create NBA Playground. So -- and then obviously, World War Z and Ghostbusters. World War Z has done extremely well for us between 3 million or 4 million copies so far. And then Ghostbusters is also doing really, really well for a 10-year-old remake. It's been really successful for us. So basically, we're on the next slide. And we're already on technology. Is that a hint that I should be moving on? You, you're hinting me that I should be moving on. So look, I just wanted to give a little summary. I know it's a big transaction, and it's a big huge -- probably the biggest step of my life, don't tell my wife, because marriage is now second to this. So it's -- 1 of the things that's interesting about Saber is, yes, we're 1 company, but we're making our arcade sports games, we are making shooters, we're doing Switch ports. We're doing -- what did I miss? We're doing mobile product as well.
Vehicle games.
We're doing vehicle-based games. We're doing free-to-play games. We're doing social games. So we really are not your typical developer, right? A lot of developers focus on 1 product and have a small independent team that works on 1 product. We try to look at whatever market opportunities are available, and do the best job we can with them. I mean, I'm going to let Andrey talk a little bit about our tech, but I just -- 1 of our strong points has always been, we're really good at maintaining our costs. So we feel we can make a AAA product or a product, which is AAA in feel, maybe a little bit smaller in content on occasion like a World War Z for maybe...
Efficiently.
Thank you.
Maybe efficiently? Efficiently, there's no maybe.
And this when you know you're no longer the boss? So Andrey. I'm going to let Andrey talk about technology.
So making games efficiently is important, but many games, we wouldn't be able to make if we didn't have our own technology. And when we started the company almost 20 years ago, we started to invest in our own tech. At the time, there were no solutions on the market, which were, I guess, readily available which would be capable of allowing us to build great games. So we started to invest in our own tech. Over the years, we invested, I think, maybe 1,000 man-years into our own technology. So it's a massive, massive investment. We have multiple components of our technology. We have a suite of tools, which allow us to create content to run this content in real-time in the various platforms, such as PC, consoles, all the Xbox, old Xbox, new Xbox, old PlayStation and new PlayStation. Like I said, many games, we wouldn't be able to make without our own technology. For example, there was a game -- our second game, which we built was TimeShift and that's a game where players could slow time, stop time and reverse time. That's not something which you can do with an off-the-shelf solution. Now in recent games such as World War Z, we had thousands of zombies on screen, not only on screen, but they were also working online. So if I'm playing on 1 machine and someone -- my friend is playing on another machine, all those zombies somehow synchronize across the network. And that's not something which you can do on an off-the-shelf technical solution. We have a suite of back-end tools. We have our lead back-end guy here in the audience. Our back-end allows us to -- many of our games, most of our games have an online component. On a game, such as Quake, we had -- what was it, 100,000 players playing concurrently at the same time in the same game all over the world, and the game never collapsed, which is pretty impressive. We have a significant live ops team. It's a team, which allows us to operate those games in live environment. So they monitor how the game works. If something happens, nothing ever happens. But just in case if something does happen, we can identify those issues in real-time and fix them, and the game will continue.
One thing I could just add to this is, obviously, our technology has been built to support a relatively large group of developers. And as part of a larger group, it would be our intention to make sure that a lot of that technology could be used across the various studios in the group. We think that there'll be some great efficiencies from that as well as some cost savings. And we have a large technical team. So we certainly have the ability to customize tech as needed for I see [indiscernible] look there, wondering what I'm going to do for him, I'm going to do a lot for you, I promise. So we look at this as technology is more than just something, which enables our internal development. It's going to be something which is capable of being used across studios.
So let's talk about the games. The -- so Saber has created a portfolio of these hit titles. And looking at these titles as pillars of the company and expanding on not only what we have but what we're creating. And the thing about great teams is when they make great products, they continue to make great products. So a few of our greatest hits of course World War Z insanely successful but really taught the team to create intense multiplayer co-op fun, and we'll take that knowledge, and we'll continue with this brand. And of course, MudRunner, at first, when I talked to Matt, he said, we have a game, it's a truck simulator. And I was like, really? Is that fun? But it is, it's insanely fun. And we're working with different truck manufacturers. We're working with different types of gameplay mechanics to really build on this experience and push it further out. And of course, sports games. People always ask me, "You're a first-person shooter guy, why do want to work on sports games?" Well, I feel that we can take some of the intensity and the action of great first-person shooters and integrate those lessons into creating really cool sports games. So look for some exciting things in the future. I won't mention, but we have some exciting things coming in the future. And then, like I said, we're going to build on the MudRunner franchise, the lessons learned, how we develop games, and we're going to continue to build on that. So we are really excited on the creative side, with our games. The teams are passionate about what we're making, and we are very excited to continue with a much larger group.
Thank you very much, and very welcome to the group. Matthew, do you have any final words, you want to send to the public and the shareholders and the market, your employees, junior colleagues?
Now what, we're just super excited to be part of the group. We see huge potential. I think sometimes Lars thinks I'm some overly ambitious in where I think we're going to be in the next 5 years. But I firmly believe that the synergies are -- we're at the tip of the iceberg here, and I'm super excited, and I love coming to Sweden. So I'm looking forward to seeing you more frequently.
Thank you, Matt. Thank you very much. Okay. So I'm just finishing this off with just take you through this slide with some numbers and I want to explain the uplift they have in the business. So taking the business from being more of work-for-hire business, to capture the value of creating your own products. And then leveraging various distributors and publishers. So looking at the 2018 numbers, they made $38 million in revenues and $14 million in EBIT profit. Then they had the uplift last year, driven by World War Z and the success of that game, it was exclusively launched at Epic and then on consoles, but the actual Epic revenues is also very strong in the actual sell-through and then looking ahead, we see they established a new platform. We see that the current year, they have a stability in their business. They have a number of good releases. I would say that are more to come in the second half of the year. And then we see obviously, we are excited for the pipeline for the years thereafter. They have previously not capitalized any development and applying Embracer's accounting policies will likely have some impact on reported revenues. However, they have been getting payments from their business partners. We will come back to this accounting when we start reporting the numbers of Saber within the group. So here is the organizational structure. They will become the fifth division and operating unit, headed up by Matt and Andrey, and the rest of the management beside the 4 other groups, Amplifier, Coffee Stain, Koch Media and THQ Nordic, they will be an independent division. I want to send a message. It's business as usual. There is no reorganization planned. We keep our business relationships. We want to invest into the business as usual. That's always our strategy. And as Matt stated, I see this personally more as a merger in a way than an acquisition. They're becoming a really important part of the group, owning a lot of shares and are committed long term. And here, you have the slide you can look through on your own on the website. So this presentation will be -- after this presentation available for download. So that was the presentations of the day. Oscar, I don't know if you have any questions? Or is it all clear?
I think I might have a few questions. Plus the floor as well. But I'll start off with a few questions, and let's start with the report and then definitely we'll get back to Saber again. First of all, I mean, quite a reasonable contribution from new releases in Q2, sorry Q3, are you happy with the release of Darksiders Genesis and Shenmue or were you expecting more from Shenmue perhaps?
I think Darksiders Genesis had a solid performance. And it was well received, and it's continued to perform also after the release window. So I would say it's exceeded my own expectations. Shenmue III, it's an IP and a product I love. And I think financially, it's fine, and I'm glad that their core fans are pleased. However, I think it's a challenge to see this as a mass market product. This is a core niche products. And I think that is the comment I would like to do on that game.
Yes. And clearly, I mean, you've released Darksiders Genesis is now on PC, the console release was a few days ago. How has the, sort of, good reception from PC translate into console sales so far?
I have seen a few sales numbers and it looked solid on the physical side. I don't have any data to share on the digital side for you, but I expect it to perform -- have a solid performance.
Yes. And anything that stands out in the back-end log? You mentioned the Metro Exodus and Wreckfest in the report...
And I think, it's just you know, I wouldn't say I'm surprised. It's just -- if you make great games, they just continue to perform. Wreckfest, Remnant, Metro Exodus, there's a number of titles continue to perform. And you see high engagement in those titles from the players. I love watching, myself, Wreckfest online. It's just a great and people just love playing it. And I think now we have a number of titles that I could see -- we could see people spending more than 1,000 hours plus in over a year. So that is a good base of building a business that you have gamers committed to your products on a long-term basis.
Great. And Metro Exodus. I think we have to mention as well. I mean, you mentioned strong sales on Steam for the re-release now this week or last week. And...
Metro performed well on Epic. And I was happy with the performance of Epic Game Store, but that doesn't say I'm not happy with the Steam performance either. So it's been great, the first days. So I think it's just -- it's a great game. People just love playing great games. So -- and I hope it will continue to perform well over the coming years on all platforms.
And could you sort of shed some detail on the sort of move from Epic to Steam or the additional Steam because, obviously, you had some sort of revenue stream on Epic. How will that sort of different -- difference develop over the coming quarters, you think?
I have no idea. I love my business partners, and I wish them all the best. And I make great games that we sell. So that's my take on it.
Yes. And Partner Publishing quickly, I mean, Parasite, great movie, in my opinion. What is the impact of that? Is it so impactful?
I'm a bit more glad to have something in the film area I could present. Obviously, it's a fantastic movie, and I'm proud that we have it. In the overall business, it's not notable, significant revenue. We are a games company. But in Germany, there's been a substantial revenue contribution to their Partner Publishing business. It helps. I love the small channels of revenues coming in.
And I think we also have to mention here that you write in the report regarding the, at least, 2 AAA releases in the next fiscal year. It doesn't seem completely certain that it will actually come out, could it be?
But I'm not a games developer. I have -- we have a plan. They're in the plan. As you noticed, yourself Oscar, there's been a number of delays in the industry. I don't want to comment why they delayed things, but making huge games is a complex process. And there is a next-generation of consoles coming out. So I've simply -- I'm always worried in a way. Are they coming in time or I don't know. So that's why I want to just say that, we just need to finish all our products with high-quality in order to make the best possible return of investment. Is that a delay? No, it's just a -- perhaps a worrying risk that things could get delayed. You have seen Biomutant and they deem it's okay, it's not polished enough and that they continue to work on it, and now it will be released the day it's polished.
And as you said, I mean, a lot of publishers have delayed games recently, Sony, Square Enix, CD Projekt, Ubisoft, Paradox. What is the reason in general? Do you think there's an impact from the new consoles coming and potential platform deals to be made? Or how should we interpret it?
No. Well, obviously, it's a -- a new platform -- it's always a new platform and it adds a layer of complexity to the -- to, I guess, the development. I'm not against them. So I don't want to comment in specific on this, but I don't think it's -- I don't want to comment on the others. Obviously, now we have a next-generation of consoles coming up. So if you are to release games on the current generation, you need preferably to bring them out sooner rather than later. Otherwise, you would preferably have them on the next-generation of consoles. So there's a lot of hard decisions to be made. I just think everyone in the industry just say we need to make fantastic games. That's the thing that counts. And I think we can clearly see that on the games we had released the past year, Metro Exodus, Wreckfest and many others that it's just worth the time to make the game finished. But obviously, if you start making a game, you have a plan, you have a budget, you have a team, you add some layer of extra time to polish things. So -- well, that's the rationale I could have managing the business. I have this plans.
Great. And I mean, in Q3, you had a strong gross margin of 50 plus percent. You had a strong operating margin. Can you comment quickly on the cash flow as well? Working capital was quite negative in the quarter, plus if Johan could share some light on that please?
Yes. Yes. So the working capital was negative SEK 312 million, as we said. The main reason for that is that the trade payables were a lot lower. So that explains the difference. Looking at operating receivables and inventory, they are at the same level as they were in September. And then looking into trade payables and why they differ, of course, it's heavily influenced on when you make purchases and when you make payments to suppliers and which in terms is heavily influenced by release schedules of the launch releases, especially in the physical side of our business.
All right...
Basically, we had Christmas purchases coming in early in the Q3. Please correct me, Johan, if I'm wrong. And then we pay them off, yes?
Yes.
Early.
Yes. And on a -- also on the general level, I mean, looking at the net working capital, it's around -- it's slightly above SEK 600 million. So it's at the same level as it was a year ago when looking at it in relation to our trailing 12 months revenue, it's about 10%. So we still think that it's on a fairly low level, but of course, you will have quarterly swings in cash flow. That's the nature of it.
Perfect. Do we have any questions from the floor? I have a few from the web after that? No. So let's do some questions from the web, and we have some questions on Amplifier Game investor, we can start off with perhaps. I think you already answered this question, how will Amplifier be accounted for going forward? You have commented on that. But can you comment on the rationale behind Amplifier and what you foresee there over the coming years? How big will it get?
Well, how big it will get is -- I think the team have a great ambition to continue building on their strategy and on their strategy of setting up new studios around various senior games developers. And to incentivize them and then to add the synergies as a group. Will the games be self-published? Will they published through the group? There is various things that we -- they will be communicating over time. And they will operate as an independent unit. There is a rationale having them as independent unit for various of reasons. Obviously, they will work very closely with the rest of the group in various sorts of publishing deals and/or change of knowledge and so on.
Great. I think we'll have to move over to the Saber Interactive acquisition given the time constraints. So I mean, first of all, we don't have Matt and his colleagues up here now, but...
We bring Matt and Tim and Andrey back here. I think -- I wouldn't say I will start answering, but -- answering it. I'll just listen to Oscar and then I will...
So first off, I'll give it to you, Matt. So can you delve a little bit deeper into the rationale behind joining Embracer Group? You talked about synergies, what is the most concrete thing that you see?
Well, I mean, on its face, obviously, it's just the library of IP. There's a ton of incredible IP that's yet to be utilized, and we see quite a few of the potential games from the IP within the library.
Don't mention the specific IPs.
I'm not mentioning anything. I'm trying to be -- I'm trying to remember that I'm no longer a private citizen. So yes, there's amazing IP. That's first and foremost. The second is, I really love the strategy of acquiring new studios and the access that Lars and his team bring to -- the ability that they bring to grow. We see tremendous opportunity for growth primarily. Our primary area of growth has been in Eastern Europe and in Russia, where it's very cost-efficient to develop. And we also have growth in Spain and in Portugal, we're -- where it's also, there's a lot of talent, and there's a lot of opportunity for growth. And we felt that if we wanted to continue to expand, the best way to do it was to have the backing of a larger entity with the ability to help us to really take it to the next level.
Great. And I mean, so far, some of your largest IPs that you worked on as a self-publisher has been World War Z and NBA 2K, and I guess those are licensed IPs? Can you talk a little bit about how you sort of mix between your own IPs and licensed IP and what's the rationale there?
Sure. Look, the rationale behind World War Z was pretty simple. We wanted to do a game that was -- what we do at Saber is we identify market opportunities, right? We look and we say, hey, what types of games are people looking for? What types of experiences do people want to play that aren't being provided by the market right now? So our philosophy has always been kind of a market-driven approach. So we wanted to create -- we looked there was a game called Left 4 Dead that sold something like 28 million copies, and there was nothing in the market like it for a very long time, and we wanted to scratch that itch. So we wanted to create a 4 person co-ops, zombie shooter. And we had 2 ways to go about it. We could either create our own IP and spend considerable money on marketing it and still we'll have to overcome significant barriers or we can license an IP. And we thought, especially as an independent developer that's trying to keep its development costs relatively contained, it made more sense to go with a license and share on the back-end. And so in the case of World War Z, it just made sense for us because there was a -- the largest grossing -- highest-grossing zombie movie of all-time, highest-grossing zombie book of all-time, highest-grossing Brad Pitt movie of all time. People don't realize that. And so I guess, he's got a lot of indie films, too. So from our perspective, it just made sense to leverage that. And so but in addition to that, we also have IP that we want to develop individually. So MudRunner, for example, and now SnowRunner, those are IP that we felt that we wouldn't have been served well by using a licensed IP for something like that. Personally, I think licensed IPs sometimes gets a bad rap. You can make just as much money with a licensed IP as you can with your own IP. It's just a question of how long you have that IP for. In the case of World War Z, we have some pretty good protections, and we can continue to develop that franchise and plan to. And as long as we have that, then it's almost the equivalent of owning it with just the obligation to share on the back end a little bit. So...
Great. And a question for you Andrey, perhaps. I mean, how -- you grew by roughly 150% in 2019. How much was that -- how much of that was down to World War Z? And how resilient would you consider the revenue?
Revenues, Oscar.
Sorry I forgot about you, Lars.
Obviously, we can't provide a financial forecast. No, they have a stability they've built up. And I was pointing out, obviously, stability in their business on a new level. And that will generate growth driven by their pipeline of releases and looking again on this current year, you see a more shift to the second half of the year than the first half, the first 2 quarters. That's the answer.
I think if we don't go into actual numbers. What's important is that we work on a portfolio of games. So we don't have 1 game. So we're very diversified. We do larger games, we do small games. We have mobile games. We have premium games. We're working in multiple locations, and we'll have multiple releases per year. So we can [ hedge ] our risks. And we have multiple revenue streams, and that makes it for a sustainable business.
Great, Andrey. And a follow-up there, will you continue with your work for higher business as well?
We love our partners. We feel like we developed very good relationships with companies like Microsoft, for example, we did a number of Halo games. Yes. We have a great working relationship with CD Projekt, [ great Polish ] to you. We have a number of other relationships, whole host of other relationships, actually. We're working for a number of types, which haven't been announced yet, but they will be in a very short amount of time. So we'll have opportunities, and we feel like -- you start working with somebody, it open doors. So sometimes, you work -- start working for something small, which leads to bigger, better things. And that's why [indiscernible] is a great way to open those doors.
Great. And I mean, perhaps some more discussion on your pipeline? What are you -- what ways are you thinking? You mentioned sports and MudRunner as important categories, perhaps?
I think they announced one title. It's published by Focus Home, its SnowRunner. The rest of the titles is not announced in the pipeline, but they have 11.
We have a very large number of titles. Some are bigger, some are smaller because they're all developed across various studios. I can't say much more than this.
That is the kind of coloring we can do on that currently. Obviously, we would like the publishers to talk about the products, whether it being Saber, us or the actual other publishers we're working with.
Great. And the final question for me. Can you say something about how many people are still working on World War Z? I mean, there -- version has come out for DLCs and live ops, et cetera.
We have a large team that's continuing to support the title of the exact number...
Yes, we move people around. Yes.
But we have -- look -- it's a great franchise for us. We see a lot of potential in the future. I wouldn't be surprised if we continue to work on it, and we certainly don't want to abandon our fan base because the way games are made these days is it's constantly feeding your fan base, even if the content is free. That's how you keep your community alive. And if you want to ever get to the sequel, you've got to keep them there. And so we understand that games, even games that are for sale are games as a service. And so that's the way we approach all of our development with all the games that we're working on.
I think if -- was a good answer, and that's a great answer in general. Thank you, Matt.
Okay. I think that's it for me. So I think I'll leave it up to you two round it off.
No, I think -- thank you very much for listening in today, and see you in 3 months.