Embracer Group AB

STO:EMBRAC B

Earnings Call Transcript 2021-Q3

[Oscar Erixon, Financial Analyst]

Hello, and very welcome to Karlstad and Embracer Group's Fiscal Q3 Presentation. We have a lot to talk about today, including strong back-catalog sales in Q3, a packed game pipeline for the next fiscal year. And also, I have a special interest in talking about the incredible indie success title, Walheim. I will come back for a Q&A presentation later. We will also talk to some Austrian and Italian guests, I believe. But first off, I will leave over to Embracer Group, CEO and Founder Lars Wingefors; and CFO, Johan Ekstrom. Please go ahead, guys.

[Lars Wingefors, Founder, CEO & Director]

Thank you, Oscar, and hello, everyone, and very welcome to Värmland and this third quarter report. And I'm really glad to report another stable quarter. If you just help me to turn the slide once again here. Thank you, Johan. We were glad to report sales that increased 44% year-over-year, close to SEK 2.2 billion. We had a performance in the Games business segment of net sales of over SEK 1.3 billion, which is a 62% year-over-year increase, and the 21% organic growth in constant currency and a 33% growth in -- on pro forma basis. The partner publisher segment had a 21% year-over-year increase in sales to SEK 813 million. And the profitability came in at just about SEK 600 million, which is a 100% increase year-over-year. The free cash flow continues to improve. And in the quarter, it was SEK 309 million, which is more than SEK 0.5 billion better cash flow than the previous -- same quarter last year despite we had record investments into new games to be released in the future as well in the quarter. The drivers in the quarter was our extensive wide catalog of products, the back-catalog sales, including titles such as Satisfactory, Spongebob, Wreckfest, SnowRunner, World War Z, the Saints Row series, the Deep Rock Galactic and the Metro series. The new release segment had a lower activity in the third quarter. However, I would like to point out 2 titles from our friends, family members at Milestone, Ride 4, MXGP. Looking at the KPIs, we had a record of products in pipeline at end of the quarter. We had 150 games under games development projects in the balance sheet. We engaged 113 studios, including 57 internal studios and 4,300 games developers. And again, we invested a record SEK 523 million into the games portfolio that will generate organic growth in the future. And worth pointing out is that's 3x the amount we completed games for or released games for in the quarter. Looking into the quarter ending now in March, we're expecting also a lower commercial activity in new releases in value. And we're giving a range this morning of completing games of SEK 120 million to SEK 140 million and meaning the full year will be completed games for SEK 840 million to SEK 860 million. But looking into the next financial year, we are expecting a record year driven by many factors but one factor being the amount of new releases. We're expecting more than 70 premium games development projects to be completed, and the value of those are expected to be between SEK 2.5 billion to SEK 3 billion. And this is not including the acquisitions we announced on February -- the third of February with Gearbox, Easybrain and Aspyr. In the quarter and just 2 weeks ago, we released an indie hit called Walheim. I will come back to that under the Coffee Stain slide. Also in the quarter, we completed the transactions with Zen Studios, and we are expecting to complete the transactions and acquisitions of A Thinking Ape and IUGO for Vancouver. That was part of the 13 acquisitions we announced in the third quarter. In the current quarter ending March, we just recently announced the 3 acquisitions of Gearbox, Easybrain and Aspyr. Looking at the M&A outlook. It's a very vivid market, and we are very active. And we are -- I will come back to that on a separate slide. We also announced this morning, and it's worth pointing out the details later, but we -- the Board have decided that we are to make an IFRS conversion and that we will start the process of becoming listed on a regulated market within 18 to 36 months. And with that said, I will hand over to you, Johan.

[Johan Ekstrom, Chief Financial Officer]

Thank you very much, Lars. So let's start by looking at our P&L for the third quarter. As said, net sales in the period reached almost SEK 2.2 billion, which is up 44% over the corresponding period last year. We have a healthy improvement or growth in our EBITDA, growing with 70% to SEK 879 million in the quarter. Also, operational EBIT doubled compared to last year, reaching SEK 603 million in the quarter, yielding an operational EBIT margin of 28% in the quarter compared to 20% in the same period last year. And the improvement in profitability is driven by the healthy growth in our top line and also by the favorable product mix shift since we see a higher growth rate in business area Games with 62% compared to Partner Publishing/Film. The adjusted EPS for the quarter is SEK 1.06, up 56% compared to last year. And if you look at our trailing 12 months financial data, we are close to SEK 8 billion in net sales and operational EBIT at SEK 2.254 million (sic) [ SEK 2.254 billion ], which is an operational EBIT margin of 28%. If we look at our amortizations in the quarter, we split them into operational amortizations and acquisition-related amortizations. The operational amortizations amounted to SEK 276 million in the quarter, and the majority of these are related to amortizations of the released games, also SEK 65 million related to amortizations of film within our film segment. The acquisition-related amortization amounted to SEK 664 million in the quarter. And the majority of these are related to amortizations of goodwill, which was SEK 536 million. And then we also have amortizations of IP rights of SEK 118 million. All in all, operational EBIT, SEK 603 million; and reported EBIT, minus SEK 61 million in the quarter. If you look at our cash flow statement, as Lars mentioned in the beginning, we continue to have a healthy cash flow. Free cash flow was SEK 309 million in the quarter. It's the fourth consecutive quarter with positive free cash flow. On a trailing 12-month basis, our free cash flow amounted to SEK 1.1 billion. In the quarter, the cash flow was driven by improved profitability, increased EBITDA, coupled with very limited investments or change in working capital. We have a SEK 2.3 billion net outflow of cash, which is related to the acquisitions or the acquisitive side of the business. Cash flow from financing, SEK 5.4 billion in the quarter mainly related to the share issue that was contributed in the beginning of October. We continue to invest into intangible assets, mainly our games portfolio. And it's also worth noting that the free cash flow has increased well while we also invest more than ever into our intangible assets and mainly our games portfolio. If you look more into the investments in intangible assets during the quarter, out of the SEK 558 million that we invested, SEK 523 million is related to investment into our games portfolio, and SEK 35 million is related to investments into the film segment. Out of the SEK 523 million, SEK 370 million is investments made with internal studios and SEK 153 million with external studios. Looking at the development of investments into our games portfolio, we see that we continue to increase, reaching a new all-time high at SEK 523 million, which is up 40% over the same period last year. And during the quarter, we completed games development projects to a value of SEK 156 million. This can also be seen when we look at the continued growth of our pipeline and development capacity. Development studios, SEK 113 million at the end of the quarter, of which SEK 56 million is internal. And the number of developers engaged in game development is a bit higher than 4,300 people at the end of the quarter. Also a record high number of pipeline projects, 150 at the end of the quarter, of which 61 is announced. If we look at the upcoming releases and expectations, we can conclude that we have a release date for Biomutant communicated to 25th of May. The expectations on completed games in this Q4 or the last quarter of the fiscal year is between SEK 120 million and SEK 140 million. Looking at it from a yearly basis, that would mean that for the fiscal year 2021, we would reach SEK 840 million to SEK 860 million. Our quality comes first approach is fundamental. We believe that this is the way to create great games that perform well and over a longer time period. And it's also the way where we add to our strong back-catalog of games. During this fiscal year, we have postponed about or over 10 games due to applying this quality comes first approach. For next year, next fiscal year, we expect to have the strongest release activity ever with more than 70 premium games being released. And the total expected value of releases from a development cost perspective is between SEK 2.5 billion and SEK 3 billion. And looking over the course of next year, it will be skewed towards the end of the fiscal year.

[Lars Wingefors, Founder, CEO & Director]

Worth pointing out it's 70 premium games development project, meaning could be porting and other projects, and the 10 released delayed games, that was during the whole financial year. And I would say the quality comes first approach was the most common reason for the delay.

[Johan Ekstrom, Chief Financial Officer]

Now looking at the balance sheet. At the end of December, total assets amount to SEK 24 billion, which is 20% more than what it was in the end of September. A large part of our assets in the balance sheet are intangible assets. And this -- if you look at the breakdown of this, it can be split between operational intangible assets and acquisition-related intangible assets. The operational intangible assets is about 24% of the total intangible assets, where the largest single item is the investments that has been made into our ongoing games development portfolio. And the second largest is the book value of completed games and released games. The acquisition-related intangible assets amounts to SEK 11 billion, and goodwill is the largest component of this, which is about SEK 9.6 billion. We have a healthy financial position at the end of December, where the available funds was SEK 12.5 billion, where available funds is defined as cash and bank balance and unutilized available credit facilities. If we look ahead and include the cash consideration part of acquisitions announced post -- or expected to be closed after 31st of December, available funds will equal SEK 10 billion. And the net cash position at the end of the calendar year was SEK 4.9 billion. Moving on to the games business area.

[Lars Wingefors, Founder, CEO & Director]

Thank you, Johan.

[Johan Ekstrom, Chief Financial Officer]

Thank you.

[Lars Wingefors, Founder, CEO & Director]

And starting with the net sales breakdown of the games business area and looking at the trailing 12 months number, we are at close to SEK 5.4 billion, which is at all-time high and compared to the same number last year of SEK 3.3 billion. Looking at the new releases and the share of new releases in back catalog, as mentioned, we had a lower activity of new releases in this quarter ending December, and the share of new releases was only 20%. The rest was back-catalog sales. Looking at the digital versus physical. It's -- we have a stable, very high number of 79% of the revenues coming in from digital channels in the quarter. And looking at own titles based on owned IPs and long-term licenses, the share was 69% for the quarter. And the release activity and organic growth, looking at the trailing 12-month basis of value of completed games, was -- we are at SEK 885 million. And as mentioned, the value of completed games in the quarter was SEK 156 million. And looking at organic growth, here, looking at this slide, we can see the year-to-date organic growth on a constant currency basis being 54%. And in that quarter, it was 22% and, again on the pro forma growth -- organic growth number, was 33% in the quarter. That's the estimated number. And obviously, because of all the acquisition, it's the estimated number on accounting and books. That's why we're not providing this as an ongoing KPI and using the organic growth only on a constant currency basis. So the business segments and business groups. Looking at THQ Nordic, they had a quarter with a lower release activity. They had a quite wide range, a number of releases, but none of the releases had notable commercial impact in the quarter. Total revenues was SEK 380 million. Key drivers in the quarter was continued performance on Destroy All Humans, Spongebob and Wreckfest, amongst many other titles. In the quarter, they acquired the Purple Lamp Studios, the developers behind Spongebob Squarepants: Battle for Bikini Bottom - Rehydrated. And during the quarter, they have signed several significant commercial deals. And on the back of the success of previous license releases, new licensing deals will be pursued. And looking at the selected pipeline, obviously, again, this is a topic coming back every quarter. Biomutant will be released on May 25 or 25th of May next -- first quarter. And in the current quarter, we are expecting to have a lower release activity, and the releases that are lined up are Kingdoms of Amalur: Re-Reckoning on Switch and Monster Jam Steel Titans 2 on PC and console. Looking at business area. Deep Silver, they had quarterly revenue of SEK 497 million, which is 6% growth year-over-year. And on a trailing 12 months basis, they're just about SEK 2.1 billion, which is the all-time high. Key releases, but in general, they didn't really have any significant commercial impacting releases in the quarter. But as usual, they had a number of good releases anyhow that contributed well. And as mentioned, they had MXGP 2020 from Milestone, Ride 4 from Milestone and Maneater from Tripwire, our friends at Tripwire, on the next-gen consoles. And again, the back-catalog's drivers once again in the quarter was Metro Exodus, the Saints Row series, amongst many others. In the quarter, they completed the acquisition of Flying Wild Hog, one of the leading Polish developers and our first establishment of a developer in Poland. They are the makers behind many games, and the one mentioned here is Shadow Warrior series, published by Devolver. They are 260 people across 3 studios in Poland. Looking at acquisitions they made in the previous quarter. In September, they acquired Vertigo Games, the leading VR developer in Holland, and the gross revenues of that business was up 40% year-over-year without any new release and obviously driven by a successful release of the Facebook Oculus Quest 2, the VR headset, according to SuperData, selling more than 1 million units. And the Milestone's performance was as usual in line with the management's expectations. Looking ahead, they're having a very wide pipeline of products. And on this slide, you can see a few of these products that are pointed out here. And I'm sure Oscar will come back to that in the Q&A session. Now looking at the business segment Coffee Stain in Skövde. In the quarter, they had SEK 99 million of revenues, which is a year-over-year growth of 175% driven by continued good performance of both Satisfactory and Deep Rock Galactic, but they did not have any new release in the third quarter. Neither did they have any major content updates. On a trailing 12-month basis, they are having revenues of SEK 484 million, which is an all-time high level. In the quarter, they acquired the remaining 40% of the shares in Coffee Stain North, and that studio have been working on an unannounced title since 2017. 16 days ago or it's over 2 weeks ago, they released a publishing title, Walheim, that I'm sure I will have a lot of questions on during the Q&A session. But I'm super glad and excited to see that the Iron Gate team in Skövde, being just a handful of people, are able to achieve such a success. And I personally have been enjoying watching this on Twitch for a number of hours, and it's just amazing how we can create such a game. The commercial performance has been solid, as been communicated by Coffee Stain. And this morning, we are communicating it has sold, as of this morning, close to 3 million copies. The commercial relationship with Iron Gate are in line with what Coffee Stain normally has with external development teams, having a publishing agreement where the developer gets a healthy majority of the revenues and having a minority ownership in the studio, creating over long time over time a potential net contribution that will contribute to the operational EBIT as well. But that is over -- could potentially be over a longer time, and that's net from taxes obviously. Coffee Stain have many other titles than Walheim, even though that's -- I'm sure it's a lot of focus right now for them. They're having an amazing pipeline for the coming year and years that I'm truly excited about. Here pointing out 2 titles, Midnight Ghost Hunt and Songs of Conquest, but they have many others. But I will let them communicate when they are ready. Moving over to Saber Interactive. They had a continued stable performance, in line with our expectations, of SEK 307 million in the quarter. They didn't really have any new releases, so the revenues was driven by a number of factors. One factor is obviously continued performance of SnowRunner and the World War Z games as well as a continued business with external business partner under the work for hire. During the quarter, they acquired 6 companies. Zen Studios, the leading pinball games developer in Hungary, that deal closed just a few days ago. Snapshot Games, the developer behind Phoenix Point, also a title worth pointing out that contributed a bit in the end of the quarter, with 65 employees both in the U.S.A. and Bulgaria. Nimble Giant, the leading Lat Am PC, console games developer in Argentina with 75 employees. Mad Head Studios in Serbia, with 130 employees. 34BigThings in Italy with 28 employees, one of the leading indie developers in Italy. And Sandbox, the PR and influencer relationships agency based in New York with 13 employees. And on February, the 3rd of February, they announced the acquisition of Aspyr that we are expecting to close in the coming months, which is one of the leading indie games -- or indie developers and publishers with 24 years track record of profitable business with 140 people in Texas. Saber are building an amazing pipeline of products and driven by obviously their organic teams at Saber but as well as with all the acquisitions they are doing and all the organic hiring they're doing with people. Worth pointing out here, they announced the title Evil Dead that has been well received. Moving to DECA Games, the mobile games business. They had the first full quarter, generating revenues of SEK 73 million in the quarter. And the driving titles was Dragonvale, Almost A Hero, Gods and Glory and a continued performance of -- especially of Realm of the Mad God. In the quarter, they announced 2 acquisitions that we are expecting to close in this quarter. It's not closed yet, we're expecting to close this quarter ending March of 2 leading companies in Vancouver in mobile games, one called A Thinking Ape and the next one being IUGO. And those companies will form the DECA Games Group. Moving to Amplifier Game Invest. I'm super thrilled, and I spoke to the CEO of Tarsier the other day here and congratulated him to the success, the critical success of Little Nightmares II. It's a IP they created but is owned by BANDAI NAMCO and published by BANDAI NAMCO, so it doesn't really have any significant commercial impact for us, even though if it does really well, it could have some royalty revenues over time. But I'm super excited about them achieving such a game again because the first game was very well received, and this game looks as well received. Now being -- having that game completed, they will move over to create new IPs, and I'm super excited. And that was the main reason we made this acquisition a bit over a year ago. Also in the quarter, we released the self-published game Fishing North Atlantic. That had a bit of issues in the start, but I know the team are working on it. And we are looking forward to what that IP and other IPs could bring for that studio. We are still committed to the team, and we really believe in that business. Also, we acquired or welcomed the Silent Games Studio in Newcastle. That has very high ambitions to become 30 people over time. And finally, we welcome the Plucky Bytes actually here in Karlstad with -- run by 3 industry veterans. Moving to the partner publishing and film business area, which had a stable performance, a bit over management expectations, of SEK 813 million in the quarter. That is a 21% year-over-year increase. And on a trailing 12 months basis, they are just about SEK 2.5 billion of revenues. Drivers were DIRT 5, Yakuza 7, the Mortal Kombat 11 Ultimate and a general of COVID-19 recovery effect at retail. The films business segment in that area, business area. It had a really good quarter, exceeding the management expectations. They had a successful theoretical -- theatrical release, sorry, of Pataní, and they also signed exclusive distribution contracts with Paramount for Italy territory. The biggest sales are within films booming for them, and they are really having much more difficulties with the physical film distribution. Worth pointing out is the video subscription channels Aniverse for the anime segment on Amazon Prime has continued to perform well for them. Also in the partner publishing business area, these 2 businesses that is not under Koch Media was reported in this business area. And that is Game Outlet, the original business that was part of founding here in Karlstad that had another stable quarter with strong back-catalog sales with a very deep catalog of physical games mainly distributed to e-tailers and Amazon and many others. As well of -- as the acquisition and inclusion of the QA business of Quantic Labs in Romania of 300 -- more than 350 people. And they will have the first full quarter in the current quarter ending March. Looking ahead, we see this quarter ending March that there is no notable release with a significant commercial impact for the partner publishing business area expected. So this will be a quarter with a lower commercial activity in that business area. However, they -- as usual, they have hundreds of different games and SKUs they are selling. And pointed out in this presentation here, they have a few games, and the distribution varies in various countries. But for example, they have Hitman, they have Persona 5 Strikers and a few others. Okay. So talking a bit of M&A. And I would like to recap a bit of the KPIs on the mergers and acquisitions and going back to where we started our journey with acquisitions 2017. And that year, we acquired companies of -- for SEK 92 million, 2018 for SEK 2 billion roughly, 2019 for SEK 2 billion roughly, now talking total maximum consideration. Last calendar year, we acquired companies for a bit over SEK 13 billion. And this year, we have started announcing acquisitions or mergers of close to SEK 22 billion. And looking at the number of transactions, that has obviously also increased over time. And just looking of adding new here, as mentioned, verticals, we call it operating groups, we started 2018 adding 2 groups: the Koch Media, Coffee Stain, one more group 2018. Last year, we added 2 groups: Saber and DECA. And this year, we started of adding or plan to add one -- deals of closing of Gearbox and Easybrain. The rest of the acquisitions are acquisitions or mergers driven by the operating models. And it's worth pointing out the strength of the -- one of the strength of Embracer is our very decentralized operating model. That is also driving a lot of M&A. Again, we announced the 2 landmark mergers forming 2 new verticals after quarter end of Gearbox Software and Easybrain. And looking at the outlook. So again, starting with capabilities. Our M&A capabilities are stronger than ever with now sown 8 operating units across the globe, globe scouting and researching for suitable entrepreneurs and creators and companies to join the family. Consequently, we are in more dialogues than ever, and our ambition is to continue to grow our M&A activity going forward. And that is driven by that we are increasing the number of operating groups. The mindset and philosophy of Embracer, I'm a firm believer of, obviously. And I -- when we are out and speaking to the entrepreneurs and companies and creators, it's very attractive. And I'm super humbled by hearing the stories and why people would like to become part of Embracer. Obviously, we are not alone in the market. We define it here as a vivid M&A market. You can say a very active market. There is the SPACs. There is the IPOs. There is the private equity venture capitalists. There is other companies on the public markets trying or doing similar -- I wouldn't say -- or doing acquisitions. However, I still believe we are able to continue our strategy being disciplined under the same principles going forward. And I would like to point out that we are a truly independent company and platform, with only approximately 1% of the global gaming market. And the main competitors we are facing out there in the dialogues on a daily basis are companies that are significantly larger than us, sometimes up to 100x or more larger than Embracer Group in terms of market cap. And I'm humbled to hear that many of the entrepreneurs and creators would like to join Embracer rather than those companies. Johan?

[Johan Ekstrom, Chief Financial Officer]

Yes. Thank you. Okay. So super excited to inform that the Board of Directors decided yesterday to convert to IFRS and also start the process to become listed on the regulated market. When we look at this, the work will be done or executed through a project. We will have 3 work streams in this project. One is for financial reporting and principles, the second one is for internal control processes, and the third one relates to corporate governance structure. It's -- we have the clear ambition to achieve industry-leading efficiency and transparency for each of these work streams. If you look at overall time line for this whole process, it's estimated, as said in the beginning, to be between 18 and 36 months. When you look at it, it's -- the timing is, of course, dependent on the pace of training, recruiting, onboarding key employees and also the need for business support and financial integration of future mergers and acquisitions. Also, the corporate governance work stream delivered its first milestone already today with the implementation of an Audit Committee and the Remuneration Committee that's become effective immediately.

[Lars Wingefors, Founder, CEO & Director]

Johan, sorry for stepping in here, but this has been a discussion we had for a number of years. And obviously, I've been hearing the demands from especially institutional shareholders why this is important, why are we doing this main listing. And from the beginning, it was many reasons, but now there is a bit less reasons but still very important reasons, that the capital market are changing and the inclusion in indexes are very important for the capital resources to the group. And there is also other reasons for the institutional shareholders why we should do the main listing. Obviously, there is many positive things here in terms of transparency, the quality in processes, the controllings, the good thing of the governance and corporate control. But for me, it's important also that the corporate -- that we are not becoming this corporate machine without a soul, destroying our businesses. So I will keep a strict eye on that we are finding this balance, doing this process becoming a listed company and can keep our business strategy. And also worth pointing out is we will continue our strategy doing M&A meanwhile we're doing this process, which will put further pressure obviously on the teams doing this. And not saying that alone, it's also worth pointing out that this is, I think, over time, important. And when doing this, I think we have very high ambitions. And we've been talking about -- a lot about how to become a benchmark in terms of reporting within this -- our segment. So we have a very interesting 18 to 36 months ahead of us. So please continue, Johan.

[Johan Ekstrom, Chief Financial Officer]

Yes. And also, as we all know, we have a very efficient M&A process within the Embracer Group. We also saw that the M&A activity is extensive and continues to be that. Looking at -- that puts requirements on our ability to integrate or onboard new companies into the Embracer Group. So we just wanted to share some of -- or share with you the onboarding process. If you look at it, we have a 1-year onboarding process within Embracer. We split it into 4 phases where there are different priorities in each of the phases. So we're not trying to do everything at once. We prioritize Phase 1, prioritization on finance; Phase 2, compliance; 3, introduction of the smarter business framework; and then last but not least, reconciliation on the previous phases to make sure that we have done what we set out to do in the beginning. We will not go through this in detail. But if you look at high-level onboarding time line and the key actions that is being performed in each of the phases, we see or we can show that we have 4 work streams that we are doing the onboarding process through. And the work streams are centered around the themes where we do the onboarding, which is mainly finance and regulatory and compliance. On top of that, it's important to have robust supporting activities throughout the onboarding process and also to handle communication throughout the process. Between each phase, we have review meetings to make sure that we are on track before moving on to the next phase. And in this onboarding process, we try to front-load as much as possible to be prepared and do as much of the work possible pre-closing when it comes to preparing ourselves and understanding the capabilities of the companies to be part of this onboarding process. I think also examples of the key activities in Phase 1, of course, it's about aligning accounting principles to K3, conducting the preliminary purchase price analysis while also following up on any due diligence findings, making sure that they are closed throughout the process. The second phase is much more centered around compliance, where we implement the global policies of Embracer. And then the third phase, there, we have the introduction of the smarter business and our sustainability framework. And this is super important for us. We need to do this while maintaining the decentralization and that the stand-alone entities maintain responsibility, authority and remaining independent. That's a critical part of our business strategy, and we need to be aware of that throughout the onboarding process. Of course, also it's critical that this is being paired with what it means to be part of a listed company. Yes. Moving on to...

[Lars Wingefors, Founder, CEO & Director]

A favorite slide, Johan, isn't it?

[Johan Ekstrom, Chief Financial Officer]

Yes, yes, it's a favorite. It was first shown at the AGM in September. And there, we looked at releases until 30th of June 2020. We have rolled it forward to 31st of December 2020 in this slide. And what we see are a scatter chart of project ROI. The sample includes projects where -- which have sales above SEK 40 million or investments above SEK 40 million. In the sample, it's 30 projects. ROI is calculated as contribution in relation to the investment where the contribution is the gross profit less marketing expenses from release date up until 31st of December 2020.

[Lars Wingefors, Founder, CEO & Director]

This is basically cash contribution. It's nothing to do with the amortization.

[Johan Ekstrom, Chief Financial Officer]

No. We also refer to this as cash flow project ROI. So it's on an accumulated basis from the release date. The investment is to capitalize development expenses for completing the project and also any follow-on investment that might be. Looking at the outcome, of course, if you are at 1.0, the low line here, that's when we break even. If you look at the average of these 30 projects, we are at 2.9x the invested amount, which is slightly above what we had in the same picture when we looked at the data until the 30th of June 2020. So it's very interesting. Yes. Then we have a forecast relating to nonoperational amortizations or acquisition-related amortizations. This forecast includes all signed deals as per today. The forecast is based on the purchase price allocations as per today. These contain both preliminary and finalized purchase price allocations. Acquisition values are converted to SEK using the exchange rates per end of December 2020, and consideration shares are valued at the VWAP as set forth in each SPA. Looking at the forecast, the Q4 forecast is based on the average exchange rate during the quarter, Q3. Looking ahead, we are using the exchange rate as per end of December 2020. And also, this forecast assumes closing dates of transactions that are still to be closed, where Gearbox, Easybrain and Aspyr is assumed to be closed on 1st of April; IUGO, ATA and Zen assumed to be closed mid-Q4. Looking at this, nonoperational amortization is estimated to SEK 750 million in Q4 this fiscal year and then SEK 6.4 billion in the next fiscal year.

[Lars Wingefors, Founder, CEO & Director]

Worth pointing out here is that assumed closing dates of Gearbox, Easybrain, Aspyr is not any confirmed expected closing dates. It could be much later in that quarter. So this is just for the technical purposes of this forecast.

[Johan Ekstrom, Chief Financial Officer]

Yes. Then we look at our initiatives within ESG. We are super excited about the sustainability report that will be included in the annual report for this fiscal year. We are putting a lot of attention and resources into the work of completing this. And also, we -- during the Q3 quarter, we rolled out and implemented a trade compliance policy throughout the group. I think that went very well, that rollout process. Training is some -- is, of course, very, very important for the development of all the people within Embracer. And during the fall, we have had global training centered around our compliance code. And by the end of the year, we had -- about 50% had completed the training, and we will continue to push for this as it's a very important matter, and we really would like all the employees of Embracer to understand and take part of our compliance code. We continue to develop and work relentlessly with our ambassador program. And as new companies join Embracer, also the participation and the members of the ambassador group is extended. And last quarter, focus has been on initiatives through the 4 pillars of our Smarter Business framework and such things as target -- or such things as recruitment, data protection and inclusion, important areas that was discussed.

[Lars Wingefors, Founder, CEO & Director]

Thank you, Johan. And I have final 2 slides here that for me are very important, and it's a bit of culture. So being in the games industry since I was 16 and growing up with the NES business and all other formats going way back, game collecting and retro gaming and the heritage and history of our industry, I think it's very important for me, but I know it's very important for many of our -- my colleagues for the businesses and for the industry. And I've been game collecting a bit myself the past years as well as collecting many other things, but game collecting has been very interesting. But then I decided, why do I collect this myself? Why don't I give this rather to the company? So I decided to give my base collection to the company, quite a lot of Nintendo games. But then we have, at Embracer level, decided to put this as a project at the Embracer Group level to create archive of all video games. So we have acquired a few significant collections across Europe the past month or year, and we approximately have about 50,000 pieces of games and consoles and peripherals and arcades, quite a lot that are extremely rare and almost unique. However, this collection or archive is by no means complete, and this will take decades, if ever, to get complete. But it will be a true joy for myself and many of my colleagues. And the ambition is perhaps to have part of this present at the headquarter here in Värmland or at some other location here but, of course, to use it with our subsidiaries to have perhaps specific exhibitions about their creative history or certain IPs or to have exhibitions that could potentially travel the world or to do something online. This is obviously a black hole of time. So I tend to -- even though I love it, I tend to not spend too much time on this, but we have a few people working on this. And Thomas Sunhede that you can see mentioned here are heading up the project. So if you have any amazing collections or are interested to know more, please feel free to reach out to Thomas. And I promise to give you updates over the coming decades how this proceeds. So with that said, thank you, Johan. We are moving to the next part here. [Presentation]

[Lars Wingefors, Founder, CEO & Director]

So thank you. I'm -- we are to -- I'm to share you a slide here where you can see a bit of the overall Embracer, and we will end this session that I will welcome one of our entrepreneurs with us. So before doing that, I would like to point out the Embracer Group, what we are and how we operate, starting by saying founded by entrepreneurs, run by entrepreneurs. And here, on this slide, you can see the Embracer Group in the middle where we are creating this inorganic growth and then having our operating groups with these fantastic entrepreneurs and creators that are creating all the organic growth as well as further acquisitions. And I'm a true believer of letting great people making their own decisions. The decentralized philosophy, empowering individuals, creativity and speed is critical to our success. We are offering the benefits of a large structure for most access to capital, the knowledge sharing and all our soft synergies across the group but quite strict synergies on a daily basis more within the groups. And we believe this is the most attractive model for long-term creatives and entrepreneurs, will help bring more publishers and studios onboard this group. And this ecosystem we are creating, I think, becomes stronger the more people we bring onboard. And investors often ask, what's the strategy? And often they mean, what strategy or what games do you do? Or how -- what business model do you do within the games? But then you need to realize that there is -- each operating group has their own DNA, own culture and strategy how they operate their business, whether it's free-to-play, premium, what kind of games, how they do the publishing, how they do the games development. And now it's most quite exactly 3 years ago, we added our first -- second or the second operating groups to the company, Koch Media, in a transformative acquisition. And I would like to celebrate that 3 years of Koch Media within the group by welcoming Klemens Kundratitz online here. Welcome, Klemens.

[Klemens Kundratitz, Co]

Hello, Lars. Hello, everybody. It's been a...

[Lars Wingefors, Founder, CEO & Director]

Hello, welcome on stage. I can see Luisa as well. Welcome, Luisa.

[Luisa Bixio]

Hi, everybody.

[Lars Wingefors, Founder, CEO & Director]

So Klemens, I introduced you, and I will leave over for you to tell you -- to tell the audience here about Koch Media and how it has been over the past 3 years to be part of Embracer.

[Klemens Kundratitz, Co]

A lot of things have happened. We have evolved from a mostly European sales organization and with 3 studios to a truly global games developer and with 10 internal studios now and growing our network of publishing companies to reach the globe. On top of that, we are -- we have developed our film company and created a game merchandising company. So it's been a very interesting journey for the first 3 years. But we -- I would first like to spend a minute or 2 about how we arrived at the decision to join you, Lars, yes, to join your machine, as you call it. It's not really a machine, I can tell you that. But it is certainly a member of -- a group of entrepreneurs that steer this company forward. We were -- when we joined the group, we were at a junction of our group development. We saw that for 24 years, we have built this company forward, but there was a next level that we wanted to achieve. And by joining the Embracer Group, we thought this would be the right solution for us to unlock our potential and to grow further. We really liked the principle of entrepreneurship, the global vision that Embracer brought along and the very unique structure, corporate structure. Also, the fact that you work very much on trust and on a -- for the family feel rather than a corporate structure, it appeals to us a lot. And then again, you came at the right time. It was the right decision for us at that time. And I can tell you, I have not -- and nobody here at Koch has regretted it.So how did the M&A phase work? It was very -- it was marked by a very personal approach. It was Lars, yourself and Erik Stenberg, your second in command. And you came along and we got to know each other. And I think you always said, I really want you to continue running your company. I want to help you run the company, but not interfere. And that promise, I must say, you -- is 100% kept here. You -- what you promised before this transaction happened after the transaction. And so -- and that long-term attitude that you have and the Embracer Group has, not 1 year, not 5 years, it's 20 years, is something that takes us forward.The M&A project was swift. It was -- we didn't spend months and months. We were accompanied by very professional advisers, which is very important on both sides to keep this on track. But it was not disruptive to our organization, which was really important for us as well.And then the journey began, and it was a, as I said, a journey marked by a lot of growth, organic growth as well as acquisitions. You can see here on this chart the kind of milestones in our development and how we evolved from a European company headquartered in Munich to a truly global company.We can also see that growth when we look at our talent in the company. When we joined the group, we were 770 people in total and had 10 publishing units, a film, a company and 3 studios. And then when we see our development -- or our organic development in the 3 years, organically, we grew by 39% in those 3 years. And when we look at our inorganic, our acquisition-based growth, then you can see that we grew up to 1,900 employees. And as you also see that, by far, the majority of our talents are in game creation, in development. But also, the other units increased. We are now 14 territorial publishing offices, and we have 4 film and game merchandise companies in the group.This is our global setup, and it is fair to say we are founded in Europe, and this is where our core markets are, but we are now very much present also in the Asian markets and in Australia, we have our 2 American companies from in publishing and in development. And our talents are, in terms of nationality, are very well-distributed around the globe.Looking at our company, what is Koch? We appreciate that Koch is, for some people, hard to understand because we are quite a diversified company, and therefore, let me explain to you the 3 main business areas here: development and publishing, partner business and film business. All 3 of them -- and game merchandise. All 3 of them are very strategic for us.When we look at the global development and publisher business, it's, first and foremost, the IPs that we are proud about and the long-term licenses that our catalog is built upon. What started historically as a single-label company with teams in various locations has become a solid group tree with multiple branches of publishing units and own products. Creating games and nurturing and monetizing IPs is of central importance for us, and we will certainly continue our journey and build that catalog forward.Our internal studios, as I mentioned, we have 10 studios. Flying Wild Hog is the latest entry in our studio portfolio, with 3 studios in Poland, are at the heart of the company. We are very proud of their expert knowledge, and each studio has their own special sauce. They have their own expertise, and Volition is obviously our studio of open-world games. Dambuster is -- stands for our first-person shooters. Warhorse Studios is our action RPG studio and so on. So we are -- we have studios in many genres and disciplines, and we are very proud about what they are achieving.One of the studios that are already mentioned in this presentation is Milestone. Milestone is in Milano, is our racing expert. And I brought to you the CEO of Milestone, Luisa Bixio, to talk to about her journey into Koch Media and to the Embracer Group. Luisa?

[Luisa Bixio]

Thank you very much, Klemens, and hello, everybody. And I'm very glad to share my experience in Embracer.Milestone. Milestone is a developer and publishing company. We are based in the very center of Milan, and we are close to 250 people. And we do racing since '90s, so 25, 27 years. In August '19, we entered in Embracer Group and Koch. Klemens, if you want to go on the other chart.My -- if we look at this more or less 18 months, I would like to say that I'm really very glad to be in Embracer, and I'm very glad of how we work in this period and the result we reach in this period, and also how we work in Milestone, in Koch and in Embracer, I think I would like to point out some pillars or some summaries.At first, the beginning, we designed with Lars, with Klemens, the strategy and the goal at medium, long-term for Milestone. After this, I started again to manage the company as I used to do before we joined the group, with a complete relation of trust and autonomy. On the same time, we have been able to implement a very good visibility relation at all the levels, IT level and even the good communication flow. So Koch and Embracer are completely updated of what happened in Milestone. We have very frequent call with Klemens, sometimes with Lars, but I manage the company, again, with the possibility to very fast decision and reaction and work capability.The other point that I think is very important, we've been able, in this 18 months, to implement many strategies, mainly with Koch -- sorry, many synergies, mainly with Koch. We implemented synergies at distribution level, all our tied dollars in all the world through Koch distributors as relation with the platform, all the digital strategies and opportunities, market view, operations. So at many additional level, including development, and I think that has been very important for Milestone.The last point on how we are working, I would like to emphasize the concept of family that was touching Lars and person, even Klemens. Being in Embracer, there is a very informal relation. All the doors are always open. There is independency, first factor, and on the same time, it's very simple to implement synergies or to have that communication. And that's very, very motivating.What we did in this period that, in this 18 months, Milestone continued the growth at many levels. As the first, we grew up in terms of revenue and even more profitability. We grew in terms of numbers of people because we are doing more projects and bigger projects and talent. Very important for us, even for the strength of Embracer Group, we have been able to sign our new very important licensed deal that are basic for the future of Milestone. Just 2 days ago, we announced the renewal agreement with Dorna for MotoGP until 2026. And then we renew for 5 years the licensing of Supercross, with Feld, for 3 years with -- for MXGP motocross title video stream. And then we signed another very, very important deal some months ago that will be announced at the end of this month.As last point that I think is very important, we have been able to increase a lot in terms of high level technology. The technology that is so important for us because it's the technology that allows to grow our title in terms of quality, innovation. We have been, we think, the first to arrive at the new console, and we developed a lot for the future.Look, to close, I think, that my experience is very, very positive. I'm very glad to be here.

[Klemens Kundratitz, Co]

Thank you, Luisa. That's great. We -- when we report our games section, we normally just use Deep Silver as the sort of name for all of our labels within the Koch Group. And Milestone and -- is part of that group. So I talked about the multi-label strategy, and it encompasses, on the one-hand side, Deep Silver, which is obviously our label for Saints Row, Dead Island, TimeSplitters and many others, but it is also the Vertigo Games, our VR publishing group on the -- from Holland. Ravenscourt, our German-based label. Most notable release is the Let's Sing series. And Milestone.With a focus on specific areas of expertise within each label, their own dedicated team of specialists across all disciplines, the labels work semi-autonomously while sharing best practices and learning across the group as a whole. And it is my pleasure to tell you today that we have plans to even further increase this number of publishing teams and labels to realign both our existing and future portfolios of products that we are invested in. So stay tuned on that.Going to our second strategic pillar, our partner business. Partner business is built on long-term partnerships since decades that we are very glad to have. And our company's DNA is very much built on partnerships as well. Global publishing partners include Square Enix or Sega, Warner Games, Capcom, Bethesda, Paradox and many, many more. I can't name them all. But these are our publishing partners.On the other hand side, we have very important partnerships also with leading developer publishers like Techland or Bloober Team or TaleWorlds or Pearl Abyss and many more as well. So publishing, helping other people, bringing their products to the global market is a key area of our business, and we will continue to nurture these relationships and also add new partners in the future.So we -- people talk to me about the publishing business and then our commitment. Well, I can tell you, we are, in the physical space, we are very well established, and we are long-term committed to the physical space, and we will act as a consolidator going forward in that physical space. And we are there for our partners to help them sell their products in all channels.Going to the third strategic pillar, the European films business. Over the last 18 years, we have steadily developed a European independent film publisher and acquired literally thousands of films. This part of the business represents around about 10% of the overall revenue of the business, very profitable as well and is currently well-established in the German-speaking Europe and in Italy.We have recently acquired Sola Media that you may have seen in the chart before. A world sales agent, which Koch produces and distributes selected family and animation movies. Here is a small selection of the films that we have engaged -- have been engaged with. And obviously, we are extremely proud that last year, we had the South Korean film Parasite in our portfolio, which among its numerous accolades won 4 Oscars at the Academy Awards: Best Picture, Best Director, Best Original Screenplay and Best International Feature Film. Becoming the first non-English language film to win the Academy Awards for Best Picture. We publish and distribute this film in German-speaking Europe across all channels and had incredible success with it.So this is the short introduction to the Koch Video Group as it stands today and being part of the Embracer Group. I would now like to just shed some light on the question of synergies, which is -- which many people talk about. What relevance has synergies in our group? And it is interesting to see that what you hear about the Embracer Group as a whole in a smaller scale applies to the Koch Media Group inside Embracer and then below Koch Media, for example, our subgroups like Vertigo or Milestone or Flying Wild Hogs, we have this principle of subsidiarity and entrepreneurship all the way through the entire group.And synergies are not at the heart of our strategic considerations, I must say. We are one of those companies where acquisitions are not made in order to create synergies. They are not the key driver. Most -- much more important is to enable great entrepreneurs to develop and run their businesses with a support of a bigger operational group and financial backing of a public company. But yes, synergies do work and are beneficial in certain areas. Certainly, within the Koch Media Group, we have a very strong central finance department, legal team, IT and also M&A is done centrally. We have established knowledge-sharing, data-sharing, asset databases, market intelligence. It's a long list of things where we can help each other. And then obviously, having a global physical distribution network benefits everybody in the Koch Media Group.But that is also, as you can appreciate, similar synergies are within the Embracer Group, physical distribution, I just mentioned, but important is that we have equity for acquisitions from our parent company. We can work with our sister companies on common development projects. We have already announced last year that we are swapping IPs so that game IPs are being better exploited, intelligence and so on. So there are certainly a lot to do but we are not forcing synergies in the group.So what is -- what does the future hold for us? Looking ahead, we see some very good potential for further organic growth as well as M&A opportunities. Notable organic growth, in the Games segment, we have some significant products ahead of us and -- which we'll release this year and beyond. But also our partner business will continue to grow, and we will be -- we are adding partners to our base, and those 2 parts of the business work very well hand-in-hand to give everybody a full global reach, physically and digitally, for all content.And then there is M&A opportunities. Lars -- you know Lars, we are all very clearly able to grow and scale our organizations. And it is not all hinging on 1 person or 2, it is very much a group effort to grow also through acquisitions.So in summary, I can only say it's been an amazing 3 years. And we're glad that we joined the Embracer Group, and we can continue following our entrepreneurial instincts. And think of us -- think of the group more of a global village than a skyscraper. Embracer is a global village of great companies. And I think that concept is unique and very scalable. Our philosophy is about enabling, connecting and powering this industry where we know that we don't know what's going to happen next year is, I think, very well-suited for our company philosophy. And it inspires creators and entrepreneurs and dreamers alike and captures our imagination.So thanks very much for the time and your attention. And Lars said to me a few days ago, never underestimate the power of dreams. And I could not agree more. Thank you.Lars?

[Lars Wingefors, Founder, CEO & Director]

Thank you, Klemens. I'm as glad as I were 3 years ago to have you on board and still on board. And I just love seeing your and your team's very hard effort to continue operating and growing the Koch Media business. And thank you, Luisa, very much for joining this session and joining the group. I just love having you on board. We have a bit over time here, so I would -- we will cut the line to Austria and Milano, and we would move over to the Q&A session. So stay with us.

[Oscar Erixon, Financial Analyst]

Great. So back for Q&A with both Lars and Johan. We have a lot of questions from myself today but also from the message board. [Operator Instructions] I'll start with a few questions from myself, starting with you, Lars, and discussing the Q3 results. I mean what drove the results in Q3? My instinct is that digital sales and the back catalog, obviously, the key driver behind very strong gross margins and growth this quarter.

[Lars Wingefors, Founder, CEO & Director]

Yes. And I think it was the general performance. Obviously, we had a market with a pandemic that I would imagine helped the demand for our products across the line, and also on digital channels with a higher profitability margin. But comparing to last year, obviously, the addition of, especially Saber Interactive, definitely helped the profitability in the quarter. But we didn't really have any new release speaking -- worth mentioning specifically that's driving the revenues. I think it was a very strong performance across the board.

[Oscar Erixon, Financial Analyst]

Great. And I mean this -- the second half of the fiscal year, obviously, a bit slower in terms of new releases. But what can we say about Q4? Are there any titles that you would point out? There are quite a lot of titles at least, but smaller ones.

[Lars Wingefors, Founder, CEO & Director]

I see in this quarter ending March, a much -- or a very low activity from the new releases, let alone the Valheim topic alone. But in general, across the board, I think the big things are coming in the next financial year. So obviously, we have very nice titles coming out, and it's great products, but I'm not really expecting any major commercial impact from those new releases during this quarter.

[Oscar Erixon, Financial Analyst]

Yes. And I mean turning to Valheim quite early here in the Q&A session, but I think, I mean fascinating to follow it, the concurrent players, the activity on Twitch. Starting with the team that has developed this, I'm hearing 3 people in Skövde. Can you tell me more about the fantastic team behind this game.

[Lars Wingefors, Founder, CEO & Director]

Yes. Well, in the respect of them, to start with Iron Gate and Richard and the team, they are an external company, even though we have a minority interest. So I think that gives this Q&A session a bit delicate because I have so much respect to what they have been building, and I would like them really to talk about the success and how they did it and so on. I'm just truly impressed what they have been able to achieve, and that's why I love the games industry, that you actually are able for just a handful of people to create such game that amazed so many millions of players, spending hundreds of hours, and creating, obviously, this business as well. But just engaging so many people. And I think this is -- I've never seen it. And we've been working -- well, I've never seen something like Valheim, at least within Embracer Group, I think it's something that I'm truly happy about, and also the quality of the product stands out. And it's just Viking, being -- as we -- I just love the theme of it.

[Oscar Erixon, Financial Analyst]

Yes. And I mean I note in your sort of ROI plot chart here that you're going to have to have a bigger plot for the next presentation perhaps. But looking at also Coffee Stain, I think it's worth highlighting here, one of the early 8 operating units. I mean they seem to have -- don't have the English word for it, but finger-top feeling when it comes to both development, when it comes to publishing and in general, I mean a fantastic company.

[Lars Wingefors, Founder, CEO & Director]

Yes. And with all the respect, I have to say, they are able to really find these amazing talents and games. And that's the thing, to be able in your daily work to pick these things and do the right decisions. And obviously, I always had a full trust for them. And obviously, this further puts nails that they are game makers. They know how to make games, and make community-driven games. And they are different, as we all are.

[Oscar Erixon, Financial Analyst]

Indeed. And I mean you mentioned Richard before. I guess they're very busy now with updates and patches. But what's the plan over the next sort of 1 to 3 years for the game in terms of console, in terms of other platforms and development?

[Lars Wingefors, Founder, CEO & Director]

Yes. I'm sure they are bombarded with requests and questions about what happens next, but I'm, as you all can see, they have shared the plan for the game, I noticed, on Steam. And I think they are very -- just very focused on executing their daily. Again, they're a very small team, so I think we should leave them alone, make their magic, and I'm sure they will communicate when they're ready about what else could happen in the future.

[Oscar Erixon, Financial Analyst]

Yes. And I mean this is Embracer Group, this is not Iron Gate, so -- I mean we have to ask a little bit about the details that you mentioned. You touched upon it in the presentation earlier. But I mean you mentioned a typical deal with external developer, and you have a minority interest. So I mean my take is that a normal deal could perhaps be that you have a 30% to 50% share of the revenues. You pay out the rest in royalties. Is that sort of fair assumption?

[Lars Wingefors, Founder, CEO & Director]

I can't go into details. Again, what I mentioned, the developer in the publishing agreement has a healthy majority, a good majority. So I think that is much more in the first number rather than the second number. I think looking -- what could this -- what -- without specifically talking about Iron Gate, what could a typical external publishing relationship potentially bring to Coffee Stain and the Embracer Group, both from the publishing side and from the minority interest side to the operational EBIT level? Well, it depends on obviously the publishing margin along with the potential contribution for the minority interest and the profitability in that company over time, net on the tax side and that we are able to do the pro forma accounting in time for reporting as well. So there could be delays in this as well. But over a longer time, I would say, perhaps not 50%, but it's definitely something like closer to that, at least, in combination.

[Oscar Erixon, Financial Analyst]

In combination. Great. And I'll try to interweave some questions here from the audience as well. We have a question on this topic from Tom Singlehurst at Citi. Does the strength of Valheim mean that it doesn't matter that you're sort of reducing the release, the launch cadence in the fourth quarter?

[Lars Wingefors, Founder, CEO & Director]

Well, now he's talking about his forecast and consensus, I would imagine. I don't know. I don't know. I think it's hard to comment on that. Obviously, looking on your expectations and others' expectations on the business, I, realizing we had Biomutant that many people expected in the quarter moving into next quarter, we might have a bit lower commercial activity than expectations, I would say, especially perhaps at THQ level and partly also at Deep Silver level. And then we have a bit of Valheim potentially on top of that, and with the general performance from Coffee Stain and Saber and so on. And I would say, quite low commercial activity within Partner Publishing segment. Even though it doesn't really contribute so much to the operational EBIT, it does contribute to the top line, so I think it's worth pointing out. It's a quite slow quarter in that business area. What's the mix of this? Well, that's your job, Oscar, and all the other 11 analysts.

[Oscar Erixon, Financial Analyst]

And one we take very seriously. And then a question here. I think it's tradition to ask a question about Biomutant, so I'm going to have to do that again. I mean it is now announced for the 25th of May, and you said -- I know in the interview that it had, was it 10,000 bugs a few quarters ago. How many bugs does it have now?

[Lars Wingefors, Founder, CEO & Director]

Less. First of all, I don't like to talk about release date. I don't normally do that. But Biomutant is a specific topic since the IPO we made more or less so. But everyone has expectations on the game, including myself. I think it looks solid. It's a very, very big game, and it's a very complex thing to do -- be made. So it's like it's a game that -- it's not a game that will have no bugs ever. It's a game that will have bugs. But is it game-breaking bugs and so on? Well, this sort of games always, again, would have some bugs, but I think the team are working and have been working in the past year or 2 years fixing this, and they are confident they will ship the products -- a quality product. So I trust them.

[Oscar Erixon, Financial Analyst]

And just a final one on Biomutant, given that we waited for some time. They announced -- and this might be a question to ask the studio, but perhaps you can answer as well. It was announced for Playstation 4 and Xbox One and PC, but not for the next-gen? Is that further out, would you say?

[Lars Wingefors, Founder, CEO & Director]

Yes. Well, if I understand the things right here, typically, obviously you can play the game on PlayStation 5 and the new Xbox, but they've been focusing now very hard to ship the game on the current consoles and on PC, and that is the first step, and that's the absolute priority. Will they make other versions and other formats? That's something that the future will bring. I'm sure there is plans for all our great products in the future in various formats. So I think now they're focusing on just executing the shipment on these 3 formats.

[Oscar Erixon, Financial Analyst]

Yes. And turning to the guidance for next year in terms of completed projects, is it possible to just break it down a little bit what has changed since your last sort of guidance of I think it was SEK 2 billion to SEK 2.2 billion or double this year. Is it -- I mean new -- some acquisitions but also the moved projects. But if you could elaborate a bit on that?

[Lars Wingefors, Founder, CEO & Director]

Yes. So what happens obviously is Biomutant. But then there is also some other releases moved out from fourth quarter, so minor, coming into next year. So that is the chunk of value in completed games. Then we had a chunk of value from the acquisitions announced on November 18 that are to the addition of the completed games. So that takes us from the previous forecast of SEK 2 billion to SEK 2.2 billion. Perhaps not all the way, so there could be a bit of further addition to that as well, potentially in Saber, but in also in other parts of the group, a bit of addition to that, that could generate further revenues. And that overall takes us to this number.

[Oscar Erixon, Financial Analyst]

And I mean we know from before that you will release 2 AAA titles, at least 2. Or you remain confident that these will, in fact, be released this year?

[Lars Wingefors, Founder, CEO & Director]

Yes. Next financial year.

[Oscar Erixon, Financial Analyst]

Next financial year, yes. Great. And then we have a question from Tom Singlehurst at Citi again. Historically, we note that the ratio of revenue from new releases to capitalize development on completed games is around 2x. With this guidance, should we assume revenue from new releases of SEK 5 billion to SEK 6 billion?

[Lars Wingefors, Founder, CEO & Director]

Well, again, I think that's a job for the analysts. Again, I would like to point out that this return of investment, plotter, you saw it varies so much what the return on investment of game title is, and you saw that plotter here. Now we're having a few very significant big titles in terms of investment. I think it's reasonable to assume the return of investment are in the lower -- low end to be safe here. So I think I've been stating that before, I'd like to state that again. This is big titles, big investments. We are confident we will make good business. But again, I'm not making -- I'm not eating percentages to lunch. I'm eating -- I'm paying the lunch with money, absolute numbers. So at the end of the day, big investments, if it rewards a good absolute number, fantastic.

[Oscar Erixon, Financial Analyst]

Yes. And there are big titles coming, obviously. But I mean now we've seen in the past couple of weeks the sort of top sharks of Steam being made up sort of smaller studios, Tarsier and Iron Gate. And a question here from the web as well on Little Nightmares II. Its sales seem to progress at a high pace, and the publisher should recoup their investment soon. I understand that you can't go into details of the publishing agreement, but could one expect some sort of revenue share agreement, I mean, in the coming quarters here?

[Lars Wingefors, Founder, CEO & Director]

Yes. I don't think anything in this quarter. Perhaps in the end of -- sometime next financial year, perhaps some money. In the great scheme of things, this is not very notable.

[Oscar Erixon, Financial Analyst]

Yes. And a follow-up for me on Tarsier. I mean you discussed a bit what the plan is on new IPs. What can you say about their sort of focus? I mean I guess they're quite specialized in sort of narrative, story-driven, really high-quality games. Should we expect that to be the focus ahead as well?

[Lars Wingefors, Founder, CEO & Director]

Yes, I think you pointed there. And I -- well, I would like them to talk really about their future when they're ready. I think they've proven they are one of the absolute world-leading in their genre, and they are super creative, and that's why I love to have them within the family, to make new things, tell new stories, make new worlds. They are creating worlds. And -- but it will take years until -- or I don't know how many years, but it will take a good amount of time to make this new thing. So this is a very long-term investment.

[Oscar Erixon, Financial Analyst]

Yes. And the organic growth for the Games segment has been very strong throughout the year, a bit weaker this quarter, I guess, driven by releases. But what can you say about what has driven the organic growth throughout the year? Is it mainly THQ Nordic's many releases and Coffee Stains' very strong performance?

[Lars Wingefors, Founder, CEO & Director]

Yes. So looking in that KPI, the organic growth on a constant currency basis, we're talking about the 54% year-to-date. Yes. So I think, obviously, THQ Nordic had a fantastic start of the year with Spongebob, Destroy All Humans! Also good performance of Kingdoms of Amalur that has driven their revenues. Coffee Stain, again, a really good performance. So I think -- and, again, we had a -- we had a pandemic. We had a great demand for games. We expect it to continue, regardless of a pandemic or not, but it was a great year for gaming, and I think most companies had a great year, and especially premium gaming. You can read about that in the market data we provided this morning, especially the premium games business has benefited during people being at home.

[Oscar Erixon, Financial Analyst]

And it seems to continue in Q4 is my impression, looking at record activity on Steam, record activity on Twitch. Is that also what you're seeing?

[Lars Wingefors, Founder, CEO & Director]

Yes, I think we're seeing a solid performance. But again, you need to have the content. And I'm sure our back catalog will continue to sell, but we need to add new games, new content into that back catalog. So I think that is critical to -- for our growth and organic growth in the future.

[Oscar Erixon, Financial Analyst]

Yes. And a question for Johan. Turning to the IFRS transition that you announced today. Just to clarify, I mean, you mentioned the listing. Well, first of all, what does that mean that you will turn to a regulated list? Does it imply the main list in Sweden? Or could it apply to international markets as well?

[Lars Wingefors, Founder, CEO & Director]

I think -- sorry, Johan.

[Oscar Erixon, Financial Analyst]

Yes, definitely, it's better for you.

[Lars Wingefors, Founder, CEO & Director]

So well, we haven't really started negotiating with -- and discussing with Nasdaq. Obviously, we know them well, and we like them. And most likely, I assume we will agree to do a main listing in Stockholm. But we haven't started that process, and there is other stock exchanges. So I think it's just the interest to figure out, is there alternatives? Our shareholder base is a lot of Swedish institutions and Nordic institutions, but that shareholder base are over time changing.And I think it's also important we would like to have conversations with our institutional shareholders in this process, how they see on this question as well and how long-term committed they are to Embracer's shareholders as well. So there is various factors in this, and I think it's already quite expensive to be listed on the First North, but it's much more expensive to be listed on the main market. And we're talking big money. So I would like to understand these fees. What are we getting for it? What's the services? Is there a room for negotiating? I just love to enter these discussions? Perhaps I'm a bit naive here, but...

[Oscar Erixon, Financial Analyst]

Now we actually have some questions for that. I think it's perhaps too detailed for this environment. But a question to you, Johan. What will -- I mean just to clarify for those that don't know the difference too well, what will be the main difference in terms of accounting and in terms of the P&L and cash flows?

[Johan Ekstrom, Chief Financial Officer]

Yes. Yes. So if you go to the detail, there will be differences. And I think in the broader sense, there are differences. I think the main difference is how you look at goodwill, for example, within IFRS there are no amortization of goodwill. That's a difference. Then I would say it's looking at the work that needs to be performed during this IFRS conversion project. It's a lot about also the disclosure that needs to be made within IFRS. From a P&L perspective, I would see from a preliminary analysis, amortization of goodwill. There are some other IAS 16, how you treat lease agreements, that's different. But I think the most important one is probably a goodwill from our side.

[Lars Wingefors, Founder, CEO & Director]

In the end of the day, we're operating the same businesses, whether it's K3 or IFRS. So I think what's important that to point out, the structure we're having with the decentralized model is also decentralized partly to mirror our functions in the operating groups as a public company as we do in the parent company. So I don't know, Johan, if you can just leverage a piece of that?

[Johan Ekstrom, Chief Financial Officer]

Yes. I think that's a super important part. I think we have been talking about it some, at least touching it earlier, when we look at investing into the capabilities and these work streams, it's very important that we build the resources and capabilities at the parent company, but it's also equally important that we build -- continue to build the resource and capabilities within each of the verticals to support the decentralized strategic model that we have.

[Oscar Erixon, Financial Analyst]

Yes, great. I think we are running a bit over time, but I think a bit more, and please stop me here.

[Lars Wingefors, Founder, CEO & Director]

You've got -- I think it's relevant. You ask us the relevant questions, Oscar, because we will have these questions anyhow. And if people need to drop, I have all the respect, but please continue.

[Oscar Erixon, Financial Analyst]

Great. A question here from Alex Duval at Goldman Sachs on cash flow. So your free cash flow was solid in the quarter. How did you manage to achieve that given all the record development activity? And how sustainable is this? And what's your view on sort of free cash flow in the next full year? And there, I mean, we have, I guess, more even distribution between amortization and capitalized development, so it will be interesting to hear it as well.

[Lars Wingefors, Founder, CEO & Director]

I think it's hard to give any forecast on cash flows.

[Johan Ekstrom, Chief Financial Officer]

Yes. I think -- I mean the first part of the question was relating to this quarter. So how did we achieve the SEK 309 million? I mean it's -- we had a solid EBITDA in the period. There were limited investments within working capital. And then you will get -- the residual amount is free cash flow, so -- despite investing as much as we could, I would say, in game development or a record-high amount.

[Lars Wingefors, Founder, CEO & Director]

I think it's also important to point out that we have been acquiring businesses that has a very high-margin and profitable business over the past years. That is also improving the cash flow. Saber was a very cash flow generating business, Coffee Stain. And so obviously, we'll continue operating those. Together, we have made big investments the past 4 to 5 years, that we are not now start releasing, even though we are still in the buildup phase in investments. That is just generating cash flow. And in the end of the day, that was a business should be financed through the cash flow from operations. And perhaps one day, we will have more free cash flow than we are able to allocate also for M&A. God knows when that will happen, but obviously, I truly enjoy to see the strong free cash flow generation.

[Oscar Erixon, Financial Analyst]

Yes. And on that topic, could you just tell us a little bit about how you think with your different acquisitions because it seems like -- I mean the acquisitions over the past year or 2 have varying cash flow profiles. So is that part of the strategy that you have that they can complement each other?

[Lars Wingefors, Founder, CEO & Director]

No. The strategy is to be diversified in all sense, companies, units, entrepreneurs, creators, game profiles, cash flow profiles of businesses. This is creating the mix of Embracer and the beauty of it. But again, we will continue acquiring or mergers with companies like Gearbox and Tarsier that are aggressively investing into the future with big projects and many projects as well as having very cash flow generating businesses. And I think that's the beauty of Embracer, that balances each other out. But we need to make -- we need to take risks, and we need to take creative risks. We need to get -- let teams like Tarsier to, okay, we trust you, you have proven your track record. Please make the new fantastic IPs and games here. That will always -- it's a negative cash flow for years until they are releasing it. That's the thing.

[Oscar Erixon, Financial Analyst]

And here's a question from Ken Rumph. You have acquired various studios whose games are being published by other publishers. Over time, would you expect Embracer to take over publishing of future games, unless contractually prevented? Or will there be reasons to choose external publishers for some games?

[Lars Wingefors, Founder, CEO & Director]

Yes. I think we will continue be business partners to external publishers as well. Publishing, it's super important for success of a game product. Sometimes there is a deep understanding of the IP, of a fan base and there also is personal relations between the developer and the external publishers. So I let the management decide whether they continue doing that with perhaps a bit lower business risk or if they would like to move it in-house or within the group with a potentially much higher margin, but adding more business risk to that performance. I don't want to interfere in that and saying, there is one way to go, and that's it. Obviously, everyone could see the natural synergies here. And I would expect over time that a good number of such cases will be moved in-house, but not everything.

[Oscar Erixon, Financial Analyst]

And here is a somewhat related question, at least. Now that Codemasters will be owned by EA. How will that affect the relationship between Koch Media and Codemasters?

[Lars Wingefors, Founder, CEO & Director]

Yes. Well, I think we need to ask EA and -- EA that question and -- Codemasters has been a business partner forever with Koch Media. And I personally love their products and the company, and I know them also very well. And especially Frank heading it up, and I personally played Colin McRae Rally when I was -- in the '90s. And EA is also a fantastic company. It was my first external business partner when I was 17, and I have super respect for their business. If they want to move their products within EA, fine. I guess, EA also understands it might be a business risk as everything to move things, so I don't know, their -- and it's not really something to me to have an opinion about. It's something for them, Codemasters and Koch. If they move that, they move it -- I don't know. I don't know if I should comment more on that.

[Oscar Erixon, Financial Analyst]

All right. And here, we have an interesting question actually from our newly-created Discord group. You've managed to gather a lot of different developers and companies. Are there any future plans to create a common platform for customers to find games and other products from these developers? So an own platform -- sales platform.

[Lars Wingefors, Founder, CEO & Director]

No.

[Oscar Erixon, Financial Analyst]

Very clear. And a question from Tom Singlehurst again here. He's made some calculations on the guidance for next fiscal year. So arriving at an average invested capital per game of SEK 35 million in the lower end of the range per project, the 70 projects, I presume, which is above the historical run rate. Is this number skewed by some larger titles? Or does it signal that games are becoming more expensive to make?

[Lars Wingefors, Founder, CEO & Director]

No. There is a few projects that have really big budgets in next year's completed games forecast.

[Oscar Erixon, Financial Analyst]

So I guess it's fair to assume it varies between SEK 10 million and SEK 500 million.

[Lars Wingefors, Founder, CEO & Director]

Yes, even less. It varies from a handful of people, again.

[Oscar Erixon, Financial Analyst]

Great. And a follow-up here, how much do you expect to spend for launches in 2023 and beyond? Is there -- I mean I guess the essence of the question is, I mean you will continue to increase the investments gradually, but you foresee sort of how that will develop in the coming years?

[Lars Wingefors, Founder, CEO & Director]

Yes. So now we're giving a forecast for next financial years, and it's already complex to give this forecast, and it's moving things in here. So I think I have a hard time giving a good color on the upcoming financials here. What you need to keep in mind though, our business is changing. And the more THQ Nordic, Deep Silver business of investing in premium games, wait a few years and release it, that is changing. We're having now more -- first of all, we have mobile titles. And we have Easybrain coming in. We also have more live -- kind of live-ish operated premium games titles that are being upgraded and with new content. That doesn't really -- that are profitable every day. And we also have new companies with very high margins. So the development cost is quite low, but the potential contribution of the releases is quite high, such as Saber. So I don't know how relevant this KPI forecasting the value of completed games will be looking ahead in a few years, but I think it's relevant for looking at the business next year, at least.

[Oscar Erixon, Financial Analyst]

Yes. Understood. And a question here from Ken again. It's easy to see the specific focus on some verticals, Easybrain and DECA, for example, but others seem to potentially overlap. Is it clear where a particular acquisition or business belongs among the segments?

[Lars Wingefors, Founder, CEO & Director]

Well, sometimes it's quite clear, but sometimes, it's really up to the -- obviously, the entrepreneur or creator who therefore like to join the family. Perhaps there is a relationship with someone or there is a trust, there is some kind of culture between them. So then that kind of they are making on that decision. Sometimes, it's not super clear, and sometimes there is a dialogue with various groups. Sometimes there might be a [ good-sounding consult ]. So it's -- and I don't think this is -- in the end of the day, what's important is the philosophy of how we operate across the group, the businesses with a decentralized model. On the daily business, they -- it's fairly similar.

[Oscar Erixon, Financial Analyst]

And could you also talk about the opportunities in licensing out your IP for series and movies? We've seen some examples of that with Borderlands, I mean, just speculating here about Valheim series, perhaps in the future?

[Lars Wingefors, Founder, CEO & Director]

You're speculating, Oscar, and I would leave that for the market to speculate as I don't want to comment on that.

[Oscar Erixon, Financial Analyst]

All right. And here's a question on M&A. Will Embracer only acquire game studios and publishers, I suppose, or also acquire invest into B2B solutions for the studios? You did 1 of those acquisitions, I think -- or 2 actually in the past quarter.

[Lars Wingefors, Founder, CEO & Director]

B2B solutions, you mean PR?

[Oscar Erixon, Financial Analyst]

Yes, I suspect they mean PR and also, I mean, QA, I guess, as well, is 1 example where you've done an acquisition.

[Lars Wingefors, Founder, CEO & Director]

I think we are open-minded for services, but I think we don't have a strategy of start. I think when it makes sense, it's more from a cultural perspective and there is synergy sometimes and there is a willingness. In terms of capital allocation, these acquisitions are fairly small, but it could make a big difference for the individual operating units, Saber, for example, they loved working with the Sandbox guys. They were very important for their business. They have the expertise that Saber didn't have in-house. So it just made sense. And we've already seen a lot of synergies coming out from that acquisition. So I think we will continue doing that.

[Oscar Erixon, Financial Analyst]

Yes. And here's a good question actually that I'm interested here as well. I mean we know the Vancouver Mobile Game Studios will likely be consolidated from mid-February or early March. But how about the latest 3 acquisitions? Should we expect them in next fiscal year? Or should we expect a small contribution at the end of Q4?

[Lars Wingefors, Founder, CEO & Director]

No, I don't think we should expect anything in Q4. I don't know, but I don't think -- this is big transactions that we need to have all our processes with regulatory authorities and other closing conditions, and there is an army of advisers doing whatever they're doing. So I think partly, this could drag into the next quarter, so I don't know. I think that's the job for analysts again, but various -- from 1st of April or mid-next quarter, but I don't think we should assume anything now in this quarter.

[Oscar Erixon, Financial Analyst]

Okay. Then we have some questions via e-mail. I'll go through them as well here. As Embracer grows and more and more projects are released each year, there are projects bound to be released close to each other from different operating groups. Optimally, they would not be competing with one another, but sometimes, it might be the case. What is your view on products cannibalizing on each other and sort of planning the releases?

[Lars Wingefors, Founder, CEO & Director]

No, I don't think. I think we are too small in general to start. We are, again, 1% of the gaming industry. The market is enormous, so I don't think there is a -- I'm sure there is dialogue sometimes to -- but it's more to help each other internally if there's a similar game. This is not a big topic.

[Oscar Erixon, Financial Analyst]

Yes. Okay. And I think we're nearing the end of sort of the most important questions here, so perhaps we can just end on -- I mean I'm actively choosing not to ask questions about the latest acquisitions since they were discussed a lot a few weeks ago. But I mean just as a final sort of question, I mean I think Saber Interactive was instrumental 1 year ago in sort of creating interest and sort of seeing the ambitions of Embracer Group. What can you say about Gearbox, given that it's a -- they have household brands, very well-known. Could that have a similar effect on M&A going forward? And what reception have you received from various parties?

[Lars Wingefors, Founder, CEO & Director]

No, I've been very glad to see a great reception across the industry and especially from North America. I'm happy to hear a lot of great respect for -- from internal teams for Randy and their amazing people they have at Gearbox. They are super well-respected as the most creative and great games developers you can find. So I'm thrilled to onboard them soon into the group. And I think also from -- not many people know about Embracer Group before these transactions. Now there's a handful more that knows about Embracer Group. I guess that could help us in the future to further grow our ambitions, including in North America. We already had a bit of new conversations with people coming out from those announcements, so I feel good about the future.

[Oscar Erixon, Financial Analyst]

Very good. And it was very interesting, I think, to hear Klemens and Luisa's view because a lot has happened in those 3 years.

[Lars Wingefors, Founder, CEO & Director]

Quite impressive.

[Oscar Erixon, Financial Analyst]

Quite impressive, I would say. But I think with that, I will end the Q&A. So thank you very much, everyone, for listening in. I will leave it over to you, Lars, for some closing remarks, perhaps.

[Lars Wingefors, Founder, CEO & Director]

Well, thank you, everyone, for listening in. And I would like to take this opportunity to thank all our stakeholders, especially our employees. I know many of you have been having and having a very difficult situation during the pandemic. Thank you very much for the hard work you bring into the company. And thank you for -- thank you, everyone else, the shareholders and stakeholders and the industry to contribute to our success. So thank you very much.