Embracer Group AB

STO:EMBRAC B

Earnings Call Analysis

Embracer Reports Stable Q3 Amidst Restructuring

Embracer Group delivered a stable Q3, with SEK 12.1 billion in net sales and SEK 2.2 billion in adjusted EBIT, driven by strong performance in certain segments, albeit with a 4% decline in organic growth and a minor drop in pro forma growth. The free cash flow reached SEK 1.2 billion, marking the second highest in the company's history. Embracer reiterated its forecast for the fiscal year 2023/24 with an adjusted EBIT between SEK 7 billion and SEK 9 billion but expects to be at the lower end of this range. The firm is unlikely to meet its restructuring target of reducing net debt below SEK 8 billion by March 31, while maintaining its net debt-to-adjusted EBIT leverage target of 1x.

Third Quarter Financial Summary

In the third quarter, Embracer delivered stable financial results with net sales of SEK 12.1 billion and adjusted EBIT of SEK 2.2 billion. Despite a strong showing from tabletop games and steady contributions from mobile and PC/console games, organic growth dipped by 4%, primarily due to a sparse release schedule for PC/console platforms and a strategic shift towards higher profitability in mobile games, leading to pro forma growth of minus 2%. The quarter's highlight was a significantly strong free cash flow, reaching SEK 1.2 billion, which is the second-highest ever for Embracer and a positive shift compared to the previous year's second half. However, moving forward, the company expects to hit the lower end of the forecasted adjusted EBIT range for fiscal year '23-'24, estimating around SEK 7 billion, driven by a modest outlook for PC/console due to recent game performances and shifts in the release schedule.

Investment and Pipeline Adjustments for Improved Future Performance

Embracer is shifting its investment strategy to ensure a better balance between capital expenditure (CapEx) and the completion of game development. This move is aimed at reinforcing future organic growth while enhancing the predictability and return on investment of their PC/console game segment. The company is focused on reducing CapEx to below SEK 5 billion by the next fiscal year and will be directing investment towards well-established IPs and studios to help drive increased ROI and profitability. Notably, the ongoing restructuring program has already resulted in a CapEx decrease, contributing to a stronger foundation for future growth and performance, with high expectations for upcoming titles like 'Tomb Raider remastered' and a new Star Wars trading card game.

Balance Sheet and Cash Flow: Navigating Challenges

As Embracer progresses with their restructuring program, which includes divestments and consolidations, there has been a tangible impact on their balance sheet and cash flow. While net debt stood at SEK 16.1 billion at the end of December, falling short of their target, the company has strategies in place to significantly reduce this post-March. Key successes in the quarter included strong free cash flow facilitated by the restructuring program and the reinforcement of the company's loan agreements, extending the maturity until 2025. Embracer's management remains confident in their ability to meet future amortization requirements and improve free cash flow, with expectations of a robust underlying performance in fiscal '24-'25 strengthened by the ongoing restructuring benefits.

Anticipating Strong Outcomes from Consolidated Segments

Embracer's commitment to efficiency and profitability is evident in their concentrated efforts to streamline operations across all segments. The company specifically highlighted their mobile games segment for its improved product mix and profitability through optimized user acquisition investments. Moreover, the tabletop games segment continues to expand, resonating with the company's focus on diversification. Meanwhile, the Entertainment & Services segment has capitalized on the strength of the Lord of the Rings IP, leading to substantial licensing revenue. Embracer's strategic approach towards marketing and operating expenses, aligning their spending more towards the high-performing segments, indicates a tactical foresight and adaptability in a fluctuating market.

Earnings Call Transcript 2024-Q3

[Erik Larsson, analyst]

Good morning and welcome to Embracer's Q3 report presentation, yes.

My name is Erik Larsson. I'm an equity research analyst at SEB. I will be the moderator today, obviously.

We will start today with a handful of presentations from Embracer management, including an update on the restructuring program, before we go back to Q&A.

So with that, I'll hand the word over to you, Lars.

[Lars Wingefors, executive]

Thank you, Erik. And hello and welcome, everyone, to this Embracer Group's Q3 presentation from Stockholm.

Let's dive straight into the business highlights for Q3. First of all, I am happy to say we delivered another stable quarter with net sales of SEK 12.1 billion and adjusted EBIT of SEK 2.2 billion in Q3. The financial performance was driven by a strong quarter from Asmodee, Middle-earth Enterprises and our mobile businesses. Organic growth amounted to minus 4%, a result of positive organic growth within tabletop offset by a light release schedule within PC/Console and an increased [ focused ] on profitability within mobile. The pro forma growth was minus 2%. The free cash flow in Q3 was the second highest ever for Embracer at SEK 1.2 billion. Importantly, for this year, we see even more distribution of free cash flow in the second half compared to second half last year.

For fiscal year '23, '24, we reiterate our adjusted EBIT forecast of SEK 7 billion to SEK 9 billion and now see it likely that we will reach the low end of the forecast range. This is driven by a somewhat softer outlook for PC/Console, compared to our assessment in Q2, due to the performance of recent new game releases as well as a few additional pipeline shifts from Q4 and shifts within the quarter. While we have a -- seen a solid delivery across 3 out of 4 segments throughout the year, there is room for further improvement of our financial performance, primarily within PC/Console.

In Q3, cash EBITDA or EBITDA less CapEx in the last 12 months was SEK 3 billion on a group level. Excluding the four of our operative groups within PC/Console that has a negative contribution, EBITDA less CapEx would be SEK 5.3 billion. Johan will discuss EBITDA less CapEx in more detail later today.

We are tracking well towards the CapEx and OpEx targets set out in the program as we approach the final stretch of the restructuring program, which includes both possible divestments and consolidation. On CapEx, we saw an important shift in the quarter with a decrease in run rate from SEK 7.9 billion, when the program started, to around SEK 6.4 billion in December, tracking towards our CapEx target of SEK 5 billion when coming into next fiscal year, '24, '25. As part of the restructuring program, we still have a few larger structured divestment processes ongoing that could strengthen our balance sheet and further reduce CapEx. Processes are in mature stages. It's important to add that certain companies might initiate restructuring before any divestment are -- is announced. However, our overruling principle is always to maximize shareholder value in any given situation.

We are unlikely to reach the target under the restructuring program of below SEK 8 billion in net debt by March 31. However, certain divestments could significantly reduce net debt post March 31. To be clear: Our group leverage target of net debt-to-adjusted EBIT of 1x on a 12 months forward-looking basis remains unchanged.

We are creating a strong foundation for the future. We are excited about the future and have a notable pipeline of sizable new games in the coming 2 years. I would like to give some more color on this. In recent years, we have made strategic investments into accelerated organic growth. This has created an imbalance between CapEx and completed games development, meaning new releases, which is now being addressed through our restructuring program. In the past 12 months, we have invested around SEK 6.5 billion into PC/Console game development while we completed games, meaning released games, with a value of less than half of that, around SEK 3.2 billion.

As we now continue towards reducing CapEx to SEK 5 billion on a group level, it's important to note that for PC/Console, on a forward-looking basis, we -- still be investing more than we currently are releasing. This means we are laying the foundation for future organic growth. Importantly, an updated group-wide capital allocation process is in production, including a clear game investment green-lighting model. Our future games portfolio will be more focused around established IPs and studios which we are confident will generate better predictability as well as increased ROI and profitability going forward.

With the actions that we are now taking, we are creating a strong foundation for the future with an improved financial profile and a more streamlined structure while leveraging the potential for our diversed portfolio. We have amazing assets and IPs and we aim to demonstrate the earnings power of those assets over time. Phil Rogers, one of our key people managing the restructuring, will go further into details about our progress later in this presentation. From my point of view, we are making good progress on CapEx and OpEx targets. And we are working hard to finalize important aspects in the final stretch of the restructuring program.

Now let's move over to the details of different segments.

Net sales in the quarter for PC/Console Games amounted to SEK 3.4 billion, a decrease of minus 5% compared to the same period last year or minus 9% organically and pro forma in constant currency. A negative organic growth -- the negative organic growth development is mainly explained by lower other revenues year-over-year relating to work-for-hire and other games development revenues.

Adjusted EBIT in the segment amounted to SEK 469 million, providing a 14% margin. The adjusted EBIT margin remains impacted by games development amortization combined with the soft performance for a range of primarily mid-sized titles across operative groups last and this fiscal year. The performance of our strongest franchises in PC/Console has been stable. In general, we see a more selective consumer and reduced levels of platform content investments.

Revenue from new releases in the segment amounted to SEK 470 million in the quarter, an increase of 2% year-over-year. The main revenue driver among new releases in the quarter were Hot Wheels Unleashed 2, Risk of Rain Returns, Arizona Sunshine 2 and Last Train Home. Hot Wheels 2 and Last Train Home were well received by critics and players but performed a bit below the financial expectations, likely partly due to a crowded release window. Risk of Rain Returns, by far, outperformed management's expectations. We also saw a notable underperformance for Wild Card Football, released early in the quarter.

In the quarter, other releases were Teardown on console, Jagged Alliance 3 on console, Borderlands that finally came on Nintendo Switch, SpongeBob SquarePants: The Cosmic Shake on the console and mobile.

Revenue for back catalog titles amounted to SEK 2 billion in the quarter, a decrease of 2% year-over-year. The quarter included the successful release of new content for several games, including the DLC The Awakened King for Remnant II and Haus for Dead Island 2, but was impacted by a soft performance for Payday 3 in previous quarter. If you look at the top 10 back catalog titles, you see it's topping by Remnant II, Dead Island 2, Chivalry 2, Deep Rock Galactic, Payday 3, Goat Simulator 3, Star Trek Online, Wreckfest, Risk of Rain 2 and finally SnowRunner.

Other revenues amounted to SEK 843 million in the quarter, a decrease of 16% year-over-year but a stable development compared to Q2 and -- Q1 and Q2. In corresponding quarter last year, a publishing deal for Tomb Raider was signed with Amazon, driving a notable revenue contribution.

Looking at the ROI chart. It was a mixed bag in Q3. Again, we had a few new small and mid-sized games released that did not perform. Risk of Rain Returns notably outperformed expectation and had very strong ROI. Hot Wheels 2 perhaps did not perform as well as previous game in the franchise and saw a tough release window but ultimately had a positive ROI contribution in the third quarter. Several other titles, including Wild Card Football, Last Train Home, Arizona Sunshine and Let's Sing 2024 underperformed and also had ROI below 1.

The weighted average ROI now stands at around 2.2x as of end of the quarter compared to 2.3x in second quarter. It's lower than we would like due to the underperforming releases in the past 18 months. Our concrete restructuring actions to-date are expected to have a positive effect on our ROI going forward. For the games from studios that we have closed down, combined with third-party publishing games where we have no ownership in a development studio, the ROI on pro forma basis is 1x. Meanwhile, for all other games on this chart, the ROI is 3.2x.

While -- worth noting, while we will still do third-party publishing in the future, we will be considerably more selective through our updated capital allocation process going forward. Our future games portfolio will be more focused around established owned IPs and studios that we are confident will generate better predictability as well as increased ROI and profitability going forward.

Looking in investments and pipeline. In PC/Console Games segment, investments in game development remained high. We continue to have an imbalance between CapEx and completed games development, which is impacting our free cash flow generation within PC/Console. In the past 12 months, our investment into new PC/Console Games were 2x higher than the value of the games we completed. As stated earlier, we now continue towards reducing CapEx to below SEK 5 billion on a group level, but we still have a growth CapEx post this. This means we will be investing more than the value of completed game development, laying the foundation for future organic growth within PC/Console but with a better free cash flow.

As of Q3, the capitalized game development costs for ongoing game development projects in the balance sheet amounted to SEK 9.7 billion. In the quarter, we had around SEK 340 million in write-downs related to the restructuring program, which Johan will discuss more later.

Looking to the pipeline for the coming, well, 7 weeks. There is a high activity with a range of new game, including Alone in the Dark, Outcast, South Park snow days, Expeditions and a few others, including -- yesterday, we released Deep Rock Galactic: Survivor; and together with Spellrogue, also released this week the first -- its first publishing titles from our family members at Ghost Ship Games in Denmark. They have done an excellent a job together with the developers. And especially, Survivor are off to a really strong start. Tomb Raider remastered, released yesterday from Aspyr, are also off to a very strong start both in terms of critic and sales performance.

We are, as stated, looking forward to Alone in the Dark, another game developed in beautiful Skövde in Sweden. We also have Lightyear Frontier, also developed in Skövde, coming in March from the studio FRAME BREAK within Amplifier games. Amplifier games is entering a period of more intense release schedule after several years of investments. Following the release of Lightyear Frontier in Q4, several studios have games that are nearing release over the coming 12 months, which we look forward to. Feel the pressure, Per-Arne.

Turning to Homeworld 3. It's a long-awaited sequel in the award-winning sci-fi real-time strategy franchise. Developed by external studio Blackbird Interactive and published by Gearbox Publishing, this title has recently been moved from Q4 to May this year.

Moving over to Mobile Games segment. The net sales in the quarter for Mobile Games amounted to SEK 1.6 billion, a increase of 4% compared to the same period last year or by minus 10% organically and minus 2% pro forma. Easybrain had a mid-single-digit organic growth in Q3, while DECA Games, including CrazyLabs, saw a clearly negative organic growth, primarily impacted by business model shift and an increased focus on profitability and cash flows. The number of monthly active users and daily active users both declined year-over-year, driven by DECA Games and CrazyLabs, partly driven by a shift to a genre with smaller player bases but better retention and monetization. Pro forma growth was more stable, thanks to a strong performance for Alien Invasion, for which the publishing rights were acquired by CrazyLabs in August 2023.

Adjusted EBIT in the segment amounted to SEK 611 million in the quarter, giving a 37% adjusted EBIT margin. Our user acquisition costs amounted to SEK 646 million or 39% of net sales. The improved profitability year-over-year is driven mainly by an improved product mix with a stronger-than-expected performance for Easybrain and for CrazyLabs' hybrid casual game Alien Invasion as well as optimized user acquisition investments.

Easybrain saw a solid performance in a seasonally strongest quarter, driven by better monetization and a strong live operations execution across its key games. CrazyLabs' shift to the hybrid casual genre has been accelerated through the game Alien Invasion, which was -- which has performed notably stronger than expected. The game was notably accretive to profitability already in this quarter. Meanwhile, hypercasual is expected to slow slightly and partially offset the performance of Alien Invasion. The strongest catalog titles in the quarter were Sudoku.com, Alien Invasion, Blockudoku, Art Puzzle and jigsaw puzzle.

Now let's move over to [ Paris ], Tabletop Games segment. Net sales for Tabletop Games segment amounted to SEK 4.4 billion, an increase of 7% compared to the same period last year or by 1% organic or 1% pro forma on constant currency. Growth was driven by the trading card games category, with a slightly negative growth for board games. Growth in Europe outperformed growth in the U.S. For the calendar year, the tabletop mass markets saw a slight positive growth, confirming the industry resilience to a difficult macroeconomic environment.

Adjusted EBIT amounted to SEK 832 million, providing a 19% margin, mainly due to product mix more geared towards trading card games and a very strong earnings growth year-over-year in the previous quarter. Asmodee delivered a strong free cash flow in the quarter, with a notable inventory reduction in the seasonally strongest quarter of the year.

Asmodee has a strong pipeline of novelties and new releases with a number of exciting new titles that reached the market during Q3 '23, '24, including new original titles such as Forest Shuffle from Lookout, Waterfall Park from Repos prod and Perspectives from SPACE Cowboys; along with a new legacy version on our evergreen Ticket to Ride franchise, Ticket to Ride, Legends of the West. Next quarter releases include Ticket to Ride Paris from Days of Wonder, MLEM: Space Agency from Rebel studio and world traveler (sic) [ Word Traveler ] from Office Dog.

Preparations for the exciting launch of the trading card game Star Wars: Unlimited on March 8, 2024, are progressing well, with strong preorders and a positive buzz in general. Releasing later this year, we're very excited to announce the collaboration, our first collaboration, with LEGO on board games with the global launch of Monkey Palace. Asmodee also announced during the quarter its worldwide exclusive distribution rights and premium supplies lines on the upcoming trading card game Altered, which is experiencing consumer success on Kickstarter, with the funding goal achieved within 2 minutes.

Heading over to Entertainment & Services segment. Net sales in the quarter amounted to SEK 2.6 billion, an increase of 12% compared to the same period last year or minus 2% organically and 5% pro forma in constant currency. The organic growth was primarily driven by PLAION partner publishing and film, which saw a notable release of an external first-person shooter game, a solid back catalog revenue as well as a solid performance for its film business. The higher pro forma growth is driven by Middle-earth Enterprises within operative group Freemode, as the acquisition was closed in October last year.

Adjusted EBIT amounted to SEK 305 million, providing a 12% margin. The higher margin year-over-year is primarily explained by stronger-than-expected licensing revenues for the Lord of the Rings IP. These were primarily driven by continued solid performance for the Magic: The Gathering trading card game The Lord of the Rings: Tales of Middle-earth, consistent performance of the Warner Bros.' movie catalog with The Lord of the Rings trilogy and The Hobbit trilogy as well as PC/Console game Return to Moria. Beyond the quarter, Middle-earth Enterprises is looking forward to the theatrical release of The Lord of the Rings, the war of Rohirrim, which has been set for release December 13, 2024.

Dark Horse Entertainment had an encouraging performance in Q3, partly supported by less headwind from external factors, and with an increased focus on profitability and cash flow generation. Limited Run Games successfully launched preorders during the quarter for many games, including the physical edition of Persona 4 Golden in partnership with our friends at SEGA. Limited Run also continues to build the catalog of classic games that are being brought back to modern platforms via their proprietary tech Carbon Engine. The latest Carbon title, Jurassic Park Classic Games Collection, released on November 22, showed solid performance on digital storefronts, adding new revenue streams to Limited Run Games.

Now looking to the market. The games market in calendar 2023 is estimated to have generated $184 billion and grown 1% year-over-year despite a challenging macro environment for consumers and businesses alike. 2023 was the second highest-grossing year in history and saw a return to growth following a post-pandemic dip 2022. The market value is a substantial 28% above pre-pandemic levels. The longer-term growth prospects remains strong. The total games market is predicted to grow again by 3%, 2024, driven by growth across PC, console and mobile. The market is then expected to grow by 5% CAGR between 2019 and 2026, to a value of $205 billion, 2026.

With that, I will leave over to Johan for financial comments.

[Johan Ekström, executive]

Thank you, Lars.

Let us take a look at an overview of the financial development. So although, last year, Q3 was strong, we see growth in net sales and EBIT this year, yes, with trailing 12 months net sales and EBIT reaching 43 billion in net sales and approximately 6.6 billion, yes, or 15% in EBIT. The sequential reduction in gross margin in the quarter is in line with expectations, with the product mix geared towards tabletop and Entertainment & Services.

We note that marketing expenses in relation to sales are at 8%. The marketing expenses outside of mobile are lower than previous quarters, mainly related to fewer larger releases in the quarter. Marketing expenses or user acquisition costs within mobile are also lower than previous periods, yes, mainly due to the increased focus on profitability in the segment. Operating expenses are slightly lower than what we saw in the last quarter. They amount to SEK 2.7 billion or 22% in relation to net sales.

Adjusted EBIT increased over last year, amounting to SEK 2.2 billion for the quarter, setting a new all-time high for adjusted EBIT in a single quarter. As mentioned in June when the restructuring program was announced, we treat expenses related to the fulfillment of the program as items affecting comparability, excluding them from adjusted EBIT. Items affecting comparability amounted to SEK 0.6 billion in the quarter, where SEK 0.3 billion is related to write-offs of game development. It is important to note that write-offs of game development are considered as items affecting comparability only when they are related to projects affected by the ongoing restructuring program where the studio or team has been discontinued.

Let us have a look at the cash flow for the quarter. We do see positive effects, yes, from our restructuring program in the quarter, and we expect them to accelerate in Q4. Sequentially, CapEx was reduced with SEK 0.3 billion or 13% in the quarter. The savings are not linear, so if you look at December alone, the run rated CapEx amount to approximately SEK 6.4 billion, which is a reduction of SEK 1.5 billion compared to the run rate as per Q4 '22, '23.

We generated a solid free cash flow in the quarter of SEK 1.2 billion, which is a significant improvement compared to Q2, yes, and slightly above our expectations. In a year-over-year comparison, it is important to note that last year included a -- SEK 0.5 billion in a publishing deal relating to Tomb Raider and that changes in working capital included unwinding of excess inventory from end of December last year. Further, we note a healthy reduction of inventory in the quarter driven mainly by the solid performance during the seasonal peak for tabletop and Entertainment & Services.

Net investment in acquired companies amounted to SEK 2.2 billion in the quarter and relates to historical acquisitions, where the majority are related to Middle-earth Enterprises and Tripwire. The cash flow effect of items affecting comparability relates to payments, cash-out payments, under the ongoing restructuring program; and amounted to SEK 260 million in the quarter. Cash flow from financing activities were impacted negatively by less utilization of credit facilities [ in PLAION ].

At the end of December, net debt amounted to SEK 16.1 billion and available funds amounted to SEK 5.1 billion. As Lars mentioned, we are unlikely to reach the restructuring program target below SEK 8 billion in net debt by end of March. Certain divestments could significantly reduce net debt post 31st of March.

In December, agreements were signed for the parent company regarding our 2 main credit and loan facilities, extending the maturity to February and May 2025. The agreements include scheduled quarterly minimum prepayments that amount to SEK 2.6 billion on an accumulated basis up until January 2025, starting in April. Free cash flow and cash at hand provide us with sufficient funds to amortize the debt, accordance to the existing bank agreements in 2024.

Embracer Group have covenants in the loan agreements. The terms for these are 2.5x net debt -- EBITDA-to-net debt, calculated according to the agreement. As per the end of December, we have significant headrooms to these covenants. Looking ahead, we expect free cash flow to improve, driven by an expected strong underlying performance in fiscal '24, '25 coupled with benefits from our restructuring program.

On this slide, we look at EBITDA, CapEx, cash EBITDA or EBITDAC by segment. It is worth noting that the majority of CapEx is directed towards the PC/Console segment for game development. The other 3 segments are CapEx light and working capital is a more important component of cash flow generation. PC/Console is the only segment that shows a negative EBITDAC. And naturally, the CapEx savings in our restructuring program are geared towards PC/Console. If we zoom in on PC/Console, it is worth noting that 3 operative groups have a positive EBITDAC of 1.1 billion, whilst the other [ 4 ] have a negative EBITDAC of 2.3 billion.

On this slide, we look at EBITDAC for Embracer in total, yes, and also compare it with Embracer excluding the segment PC/Console. In Q3, the TTM EBITDAC was SEK 3 billion on a group level. If you would exclude PC/Console, it will be SEK 4.3 billion. Applying the run rated December CapEx of SEK 6.4 billion to the trailing 12 months EBITDA improves EBITDAC by SEK 1.4 billion to SEK 4.4 billion for the total group.

As Lars mentioned earlier, we reiterate the forecast for this financial year with the SEK 7 billion to SEK 9 billion range and now see it likely that we will reach the low end of the range. This is driven by a softer outlook for PC/Console for the remaining part of '23, '24, compared to our assessment in Q2, yes, due to performance of recent game releases as well as a few additional pipeline shifts within the quarter and also outside of the quarter. Yes...

[Lars Wingefors, executive]

Okay, thank you, Johan.

[Johan Ekström, executive]

Thank you.

[Lars Wingefors, executive]

With that, I will hand over to Phil Rogers, who is with us on stage here in Stockholm today. Phil is deeply involved in managing the restructuring program as Embracer's Interim Chief Strategy Officer and as the leader of the key PC/Console work stream as well as CEO of Crystal Dynamics and Eidos.

Welcome, Phil.

[Philip Rogers, executive]

Thank you, Lars. And good morning, everyone. It's great to be here.

I've just got one slide to show this morning. It's just over 8 months ago now that we announced the start of the restructuring program, with a plan to run it through the end of this fiscal year, so today, we're entering the final stretch. And I'm pleased to say we're on track for the targets we set out for OpEx and CapEx savings. In turn, we believe this is laying a strong foundation for improvements in current and future cash flow generation.

Now on the OpEx side, we said that savings initiatives are really well on track, delivering reductions through both head count and other overhead control. On the CapEx side, we continued to implement changes during the quarter and have seen tangible savings in the latter part of Q3. Our December run rate CapEx of SEK 6.4 billion is 19% or SEK 1.5 billion lower than when we started the restructuring. Now this really has been a collective effort. The savings we're delivering have been led by the operative groups, with Embracer supervision and support. We've worked with a focus to ensure the right decisions are made for our portfolio and future strength.

Now all these decisions have been difficult ones, particularly parting ways with valued team members. And as of December 31, total head count reductions have resulted in an 8% drop in our global workforce. We also saw additional reductions in January and also earlier this month. In all cases, we continue to ensure affected employees are informed first; and that actions are always carried out with compassion, respect and integrity. We sincerely wish all those affected the very best on their future journey.

So overall, standing back, we see in the results today that the OpEx, CapEx, head count actions have contributed positively to the free cash flow generation in Q3. And as we now enter this final stretch of the program, we know the cumulative impact of these changes serves well to get the CapEx down by our SEK 2.9 billion target to the run rate of SEK 5 billion for next fiscal year. We appreciate our teams going through these last 8 months with us and taking hard looks and making bold changes so we can focus on the power of our IP and game portfolio. Now both Lars and Johan have already spoken to the divestment processes and the net debt target, so I'll close this part of the update by briefly looking to Embracer after the restructuring.

I'd say we're progressing well with the design of our future structure. What we found through the course of these past 8 months is that there are natural and close alliances between operative groups. And we're confident this will result in smart consolidations, not forced but forged and infused by shared goals: shared goals to push our world-class IPs to enable great teams to make great games and entertainment together, a shared goal to deliver better results. The ending structure will be a more focused and simplified group.

Looking to PC/Console. We've seen for many quarters the reporting on ROI and the trends we face. Our focus on quality and the changes happening through the restructuring confront these trends, and going forward, we'll work within an updated capital allocation process. This is on track to roll out in the final stretch of the program. We're also bringing together development and business leaders from across the organization to leverage their experience and knowledge in an updated PC/Console green-lighting process, not only to help guide at the start of a game project but also through their development and publishing milestones, helping deliver higher-quality games profitably and predictably.

In closing. We are a group with great people and IP, great customers and great partners. We're confident that, through the decisions taken during the restructuring, tough as they have been, we're laying a strong foundation for the brightest possible future. We thank everyone for their support and commitment to making it happen.

And with that, I'll hand back to Lars.

[Lars Wingefors, executive]

Thank you, Phil. And thank you for the hard work in this process, Phil.

I would like to take the opportunity to say a few words before heading over to the Q&A.

To summarize this quarter. Bringing all-time-high net sales and adjusted EBIT even if we are in the middle of our restructuring program is an achievement we should be proud of. We are approaching the finalization of the restructuring program. It's been a challenging time, and we have worked hard with group-wide efforts to get where we are today. For that, I'm very thankful. Everyone has put in extra effort. We are determined to deliver in the final stretch.

Many decisions are not taken lightly, especially parting ways with team members. And it's important to ensure that affected employees are informed first; and that actions are carried out with compassion, respect and integrity. We are adapting to a new reality. The Embracer model is being adjusted and improved, but our long-term vision is still unchanged. Challenging times are also learning times that will strengthen us into the future. I'm confident that the decisions we make today set the foundation for the coming decade. For me it's important we keep the things we believe are important for the future of Embracer. Decisions are always made with this in mind.

We are progressing well with the design of our future structure and organization model, and when ready, we will bring that to the market. As previously communicated, we will hold a Capital Market Day in summer, after the completion of the restructuring program. I'm humble about and share the frustration many employees and shareholders have been feeling the past year. I would like to thank all long-term believers in Embracer. We are working hard, and you will be rewarded. Behind the scenes, we are making steady step-by-step progress; and some recent development in the past days gives me confidence to say we have the worst behind us. I promise to remain open minded and respectful but also firm to what I believe is right or wrong in all given situations.

Once again, thank you all.

[Erik Larsson, analyst]

[indiscernible] my microphone is...

[Unknown Attendee]

[indiscernible].

[Erik Larsson, analyst]

Okay. All right, we're back with Q&A. Thank you for the presentations. I'll start with a few of my own then I'll ask the audience for any questions before moving into the telephone conference and webcast questions.

[Erik Larsson, analyst]

So first of all, I think it's a lot of focus on divestments today. You have given some color. Obviously it's very difficult to give details. What would you say -- or have there been any changes to these processes, except maybe a longer time line?

[Lars Wingefors, executive]

Well, it's -- obviously is there is progress made every day and there is a very active process -- or processes. And obviously they are -- as in any deal making, there are changes. Ultimately, until you have a binding agreement, you don't have a binding agreement. And ultimately we need to make decisions what we believe is right for our shareholders, but with that said, I feel confident.

[Erik Larsson, analyst]

And maybe a difficult question, but would you say that -- a divestment or more divestments, is that more likely than unlikely?

[Lars Wingefors, executive]

I think we need to take a step back. We are -- these divestments are made under a restructuring program. And it's obviously partly to -- potentially to delever the balance sheet, but primarily it's because of also it addresses other targets within the restructuring program as well as the future strategy. It would have been easy to start the process divesting the absolute [ most cash flow-generative ] businesses in this kind of M&A market, but that is not what we've been doing.

[Erik Larsson, analyst]

Then I have 2 questions for you, Phil. You're -- play a key role in the restructuring. And what would you say is the most important change that you've made or that's ongoing currently?

[Philip Rogers, executive]

I think -- I'm not saying it's a change we've made, but something we've realized through the program is that there's a great collective knowledge and resource and energy that we've really, I feel, tapped into. It's been a real soul-searching time, restructuring. You see it across certainly in the PC, console industry, but I think just probably breaking down some barriers and some silos and getting people communicating and sharing has been a -- welcome really throughout this. It really has been a team effort and so we've had to step through things in a very logical way, but having lots of people really come and help lean in, I think, has been really welcomed.

[Erik Larsson, analyst]

And you mentioned the current structure with the operating groups and potentially consolidating. What would a key factor for making a merger between one or a few [ groups be ]?

[Philip Rogers, executive]

I think, as I said in the notes, I mean -- and it really is a reflective point at the end of this eighth month. Or we're now 8 months in. There are natural alliances and common minds on how we want to approach certain games and IP. Honestly, we have this world-class IP portfolio. I say that, but I really hope it resonates. And for many people, probably some watching today and working in studios, this is what gets them up every day and makes them drive forward and forward. And I think certain alliances naturally work around that. I think there's also an alliance around how we share and share and work more efficiently, so I think these are really the, again, just what we felt and what we're now sort of working our way through. And there's a determination to deliver better results, so I think people see it as a natural cause.

[Erik Larsson, analyst]

And in terms of the underlying market or general market, would you say that there have been any changes these last few quarter and seasonally important quarter?

[Lars Wingefors, executive]

Well, I think the whole industry feeling a significant shift, looking back just from last summer. More or less, all companies are through a restructuring program. There is less investments made from the industry into content. I think the underlying consumer market is solid and is still growing, but the underlying changes -- there's a lot of underlying changes made to the industry. That obviously affects all of us in the industry. I think looking at the 8% reduction in workforce is there is obviously -- I don't know the number for the whole industry, but I think it's something that everyone needs to get through. I mean, as I said, it's more driven by the overinvestment in the previous years because everyone just put all capital into gaming and perhaps a bit too much capital in a few instances.

[Erik Larsson, analyst]

Any questions from the physical audience?

[Unknown Attendee]

[Operator Instructions] We'll take a question in the room while you're queuing up.

[Rasmus Engberg, analyst]

Rasmus Engberg with Handelsbanken. I had 3 questions; 1 for you, Johan. In the cash flow, there is a more than 1.1 billion negative effect from other operating liabilities compared to last year, which sort of pretty much moves the cash flow to negative year-on-year. Can you explain what that is?

[Johan Ekström, executive]

So then you're referring to the balance sheet or...

[Rasmus Engberg, analyst]

In the cash flow, other operating liabilities.

[Johan Ekström, executive]

Okay, so the change. If you look at the operating liabilities within working capital and look at that as a whole, the reduction is less than that, so you need to -- there is a shift between trade payables, yes, and other operating liabilities in -- if you compare Q3 now with Q3 last year.

[Rasmus Engberg, analyst]

And is this something that sort of [ we're leaving out ]? And you did mention that you thought that cash flow would be more equally spread over the year, so can you give us some sort of indication for working capital in the fourth quarter maybe?

[Johan Ekström, executive]

Yes. So if you look at the positive contribution that we had from working capital in the third quarter, it was a bit better than we expected. And we think that the free cash flow generated, the free cash flow generation, this year will be more evenly distributed compared to last year, without giving you a specific cash flow forecast for the Q4, but we expect positive free cash flow also in Q4.

[Rasmus Engberg, analyst]

Yes. And then I have 2 questions about the restructuring. I don't know if they are for you, Phil; or for Lars maybe. Are you -- is it expected to end in the current quarter? That's the first question.

[Lars Wingefors, executive]

Yes. We don't expect to continue the restructuring program. However, I expect to continue adapting, adjusting the business forever, but the restructuring program will end in March.

[Rasmus Engberg, analyst]

And the second question is more kind of philosophical, I guess. You're down in number of projects under development by 20%, 25%, from the peak. And looking back, that was clearly contributing to the industry's overinvestment, I assume. Is that -- do you think that was a function of your decentralization, your capital allocation? Or was it sort of -- how is this changing going forward?

[Lars Wingefors, executive]

Well, I think we follow with a very clear strategy, onboarding great entrepreneurs and backing their business plans. I think everyone has been delivering according to those plans. The thing is -- and we put -- in the capital allocation, we put organic first, meaning the first investment came to organic growth, which we now see the outcome of. And then secondly, we made M&A. So it's kind of, okay, we had that strategy back then. Now we need to adjust that because the cost of capital has increased. So it's just the overinvestment into content that is not supported by the cash flow from the operations or external capital. You can debate. You can debate the speed we went to build organic growth, but the ambition was obviously to aggressively organically grow the company. Now we need to adjust for that, and that's basically the core of the issue that we are addressing here.

[Rasmus Engberg, analyst]

And so the -- going forward, it -- there will be higher thresholds, so to speak, but will be more that has a similar process...

[Lars Wingefors, executive]

Yes. It's an -- obviously, when you are expanding so much and you're taking business risk both setting up new studios, building new IPs, acquiring game developers that you are investing into that not necessarily has the track record, if you change that, you need to cut the things that has the highest -- what you believe has the lowest chance of success going forward. And that -- what we are doing now, keeping the most iconic studios and IPs under development.

[Unknown Attendee]

And the first question from the teleconference is from Nicolas Langlet from BNP.

[Nicolas Langlet, analyst]

Yes. So I've got 4 questions, please. The first one, on the pipeline for AAA games. So a year ago, you announced 31 AAA game in the pipeline, of which -- for full year '24. Considering the ongoing reorganization, how many AAA game are left in the pipeline for the same period? And can you already give us some visibility for next year in terms of AAA game?

[Lars Wingefors, executive]

We decided not to give full color or color on the number of AAA games going forward. We feel we are focusing now on the restructuring program and the potential divestments. And we will come back to the market, either on next quarterly or a Capital Market Day, to give update on the future pipeline.

[Nicolas Langlet, analyst]

Okay, okay. And then second question. You mentioned lower contribution from the platform deal [ and ] PC/Console. Do you think there is something structural here? Or it's just a [ temporary reduction ]?

[Lars Wingefors, executive]

No. I see -- well, in general, there is a few platform, obviously, that we all know has moved out from the industry. That has impact, but I also think the remaining platform had, as everyone else, a very aggressive approach to investing into content. Now when they have better data and their cost of capital is higher, they are more selective. What I've actually seen in recent weeks actually: We are signing platform deals for content that we are happy with. Yes, we are turning down some offers. We believe it would be better to go to the market ourselves, but sometimes we are pleased with including some titles in the subscription program, so it's kind of business as usual. If you make the right games, you can do good business.

[Nicolas Langlet, analyst]

[ Okay ]. Then on the SEK 2.9 billion reduction of CapEx, your sort of mid-term target, does it include disposal effects? Or you can achieve it without any large disposals.

[Lars Wingefors, executive]

I think we gave color on that. That is including potential divestitures.

[Nicolas Langlet, analyst]

Okay. And if you don't make any disposal, what will be the [ 2 top lines ]? Will it be [ 2, 2.5 ]? Any guess...

[Lars Wingefors, executive]

I understand your interest, Nicolas, to get full color on this, but I think it will be very speculative. What's important in then, that we are keeping the things we really believe in, ultimately. And that's, I think, the foundation for making decisions, whether it's layoff or closures or divestments.

[Nicolas Langlet, analyst]

Okay. And final question for me. So you have mentioned a couple of time you expect improved ROI in the coming year, supported by all the initiatives and reorganization you are making. How long will it take for the ROI to improve? Is that something we should start to see next year? Or we'll have to wait 2 to 3 years for the full impact of the reorganization.

[Lars Wingefors, executive]

I think the actual reported ROI numbers obviously is becoming, by every quarter, larger and larger because it's now 5 years old, so to change that will take some time, but the actual ROI for the games released, I expect to improve notably, at least, next fiscal year. Because obviously we have been -- we are shutting down many things we believe the least in and keeping the best. So that will be the outcome of it. We provided some color on that, Nicolas. I'm not saying looking at historical adjusted 3.2x is the right way to look into the future. It's just a data point to give some data point to how we look at things.

[Unknown Attendee]

The next question comes from the line of Martin Arnell from DNB Markets.

[Martin Arnell, analyst]

I hope you can hear me.

[Unknown Attendee]

Yes.

[Lars Wingefors, executive]

Yes.

[Martin Arnell, analyst]

My first question is on your full year guide on adjusted EBIT. It now implies a flattish result in Q4 versus Q3. And I was wondering if you can share some light on the mix because in Q3 you had a strong mobile and a weaker PC/Console. Is that going to be the other way around in Q4? Or how do you view the mix?

[Lars Wingefors, executive]

Well, we didn't provide more color than obviously we're expecting a more busy PC/Console segment in the fourth quarter driven by all new releases, including this week's releases. So that, we will see, will drive more profitability in that segment. Obviously tabletop had the seasonally strongest quarter in Q3, so there is a shift with -- between segments, but we still see a solid performance coming out from mobile and Entertainment & Services.

[Martin Arnell, analyst]

And the other question I have is on the cash flow outlook. Is it fair to assume the second half is back-end loaded on cash flow? Or is it similar to Q3 in your expectations?

[Johan Ekström, executive]

No. So the color we gave there is that it will be more evenly distributed. I would say that is the color that we are able to give without giving a firm free cash flow number for Q4. And there are different variables coming into play in terms of cash collection related to tabletop that's normally very strong in Q3, but on the other hand, it also depends on when releases within PC/Console are done, in terms of timing and working capital effects. But I wouldn't say that it would be back-end loaded. More evenly distributed.

[Martin Arnell, analyst]

Okay. And final question I have is on the outlook for the next fiscal year starting April. Or how do you feel about that right now? And there's no outlook for it, but are you confident that you could exceed the low end of the range, around SEK 7 billion, for next year? Or...

[Lars Wingefors, executive]

I think in the report -- or we stated that we see growth -- we still have a growth CapEx and a very strong pipeline that we will be releasing next year and the years thereafter, so -- but we have not provided more color because we will come back to the market on this. And I think we should focus here now to get the things done, we would like to get done, and not put out a lot of new promises to the market. So that's our absolute focus right now.

[Unknown Attendee]

The next question comes from the line of Simon Jönsson from ABG Sundal Collier.

[Simon Jönsson, analyst]

Just a follow-up on the CapEx here. You said the run rate is SEK 6.4 billion. Can you give any color on what the run rate is currently here mid-Q4?

[Lars Wingefors, executive]

No, it's lower.

[Simon Jönsson, analyst]

All right. Nothing, no more color on that?

[Lars Wingefors, executive]

No. I'm sorry, but obviously we are making adjustments and we have been doing some layoffs and closures. And so it's getting lower by every month, but I don't have any more color than that. Sorry, Simon.

[Simon Jönsson, analyst]

All right, I understand. And one final from me: Will you give a new EBIT guidance for the next year?

[Lars Wingefors, executive]

Yes, it's very interesting questions. And we are debating that a lot, but if we are to give any guidance, we will do that on a Capital Market Day. That's our ambition, but I have a mixed feeling about giving promises for the future. But obviously I understand the market would like to get guidance of how we look at the future, but now we are, again, very focused on executing what we need to execute right now. And then we are -- I'm sure my very hardworking and intelligent team members will come up with some ideas and proposals how we'll put this to the market later in the year.

[Unknown Attendee]

And there are no more questions from the telco, so I hand the word back to you, Erik.

[Erik Larsson, analyst]

We have a few questions here from the web. And we're running a bit out of time, but I'll take a few of them. So the first one is from Nick Dempsey. And he's wondering if you can give an indication of how you are thinking about the PC/Console pipeline into fiscal '25. Will your restructuring have any impact on that slate? And has anything been shifting within your thinking in terms of release dates?

[Lars Wingefors, executive]

I think the impact from the restructuring is less into next fiscal year. It's more for projects that are in [ outer-years ]. There is changes for small or mid-sized games but not for any very sizable games.

[Erik Larsson, analyst]

And he has another question on disposal. Regarding these mature discussions, can you say whether these are weighted to PC/Console? Because that would help in terms of understanding where CapEx might trend in fiscal '25.

[Lars Wingefors, executive]

I think I -- we provided a lot of color on -- around this, so I don't want to take those specific words [ in my mouth ].

[Erik Larsson, analyst]

Fair enough. We have another question or a few questions from Viktor Lindström at Nordea. So on average, how large proportion of the CapEx is allocated towards the back catalog?

[Lars Wingefors, executive]

Really good question. And I don't have the specific number on that. I would say it's a fairly small portion of it, I would say, a very small portion of it, but let's come back to that in a future conference.

[Erik Larsson, analyst]

And with regards to the AAA games pipeline, how many AAA games will be impacted by the restructuring?

[Lars Wingefors, executive]

Again we will come back to the future pipeline of games. Again, there is changes to the [ outer-years ] to the pipeline, also from some larger projects.

[Erik Larsson, analyst]

And then a question from Thomas Singlehurst. He says, "I don't suppose the move away from net debt guidance is a huge surprise, but it's disappointing. How can we be sure that you're going to follow through on the sale here?" Or potential divestment.

[Lars Wingefors, executive]

Again, I don't have the power to move dates. We have a restructuring program and its end in -- is March. And that -- because of that, that target is passed. And we have underlying leverage target which is very similar, so our ambition is still to lower the debt and, over time, get down to 1x forward-looking EBIT.

[Erik Larsson, analyst]

And let's see if we can get one more question maybe. Again on this divestment and you postponing it a bit, or the time line, could this be related to you're not getting the price that you're -- you want to get?

[Lars Wingefors, executive]

The process are in late stage. And I think we wouldn't run processes unless we currently had good-enough deal terms on the table. Because then I will shut the processes down. So with that said, subject to binding agreements, I guess we will be pleased with them.

[Erik Larsson, analyst]

Okay, I think we'll wrap things up there, so thank you for your answers. Thanks for all the questions; and on the web as well, of course.

[Lars Wingefors, executive]

Thank you. Thank you, everyone. Thank you, Erik.

[Unknown Executive]

Thank you.