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Edited Transcript of EMBRACb.ST earnings conference call or presentation 15-Feb-17 9:00am GMT

Q4 2016 THQ Nordic AB Earnings Call

Stockholm Jul 30, 2020 (Thomson StreetEvents) -- Edited Transcript of Embracer Group AB earnings conference call or presentation Wednesday, February 15, 2017 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Lars Wingefors

Embracer Group AB (publ) - Founder, CEO & Director

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Conference Call Participants

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* Lars-Ola Hellstrom

Pareto Securities, Research Division - Analyst

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Presentation

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [1]

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Ola. I'm very proud being here today with the first quarter report and year-end for 2016.

Before running into the numbers, I would like to recap on our strategy for profitable growth. Our core business model, as we talked a lot about during the listing process, is about our acquisitions of IPs and the asset care we are providing those IPs and development for sequels. And I will come back to that in the numbers, and I'm very happy to present the Q4 numbers. We had a really strong Q4. The growth was 30% year-on-year and the EBIT margin was 39%. The main driver for Q4 was the broad portfolio of gains in the catalog, mainly promoted on various digital channels such as Steam, PlayStation and Xbox Live.

As you look at the numbers here, you can see that the EBIT levels are increasing a percentage more than EBITDA levels, and that's due to lower amortizations of own development in the quarter. And this is because we -- the releases we made of own development in the quarter was less in terms of millions than the comparable quarter 2015.

Looking at the full year numbers, we have been growing our net sales with 42%, our EBIT/operating profit with 43% and again, the EBITDA level at 26%. So -- and the depreciation-own developments are on the full year numbers, as you can see, about the same. It's a little bit less from 2015 from SEK 26 million to SEK 24 million.

During the Q4 period, we made 4 acquisitions of IPs. The main ones being Delta Force from NovaLogic, Joint Operations, Comanche from NovaLogic. We bought the previous THQ Inc. title Sphinx and the Cursed Mummy. And we finished Q4 buying the previous publishing title, This Is the Police. This Is the Police was a title we published where we released during August last year.

We also released 2 own titles and 2 published titles during the quarter. The 2 own titles was Darksiders Warmastered Edition and We Sing. Combined, these releases' performance are according to the management expectations.

I am also happy -- proud to show some numbers from our balance sheet. Because of the IPO process and raising of new capital, our cash position end of December was SEK 167 million comparable to SEK 25 million the year before. And we also had unutilized credit facilities at the end of the Q4 at SEK 71 million, so the group's total cash available was SEK 238 million. Equity are SEK 345 million and the asset ratio is 74%, so we have a very strong balance sheet.

The cash flow from operations are slightly down. Obviously, the cash flow from the EBITDA level has been increasing, but it's slightly down due to the tax and increased working capital reductions. Also some interesting numbers, looking at the balance sheet for the total intangible assets. You can convert this partly to the investments made during the past years -- the past year. So we have increased the total intangible assets from SEK 104 million end of 2015 to SEK 228 million end of Q4. And the absolute majority of this is the ongoing development for products. We are running at full speed for development. I will come back to that very shortly, but that position has increased from SEK 51 million to SEK 174 million during the year. We have also acquired increased acquisitions of IPs during the year. So from SEK 4.6 million 2015, we invested SEK 22.6 million during full 2016.

In order for you to get a better understanding of the business and for analysts and others to follow the business, I'm providing a bit of more KPIs today. And the new -- especially the new KPI I would like to point out is the share of new releases sales. So what is this number? Yes. New releases sales in Q4. So during Q4 2016, the new releases we made were 36% of the net sales, meaning SEK 46 million. That means that is only the new releases in that quarter. So titles released in Q3 or before are then counted as backlog. The comparable number for this KPI was 52% 2015, and in millions, that was SEK 51 million. And as you remember, we had 2 strong titles 2015 in Q4. We had Darksiders II HD version, and we had, especially MX vs ATV Supercross.

The next KPI I'm providing is new releases sales for the full year. So this KPI is for all titles released during 2016, and that amount is 41% of the business. Meaning SEK 123 million during 2016, and the comparable number was 42% 2015 and SEK 88 million. Meaning -- this KPI will mean that the titles released in Q1 2016 will then be counted in Q1, Q2, Q3 and Q4. And titles released in Q2 -- obviously, Q2, Q3, Q4. But the titles done in Q4 will only be counted in Q4. And next time I'm providing this KPI, all titles 2016 will be counted as backlog.

Looking at the old KPIs we've provided is the owned titles percentage of sales. That number decreased a bit from 76% 2015 to 71% 2016. That is because we had a lot of publishing titles, especially in Q3. As you remember, we published Quantum Break, for example, from Microsoft. We published Warhammer from Fatshark here in Stockholm, and we published many other publishing titles during the year. But in terms of millions, our own titles increased from SEK 162 million 2015 to SEK 214 million 2016. Just to clarify, own tiles meaning it's the IPs and franchises we own, everything else then is publishing titles.

Then I'm providing some other KPIs. They are not always super relevant, but just to give you a bit of more understanding for the business. And then the amount of own titles, 204 publishing titles. The cost carrier numbers in our systems, well, we can call it SKUs, it's 1,470. I would like to give you just the picture. We have a very complex business, so it's hard to provide all details. Obviously, I can't do that. But there is a lot of products, a lot of channels, retailers, so it's a complex material. And that's what I'm saying here. We had -- in Q4, we have the strong backlog sales. As you can see in the numbers here, the share of new releases only were 36%, the rest was then backlog.

I hope these new KPIs will give you some more color until we have the next quarterly report. Perhaps, I will try to get better every quarter providing KPIs.

Now looking into the future. As you know, we are not providing any financial forecasts. However, I would like to talk to you about our upcoming products. And in Q1 2017, we will have the following new products or new releases. I would say there is no major title for us in Q1, but we do have new products. And the product I would like to point out here is especially Halo Wars 2 coming out this week in cooperation with Microsoft and 343 Industries. And in end of the quarter, we have This Is the Police, where now being our own IP, we are very excited to bring this out on console, PlayStation 4 and Xbox One, both on physical and digital formats. In the corresponding quarter 2016, we had no new release.

I will now also tell you a bit more now on our mobile products. As you remember during the listing process, we just acquired a studio called Foxglove Studios actually based out from Stockholm. They had been working on 2 titles for 2 years owned by a Japanese big gaming company. Somehow, they decided not to continue their western operations, not only Foxglove but a lot of other studios. And we agreed with the teams to take them on as fully owned studios. However, we let the employees of the studios still owning the rights for IP, but we made a deal that we will recoup the cash -- the burn rate we're spending with them to get these 2 products out, and we will also have a bulk or a good chunk of the net profit of the products. The 2 products, they are called Snipers vs Thieves and the Muscle Hustle, a wrestling game. These are multiplayer mobile products. I would say they are very good mobile products. They are very, very senior teams. They've been working 2 years, and they have been like -- about 10 people on each game. As you know, the lady heading up this operation on Foxglove is Senta Jakobsen which is -- she's been in this industry for many years. And she was previously Chief Operating Officer at DICE here at Stockholm.

Okay. So this product has been soft launched or being soft launched during Q1 together with 2 different publishers, one called PlayStack and one called Playlab. So as you know, at THQ Nordic, we don't have our own publishing operations for mobile, so they will provide the PR, marketing and all the publishing duties. And I have to say I'm a bit excited for this. Sniper vs Thieves is a very good mobile product. It has been on Google beta play since December. And it -- so far, it had about 2 million downloads and Google also seemed to be very excited. Apple are also interested, but -- or excited. But we had a trial in Nordics here, so the 4 Nordic countries during -- not last week, but I think the week before. And we were the most downloaded game for a few days in most of the countries. So we had about 200,000 downloads here in Nordics, which is a good number for Nordic.

The challenge with the type -- this is a free-to-play product. So this is -- for me, it's a new market. So perhaps I'm sounding too excited, but I would like to give you some color. So my view on this, Sniper vs Thieves has good traction. People like to play it. They would like to come back to it. They are on YouTube. You can find a lot of videos and so on. But it's a challenge to get people to spend enough in the game. And obviously, what I understand, if you don't have the right KPIs, the product are financially not worth anything because you can't charge for the products. You need to get people either to spend something or you look at some advertising. So this is about spending. Masks -- this is about robbing banks and -- Sniper vs Thieves, so...

All right. The other part is the Muscle Hustle, a wrestling game, a fantastic game, multiplayer, also had very good KPIs -- better spending KPIs. The problem is the traction. People are not doing it on YouTube. They're not really talking about it so much, but they like to play it. We have some serious interest. It has been under soft launch in Malaysia, Indonesia and Philippines during the past month. But I wouldn't -- this is my view today. This is a new market for me. We previously had pay-to-play products. This -- that is a totally different market. For example, we had The Book of Unwritten

Tales 2 for launching on pay-to-play during the past weeks. But the numbers of that is okay. It's not that exciting. So the big market is free-to-play. I'm looking forward coming back on these 2 titles in the coming quarters.

Okay. So here comes the big thing. What are we going to do in the future? So we raised new capital. We are building our strategy for growth and it's very much about the investments we are making to own development. We have a very strong pipeline for 2017 and onwards. We have some major sequels coming out on own IPs and publishing titles, and they will come, as of the information I have today, in Q3 and Q4. The titles announced are ELEX, own title or 70% owned; it's Battle Chasers, a publishing title; Aquanox Deep Descent, own title; SpellForce 3, own title; and Guild 3, own title.

As of today, there is no delays. However, we are in the games industry. So it's normal that product gets delayed for various of reasons. Key for me as owner and on the business side of it is that we bring our products that has the right quality, so the product will have long-term value, meaning the product should be without bugs by releasing, should have the polish that the consumers expect. These products have millions of fans waiting for this collectively.

Coming back to the intangible assets. We had SEK 174 million in ongoing development end of December. By end of December as well, we had 27 products under -- in the pipeline, whereof 7 were announced and 20 were not announced as of 31st of December. As you know, our strategy is to announce products where we think is beneficial for the company and especially for the product from the consumer's perspective. So we will make announcements during the year at trade shows and other occasions. And that will be announcements on both owned and publishing titles, also coming out 2017, but foremost, some of these will be for 2018 and onwards.

There is different strategies -- to give some color on that, there is different strategies. How long time do you need to announce a title before you're releasing it? Various publishers have everything from 1 month minimum up to years. I would say when you announce it, you have kind of a moment. And that moment you need to catch. You need to catch the excitement and continue having the audience or consumer, fan bases excited until the release. And you need to convert that excitement into hopefully prebooks of the new releases. So there is different strategies, how long you should announce titles. This title, you see here, ELEX, was announced long time ago. And that is always a challenge to keep that excitement going. However, I am excited for the future, what we have to show you in the future.

I would also say that compared to many other publishers in this industry, we have a lot of products, many titles, many releases, many IPs. I will also state that, "Okay. We have some substantial investments in ELEX and a few others, but we are not dependent on any of them." I'm still, as I stated during the process, comfortable with that it's a good investment, and maybe we will have a good return of investment. But I would like to point out that we have a broad portfolio of backlog, but also of new releases.

Okay, ladies and gentlemen, that was my presentation for the quarter. I would welcome to -- you to have questions. And in this session, we'll have help of you, Lars.

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Questions and Answers

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [1]

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Yes. Thank you, Lars. Once again, congratulations to a really strong report. Also, thank you for giving me some new KPIs. So it's easier for me to track this company.

First of all, I was thinking to start if we can -- if you can say something about specific titles that over-delivered during the quarter, which you're really satisfied, that surprised on the upside?

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [2]

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Well, combined, as I stated, the new releases was according to expectations. There's always titles that -- there's always titles doing a bit better. I would say there was none of the titles doing extremely well. That if something does extremely well, I will point out that. Darksiders Warmastered Edition had a great feedback from fans and from -- on Metacritic, we had good reviews. Again, it's a 5, 6 years old product. We gave away 2 million copies on Steam for free to the previous owners. And they were, of course, very glad to get this new version. And I think that is an investment for the future in the IP.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [3]

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And what concerns publishing titles? Was it some that over-delivered or...

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [4]

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Well, we had The Dwarfs. It's okay. We made our money. It wasn't too big investment.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [5]

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Okay. You invested SEK 67 million during the quarter. It's worth quite a lot. Are we now -- if you would split that, how much is for titles that is to be released during 2017? And how is -- how much is for titles later on?

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [6]

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First of all, I think that number is including the IP acquisitions we made. So I think you can dig that number down, how much development there is. I'm sorry, but I don't have that exact number. So I'm not providing that KPI, how much of the development investments are being released.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [7]

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Okay. I must say it was really exciting to hear about the mobile venture with Foxglove. For how long have they been developing these games, you said, 2 years?

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [8]

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Yes. It's, I think, over 2 years, though.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [9]

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Have you something to say about the investment budget? How much they've been putting in?

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [10]

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Well, the team is -- in total, they are 18 very senior people. So this is not low-cost productions. Well, we made a deal that we pay the burn rate and we recoup the burn rate and we share kind of the margins on it. My thinking of Foxglove is not these 2 titles. And I think it's nice to have them. I'm excited and I would like to support it, but the thinking behind Foxglove was to like understand the market, start looking at our own IPs, what they could make for the future. But please, this is like kind of a little bit excitement in the corner. This is not a big...

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [11]

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If this venture goes well, can you consider using existing IPs for free-to-play games?

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [12]

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Well, I am not the man to answer that question. I will come back to that in the coming quarters.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [13]

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Do we have any questions from the web or -- and from the telephone conference?

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Operator [14]

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(Operator Instructions)

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [15]

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Okay. No questions, so I go on. Maybe you can tell a little bit more about the acquisitions you have made since the IPO, the NovaLogic and the Sphinx acquisition. And what kind of development activities can we expect? How many of the titles is a potential sequel or is it mostly porting and remasters? What's the spectrum of these investments?

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [16]

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Yes. Well, there's some -- first of all, there's some asset care to be made on Sphinx and the Delta Force titles. There's new platforms to be added for the catalog of NovaLogic. I would say the NovaLogic has a challenge because those titles are on the edge of being very old. It's games from the '90s, early 2000. So that early 2000 works okay. '90s, it's becoming a lot of retro. I think that the IPs such as Delta Force, for example, has -- I would not say a strong following, but there is millions and millions of players that remember the game, played the game, lived with this game when they were young and they're now in my age. So I think if you have the right team, dev team, you can make something really good on that. That's just one example. Sphinx has also a following. It's a bit more niche. There is a potential on Nintendo Switch. There is -- yes, there is a legacy from THQ Inc. on this as well.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [17]

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And really strong ratings for that IP.

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [18]

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Yes, good ratings. And This Is the Police, it's like -- that's a new thing. We published the title and then we acquired it. I like it. It's a good investment, I would say. I'm excited for that IPs in the future. The good thing is it's a current game. There is a current team. There is like an up-to-date product.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [19]

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Concerning new IP acquisition, how is the deal flow? Have you noticed even more potential deals since you changed the name to THQ Nordic or is it basically the same?

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [20]

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We always had a good deal flow, and that's because I'm proactive rather than waiting for the deals to come. There is always a challenge if you approach the people and would like to buy something rather than the people come to you and need your help. So there is a difference in this. I'm not concerned. We will make acquisitions going on, continually making acquisitions this year and the years to come. There is some deals that are too expensive in the market. So I want to keep the strategy of paying the right amount for the products rather than getting -- overspending on acquisitions.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [21]

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Sounds likewise. Also another question on the publishing side. Now you got this new deal with Microsoft for Halo Wars 2, which is a high flying title. Should we expect more and larger titles on the publishing side going forward?

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [22]

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Yes. As classified as publishing, you -- we -- I'm really excited for the future. But publishing title is like a wide spectra here. So for example, Battle Chasers and a few others we have, we are investing in the development. We're owning all rights for all future on digital and physical formats and working with the team on that for sequels and so on. But then we have publishing titles with Microsoft. Microsoft, that's a big company. So doing Halo Wars, that is a very specific thing. We're doing -- the thing of Halo Wars 2 is we're doing the physical version on the PC edition now in the European markets. It's okay. We like to work with Microsoft. It's a business, and we're providing something they need and the market need.

How long is this market? I think there is a market having physical products for years to come because people would like to have something in the bookshelves, especially collector's editions as well. But the issue with just doing physical publishing deals is I don't see the same long-term income, so you have income in the quarter releasing it. And then there is a challenge, have that income going forward in a sizable amount compared to -- if you have a product on publishing, also you have digital product, you can have income for 20 years. So this is something we are working on to balance. I'm happy to work with Microsoft, but it has to be a business for both parties.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [23]

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Okay. Should we check if there is any question? No questions. We -- I can continue the questions with the pipeline. And you will announce further down the road when the projects will be announced. So -- but concerning titles for 2018 and '19, will larger part of the project pipeline be revealed this year or is it only some high flying...

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [24]

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I can't really provide. It's a larger part or a percentage on the pipeline. But I would say there is a good chunk that's coming out this year. Of course, but this -- gaming industry, you need to invest. It takes 2, 3 years to make a good product. So I think you should be worried if I didn't have any plans for 2018, which we do, of course. So 2018, we're now planning for 2020, '21 in discussions.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [25]

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At the IPO, we had -- I think it was 29 projects. And now we have released some and excluded them of the pipeline, and now we're at 27. So I think one project is added since the IPO. How much is in the planning phase? If we stand here in 6 months' time, how many new projects do you think that you have added?

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [26]

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We have a good deal flow. We have a good process of signing up new products. And also, I love this asset care, reporting. I love this -- where you can reuse some of the assets. It's a bread-and-butter business for us. Making -- made your investments on AAA products, you need to be careful.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [27]

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And concerning development studios, is it still 19 or have you added another...

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [28]

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Sorry, what studio?

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [29]

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Development studios, external?

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [30]

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Yes. I'm not providing KPI on that today. I'm sorry.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [31]

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Okay. Okay. I think that was it for me. Thank you, all, and thank you, Lars.

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [32]

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Thank you.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [33]

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And let's see you in first quarter report.

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [34]

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Yes. Thank you.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [35]

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Thank you.