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Edited Transcript of EMBRACb.ST earnings conference call or presentation 14-Nov-17 8:00am GMT

Q3 2017 THQ Nordic AB Earnings Call

Stockholm Aug 4, 2020 (Thomson StreetEvents) -- Edited Transcript of Embracer Group AB earnings conference call or presentation Tuesday, November 14, 2017 at 8:00:00am 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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Hello, everyone. I'm happy to be here to report another stable quarter for THQ Nordic.

During the quarter, we had a net sales increase of 9% compared to last year in Q3. Net sales was up to SEK 84.7 million as well as improved gross margin up from 53% to 65%. The EBITDA level increased from 33% to 41% during the quarter. And most importantly, we made EBIT of SEK 24 million compared to SEK 16 million last year. That's an EBIT margin of 28%. That's a 50% increase over last year.

And the reason for the improved EBIT margin is mainly driven by higher net sales of owned products as long as improved margins. I have to note that the comparable quarter last year had a publishing title with a lower margin and only on physical distribution. This quarter, we had a few releases, one of them being Sine Mora, which in the end of the quarter, did fairly well on Nintendo Switch.

Looking at the interim period, the first 3 quarters of the year, we almost doubled the EBIT from SEK 44 million up to SEK 86.2 million. That is an EBIT margin of 34%.

Looking at the breakdown of the business. We, as stated, improved the net sales of owned products. Compared to the second quarter of the year, the net sales of owned products increased from SEK 13.7 million up to SEK 32.7 million. As well as the digital share of the total revenue were up 5% compared to the same period last year.

I have to note, though, that even though we had a good share being digital, we did not have any major [EST] promotion, meaning digital sales promotions during the quarter, especially compared to the second quarter, if you remember, we had Humble Bundle, Steam Summer Sale, Publisher Weekend and as well as the Darksiders II -- or Darksiders back-catalog promotions as -- with the announcement of Darksiders III.

Furthermore, looking at the investments and depreciation during the quarter. We had a stable depreciation of IP being SEK 3.5 million. I would like to remind you that we depreciate all our IPs straight over 5 years. So that's 20% per year. So during next year, all our THQ assets will be fully amortized.

Game development depreciation were SEK 6.5 million, and that's because of most of the new releases were released during the end of September or during September. So our depreciation levels will significantly increase during Q4, where we have a lot of new releases as well as the Q2 releases coming into full effect.

During the quarter, we completed the development that were put into the balance sheet of Battle Chasers. However, that title will be started depreciated or amortized during the release month of October. So that's the reason there is SEK 39.8 million in completed development.

Capitalized internal development, that's the amount of money basically spent on all our internal game development studios, and compared to last year, it's almost doubled from SEK 10.2 million up to SEK 19.2 million. And historically, our game development has been about 1/3 being internal and 2/3 being external studios. And because of the acquisitions now in August with Black Forest Games and Pieces, that ratio will most likely increase -- the internal ratio will most likely increase in the future.

The total game development and royalty advances for future products were SEK 78.1 million. That's more than doubled the last year number of SEK 35.1 million. And that is the mainly, you can see that as an investment for the future pipeline for the coming periods and years.

And finally, the IP acquisitions during the quarter were SEK 3.8 million. That's mainly being the IP acquisitions from the Black Forest Games, the 3 titles we put on to balance sheet. We have also started the depreciation of The Guild Early Access because we started having revenues. However, the full game release will happen in the future.

Looking at the releases made during the third quarter. We had Sine Mora that we released on PlayStation 4, Xbox One and PC during August. And most importantly, we released it in America in September on Nintendo Switch. And in Europe, it were released in October. We had the title Baja -- Edge of Control, that were IP we acquired from THQ Nordic -- THQ Inc., off-road racing game. It has been placed at mainly mass market retailers in North America. And so far, the sell-through has been okay. So we hope this will be a slow but steady seller over the next years.

We had The Hunter - Call of the Wild publishing title from our friends here in Stockholm at Avalanche and Expensive World Studios at Sweden. We are handling the physical distribution for North America, Australia and New Zealand. And so far, the title has been having satisfying numbers on sell-through at mass market retailers.

The 26th of September, we released The Guild 3, the medieval economic simulator on Early Access. The game has been under development for more than 3 years in -- at GolemLabs, an external studio in Canada. To be honest, myself, I were bit surprised of the -- all the bugs and technical issues. But also, that is the reason we decided to launch it in Early Access. The good thing with the game is the fans, they could really see there is a Guild game there, but we significantly need to improve the quality of the product until the game could be in final shape for release sometime in the future.

And finally, we released Sniper Vs Thieves (sic) [Snipers Vs Thieves], our first major mobile title. The publishing were made by a third-party publisher in the U.K. The game has been under soft launch since November last year and it went into global launch in August. I would say, the download numbers or installs are excellent. More than 13 million downloads by end of the quarter. So by far, this is our most played product on a daily basis and in the total download numbers.

However, as you know, in mobile gaming, that is not the proof for success. So the title needs to significantly improve the monetization, meaning the amounts of money the players are spending in the game in order to have a long-term visibility or -- yes, track record to continue the development. So we are -- they are working very hard to improve the monetization in the game.

Also during the quarter, we made 2 major game announcements. We had a big presence at gamescom in Cologne in August, where we showed our -- mainly our Q4 lineup as well as we announced a coming title, Biomutant. And however, when we signed Biomutant, we know it was a great team with a great experience, and we really believe in the product. However, the reception at the trade show was fantastic. It was one of the most talked about title at gamescom. We had amazing feedback from all major games press, and there were hours of lines in queue to play the game. So the game is fully playable at trade shows since then. So we expect Biomutant to be one of our key titles for the future.

In September, we also announced MX vs. ATV All Out. That is the first -- and I'm very happy to make this announcement, that is our first new MX game ever. And it's the first game for 7 years since MX vs ATV Alive released in 2011. The game is being developed in our own internal studio, Rainbow, Rainbow Studios in Phoenix, Arizona, and they have been working for a long period of time, making this into the next-generation of MX game. They are working in the Unreal Engine, and we will very soon start increasing the PR and marketing activities.

During quarter, we acquired 2 studios, one being Black Forest Games, based in Offenburg in Germany, close to the French border. They have a very long track record of making a lot of different types of console and PC games. I were there visiting myself, and I really met a great team, and quite a few of them have been working together since the '90s. They are 55 headcount currently. They have a major pipeline project that is not announced, but that will be announced and released in a fairly short period of time.

As well as Pieces Interactive, we acquired one week later. They are based in Skövde in Sweden. They were 13 headcount. They were increasing that headcount a bit during the coming periods. They have also worked on an unannounced pipeline project that also will be released fairly soon. The total THQ Nordic headcount were 469 as of end of the quarter compared to 432 end of second quarter.

I have to note that Black Forest Games are -- will or are our -- now our biggest internal studio, and they will have the capacity to make sequels on our major IPs as well as smaller asset care project at the same time. So they have a full capacity in-house. That is very valuable for us going forward.

Financing activities. We raised in the end of the quarter, SEK 598 million in the new share rise offering before transaction cost. I'm very happy to welcome quite a few new institutions as shareholders. And those cash will mainly be used or will be used for acquisitions of IP studios or potentially new bigger game development projects. After the quarter end, we also increased the working capital facility with Danske Bank from SEK 100 million up to SEK 250 million.

Pipeline. We are now in the middle of Q4, and we have released quite a few titles already in Q4. We have released Battle Chasers on PlayStation 4, Xbox One and PC. We have released the second major mobile title, The Muscle Hustle. We have released another installation of We Sing Pop for Xbox One and PlayStation 4. We have released the -- our biggest project so far, called ELEX at PlayStation 4, Xbox One and PC. We have digitally released This is the Police on Nintendo Switch. And a few days ago, we released a minor asset care project called Sphinx and the Cursed Mummy on Steam. Coming up in Q4, we have quite a few titles still to be released, so stay tuned.

For the coming year and periods, we have quite a few titles that I will come back in the coming reports to talk more about. During the quarter, we have also signed on a few new major projects that will be in the future pipeline for 2019 and onwards. So in the end of the quarter, we had 29 game development projects, where 13 were announced and 16 were unannounced. So we are -- as long as we are releasing products, we need to sign on new projects. And I'm really looking forward for our most exciting year so far, that will be 2018.

That were my quarterly report.

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Questions and Answers

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

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I'm very happy to welcome you, Lars-Ola.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [2]

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Thank you, Lars. We will not speak so much about the report today, on the actual numbers, just only one question. And the games that were released and the products that was out in the market, what surprised you most on the upside games that actually was performing a bit better than expected.

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [3]

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Well, I think overall, we had a very stable quarter. The Sine Mora Switch release, that was our first release on Nintendo Switch, and we were not sure how well Nintendo Switch will perform as a platform. So I would say those numbers, especially compared to the PlayStation 4 and Xbox One and PC numbers, were kind of surprising me.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [4]

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And you also announced the sequel of MX, and you had a bundling offer in September. Was it affecting in a positive way as well?

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [5]

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No, that bundling offer was kind of a disappointment because it just disappeared in the wrong side of the EST stores. But we will, for sure, have more promotions coming up.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [6]

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And I also noticed This is the Police has continued to perform really well on all formats. Now you have released it at Switch in October. Is it performing on that format as well?

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [7]

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Yes. There is a few dollars coming in.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [8]

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There's a few dollars coming in.

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [9]

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There -- it's not a major release, but it's quite, in development terms, cheap product to develop. And it's a steady seller on Steam. And I think it works quite well on Switch. So yes.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [10]

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Maybe looking into the fourth quarter, which is going to be the most important this year and also 2018, you have now released Battle Chasers, really good reviews. It seems to be selling really well. ELEX seems to work out nicely as well. Are you -- are we in line with your internal expectations for the games released or...

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [11]

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I say, collectively, we are in line with the management expectations of all releases until today. I'm not saying that is the financial expectations, I'm saying this is all -- overall expectations of the title. Some are performing a bit less, some are performing a bit better. I'm happy to have my first major baby out, ELEX. It's the first new IP as well. It's a damn hard game. It doesn't appeal everyone. You need to spend quite a few hours in the game actually until you can start playing the game in a normal sense. So -- but the diehard fans, they love it.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [12]

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And I read some reviews that it's a bit buggy, but how fast can it be fixed? And you have a live team operating on that or...

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [13]

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I don't know. There is a question, is the game buggy or it's just too hard? I think quite a few journalists reviewed the game without actually either playing the game or just played 30 minutes. You need to spend 50 hours in the game.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [14]

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It's hard to have a job done.

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [15]

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We have players that have spent a few hundred hours in ELEX, yes? So...

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [16]

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Yes. Also, The Guild, it was released end of September.

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [17]

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Yes, at Early Access.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [18]

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Yes, Early Access. How much should work do you think it's left to do? And when can we expect it...

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [19]

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There is a lot of work left.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [20]

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So H1 next year, full-scale release?

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [21]

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I would say I'm a bit conservative, pessimistic. I could see a lot of work. However, I would say The Guild 3 has a huge fan base. It's a title -- if you do it well, it could sell for a number of years. We can bring out a lot of more content. So that's why I'm very keen on investing into this title and to put out a code that are really working well that you can build on. And I was not really super happy with the current build. Commercially, it's okay.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [22]

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Okay. And then going onto the next title that is going to be released, not Black Mirror, but SpellForce 3: Age of Empires will be delayed until early in 2018, you will slate it for at least mid-October. What -- can it be positive for SpellForce 3 or...

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [23]

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SpellForce 3 is a major investment in our internal studio. So I have quite high expectations internally of the title, both in terms commercially but also in terms of quality. I hope they are able to pull it off, yes. I'm trusting my guys, but there's a few weeks to go.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [24]

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But do you think that the game can attract some of the player that was waiting for Age of Empires that they will play that game too?

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [25]

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Obviously, it's the same audience, yes. So for sure.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [26]

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It can be a potential upside too.

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [27]

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Yes, it's hard to say if Age will -- the delays of Age will be good or -- I don't know. We haven't thought about it. We are really focused on delivering a really good product.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [28]

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Yes. And you kind of hinted here that we will see some announcement for fourth quarter as well. What's the reasoning to delaying the announcement and not making promotions for it? Because now it's...

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [29]

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I didn't phrase the quarter that I will announce it in the quarter, but that's your phrasing. But the reason being you can have different strategies of doing PR marketing. One strategy could be that you do like a same-day approach and grabbing the attention you're getting in the media and releasing a product the same day. Or you can do the same thing, but perhaps a week earlier. Doing the whole Darksiders III thing, traveling the world with trade shows and all the PR marketing for a year, it's a substantial effort. And sometimes is -- you make it too early, so the fans get tired waiting for a product. People are -- they want to play at once, yes?

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [30]

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Okay. And also when we were at gamescom, you announced the Black Forest acquisition, you said that they will release the new game and what it will be soon. So I just wonder what's your definition of soon, if...

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [31]

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My analyst doesn't know, I'm the CEO.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [32]

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You see it...

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [33]

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So soon is soon, yes.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [34]

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Yes, it is soon. Yes, it's soon. Going on to 2018, we have MX slated for release then. And I just realized a couple of weeks ago that Mad Skills Motocross is also targeting a sequel in 2019. How you can...

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [35]

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Yes, you mean the MXGP game by Milestone, yes.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [36]

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Can you compare these titles or...

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [37]

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Yes. Well, it's a similar audience. They have been very good doing the European Motocross. What I understand they're now doing an American Supercross. I think there is room. I think our games is very different. However, they're made in the same engine. I'm confident we have the fan base. I think we are focusing on delivering it to that audience. So rather than speaking about the competition, yes.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [38]

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Okay. And about SEK 600 million. We have talked about earlier that you get a lot of propositions for publishing deals. Out of hundreds of projects you see, how many is worth evaluating? And...

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [39]

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It's hard to say. We daily have, I would say, a few -- a handful opportunities. So over a year, that becomes a lot. So we are evaluating quite a lot. However, obviously, we are focusing on our own IPs and our own studios, even more and more. So the publishing titles we will pick up for the future will most likely be bigger and bigger, that they need to be worth doing.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [40]

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So could you even consider now invest SEK 150 million to SEK 200 million is a single project?

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [41]

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No, I think that's over our reach at the moment.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [42]

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But on the top that -- where you guided that the IPO process, SEK 125 million, something like that? And concerning IP acquisition or larger IP acquisitions, what's the main obstacle there? Is it price expectations of the seller?

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [43]

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No, it's the slowness of the seller. It's big organizations and the people are afraid of making decisions, yes? That's the big obstacle.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [44]

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But you have some ongoing discussions, I guess?

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [45]

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I have a lot of ongoing discussions, yes, that's my work. And I have a great team executing on that. So I'm sure we will see some very nice deals in the future. However, I will be waiting on the right terms

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [46]

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As always. Questions from the audience?

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Unidentified Analyst, [47]

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You mentioned the new projects for 2019. Are those mainly your own IPs? Or are you already looking for publishing deals? Or if you can comment something?

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [48]

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Those we signed during the quarter, I would say, are our own IPs, yes.

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Unidentified Analyst, [49]

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Okay. Mostly new or follow-ups or...

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [50]

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There is always a mixture. It happened to be our own IPs during this quarter. But obviously, I can't comment more than that. Stay tuned.

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Unidentified Analyst, [51]

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So my question pertains to Darksiders. And unfortunately, I'm unsure if I'm going to get an answer to this, but I'll try. So will you have a multiplayer, apart from what you had in previous games? And what are you thinking about like Overwatch and Destiny?

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [52]

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Yes. Well, I think start with the Darksiders multiplayer and co-op, I think, obviously, there is -- one day, it will be a day after Darksiders 3 release. What are we doing with Darksiders then, and obviously, we are evaluating various things. And one thing that being in demand are obviously multiplayer and co-op. So -- and Darksiders being one of our main IPs, so god knows what we have in our pipeline, yes?

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Unidentified Analyst, [53]

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Having so many studios and so many games, and you need to have a certain independency on the studios, but at the same time, have a perhaps a rather tight lease on them. How do you go about to organize this within your company?

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [54]

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I think, first of all, we are acquiring studios has an established setup, culture. They have the systems and financial in place already. So I think the management -- or the management of our internal studios are fairly easy. And they don't have any external customers. They don't have any external interest. So they really become internal development capacity. So I think we treat them in the same way as we treat the external studios in terms of management, the product, yes? Because that's the most important thing, what are they delivering. Are they delivering what they're telling us? If not, we're making the changes as we're doing with the externa studios as well.

Financially, obviously, we have a reporting package and all that in place. We have some controlling functions. I don't believe in having too much control and too much management overlay because this industry has clearly proven that if you add too much corporate bull(expletive) into studios, they fail, yes? People leave. And quite often, the big studios or the big publishers, internal studios sometimes collapse. So they just close it. So I think we have a kind of different approach to that, believing in people, believing in what they are good of doing and we are supporting that. So far, it has worked very well.

All right.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [55]

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Is there any questions from the telephone conference?

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Operator [56]

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(Operator Instructions) We have one question for you so far. The first is from (inaudible).

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Unidentified Analyst, [57]

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Lars, it's regarding ELEX. Can you give any guidance on where you expect the sales split on the title?

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [58]

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No -- well, I think traditionally for bias games, the major format has been PC. However, this time, we do have quite a lot of expectations on PlayStation 4 and Xbox One. I can't really give you a percentage split on that. But obviously, there will be good revenue from all platforms.

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Unidentified Analyst, [59]

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Okay. That's fair enough. And another question is based on your digital sales, how much roughly is from Steam?

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [60]

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Historically, steam has been about 1/3, up to 40% of our digital sales on a regular basis. The rest has been promotions on the various PlayStation stores and Xbox stores as well as the all other minor PC EST channels such as GOG.com and the other 35 or so we're having as well as a bit on the mobile income.

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Unidentified Analyst, [61]

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Okay. Let's rephrase my question. How much of the PC digital sales are from Steam roughly?

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [62]

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No, that's depending. I understand where you're trying to comment. But historically, I would say our Steam percentage is about 80%, 85% on our products.

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Operator [63]

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(Operator Instructions)

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [64]

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All right. Lars-Ola, do you have any final questions?

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [65]

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Yes. I can go back to the 2019 pipeline. And should we interpret that its own IPs that is in the project -- unannounced projects that is for 2019? It's no publishing deal...

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [66]

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No, no. I was saying the title we signed during this quarter for 2019 and onwards happen to be our own IPs. We are signing title every quarter. And it's not only 2019, there is also the coming years.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [67]

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Can you say something about Sniper vs Thieves, how much it contributed in terms of revenues?

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [68]

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What I said before is my expectation financially on Sniper is that we make the money back and we learn something kind of. And currently, it's on that level. Obviously, it's kind of depending how it continues now. But it's not a commercial success. It's a success in number of installs, and people really enjoy playing it. The problem is people are playing for a day or a week and they leave it, yes? But we have a few players. If they stay more than 2 weeks, they start spending a lot. They're quite interesting, yes? Unfortunately, it's not enough players doing that.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [69]

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And The Muscle Hustle that is released now is...

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [70]

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I think you can look in Google Play yourself and -- or Apple App store. I think the reviews has been, so far, really good, yes? People are really enjoying the game. That's why I want to say this. I will update you more next quarter.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [71]

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Okay. Thank you. Any more questions? No?

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [72]

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All right. Thank you very much, everyone. See you next quarter.