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Edited Transcript of EMBRACb.ST earnings conference call or presentation 14-Nov-18 8:00am GMT

Q3 2018 THQ Nordic AB Earnings Call

Stockholm Jul 9, 2020 (Thomson StreetEvents) -- Edited Transcript of Embracer Group AB earnings conference call or presentation Wednesday, November 14, 2018 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Anton Westbergh

Embracer Group AB (publ) - CEO of Coffee Stain

* Lars Wingefors

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

* Tim Badylak;CEO of Coffee Stain Publishing

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Conference Call Participants

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* Oscar Erixon

Carnegie Investment Bank AB, Research Division - Financial Analyst

* Pierre Mellstrom

Handelsbanken Capital Markets AB, Research Division - Small Cap Analyst

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Presentation

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

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All right. Morning, everyone, and welcome to this Q3 2018 interim report. I'm happy to announce another stable quarter. We had strong growth in sales, up above 1,400% to close to SEK 1.3 billion, driven by the revenues from mainly Koch Media. We also had -- happy to announce that we also made more money. So EBIT was growing 278% to SEK 91 million. During quarter, we had 14 releases in our business area games. We made 3 IP acquisitions and one studio acquisition.

So looking again at the numbers. I have to remind you that we consolidated Koch Media on February 14 this year, and that is the main reason for the increase in the sales. The EBIT in actual percentage is down due to significantly higher earnings -- no, sorry, higher revenues in the Partner Publishing segment within Koch Media. That has a lower margin, but also lower business risk. But I'm happy to say that both THQ Nordic and Koch Media contributed to the EBIT in the quarter.

Looking at the Games business area. It was a stable quarter without any major releases. The THQ Nordic business area grew 47% to SEK 124 million driven by our own releases of Titan Quest on Switch, Red Faction: Guerilla Re-Mars-tered and the sequel, This is the Police 2. And also a good performance on the digital back-catalog sales, mainly driven or partly driven by Wreckfest.

Looking at Deep Silver, it was also a stable quarter with revenues of SEK 252 million driven by a range of titles, but new releases, including the rally game Dakar 18 as well as in the end of the quarter, the publishing product, Pathfinder: Kingmaker, that had a stable performance on Steam. At Deep Silver, we also decided to seize the mobile games development at Fishlabs, and that team are now working only on console and PC games, including the port of Saints Row 3 to Nintendo Switch. Sorry for flipping the slides here, but it's actually not me flipping.

Looking at the KPIs, you can find in the end of the report, we have the share of the Games business area, our own titles, our own IPs represented 50% this quarter. It's up from the 39% in Q2. The digital sales are stable at 52%, the rest is physical. And the new releases, as stated we didn't have any major releases, were only 31% in Q3.

Cash flow. As you noted, it was some changes in the cash flow. And the cash flow from operating activities in the quarter before changes in working capital was SEK 224 million. But change in working capital was SEK 964 million, meaning that we had minus SEK 740 million in cash flow from operating activities after changes in working capital. So this means that we made a decision during the quarter not to use forfaiting at customer receivables at Koch Media that we previously had used in in Q1, Q2 and rather we use the bank debt facilities at Koch Media. So it was a proactive decision. All in all, cash flow for the period was minus SEK 167 million compared to -- well, for a period. I'm happy to answer any questions on the cash flow later on from Oscar.

Some more KPIs, the depreciations and investments. So the IP acquisitions depreciation were SEK 2.8 million. The games development depreciation was down a bit to -- close to SEK 86 million in the quarter. The Partner Publishing and the Film depreciation was SEK 28 million. The goodwill, minus -- or SEK 2 million.

Looking at the investments. We made external game development investments and advances for upcoming releases in the future of SEK 132 million and the internal capitalized development was SEK 102 million for not released products. The IP acquisitions, driven where these 3 announced IP acquisitions, was SEK 21.6 million. Investments in films was down a bit to SEK 17.3 million. And the finalized and completed games development in the quarter was SEK 50 million, meaning the titles where we've invested into that were released during the quarter and then we started the amortization period.

Looking at the balance sheet, just quickly. Our intangibles are up a bit to close to SEK 2.2 billion. The current receivables, mainly then driven by the customer receivables at Koch Media, was up from end of last quarter of SEK 600 million to SEK 1.4 billion. And I have to say that we have a credit insurance policy for all customer receivables in the group. The cash balance is SEK 1.346 billion. That is my notes really from this slide.

The completed ongoing game development projects now ending in the quarter of close of SEK 1.6 billion.

So the release activity. Again, we had 14 releases that is not including the rerelease at retail of Metro Redux we made across Europe in the quarter. So again, Red Faction, our own IP, that we put out on PC, PS4 and Xbox early in the quarter. We had Titan Quest on Switch. Both these games, I have to say, had some glitches and bugs, but we are continually working on them. And we -- I could recently, in the past week, see some great updates on these products. de Blob 2 on Switch, our own IP. Giana Sisters acquired from Black Forest, it's now put out on Switch, published by HandyGames. This is the Police 2, and we published 5 PC titles from Microsoft in the end of the quarter on physical and certain digital channels. We had Bard's Tale at Deep Silver from our friends at inXile or Microsoft in the end of the quarter on PC. We had Broken Sword 5 at Deep Silver on Switch. We have Dakar 18, as I mentioned. And Pathfinder that was a strong release in the end of the quarter, a game made by Owlcat Games in Moscow.

And releases after end of the quarter, we had 6 products releasing up until today. We have theHunter from our friends Avalanche, 2019 edition on physical formats, now across the globe. We have 8 To Glory on physical formats. We have Townsmen on Switch, an own IP is a game made by HandyGames in Germany. The same HandyGames are also made Aces of Luftwaffe. We published Bridge Constructor at Deep Silver. And finally, we brought out, Let's Sing 2019. And I guess we are competing to bring out the last Nintendo Wii regional product globally.

And mobile games, we continue the development. We are now, during the quarter Q4, expecting some major updates on, especially Sniper vs Thieves. Pocket Cowboys we ceased the development, that game didn't have good enough data.

At Partner Publishing, we had a long range of releases from our more than 50 business partners at Koch Media. More than 400 product lines was released during the quarter. Promise, I will not tell you all 400 in this presentation. However, I have noted a few larger releases we had in the quarter, and Q3 most likely was the most strong release list for Partner Publishing this year. We had F1 2018 from Codemasters. We had Shadow of the Tomb Raider from Square Enix, Dragon Quest from Square Enix, along with Shenmue I and II from Sega. This is just a pick of a range of releases during the quarter. And looking forward, we also have strong releases both in Q4 and Q1. In Q4, we will have Football Manager 2019 physical across Europe; RIDE by Milestone; Just Cause 4 from our friends at Square Enix, but developed here in Stockholm at Avalanche; and Persona 3 and 5: Dancing from Atlus.

And acquisitions. We made 3 IP acquisitions. One, we acquired Kingdoms of Amalur, the game Reckoning, the assets and IP from the estate of the developer. We're still not having the publishing rights for it, but we do have the full sequel rights or spin-off rights for the product. And we are working on to -- on this to make this even more successful transaction. We acquired TimeSplitters, well-known IP created in the U.K. and it origins from our team at Free Radical Design that we have in the group, it's now called Dambuster Studios in Nottingham that we own. We acquired Alone in the Dark, a very, very classic IP made by Infogrames in the early '90s. And we made one studio acquisition/publisher, HandyGames. They're both a developer and a publisher for our smaller releases, both on mobile and on PC and console.

In terms of acquisitions, well, we noted we had a few releases after publishing this report. So I'm happy to announce 2 acquisitions today. We will talk more about them very soon. But I think we have been very active the past 6 months since the racing in June to constantly engaging with various games developers and publishers across the world. And that is ongoing discussions I prefer to have direct with co-founders and the management in these companies. And I -- how should I state this? I'm not done yet, but patiently, it needs to be the right team, the right transaction for us and it needs to fit our strategy. And this is the work I'm doing with my team in the parent company, but also Klemens here today are working at Koch media and Deep Silver as long as the management at THQ Nordic in Vienna.

Pipeline. Well, you've seen this slide before. So we have an extensive pipeline. Looking in the immediate future, we have Darksiders III coming up on November 27 at THQ Nordic. I'm -- I like what I see. I think the game will please the fans very well. But stay tuned on November 27. Obviously, Wreckfest, I've always been a big believer in, now coming out next year on console, now being our own IP, along with a long range of more products, especially to point out Metro Exodus that I have to say, I don't like to use strong words, but it looks fantastic coming out in February 2019.

In total, we are having 55 games that we are investing into under development, whereof 35 is not announced that will come over the coming years.

So I would like to welcome our new family members from Skövde, Anton Westbergh, a CEO, company founder.

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Anton Westbergh, Embracer Group AB (publ) - CEO of Coffee Stain [2]

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Hello.

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

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And Tim.

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Tim Badylak;CEO of Coffee Stain Publishing, [4]

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Hello. Is it our right time to talk? All right.

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

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I think, well, you are free to say and introduce yourself Anton and Tim, but I would like to introduce the transaction before you actually going into the deep details of this.

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Anton Westbergh, Embracer Group AB (publ) - CEO of Coffee Stain [6]

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Sure, absolutely. Yes, so my name is Anton. I am the CEO of Coffee Stain. I am also one of the original founders of Coffee Stain. I've been with the company since we started in 2010. And yes, that's pretty much I do, and I do pretty much a lot of things in Coffee Stain. I focus mostly on the business side, and here's Tim.

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Tim Badylak;CEO of Coffee Stain Publishing, [7]

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Yes, I'm the CEO of Coffee Stain Publishing. I've been around for 2 years in -- with Coffee Stain. Previously have some experience in AAA development -- developer. I started as a developer. But yes, I think we can talk more.

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

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You will have the chance to talk a lot more very soon. Sorry to bring you a bit early up on stage, but you can...

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Anton Westbergh, Embracer Group AB (publ) - CEO of Coffee Stain [9]

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Go back?

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

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No, no, no, don't go back, but you can use the table here across the floor. So I'm really happy to have you here. I'm really happy making these transactions. We have been talking...

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Anton Westbergh, Embracer Group AB (publ) - CEO of Coffee Stain [11]

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For quite some time.

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

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You came to Costa last year to have a coffee.

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Anton Westbergh, Embracer Group AB (publ) - CEO of Coffee Stain [13]

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Yes. Wanted to get know you a bit. See who is this guy.

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [14]

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Yes. Exactly. So it's been ongoing discussions. And I really believe this transaction adding a new leg into the group is a very valuable asset. So looking at the highlights. So what is Coffee Stain? It's a strong Nordic developer and publisher with a different profile from THQ Nordic and Deep Silver. More digital, younger, a bit smaller productions, very profitable, very good at creative side and creating new IPs, which is a bit different than THQ Nordic acquiring IPs and building on them. You had a really strong track record, obviously, driven by Goat Simulator and the success of it. And in total, you sold more than 16 million units of games.

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Anton Westbergh, Embracer Group AB (publ) - CEO of Coffee Stain [15]

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Quite a good number.

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

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That is a good number. I've now been knowing you and the sellers are company founders in the group. And I find you all very passionate about the company, about games and that's why I really like to see. And you're making -- I firmly believe you're making this transaction to stay and to grow this business within the wings of THQ Nordic, but with the strong independence.

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Anton Westbergh, Embracer Group AB (publ) - CEO of Coffee Stain [17]

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Yes.

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

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The actual transaction, we are paying upfront consideration of SEK 392 million payable today, SEK 392 million, equivalent of SEK 317 million on a cash and debt-free basis, and that's because you already have a good amount in your balance sheet. And then we agreed an earn-out, and it's 2 parts of it. One, it's linked to operational goals regards to upcoming game releases over the coming 3 years. And that is a maximum of SEK 405 million, and that is paid. We're giving you the shares today. But if you're not delivering, we're having a clawback, but you are confident you will deliver.

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Anton Westbergh, Embracer Group AB (publ) - CEO of Coffee Stain [19]

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Yes.

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

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I would be happy to deliver. And then we have financial goals. And that is that you would make a profit of SEK 520 million before tax, latest, end of 2023, and that is accumulated number.

I should not comment what I believe on that, but we just agree on that number.

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Anton Westbergh, Embracer Group AB (publ) - CEO of Coffee Stain [21]

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Absolutely. It's connected with a very interesting future ahead. So yes, more on that.

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

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I have -- I've given financial forecast today, and this is the first time in my life. And it's only linked to Coffee Stain. And the reason doing that is because I want to explain for the investors, shareholders and the market why we're making this transaction and paying this cash and how much I believe in the business. And the financial forecast is closed only for the financial year 2019 and are giving you a range of net sales target of SEK 200 million to SEK 250 million, with the earnings before tax of SEK 100 million to SEK 150 million just for that year. And then, I believe, looking out from today that you will have a strong growth in sales and profit over the years. As a publisher and developer, it's important to have releases. And obviously, next year, we can see you have a number of releases, but you would also have a number of releases coming past 2019.

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Anton Westbergh, Embracer Group AB (publ) - CEO of Coffee Stain [23]

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Absolutely.

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

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Unfortunately, we can't talk about all the releases today, but I enjoy looking at the products. There is synergies, as always. We know, we understand what you're doing. We will learn a lot from what you're doing, but we do understand. We are in the same segment. You're doing premium games that people pay for. However, they are more digitally distributed, but there is potential synergies to do distribution on certain products. And I'm sure we will find that distribution. I have a good contact here in the room, across the globe. I'm sure we can discuss and evaluate cooperations about marketing, know-how, development and many other things. However, I have to say you will report directly to me and you will have -- remain a strong independence as an own group.

So that is really my overview of the transaction and why we're doing it.

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Anton Westbergh, Embracer Group AB (publ) - CEO of Coffee Stain [25]

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Yes.

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

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And now welcome, Anton.

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Anton Westbergh, Embracer Group AB (publ) - CEO of Coffee Stain [27]

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Thank you very much. So now we've had a lot of numbers here, which is obviously fun, but we tend to focus more maybe on the creative side on the games, which I think is more fun. So let's talk a little bit about Coffee Stain. I'm going to go through the first slides pretty quickly. This is just to give you an overview of the company as right now. We are a group of companies. We have our main studio called Coffee Stain Studios in Skövde, which is run by Johannes Aspeby; and then we have our Stockholm office run by Sebastian Eriksson. We have Coffee Stain Publishing, which is headed by Tim over here. He's going to talk a little bit later. And then also we have a small new studio in Gothenburg, called Lavapotion, which is run by Magnus Alm.

And this slide will give you a little bit -- an image of showing how our company has developed. I mean we've been around for 8 years. And the first years, we were a very small team. We were focusing heavily -- on just focusing on one game at a time and stuff. And then in 2014, you could say that things started to change with the launch of Goat Simulator, which has been a really, really big success worldwide, and it's continuously doing very well even at this date, which is pretty amazing for a game that we maybe thought was just a joke that would die out quickly. But yes, so as you can see here, a lot of things has happened in the latest years, and this is kind of the direction we're going right now. We're doing more business. We're doing more investments in various -- all the companies that we have invested in and also the publishing side that we see that will be a bigger part of us as a group in the future.

So let's go back a little bit and talk about where it all started. I think most of you maybe know Coffee Stain for Goat Simulator, but maybe you don't know that we actually started in a small town called Skövde 8 years ago. We were 9 friends in the university there and we came straight out of school. We went into the incubator and brought our own furniture, our own computers and it was very like start-up style. We -- I mean self-funded. We've never had any investors really. And like we were pretty, you could say, cocky. We were really sure that we would managed to do this in a pretty harsh and tough business. But there were a lot of like factors. I mean we have always -- we still have -- we have a great team, and we had that when we started and like some good timing with how the digital distribution kind of started to move with Steam growing so much in those days. We were pretty successful with Sanctum, which was the first game that we launched on Steam.

Let's see here. Yes. Yes. So right now, I mean, we're -- we do focus on a couple of different projects right now, which you see them here down here, which are Goat Simulator really now. The one that we -- on the furthest right here called Satisfactory is the -- our current biggest project that we've been working on for roughly 2 years in our main studio and a little bit more on that. So I'm going to just give you a little brief overview of the previous games that we've launched as well. So Sanctum was launched in 2011, and it was actually kind of the first game that we self-published. Maybe you saw this little game here called, I Love Strawberries, which was actually our first game, and it's a mobile game. And in the incubator, we were told by everyone that we needed to have a publisher. So obviously, we got the publisher. It was actually Atari, which probably a lot of people know here. Sadly, that didn't turn out too well. The game did -- it did okay. We got like advanced payment and that was pretty much it. And I think that kind of led us to realize that, hey, we can do this on our own. So let's try self-publishing. So that's what happened with Sanctum. I think we were a bit lucky there with the first game and like those learnings were very, very important for us. Sanctum was very successful. As you can see here, I mean, Sanctum has done great. The first game launched in 2011, and I think we had something like 500,000 copies. And that's a group of students pretty much at that time. That was like crazy to get a success like that. And it kind of allowed us to keep building the company, keep running on our own, building Sanctum 2, which was launched in 2013, and also really successful. So it's a very beloved IP, I would say, with a big audience. We have had over 2 million people buying the game on Steam and, yes, very positive reviews.

So -- but this is the thing that really, really accelerated things for us. In 2014, we made this game jam in the studio and on 1st of April, we launched Goat Simulator, and it was an instant success. We were the top grossing game for a week or so on Steam, which is pretty impressive of all titles. And it's -- I mean it's been pretty crazy, like pretty much every platform we put it on, it's been extremely successful. And we've kept on like developing spin-offs and doing lots of various variations of this game for -- I mean for a very long time. And that's made -- that's the reason why it's been for us as a company, we've been like really been able to make a lot of out of that.

And we are a very creative-driven team. For us, it's very important to create new IP, as Lars has mentioned already. I think that's our biggest strength. We always want to innovate and do new things. So for the last 2 years, we've been working on a new game called Satisfactory, which is currently in a pre alpha -- closed alpha state, where we have testers in the game, but it's not like a public alpha or anything. And this is a really exciting project for us because it kind of aligns a lot of the things that we believe strongly, and you have -- we like to have community-driven kind of where we can develop together with the community and like get that kind of nice feedback loop and here, we have a really strong incentive going. So we are pretty excited about how this will turn out.

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

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Don’t be too excited.

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Anton Westbergh, Embracer Group AB (publ) - CEO of Coffee Stain [29]

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No, I'm not going to be too excited.

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

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Because the analysts will.

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Anton Westbergh, Embracer Group AB (publ) - CEO of Coffee Stain [31]

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But yes. I mentioned briefly that we have also the other studios. So this is a little bit -- a little fact about those. Coffee Stain North is actually here in Stockholm. And it started in 2013. We actually was part of our publishing with our first game called A Story About My Uncle that we published that we didn't develop ourselves. They developed. At that time, they were called Gone North Games. And we've been working with them ever since. And that's kind of great collaboration. And with them also helping out a lot on the Goat Simulator games for us. We decided to acquire 60% of their company. So they're part of our group now, and that's a really nice team and great to have on board.

And then on the right, you have Lavapotion, which is our -- it's a small team, created by some really also passionate people that the project that they're working on is still secret, but we say it's a turn-based strategy game. That's pretty much it we get to know for now. And we -- it's kind of resolved around us finding the right people. We kind of shared similar values, had even thought about same ideas when we met these people and then -- so things kind of just clicked, and that was turned into our little -- yes.

All right. I'm going to head out. Over to Tim now and let him talk a little bit about the publishing, which is the very exciting part of Coffee Stain that -- but I'll hand over to Tim.

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Tim Badylak;CEO of Coffee Stain Publishing, [32]

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Thank you. So yes, I'm going to reiterate what Lars and Anton has been saying. Can you hear me? No? Here we go. Perfect. So the publishing group or the publishing team is still -- the company is quite young. We've been around for 2 years. It kind of started as Anton said activity and kind of grew more and more ambitious over time and then we decided to get some help. So currently, we are 5 people with quite nice range of experience. We have Daniel from Mojang being the first hire, I believe, and Albert from King has been working on Candy Crush on multiple titles and Sebastian on the gaming computer that's been helping a lot of companies like Coffee Stain start-up and then, of course, Anton being quite hands-on in this. Me myself from AAA like I said before. We came -- we wanted to be the publisher that Coffee Stain wanted back in the days. So -- but a bit more refined of what we do is that we think that small teams can make quite like remarkable games these days. We think that if they do it right they can stand out from both indie and AAA if they are similar to us and share our values, I think.

So we want to find teams that focus on -- like a focused experience. They were creating a focused experience. They own their own creative vision, and they want to create something, and they're really passionate about it and heavily incentivized as well to make something great. That is kind of why we like to go in as a minority shareholder in new companies. Yes, our portfolio strategy is quite vague. We're not painting ourselves into a corner that we need to work on a specific game. The different -- we have different genres, different platforms that's been working out for us. But what you could say is that we tend to like to create new IPs; have gameplay as a focus; community driven, as we mentioned before; and usually a lot of co-op and multiplayer in there. We like to play together when we build stuff.

Moving forward, we're going to likely expand a little bit to be able to do more because we have -- see a lot of opportunities. Yes, the climate today is like you have this great tech available for everyone like Unreal and Unity. You have a bunch of students coming out of school. You have a bunch of veterans that have been working 10, 15 years that want to create like their baby. So we want to help all of those people out there. I think that we're going to be a small, well-synced team to create something great.

Cool. Next. So Ghost Ship Games is one of those great examples. We met them at DreamHack. Kind of clicked straight away when we heard them talking about their game. These were veterans. They've been working together on other companies and had different experience. They showed us their first game, Deep Rock Galactic, which we kind of signed straight away. Yes, and kind of invested in their company straightaway, yes. Yes. And that's been going pretty good. We had an early access launch this February this year with more than 400,000 sold copies. Really strong reviews. And for an early access title, maybe more important, we have like regular updates, meaningful updates each month that kind of keeps the community going. So there's -- we have some indication that people will love the full release. I think that's it. And like I mentioned before, we have a couple of games that we want to release in 2019, and then we have more games.

So in summary, I think that Coffee Stain has never made more games than this. Like this is our peak right now. We -- more internally and externally, and we think we really got something interesting going.

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

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I'm really happy to have you on board. I see you not only as great games makers because you definitely are, but also seen and especially now, I experienced it, that you're actually very good businessmen, negotiating. So if you use that also to all externals, it will be fantastic.

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Anton Westbergh, Embracer Group AB (publ) - CEO of Coffee Stain [34]

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I don't know if we touched on that, but -- on the negotiate side as well, it's kind of a thing that we think is interesting from the publishing aspect is to do this kind of investment as part of the publishing strategy, which is not very common, I would say, and that's something that we might look into doing in the future as well because we -- when we go into publish a game, we're really hands-on, and we want to add all the focus that we can do. So we are -- I think we're probably more hands-on than most publishers. And then we also see that the partnership has to be really, really good. So the investment makes sense in that way. So we have to identify these teams that are really good, where we believe there's a chemistry and then we do like this very tight partnerships. And that's...

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

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I think it's a very interesting business model and opportunity. And THQ Nordic had a strategy of not acquire minority investments. Now having you on board, I'm fully supporting your strategy. I really believe it's right. And if you find a good, great team that has a very successful product, obviously, you would like to continue working with them and help them over the coming years. And that would be easier if you are in the same boat.

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Anton Westbergh, Embracer Group AB (publ) - CEO of Coffee Stain [36]

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Absolutely.

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

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Rowing.

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Anton Westbergh, Embracer Group AB (publ) - CEO of Coffee Stain [38]

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Well said.

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

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Yes. So well, yes, this is my last slide here. A bit more boring.

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Anton Westbergh, Embracer Group AB (publ) - CEO of Coffee Stain [40]

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All right. Thank you.

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Tim Badylak;CEO of Coffee Stain Publishing, [41]

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Thank you, everyone.

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [42]

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Thank you, Anton. Thank you, Tim. So Coffee Stain with THQ Nordic post the deal. As stated, they will execute their business plan. There is no cost cutting, rather investments planned. It will operate as a separate entity under the parent company, so it's a third leg. And Anton will report directly to me. And first consolidated reporting will be in next quarterly report, February 13, and the revenue recognition will be from closing that are scheduled for today.

So that is the presentation of Coffee Stain. We have one more to go. Unfortunately, we don't have our friends from Finland here.

So after announcing Coffee Stain at 6:30, we actually signed 6:29 -- 6:28. We signed another deal in Helsinki. I had help from one of my management team to actually sign that close to 7:00 and announcing it and it's Bugbear Entertainment. So Bugbear is some crazy racing fans. They really are into racing games, and they've been making racing games for more than 20 years. And Janne, the CEO and company founder, is genius creating some amazing experiences that they have proven by the release of Wreckfest. They have their own engine that -- he's been able to make some amazing physics that is very important for these games.

So the highlights, not only Wreckfest in the past, they made another series called FlatOut that had a number of releases. That sold more than 3 million units. We acquired this morning 90% of the shares, and we have an option to acquire the remaining. The minority shareholder was Janne, the company founder included in the transaction were all the IP rights, including Wreckfest and Stuntfest, but not including FlatOut, that is owned by third party.

So Wreckfest was released right under E3 at June 14. We hoped that we were able to bring it out in Q4. Unfortunately, we had to delay the release until next year. We really want to make sure it's an amazing experience on console. It's a multiplayer. It's a bit complex technically to bring it all together, but we're sure it will deliver when it's released. And it also had positive reviews on both from consumers on Steam and from journalists at Metacritic. And we will continue working on Wreckfest as a product in the foreseeable future.

Looking at the history of Bugbear, the first game they made was a game called Rally Trophy, published by a company called JoWood, and JoWood is owned by THQ Nordic now because that was the foundation of THQ Nordic. So now we have the IP and the rights back in the family. I'm not saying we're making a rally game, but it's nice to have it in-house again. And obviously, FlatOut was the big breakthrough. It's a very similar game to Wreckfest, I would say. And then they've been working with work-for-hire products such as Sega Rally and Ridge Racer. And then they founded Wreckfest on early access, and then we came along 2 years later to help them to bring it over the finishing line. They also made a small product called Stuntfest that we are expecting to be released in the future.

I have to say, it's an 18-man efficient team. We could see the potential to further in the future scale that up just a little bit, hopefully, together with Janne and his team. And Helsinki and Finland is an amazing environment for creating games and games development. So I'm sure with the support of the group and financial backing and publishing support and marketing, I'm confident we will be able to bring more talent on board at Bugbear. We didn't disclose the purchase price this morning. But what I disclosed was the purchase price was matching the management expectations of the royalty we were expecting to pay for publishing Wreckfest over the coming -- or their products over the coming 3 years.

So Bugbear. Thank you and Oscar, I don't know if you have any questions for me today.

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Questions and Answers

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Oscar Erixon, Carnegie Investment Bank AB, Research Division - Financial Analyst [1]

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I have a few questions, definitely. All right. So if we start from the beginning a bit, just the Q3 report a little bit, and then we'll come to more about the acquisitions as well. But first of all, a strong quarter both in terms of volumes, obviously, but also EBIT. So if you compare Q3 to Q2, what are the main differences? Obviously, much higher volumes in Partner Publishing. Is that the main difference?

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

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Yes, I would say that is the main driver of -- that's one of the main drivers of the increase in revenues, obviously, but also EBIT contribution. And as I stated in absolute numbers, that's my target to increase the actual profit you're making, and we increased it. This quarter, it was driven by Partner Publishing. So it will varies over the quarters what is driving, but the diversification of the business is paying off. The margin of Partner Publishing in the quarter, as I stated, was a bit probably lower in the past, but we took some lower business risk. And the margin is always balanced to the business risk you're taking on especially physical stock.

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Oscar Erixon, Carnegie Investment Bank AB, Research Division - Financial Analyst [3]

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Yes. And I mean, you mentioned some quite large games there at the beginning with the Tomb Raider and so on. Were there any projects where you actually took more risk or was it really more of a service business in this quarter specifically?

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

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We're always taking, I wouldn't say -- we're having a pellet or a smorgasbord of services we're providing to our partners. I can't really comment on the partners, but -- so that is really my statement on this.

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Oscar Erixon, Carnegie Investment Bank AB, Research Division - Financial Analyst [5]

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Okay. And just going through the other business areas as well quickly. THQ Nordic, slightly lower sales in Q3, but I think you had a quite successful publisher weekend, but not very many releases. Is that fair?

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

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No. That's -- it's a fair statement. Definitely, we didn't have any major releases. It was 3 asset care and one sequel. I'm proud to work with Microsoft, but those titles doesn't bring in significant revenue. So it's a stable quarter. And I think the whole team has been working very, very hard on various straight shows, such as games common packs, but working on to bring out the upcoming releases of Darksiders, especially now and the releases for next year.

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Oscar Erixon, Carnegie Investment Bank AB, Research Division - Financial Analyst [7]

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And going to Darksiders, closing in on the release now just in 2 weeks, is there anything new, any new sort of data points, preorders, more expectations?

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

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No. I think as I told you at the last quarter report, we announced the price and the SKUs in July and we saw some strong preordering, especially on collectors additions. We're bringing out this huge $400 box. So I think now the marketing support are now being intensified, and you'll see more activities up until the release and at release and post release. Obviously, releasing a game in Q4 is always a challenge because there is a lot of other titles and there is a lot of other products that want to be communicated in media. So you need to spend your money wise to get the payoff. So I think they have a great plan. And I don't want to promise anything. In the end of the day, it's consumers deciding and so let's see November 27.

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Oscar Erixon, Carnegie Investment Bank AB, Research Division - Financial Analyst [9]

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Yes. And what do you expect in terms of reviews and stuff, which is an important factor, I think, for longevity of sales?

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

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Yes. Well, I can't. Again, it's up to the journalists and the consumers to decide how -- what I hear and see, please the fans. But I guess, fans are different. I'm sure there will be fans not enjoying it. And hopefully, it will be a lot of fans, more fans really enjoying it. I think they've been creating -- it's the same team that made the previous 2 games. Obviously, they're delivering on that environment, and so let's see on November 27, yes?

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Oscar Erixon, Carnegie Investment Bank AB, Research Division - Financial Analyst [11]

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Yes. And switching over to Deep Silver quickly. You obviously have a big, big release coming up in February and you have less competition now than last we spoke I believe days gone has been delayed. How big of an impact can that have, do you think or is it not really competing?

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

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Well, I don't want to comment on that game specifically. But obviously, you will preferably be alone on the release date. However, I firmly believe that game looks fantastic and we can see some good momentum from fans. So I'm confident that we -- whatever date we pick in a year it would sell.

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Oscar Erixon, Carnegie Investment Bank AB, Research Division - Financial Analyst [13]

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And Kingdom Come, I suppose, is given the sales in Deep Silver is performing strongly?

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [14]

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Yes, Kingdom Come was a big -- not a big surprise, but it was very valuable contribution at Koch Media when we made the acquisition, and they continue to deliver updates to the game. I think fans are pleased in general with updates, and it continues to sell well on especially digital formats but also as a physical product. So they're bringing out DLCs regularly.

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Oscar Erixon, Carnegie Investment Bank AB, Research Division - Financial Analyst [15]

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Yes. And do we have any questions from the floor, perhaps before I start on acquisitions?

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Unidentified Analyst, [16]

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Lars, there's 2 announced DLCs for Darksiders. Is there any information about the time line or any stuff like that?

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

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Nothing else than that's been communicated on the -- from the publishers. So I don't want to communicate new release dates for anything. So sorry, I don't have any new information there.

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Unidentified Analyst, [18]

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Yes. And as I understand, I will hop to the Coffee Stain acquisition. They will continue with these types of minority investments that they have done mostly the last 2 years. Is that correct?

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

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Yes, minority or majority, it's -- they are taking positions that is not 100%, and that is the difference. And they will continue doing that. It's a strong business model that works for them. So I'm -- and I believe in it. I've been turning down over a number of years so many offers to invest into developers because we have our strategy of not doing it and now we could -- doing this within Coffee Stain.

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Unidentified Analyst, [20]

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So you can say it's opening up a possibility for more?

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

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I don't want to take it into the other groups yet, but let's see what -- how it works within Coffee Stain.

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Unidentified Analyst, [22]

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But you obviously have a lot of deal flow coming in at THQ Nordic directly?

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

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Yes, I believe, yes.

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Oscar Erixon, Carnegie Investment Bank AB, Research Division - Financial Analyst [24]

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Okay. And you mentioned some synergies also with Coffee Stain. The guys were there. So digital distribution is almost 100% now? Or how should we...

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

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At Coffee Stain?

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Oscar Erixon, Carnegie Investment Bank AB, Research Division - Financial Analyst [26]

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Yes.

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

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Well, they have been physically publishing a few products through a great company called Koch Media in the past. So they helped them bring out Goat Simulator on various channels across Europe, and I'm sure they will work where it's relevant. But their bookings is either basically all digital sales and royalty report from Koch Media.

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Oscar Erixon, Carnegie Investment Bank AB, Research Division - Financial Analyst [28]

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Perhaps this question should be asked to Anton and Tim, but just wondering about the number of titles that you released, seem to be quite a lot...

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

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Welcome up to on stage again, Anton and Tim.

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Anton Westbergh, Embracer Group AB (publ) - CEO of Coffee Stain [30]

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Sorry, the number of games?

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Oscar Erixon, Carnegie Investment Bank AB, Research Division - Financial Analyst [31]

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Yes.

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Anton Westbergh, Embracer Group AB (publ) - CEO of Coffee Stain [32]

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So -- yes, I mean, like we have more than -- I mean it's been a growing pipeline for us and like the ambition is to kind of try to scale up slowly but steadily. I mean we are really, really careful about growing because we think that kind of the creative aspect of things has to take priority and like finding the right teams and not doing rash decisions. So we're going to kind of -- as we find more things, we'll kind of add more stuff to the pipeline, and we'll see.

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

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It's a great answer Anton.

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Oscar Erixon, Carnegie Investment Bank AB, Research Division - Financial Analyst [34]

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And must ask which title are you most excited about the upcoming ones?

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Anton Westbergh, Embracer Group AB (publ) - CEO of Coffee Stain [35]

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That's very hard. We're obviously excited about all the titles.

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Oscar Erixon, Carnegie Investment Bank AB, Research Division - Financial Analyst [36]

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Okay. Fair enough. Good answer, right Lars?

All right.

And just quickly then on Bugbear, obviously, Wreckfest performing better and better on Steam, you can say?

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

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Well better and better, but it has a solid performance on a daily basis. And you can see when you do promotions, it definitely increases sales. And I think when we're bringing out more content, also for PC, it will further engage new players and the community again and bringing that content as well on console. So I'm confident about the product.

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Oscar Erixon, Carnegie Investment Bank AB, Research Division - Financial Analyst [38]

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Okay. And how did the decision to do the acquisition come up? Because, obviously, you helped them quite a lot improve the game, but you saw good potential there.

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

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Yes. It's been an ongoing kind of discussion, thinking about doing this. And obviously, the price increased a bit since June. So -- but the risk is lower. So you have to offset that risk with the price. So I think now, Janne and his team they know us very well. They know what they will get. They know that we are keeping our words to support them and to invest into them, and they will have a stability and ability also to recruit new employees because they had some difficult times in the past.

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Oscar Erixon, Carnegie Investment Bank AB, Research Division - Financial Analyst [40]

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Yes. And I have to ask also about the overall pipeline going into 2019 and beyond that. Is there anything new to add regarding perhaps Shenmue or Dead Island? And I've noticed that Shenmue I and II has sold really, really well, surprisingly well, I suppose, to relaunch.

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

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Well, Shenmue is a fantastic product. Again, I remember selling the original and actually distributing it in Sweden back in the days when releasing on Dreamcast. I'm confident about Shenmue as an IP and what the team has shown the fans looks very promising. And they also announced it's coming next year, but rather referring to our website about specific release dates.

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Oscar Erixon, Carnegie Investment Bank AB, Research Division - Financial Analyst [42]

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Okay. Do we have any last questions from the floor, perhaps?

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Unidentified Analyst, [43]

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Lars, congrats on a great report. I'm just wondering, regarding the EBIT margin of 7%. Can you comment a bit more about Koch Media in specific? I mean THQ as a stand-alone company had EBIT margins of around 30%, 40% and you said that both companies contributed.

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [44]

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Yes, I understand. We decided not to disclose specific EBIT margins at each division and business area for many reasons. And then -- but obviously, Koch Media are working with a lower -- much lower EBIT margin and now very much driven by the Partner Publishing segment. And you're right, THQ Nordic has a higher EBIT -- reported a higher EBIT margin in the past. And -- but this is not the key KPI for me. The key KPI to continue growing the -- how much money you're making in absolute numbers.

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Unidentified Analyst, [45]

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Okay. And a follow-up on the release schedule for Metro Exodus, 22nd of February. It seems that it's -- some other big games coming up that date as well. How do you see the release window there?

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [46]

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I think -- as I told you before, I think Metro stands on its own feet. It has a strong fan base community on the existing games. I'm confident it will sell whatever date we bring it out. So that is what I could really comment. I don't want to comment on our other peers and colleagues products really.

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Oscar Erixon, Carnegie Investment Bank AB, Research Division - Financial Analyst [47]

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Okay. And I think we have some more questions from the telephone.

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Operator [48]

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(Operator Instructions) Our first question comes from the line of Pierre Mellstrom of Handelsbanken.

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Pierre Mellstrom, Handelsbanken Capital Markets AB, Research Division - Small Cap Analyst [49]

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Lars, Pierre here. I have another question on Darksiders III. You guys talked about 2 DLCs. Are they to be released in the fourth quarter or are they more for 2019?

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

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Unfortunately, that is not communicated fully yet. So you need to stay patient and wait to see that announcement of this DLCs.

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Pierre Mellstrom, Handelsbanken Capital Markets AB, Research Division - Small Cap Analyst [51]

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All right. And speaking of waiting and seeing how long, maybe it's also too early to say, but how long do you think before you can see something on like Kingdoms of Amalur IP?

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

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I really like that IP. So I could just promise you that we're working quite hard on to make something in the future. But it would most likely take -- you need to take a very long perspective on this. So don't expect anything on the short-term basis in regards to Kingdom of Amalur.

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Pierre Mellstrom, Handelsbanken Capital Markets AB, Research Division - Small Cap Analyst [53]

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Okay. And apologies if anything I ask because it seems like I disconnected a while, so I might have missed something. I was also wondering about the sort of the Tomb Raider sales seemed a bit weakish at least in the U.K., just the numbers that I saw. Would you say that technical distribution is sort of shrinking faster than you expected? Or was this more game specific that you mentioned?

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

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Koch Media are delivering a very stable business. And according to the business plan, we got when we acquired them. And there is no signs in the Q3 that is different. We know physical is a challenging market. But we also know that Koch Media is a consolidator in that market. One of the few that are really delivering a lot of value to business partners and retailers across Europe.

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Pierre Mellstrom, Handelsbanken Capital Markets AB, Research Division - Small Cap Analyst [55]

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And is that sort of something we can expect enough since on the coming year sort of or...

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Lars Wingefors, Embracer Group AB (publ) - Founder, CEO & Director [56]

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Update on...

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Pierre Mellstrom, Handelsbanken Capital Markets AB, Research Division - Small Cap Analyst [57]

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On the consolidation part?

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

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Yes. It's a topic on the agenda to help more partners in the future to bring out their products. But obviously, it's a negotiation and discussion, and we need to make sure that we can take care of our current partner fully before bringing on new ones. So I'm confident that Klemens and his management team will manage this business very well. This is his home territory since 20 -- more than 20 years.

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Pierre Mellstrom, Handelsbanken Capital Markets AB, Research Division - Small Cap Analyst [59]

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Okay. And then on Coffee Stain. The accumulated number that's starting from today or...

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

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Yes.

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Pierre Mellstrom, Handelsbanken Capital Markets AB, Research Division - Small Cap Analyst [61]

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For the earn-out, I mean.

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

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Yes. That's correct.

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Pierre Mellstrom, Handelsbanken Capital Markets AB, Research Division - Small Cap Analyst [63]

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Okay. And the Coffee Stain how long do you guys expect the Satisfactory game to be in early access?

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

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Sorry, how long?

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Pierre Mellstrom, Handelsbanken Capital Markets AB, Research Division - Small Cap Analyst [65]

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Yes. Like on the how long period, I realize that's hard, but just a gut feeling sort of asked.

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

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Well, the -- I can't comment on that on Satisfactory, but normally on early access you make decisions along the way according to the feedback from fans. And so to be honest, I don't think they know that yet. They will make the decisions with their fans along the way. But as a note...

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Oscar Erixon, Carnegie Investment Bank AB, Research Division - Financial Analyst [67]

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Okay. Then perhaps just a final question for me, then you're off the hook. Just Q4 and 2019, when looking from Q3, which was quite strong. What can we expect in Q4, first of all and then...

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

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A lot of great games and a strong release pipeline.

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Oscar Erixon, Carnegie Investment Bank AB, Research Division - Financial Analyst [69]

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But I suppose the results are going to be driven a lot by Darksiders III. Is there anything on that?

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

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Yes. Darksiders III will be a driver in our owned games segment in Q4. But we have a long range of releases, both in Q4 and Q1 in all business segments. So as I stated, Q3 most likely was the strongest release list for the year at Partner Publishing. But we have more releases in our own games segments in Q4 and Q1. So diversification and quarters balance out.

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Oscar Erixon, Carnegie Investment Bank AB, Research Division - Financial Analyst [71]

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Perfect. I think we'll end on that note. Thank you.

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

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Thank you.