Embracer Group AB (publ)

Reported Q2 net sales were SEK 8.5 billion, down year over year, and adjusted EBIT was SEK 1.2 billion. Free cash flow was minus SEK 473 million in the quarter, or about minus SEK 500 million as discussed, and trailing 12-month free cash flow was SEK 1.2 billion. Asmodee reported SEK 3.8 billion in net sales, down 6% reported and down 12% organic/pro forma at constant currency, with an adjusted EBIT margin that improved by 2 percentage points year over year. PC/Console had minus 33% organic growth and an 8% adjusted EBIT margin, while Entertainment & Services had minus 9% organic growth and a 2% adjusted EBIT margin; Mobile generated SEK 1.3 billion of revenue with a 28% adjusted EBIT margin. Looking ahead, management said Q3 PC/Console will contribute little or no EBIT, second-half earnings should be lower year over year mainly because of delays, and Kingdom Come: Deliverance II is still expected on 11 February. The Easybrain sale is for USD 1.2 billion, or SEK 12.9 billion, cash and debt free, with expected net proceeds of SEK 12.7 billion.

Lars Wingefors framed the quarter as a transition period: the big year-ago releases are rolling off, some smaller games underperformed, and release delays are pressuring margins. At the same time, he sounded confident about the pipeline, said the most important release, Kingdom Come: Deliverance II, is not delayed, and emphasized that the Easybrain sale materially improves strategic and financial flexibility. He also said the company will evaluate capital returns and potential investments with the Board, while stopping short of any aggressive acquisition posture.

Müge Bouillon said the SEK 2.3 billion year-over-year drop in net sales was mainly driven by fewer new releases and the impact of divestments, especially Saber and Gearbox. She noted that Remnant II and Payday 3 contributed SEK 1.4 billion of net sales last year versus SEK 0.3 billion from this year’s new releases, and that gross margin percentage deteriorated because of the mix. Operating expenses fell by SEK 0.6 billion to SEK 2.1 billion, or 24% of sales, while adjusted EBIT margin was 14%, down 3 points. She also highlighted free cash flow of minus SEK 473 million, capex down SEK 1 billion year over year, net debt of SEK 13.2 billion at end-September, and available funds of SEK 8.2 billion.

Analysts focused on the weak PC/Console margin, asking whether the cost base is still too high and how much is due to amortization versus delayed releases. Management said the quarter was hurt by the lack of new releases and underperforming titles, but also by amortization from the past two years’ releases; for Q3, they described PC/Console EBIT contribution as little or none and said delays are causing cost overruns. Questions on cash flow and Asmodee seasonality were met with the explanation that Q2 is usually a working-capital build quarter and that the second half should generate more cash. On the Easybrain sale, management said it was a mutual process that started in late summer, closed at an attractive price, and will leave the group near net cash, with no change to the planned spin-offs.