Swedish gaming company Embracer Group, which owns the intellectual property catalog and worldwide rights to motion pictures, video games, board games, merchandising, theme parks and stage productions relating to the literary works of The Lord of the Rings trilogy and The Hobbit by J.R.R. Tolkien, posted improved fiscal first-quarter financials Thursday, touting the LOTR business for outperforming its expectations so far.
The company also said its cost-cutting initiatives, unveiled earlier this summer, were progressing on track, with a current focus on a review of its existing product pipeline.
Ahead of a results discussion featuring CEO Lars Wingefors and CFO and deputy CEO Johan Ekström, the company posted a revenue gain of 47 percent for the April-June period over the same quarter of 2022 to 10.45 billion Swedish krona (SEK) ($957 million), with organic growth excluding acquisitions, coming in at 20 percent. The financial update came a year after the company had unveiled the deal for LOTR IP holder Middle-earth Enterprises, along with a slew of other acquisitions.
The organic growth was “driven by solid performance for Dead Island 2 in the PC/console games segment, as well as solid topline development in the tabletop games and Entertainment & Services segments,” the company said.
Embracer’s earnings, as reported in the form of adjusted earnings before interest and taxes (EBIT), hit 421 million SEK ($39 million), a swing from a year-ago loss of 398 million SEK, with the company also touting a “notable improvement” over the previous quarter and adding: “The first-quarter result is also ahead of management expectations for the quarter.”
In the latest quarter, the firm’s Entertainment & Services unit made “a notable contribution, growing by 70 percent organically,” Embracer said, noting “a strong contribution from Middle-earth Enterprises, driven by strong licensing revenue for The Lord of the Rings. The performance of Middle-earth Enterprises is well ahead of the business plan developed at the time of acquisition a year ago.”
Added the company: “It is encouraging to see many exciting external projects based on this incredible IP, including the recently successfully released Magic the Gathering trading card game The Lord of the Rings: Tales of Middle-earth, the upcoming PC/console survival-crafting game The Lord of the Rings: Return to Moria as well as many other exciting new products that will grow the IP further.”
For its fiscal first quarter, though, Embracer also reported a free cash flow loss of 600 million SEK ($55 million), “in line with the plan for the year given the continued imbalance between investments and completed PC/ console game development.” But it predicted “significantly improved free cash flow already in the second quarter.”
After all, in June, Embracer unveiled plans to cut costs, including layoffs and the sale or closure of some gaming studios, as part of a restructuring. It also named Matthew Karch interim COO and Phil Rogers interim chief strategy officer. They will co-lead the planning and implementation of a “comprehensive restructuring program,” the firm said without immediately detailing a figure for the number of layoffs. Its headcount stood at around 17,000 at the time.
Other cost-cutting actions mentioned back in June included closing down or selling some gaming studios, “the termination or pausing of some ongoing game development projects,” as well as “decreased spending on non-development costs, such as overhead and other operating expenses.” The company also unveiled plans to reduce third-party publishing and “put greater focus on internal IP and increase external funding of large-budget games.”
Promising a transformation from a heavy investment mode company to “a highly cash-flow generative business,” Wingefors explained in June: “During the past years, Embracer invested significantly, both in acquisitions and into a strategy of accelerated organic growth. We have acquired some of the world’s leading entertainment IP, and we have invested into one of the largest pipelines of games across the industry.”
Wingefors saidThursday: “We are on track to deliver on the restructuring program announced on June 13, 2023, with a series of initial actions now taken. Even though it’s a challenging time for everyone impacted, I am confident we will emerge a stronger company.”
Embracer didn’t immediately share much detail on these “initial actions,” such as the number of layoffs, beyond saying that they have included a focus on potential operations closures and other steps “to reduce the number of projects and studios,” as well as overhead savings initiatives. During an earnings conference call, management didn’t provide details on studios closures, but signaled it would share such details at a later point where appropriate.
“In addition, we have set a high priority on increasing external funding of certain larger projects and potential divestment opportunities,” the company said Thursday. “With a series of initial actions now taken, we expect further savings after the completion of a global review of the existing pipeline, which is currently ongoing. This review will guide our capital allocation to optimize return on investment.”
On its call, management mentioned it was also rolling out a new “group-wide investment greenlighting process” to optimize capital allocation.
Beyond savings in expenditures and improving capital allocation, the third goal of the restructuring is “efficiency improvements.” On that front, a management slide highlighted that the company had taken key steps “to create a new process for game investment and game development progress review.”
Overall, Embracer said it was tracking toward its targets, including reducing capital expenditures by at least 2.9 billion SEK ($265 million) and overhead costs by at least 800,000 million SEK ($73,000) by fiscal year 2024/2025, as well as lowering net debt below 8 billion SEK ($733 million) by the end of the current financial year.
Wingefors ended his prepared remarks by highlighting that layoffs and other cost cuts are difficult, but needed. Highlighting that the business evaluation so far has shown “a fantastic amount of hidden gems in terms of new business growing and amazing games being built across the group,” the CEO concluded: “It is painful for all of us to have talents leaving the group, but we are doing everything we can to avoid corporate stupidity.”
During an earnings call Q&A, Wingefors declined to comment in detail on a hoped-for major strategic partnership that didn’t materialize earlier in the year. Asked about reports that the planned partner was the Saudi Public Investment Fund’s games and e-sports company Savvy Games Group, he said, “We will not comment.” But he emphasized about the collapsed deal that “now that’s history…we have left this behind us.”
He also signaled that working with business partners continues to be an interesting option for his team. “The idea to partner up with someone to finance and to share business risks [with] both partners being in the same boat I think is still valid,” Wingefors said. “With Embracer being known as a company with such a broad pipeline, including a significant priority of IPs, well-known IPs, I think it’s a very interesting proposal for players.”
