Embracer showed yet another stable quarter. The net sales were almost spot-on our projections while the Operational EBIT came in 19% higher. That the company showed a decline in net sales compared to last year was entirely in the cards; as during Q4’FY19, Embracer had a couple of major releases. The main reason we saw a better margin than we had expected was far lower SG&A, probably a COVID19 and release schedule effect with fewer gaming conferences, events, and marketing. Cash flow from operations during the period was solid and amounted to SEK 765.7m, fueled by both the high operating profit but also reduced working capital.
The sales within the Games area exceeded our expectations, fueled by a higher new release revenue. The most significant contributors to new release revenue were Darksiders Genesis, Metro DLC, Metro Redux, Hunt: Showdown, and a couple of smaller titles.
The backlog sales were in line with our projections and saw a stable development during the period. Key franchises like Metro Exodus (release on steam), Kingdom Come: Deliverance, Wreckfest, Milestone games, and release of Saints Row titles all had a healthy contribution. Update III of Satisfactory (Coffee Stain) was well received, and the business unit had its strongest quarter ever. We believe both backlog and release sales were impart fueled by the COVID-19 effect with increased demand for home entertainment.
Some key releases during the next quarter include:
The number of new releases during Q1 is substantial, and given the healthy market conditions and appetite for new gaming content, we are likely in for a strong quarter.
Amplifier constitutes there work with establishing new studios, and conduct smaller game investment. During the quarter, the unit set up a new game studio in Gothenburg called RiverEnd Games lead by industry veterans. They also increased their stake in Misc Games to 55% from 45% and acquired a small indie studio in Italy named DESTINYbit.
The business unit had net sales of about 9% below our projections. This is the segment within the Group that has been affected the most by COVID-19 in a negative way. Physical store sales have gone down dramatically, but most consumers then shifted to e-tailers instead. Partner Publishing’s logistic hubs have remained operational. Looking ahead, there are no significant releases during Q1. However, there are multiple smaller ones. We are likely in for an ok quarter in terms of business volumes.
We find that possibly the most interesting info in the report was related to the pipeline in the coming years. We have previously expected to see two AAA games come to market during FY’21 (this financial year), now the company indicates that the first AAA release after Metro will take place in FY22. In isolation, that would mean less new release income then we previously expected. However, at the same time, the management states that the value of completed games (reported as finalized development during the quarter) will more than double from SEK 589m during FY’20 to SEK 1200-1400m in FY21. We regard a AAA game a title with a development budget above USD 30m. The pipeline during FY’21 will be filled with a sizeable amount of midsized games rather than a few big ones. In a way, this reduces the title risk with more income streams but also reduces the blockbuster potential to some degree. All in all, we will likely trim our full-year estimates lightly, but not to any significant extent.
At the end of the quarter, the company had cash and unutilized credit facilities of approximately SEK 5bn. In addition to this, the company raised SEK 1.6bn after the close of the quarter through a directed share issue. Embracer has always intentionally decided not to leverage its operation and take on debt to finance an acquisition. But as the current pipeline now will unfold in the coming years, the management expects to see a notable improvement in free cash flow that view has changed somewhat. The company states that the ambition is still to keep a net cash position, but for the right inorganic (M&A) opportunities, they might consider temporary financial leverage.
No new M&A deal announced. We know that the market almost craves new deals from Embracer. However, we feel confident that management will not stress making acquisitions just because the market wants them to. Embracer’s success thus far is only to make great deals, and we believe they will continue on that road. The company continues to state that they are in multiple discussions with interesting targets that might form a new operating unit. The management also means that the current COVID-19 environment has not effected the deal-flow, but that they rather have seen it increase since the Saber acquisition. We believe the now stated possible intention of using leverage for M&A could imply an even larger deal then Saber Interactive in the making, time will tell.
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