Embracer reported revenue of SEK12,050m and adjusted EBIT of SEK2,150m in Q4 2023 which was in line with our forecasts of SEK12,267m and SEK2,162m respectively. Coming to the performance per segment, PC/Console was weaker than expected with both lower topline and lower EBIT-margin. Tabletop was also somewhat lower than expected while Mobile and EES was stronger than expected. Net investments came in at SEK1,688m and the company comments that it makes good progress towards its capex target of SEK5bn for 2024/25E (the annualized run-rate in Q3 was 6.4bn).

Commenting on the outlook, the company reiterates its SEK7-9bn EBIT forecast but expects to be in the lower end. The company states that the update is driven by a somewhat softer outlook for PC/Console owing to soft performance of new releases and shifts in the pipeline.

While cash flow improved with an operating cash flow of SEK2,477m and net investments of SEK1,668m, net debt increased to SEK16,127m (in Q2 2023/24 net debt stood at SEK14,624m) due to payments of deferred considerations. The company also updated on its net debt target where does not expect to meet the target of SEK8bn by end of 2023/24. However, the company further comments that potential divestments could significantly reduce net debt after end of 2023/24 while adding that its net debt target of 1x NTM adjusted EBIT remains unchanged.

The key focus for Embracer is to improve the performance for its traditional core business in PC/Console. The segment has seen weaker-than-expected performance with declining ROI and an imbalance between game investments and cash flow generation. The ongoing restructuring program aims to improve this by cost optimizations and reduced investments together with increased scrutiny of game project evaluations as well as close-down of projects with weak projected ROI. While the ongoing restructuring yielded limited visible impact in the PC/Console segment in Q3 2023/24, this was also partly due to few new releases in the quarter. Looking into Q4 2023/24E and the next few years, we expect the balance between investment and completed games to improve. Furthermore, the restructuring program which will be finalized by March 2024, should soon see more visible impact on the segments profitability.

On the back of improving performance from the PC/Console segment, we also forecast improving cash flow for Embracer. The company has also made solid progress on its capex reduction program, where the annualized run rate in Q3 2023/24 was SEK6.4bn compared to SEK7.9bn when the program started. The target is to get the level down to SEK5bn, however, to achieve the target, divestments are likely needed. As the company highlighted in its Q3-report, all segments excluding PC/Console have very strong cash generation with a LTM EBITDA minus Capex of SEK4.3bn. The PC/Console segment on the other hand yielded a negative LTM EBITDA minus Capex of SEK1.2bn. While PC/Console will continue to have higher investments than the other segments going forward, the capex cuts carried through during the restructuring program should yield a significant effect on group EBITDA-Capex in the coming years.

While the Q3-results were overall close to expectations, the PC/Console segment continued to perform weaker-than expected. While we expect improvements in the coming quarters on the back of the restructuring program, we have lowered our estimates for the segment. While we have done limited changes on other segments which are performing well, we have lowered overall adjusted EBIT with 3-7% for 2023/24-2025/26E. The tables below summarize our forecasts for the group and key financials per segment.

On the back of the reduced estimates we have also lowered our valuation range where the new base case stands at SEK36 (SEK38) while the new bull case stands at SEK53 (SEK54) and the bear case is SEK23 (SEK25). Our base case implies 7x 2023/24E EBITDA while the share currently trades at 5x EBITDA 2023/24E. The table below summarizes growth and margin assumptions for the valuation scenarios.