Q1 2027 Embracer Group AB Earnings Call
Speaker #1: I am Shari Dacaros, call operator. I would like to remind you that all participants will be listened to remotely, and the conference is being recorded.
Speaker #1: The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and 1 on your telephone. For operator assistance, please press star and 0.
Speaker #1: The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Phil Rogers, CEO. Please go ahead, sir.
Speaker #2: Thank you very much, operator, and good morning, everyone. Thank you for joining our webcast today covering our Q1 results. This is a quarter that shows the foundations we have been laying are starting to pay off.
Speaker #2: So, let's get straight into it. Mugey and I welcome you today from our Stockholm office, and as usual, we'll run through the main updates for our operating segments and the financial performance.
Speaker #2: And then open it up for Q&A. One important reminder: from this quarter, we report in our new operating segments, and we've introduced cash EBIT as our key earnings measure.
Speaker #2: Together, these changes sharpen our focus on operating performance, capital discipline, and stronger conversion of earnings into cash flow. This is the operating model we are building the future on, and it sets.
Speaker #1: And we were up against tough comps with Kingdom Come: Deliverance 2, releasing in February 2025. From a cash EBIT perspective, the margin was minus 4% in the quarter.
Speaker #1: I'll be straight with you: not a strong quarter on the headline. But here's what it proves—we came in above our internal expectations, powered by solid catalog performance, especially Kingdom Come: Deliverance, Metro, Remnant, and Dead Island.
Speaker #1: The worlds we steward keep earning, and that's really the foundation this business is built on. And it's exactly why the release slate ahead matters so much.
Speaker #1: On the next slide, let's look at some earnings dynamics that drive fellowship. This chart shows the engine of the publishing and development business. New releases drive the revenue peaks, feed the catalog, and ultimately power cash EBIT margins and cash EBIT.
Speaker #1: You can see it clearly: the release of Kingdom Come: Deliverance 2 in February 2025 drove a significant revenue peak, followed by solid catalog performance in FY26, boosted by three DLC releases.
Speaker #1: Over the past five quarters, new releases have been limited, so the model has been running on catalog alone. That's about to change. First up, we have two titles lined up for Q3.
Speaker #1: Both Dawn of War 4 and Stage Tour are showing promising early traction. From a publishing perspective, the big one this year is Metro 2039, which is scheduled for February and is expected to be a key driver, bolstered by Amazon's publishing of Tomb Raider: Legacy of Atlantis.
Speaker #1: Our collaboration with Amazon continues strongly on all things Tomb Raider. We're excited to share more updates on Tomb Raider: Legacy of Atlantis again at Gamescom in just a couple of weeks.
Speaker #1: And it builds from there. From FY27, we expect the release of the next game in the Kingdom Come franchise from Warhorse Studios, and Darksiders 4 from Gunfire Games.
Speaker #1: As we said in May, at least two major games with full economics. That's the rhythm this business was designed for. We spent the past two years putting the studios, the pipeline, the discipline, and the empowerment in place to sustain it.
Speaker #1: And it will power the growth and profitability of Fellowship Entertainment.
Speaker #2: Thanks, Phil. And good morning, everyone. Looking in a bit more detail at Fellowship's financial performance, while Phil has just spoken about the top-line performance, where Fellowship delivered net sales of SEK 810 million, down 22% on an organic basis.
Speaker #2: The gross margin percentage for the quarter remained stable year-on-year at 85%. The impact of the top-line evolution was partly offset by lower operating expenses, which came in at SEK 373 million before marketing costs, reflecting the realization of prior-year savings initiatives.
Speaker #2: Capex remained relatively stable at SEK 288 million for the quarter. Adjusted EBIT margins were relatively stable due to lower D&A as a result of no new releases in the quarter.
Speaker #2: Cash EBIT amounted to minus SEK 32 million, with the year-on-year evolution mainly due to the strong top-line comparator mentioned earlier and limited new content in both publishing and development and licensing during the quarter.
Speaker #2: We'd like to emphasize that cash EBIT margins will be impacted by the level of capital we decide to deploy in growth capex relative to the revenue generated in a particular year.
Speaker #2: In the short term, these margins may be lower as we build the revenue engine Phil referred to earlier. But as that ramps up and the release cadence is increased, we can expect a steady improvement in the cash EBIT margins over time.
Speaker #1: That's the pipeline, and there's a lot to be excited about. The current financial year is anchored by Metro 2039 and Tomb Raider: Legacy of Atlantis, both expected to be released in February.
Speaker #1: To touch on Warhammer 40,000: Dawn of War 4, this is now expected in Q3, December, rather than Q2, and fan excitement is building strongly.
Speaker #1: The game looks really promising, and early indicators show the excitement among fans is building, with over 1 million wishlists on Steam already. The fan engagement for Stage Tour, from Red Octane Games, is also very real.
Speaker #1: This game is being built with community at the heart, and it was great to see their reaction at the recent San Diego Comic-Con. And as mentioned, in the year ahead, a further strengthening pipeline with Darksiders, Kingdom Come, and Tomb Raider: Catalyst, the next chapter in our Tomb Raider series, published again by our friends at Amazon.
Speaker #1: In May, we talked about our new licensing business area, and our conviction has only grown since. This is a durable, high-margin revenue stream that sits alongside development and publishing.
Speaker #1: And the foundations are already producing. There was a lot of exciting stuff going on, some near-term and some further out. Starting tomorrow, with the launch of Magic: The Gathering: The Hobbit, the trading card game from our great partners at Wizards of the Coast.
Speaker #1: So far, it's tracking very well as a fan favorite and follow-up to the 2023 successful release of The Lord of the Rings: Tales of Middle-earth.
Speaker #1: In Q2, we expect our licensing business to compensate for the lighter new content quarter in publishing and development. Further out, the slate is genuinely exciting.
Speaker #1: Multiple feature films with our partners at Warner Bros., a strong collaboration with Asmodee across tabletop games, plus merchandise, location-based experiences, and of course, video games.
Speaker #1: In closing, The Lord of the Rings is one of our core IPs, but as we highlighted in our May update, we've got a great roster of other amazing IPs to fuel our licensing business.
Speaker #1: Now let's turn to the Embracer operating segment, which delivered a strong earnings improvement. The PC/console business area led the way, with a successful launch of Gothic 1 Remake and continuing momentum for Reanimal. Gothic saw a strong reception from players, reaching 500,000 copies sold within the first week.
Speaker #1: The game is, as of today, already close to recouping its full development and marketing spend. And the strength ran right across the segment. Mobile grew net sales and profitability year over year, driven by Subway Surfers.
Speaker #1: Entertainment and Services delivered very strong top-line growth, with higher profits driven by distributed titles and PlayOn partners, including Crimson Desert. Embracer is much more than a games business.
Speaker #1: And that's a strength. With the diversity of activities and stable, revenue-generating businesses – in the E&S and mobile business areas in particular – we expect Embracer to deliver a steadier, more predictable revenue profile on a like-for-like basis going forward.
Speaker #1: These businesses share a lot of DNA, but they are different in terms of revenue and profit dynamics. In Q1, each business area grew. Every one.
Speaker #1: E&S grew the strongest, driven by play-on partners' physical business spanning software, hardware, and retro. True specialists. Cash EBIT showed a strong improvement, though the gross margin was noted to be lower year-on-year due to the sales mix.
Speaker #1: Going forward, the sales or revenue mix between the business areas will be the primary variable driving gross margin and cash EBIT margin year over year.
Speaker #1: That's a mix effect, not a health question. The underlying businesses are performing.
Speaker #2: Turning to the more detailed Embracer financials, the Embracer segment was the main driver of group top-line performance, with SEK 3.1 billion of net sales representing 63% organic growth year-on-year.
Speaker #2: As Phil has mentioned, the PC, console, mobile, and entertainment services business areas all contributed to this growth. The very strong growth in the entertainment services business area resulted in an adverse mix effect, which reduced the gross margin by 10 points to 49% for the quarter.
Speaker #2: Operating expenses, excluding marketing, declined to SEK 543 million. This was driven by targeted savings actions, including divestments over the last year. User acquisition costs for the quarter amounted to SEK 300 million, supporting revenue growth in mobile.
Speaker #2: The increase in segment marketing costs resulted from higher release activity in PC/console. Capex of SEK 389 million was down SEK 76 million year-on-year, also benefiting from savings actions taken over the course of last year.
Speaker #2: Adjusted EBIT margins improved by 10 points due to the gross margin contribution of new releases in PC and console, as well as the effects of the OPEX savings.
Speaker #2: Cash EBIT for the quarter of SEK 136 million represents a significant improvement of over SEK 300 million year-on-year, with around SEK 40 million of that arising from the impact of decisions to divest or close certain entities over the course of last year.
Speaker #1: Now to the Embracer pipeline. And it's packed full of fun. In the second quarter alone, we have several exciting releases: Hot Wheels: Infinite Rush from Milestone; Way of the Hunter 2 for console, from Nine Rock Games and THQ Nordic; and the Early Access release of The Guild: Europa 1410 from Ashborne and THQ Nordic.
Speaker #1: Although not on this slide, I also want to spotlight Reanimal—again, developed by the talented team at Tarsia and published by THQ Nordic. With solid, continuing momentum, Reanimal’s main expansion, the Expanded World, will release in three chapters. Chapter 1, The Prisoner, just launched on August 7.
Speaker #1: On top of that, there's a stream of new iterations of previous releases and asset care plays for some great IPs, as you can see here.
Speaker #1: This is an area where Embracer truly excels. Embracer today has the strongest, most focused PC/console project pipeline it has had in years. With an improving ROI and profitability outlook, the strategy is decided, the portfolio is set—now it comes down to execution, and converting this pipeline into significantly higher profitability and cash generation, which is exactly what this team is built to do.
Speaker #1: And with that, I'll hand over to Mugay to take us through the group financial performance.
Speaker #2: As you've already seen this morning, we have delivered a strong start to the year, with net sales for the quarter of SEK 3.9 billion, up 24% year-on-year and above our expectations.
Speaker #2: The top-line performance was primarily driven by strong performance across all business areas in the Embracer segment, including the successful release of Gothic 1 Remake, and was partly offset by negative growth in the Fellowship segment due to a strong comparator we mentioned.
Speaker #2: Sales growth was also partly impacted by divestments, primarily from Ark Games, as well as moderate FX translation effects, which had a combined impact of around minus SEK 210 million for the quarter.
Speaker #2: Now, if we exclude the divestment and FX impacts, our organic and pro forma net sales growth stands at 33%. The gross margin percentage for the quarter was 56%.
Speaker #2: Down 12 points year-on-year. The primary driver is the revenue mix, with a higher proportion of revenues in the Entertainment Services business area in Embracer, and a lower revenue contribution from Publishing and Development in Fellowship.
Speaker #2: Operating expenses excluding marketing costs decreased from SEK 1.1 billion to SEK 972 million, supported by targeted savings actions, including divestments. User acquisition costs increased by around SEK 80 million to SEK 300 million, supporting the sales growth seen in mobile within the Embracer segment, while other marketing costs increased by around SEK 60 million due to higher release activity, also in Embracer.
Speaker #2: In total, operating costs as a percentage of net sales reduced by 10 points year-on-year. We're happy to maintain discipline and focus on our operating expenses.
Speaker #2: Capex for the quarter amounted to SEK 677 million, down slightly from SEK 736 million in the prior year, driven by Embracer, and largely stable since Q4.
Speaker #2: This results in cash EBIT for the quarter of 47 million SEK, up 146 million year-on-year. A strong start to the year in the context of our expectations.
Speaker #2: Similar to the net sales drivers, the improvement is mainly driven by higher new release activity and the effects of savings actions in Embracer, partly offset by the effect of a strong KCD2 comparator in Fellowship.
Speaker #2: Moving on to cash flow. We delivered positive free cash flow for the quarter. A significant improvement compared to minus 383 million SEK in Q1 last year.
Speaker #2: On a trailing 12-month basis, free cash flow amounted to SEK 192 million, up almost SEK 400 million compared to last year. We're happy to see another quarter where TTM free cash flow continues to trend positively.
Speaker #2: The improvement was driven by improved profitability and lower capex, which I've described on previous slides. Lower tax payments and improved net working capital movements also contribute.
Speaker #2: Below free cash flow, cash flow from financing activities mainly relates to drawing of local facilities, but also includes an outflow of SEK 94 million related to the share buyback.
Speaker #2: The net cash flow from acquired or divested companies is primarily driven by earn-out payments. The earn-outs paid in Q1 covered the vast majority of earn-out obligations for the fiscal year.
Speaker #2: Total remaining obligations related to historical acquisitions amount to SEK 214 million. At quarter-end, we have a net cash position of SEK 3.5 billion, and total available funds of SEK 6.4 billion, taking into account undrawn facilities.
Speaker #2: Finally, looking ahead, we are reiterating our full-year guidance of at least SEK 1 billion cash EBIT, with improving confidence following our Q1 performance. For Q2, we expect cash EBIT improvement year-on-year, following a similar pattern to Q1.
Speaker #2: Free cash flow is expected to be weighted still towards H2, with some seasonal build-up of working capital expected in Q2. We anticipate significant improvement in full-year free cash flow generation, in line with the improvement expected in cash EBIT.
Speaker #2: Overall, we're happy with the quarter, and we're working hard with our teams to continue delivering on the ongoing business while also preparing for the separation and spin-off of Fellowship.
Speaker #2: With that, I'll close out the presentation part of this morning's call, and we'll move on to Q&A. Operator, over to you.
Speaker #3: Thank you. We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on their telephone. You'll hear a tone to confirm that you have entered the queue.
Speaker #3: If you wish to remove yourself from the question queue, you may press star and two. The questioner is on the phone and has requested to disable the loudspeaker mode while asking a question.
Speaker #3: Anyone who has a question may press star and one at this time. The first question is from Jasper Tugemo at Handelsbanken. Please go ahead.
Speaker #4: Yes, thank you, operator, and good morning. A few questions from my side. So, first question is on cash EBIT and capex here. As more of the year-on-year cash EBIT improvements appear to come from lower capex and leases, how much of this lower investment should we view as structural versus quarterly-facing?
Speaker #2: Thank you very much for the question. We had already mentioned during last quarter that we expected the capex levels to continue trending lower than last year. But I shall say, as the structuring group has already made big progress, the levels represent a higher portion of our underlying activity.
Speaker #2: So we don't expect big swings or big changes in the levels we are having on our capex levels now.
Speaker #4: All right, that's clear. And secondly, on Fellowship and the licensing business, if you could give some more color around this one—how large you think it could be, what annual growth rates we could see in the next three years, and is this more of a lumpy business for you?
Speaker #1: That's a great question. I think it's too early right now to predict the sort of percentages and get overly precise. I think what we see is, as we've mentioned, it's a very durable, and we believe, high-margin revenue stream.
Speaker #1: We're getting going with it, and we've got a number of initiatives right now—between the sort of further out and the nearer term. We'll see growth, certainly, in the quarter we're in now, when we get through the launch tomorrow of Magic: The Gathering, The Hobbit.
Speaker #1: But we see it as really something that can grow well for us. If we look at other licensing streams from different organizations and see how they've approached it, and the sort of scale they get, we certainly see that's well within our reach.
Speaker #1: But I don't think right now is the time to get drawn on particular growth rates. Will it be lumpy? I think there's going to be some element of lumpiness.
Speaker #1: Of course, it all depends on the relative scale you're looking at. We certainly see growth. We see the importance of building up a broader portfolio on the licensing.
Speaker #1: We have a broader portfolio now, but of course, a lot of the focus is always on The Lord of the Rings and The Hobbit primarily. But we have more licensing opportunities, and we're executing on that on a number of our IPs.
Speaker #1: So I think we'll, over time, come and present back more on this business, but certainly see big growth opportunities for us.
Speaker #4: Okay, thank you for that. And it would be interesting to hear your view on this decision here to stop supporting physical copies.
Speaker #4: What implications do you see from this, given that you had quite good sales growth in Entertainment and Services from distribution in this quarter?
Speaker #1: Yeah, I think we know it's something we've always known, in some ways—that potentially this can happen. So to get that news out and delivered, it's something now that we're planning hard for.
Speaker #1: I think, firstly, to say, without physical distribution businesses, there is always, already today, a natural diversity—we have distribution of retro products. We're also distributing physical consoles as well.
Speaker #1: So, I think it's too early to get too precise again on what that could mean for us. Especially with other solutions, it's going to be interesting to see from a broader perspective how the code inbox works with GTA, and what a great example that could be.
Speaker #1: See how that sort of trend goes going forward. But we're always adapting, and we'll judge the impact over time.
Speaker #4: All right. Thank you for that. I'll jump back in line here.
Speaker #3: The next question is from Rasmus and Burke, Kepler Cheuvreux. Please go ahead.
Speaker #5: Yes. Hi. Hi, good morning. Thanks for taking my question. Just on the guidance for the second quarter—you don't have any real releases of any significant size.
Speaker #5: But so the driver for the better profit is a combination of is it the licensing and lower costs and capex, or what is the sort of how does that play out in your guidance?
Speaker #2: First, we had already indicated that the first part of the year would be quieter because, as you know, primarily Metro is already lined up in the second part.
Speaker #2: But as you have seen today, the Embracer segment, for example, has contributed across all business areas to both sales and earnings growth. We expect the following quarters to benefit from all our business areas as well.
Speaker #2: It will be a combination of both new releases, which are lined up in the coming quarters with different depth, as well as the underlying performance.
Speaker #2: So, the catalog performance—and, obviously, the right level of capex monitoring—means we don't expect any surprises, nor is it reliant on any unexpected or uncommon initiatives, if you will.
Speaker #5: So basically, if I were to try to take the two businesses separately, there is licensing to help in Fellowship, and then in both businesses, I guess—or you have the current momentum in Embracer Group, then.
Speaker #5: So, from mobile and the releases you had in the previous quarter, is that how it works, or?
Speaker #2: The momentum in Embracer is correct. On our Fellowship activity, we expect to benefit from licensing, but our PC/console activity is also expected to contribute to our year-to-date growth with the releases we've shared earlier.
Speaker #5: But I mean, just in the coming quarter, there isn't anything from Fellowship, right?
Speaker #2: No major release.
Speaker #5: No? Okay. All right. Thank you. Thank you.
Speaker #3: The next question is from Simon Johnson, ABG. Please go ahead.
Speaker #4: Hello, and good morning, everyone. I just have a question on the new game from Warhorse, scheduled for next year. If I understand correctly, this is a Kingdom Come game.
Speaker #4: Can you maybe elaborate a bit on how long it has been in development and the scope of the game, given the short timeline since the last game?
Speaker #1: Yeah, I'll take that question. Thanks, Simon. It's a big game. When we talked about it in May, I think we wanted to sort of make that announcement in May. It really is quite symbolic because it helps put color on the Fellowship pipeline.
Speaker #1: But it really is for the game team to talk more about the title at the right time with players. But we think it's something that, if you stand back, we've got a great player count now through Kingdom Come: Deliverance II.
Speaker #1: We see through their play styles what they're looking for. So you could imagine we're building something that we believe will hopefully excite the audience.
Speaker #1: In that Kingdom Come sort of setting. But it's a full-size game. I mean, this is what Warhorse is supreme at—building these rich, really vast open-world sims.
Speaker #1: And it's something we're very excited about, as the development time—it's been in development for quite some time. It's a full project, and it's going to have a very—this is part of our planning to have that better cadence coming off Kingdom Come: Deliverance II.
Speaker #1: There's a lot of smart work between the respective teams, and that's really when we talk about the rhythm and the structural changes. But primarily, it's by having world-class studios like Warhorse who can really deliver in that way.
Speaker #1: So, I’m excited, and I hope you will be too.
Speaker #4: All right, got it. And when you say it's like a full-size game, does that mean like a regular sequel, or could there be some kind of spin-off?
Speaker #1: Yeah. I don't know what regular sequels mean in today's world, but I think we're building worlds. And I think we can find lots of story arcs in the worlds we build.
Speaker #1: So again, it’s the game team really taught more. But I think what’s great—a great day for me when I’m at work—is seeing creative teams who are thinking about sequels, prequels, spin-outs, spin-offs, so I think there’s lots of planning and creative thought that goes in.
Speaker #1: And, but very much within that Warhorse Studio DNA and expertise. So, fans should be excited.
Speaker #4: Yeah, okay. Thanks. That's a very impressive cadence from War Horse, indeed. That's all from me, so thank you so much.
Speaker #1: Thank you, Simon.
Speaker #3: The next question is from Amar Kalyasevich, DNB. Please go ahead.
Speaker #6: Good morning, guys. Just two follow-up questions from me here. Obviously, Metro seems to be doing well with the high number of wishlists and good reception.
Speaker #6: Out of the release, let's see more on Gamescom. But I just want to touch upon your increased confidence here in the target of at least SEK 1 billion in cash EBIT.
Speaker #6: Is that related to Q1 being good, or is it related to higher expectations for Metro, or anything else in the pipeline here that you can tell us about?
Speaker #2: Do you want to start with Metro?
Speaker #1: Yeah. I'll start with that one. Hi, good morning, Amar. I think it's multiple facets. I mean, I know we get these questions, sort of, "Is it either/or?" But it's a multitude of contributors.
Speaker #1: Yeah, we do respect Q1 was a relatively small quarter. But just the momentum that's behind beating forecasts, coming in ahead, is very real.
Speaker #1: And I certainly feel we're taking momentum into Q2. And step by step, that's how we build the fiscal plan going forward. So that's really where I think the confidence comes from.
Speaker #1: If we look at something very specific like Metro, the wishlist cadence was great to see. I mean, this is a very new, or relatively new, sort of indicator.
Speaker #1: But see how fans engage when there's so much choice out there for entertainment—see how they sign in. It is really pleasing. And obviously, it's a relatively late reveal, Metro 2039.
Speaker #1: So it's exciting just to get that out and see the reaction. And we'll get more from Gamescom. It's going to be great to have people get their hands on it.
Speaker #1: So, I think this is how confidence generally builds through the fiscal year. I think as we get toward the half-year, and looking forward, we’ll come back and comment on that even further.
Speaker #1: But it's multiple factors. And getting that business delivery in line with what we're seeing in production terms and gamer reaction—really, these are the three that we're trying to balance.
Speaker #1: And get it right all the time.
Speaker #2: And good morning, Amar. So, we are reiterating our guidance with increased confidence. Obviously, when we work on our projections, it's a very thorough process.
Speaker #2: We slice and dice things by line, but also by period. So, every quarter has its importance. This is a quiet quarter, but we're not taking it lightly.
Speaker #2: So, every quarter is an achievement. It makes the year go by faster, if you will. However, every quarter ahead of us is filled with deliveries.
Speaker #2: That we take seriously. When we work on the forecast, as you know, it's a mixture of different risks and opportunities that are embedded. So, we'll be staying humble, but we'll be working really hard to achieve the upside.
Speaker #2: As we've indicated.
Speaker #6: We're still clear. Thanks for that. And then just maybe one follow-up on Metro and Tomb Raider. What are the current statuses of those games?
Speaker #6: Are they entirely finalized and complete? Do you have any more milestones that you need to achieve for them to kind of hit their planned release dates?
Speaker #6: Yeah.
Speaker #1: Yeah, for sure. Ultimately, there are multiple milestones left. I mean, we're closer now than ever. As ever with games, there's a level of polish.
Speaker #1: There's performance, there's playtesting, all the debug and QA, final tuning, getting that content ultimately locked as soon as possible as well. So this is the pattern we're on now.
Speaker #1: It's a pattern, thankfully. Again, the world-class studios in 4A and Crystal Dynamics, who are working with Flying Wild Hog and also recently with Eidos Montreal, too.
Speaker #1: So this is what these studios do, and we work through those milestones step by step, every day.
Speaker #4: Okay, perfect. Thank you, guys. That's all from me. I'll get back into the queue.
Speaker #3: The next question is from Thomas Nilsson, Nordea. Please go ahead.
Speaker #5: Thank you for taking my question. I would like to ask a bit about the Embracer segment profitability. It delivered SEK 136 million cash EBIT this quarter, versus negative SEK 193 million last year.
Speaker #5: How much of that improvement reflects structural cost reductions versus stronger releases? And what would you say is a reasonable average through-cycle operating margin for the Embracer segment going forward?
Speaker #2: As you have seen, the Embracer segment is composed of a diversity of activities, each of which has its own seasonality, business profile, and margins. It would be fair to assume that the margins and business cycle of PC/console are very different than entertainment services, which themselves are very different than mobile.
Speaker #2: So, not sure if it would be relevant—at least it isn't, the way we try to look at a blended margin or forecast, because it really depends on the activity.
Speaker #2: On your question around cost versus new releases, we did enjoy the successful release of Gothic 1 Remake in the PC/Console business area of Embracer, with a high margin, obviously, which did contribute.
Speaker #2: But from a sales perspective, Entertainment Services was the main driver, with an adverse mix effect. So overall, I shall say we maintained a cost discipline.
Speaker #2: The vast majority of the initiatives in the Embracer segment have taken place, so we'll be ensuring that we maintain them. We don't expect much volatility there.
Speaker #2: Which would mean that all right business, good business in the year to go, is going to deliver cash, EBIT, and earnings. But it wouldn't be relevant or easy to guide on a blended margin percentage.
Speaker #5: Okay. Thank you very much.
Speaker #3: The next question is from Ayush Ghosh at Barclays. Please go ahead.
Speaker #6: Thank you. Yeah, so just a follow-up on Metro 2039. Obviously, we've got it coming out and landing in February 2027, and it's likely to be a far more important contributor to profit than Legacy of Atlantis.
Speaker #6: But just wondering whether it would be possible to achieve your cash EBIT guidance if Metro 2039, in particular, slips a couple of months and therefore lands in FY28?
Speaker #2: Good question. Of course, Metro is clearly important. And here, it is backhanded. But we expect positive earnings in all quarters, and not to underestimate the portion of Q3 as well.
Speaker #2: So it is important, yes, but we've got other important things lined up as well on other lines and in other quarters.
Speaker #6: Thanks. And just another question. So, could you just give more color specifically on how your licensing deal with Wizards of the Coast works in relation to the upcoming release of Magic: The Gathering: The Hobbit?
Speaker #6: And obviously, you mentioned your expectations, but if that releases even better than expected, could it make a notable difference to Q2 '27 cash EBIT?
Speaker #1: Yeah, I'll take that one. I mean, I'm not going to get into specifics of the licensing deal, but if you look back to the 2023 release and imagine the structure behind that deal, you could imagine something quite similar.
Speaker #1: The trading card game category has been really interesting for us as partners, but also for players and consumers, and seeing how that's grown. So I certainly see momentum.
Speaker #1: And I think Hasbro themselves talk about momentum they've got, and in particular, I think they had some comments on The Hobbit in their earnings call just a few weeks ago.
Speaker #1: So we're encouraged that they see and talk about the growth and the fan engagement. We're obviously a step behind that, right, in terms of that we're a licensing partner.
Speaker #1: And they're driving that business, but we're excited by it. We certainly see more potential than we did a few months ago, and that's just because, in some ways, it's hard to predict.
Speaker #1: I think, again, it was a comment similar to Hasbro that these games are quite hard to model, but every pack is different in terms of SKU count and cards composition.
Speaker #1: But there's certainly great potential for it.
Speaker #6: Great. Thank you so much.
Speaker #3: The next question is from Jakob Adler, Danske Bank. Please go ahead.
Speaker #7: Hi, Phillip again. Thanks for taking my questions. I just have two short follow-ups here, but starting off a bit and getting back to game specifics on Legacy of Atlantis or Tomb Raider—I'm just curious to hear your thoughts on what you've baked into guidance regarding this title.
Speaker #7: Is it mainly because, I suppose, day one you'll probably start getting some IP royalties, but then I guess you start getting the rev share post-recruitment from your publisher, right?
Speaker #7: So, I just would like to hear some thoughts on what you've baked into the guidance for Legacy of Atlantis, if possible.
Speaker #1: Yeah, that's a great question. Thanks, Jacob. I think, again, all deals are quite different, so I think it'd be dangerous to assume every deal looks like this or every deal looks like that.
Speaker #1: I would just guide you broadly and just feel like we're trying to consistently be sort of conservative, and not overly cautious, but just thoughtful as to how we approach launches.
Speaker #1: And as we've seen, if you look at recent releases like Kingdom Come: Deliverance 2— I know it's a game we keep referencing a lot.
Speaker #1: But the launch was of a certain size, but really the real power of that game then came through in the ensuing fourth and now fifth quarter, sixth quarter as well.
Speaker #1: So I think the launch is really just the start. And I know it's right at the end of the fiscal year and how pivotal it could be.
Speaker #1: But I think it's difficult to try and gauge too much about the deal itself. I mean, Amazon is the publisher. You know, we don't have the full economics, so it's not necessarily a key financial driver in this fiscal year due to these dynamics.
Speaker #1: But it's hugely important for us in the long term, especially for us as an IP company.
Speaker #7: Yeah, very clear. Thanks for that answer. And then just a second question: I mean, here in November, we obviously have a major release from a competitor, being Take-Two with GTA 6.
Speaker #7: And looking at the historical GTA games, it's been quite console-dominated, right? And in your PC-console business, you have a relatively good share of console sales, right?
Speaker #7: I just would like to pick your brains on how we should think about the competition in Q3—not only from a release perspective but also from a catalog perspective, with this major title releasing in the market.
Speaker #1: Yeah, that's a great question. I mean, every single launch of Grand Theft Auto, if you go back through, well, certainly through 5 and 4, have left their watermark on the market and player behaviors. I think since those times, more and more players in the market, more and more choice.
Speaker #1: But we recognize that, in terms of player time and wallet, critically, it will take time out. We've been strategically, as a business, thinking about that for some time.
Speaker #1: That said, if I perhaps reference the game we slated or announced yesterday with Dawn of War and December, that's a PC launch. And it's a really particular gaming audience there.
Speaker #1: A very core RTS group. And we think, although it's a few weeks then, or a couple of weeks after GTA, we think we can find that audience and really capture their attention.
Speaker #1: Which we've already got, but maintain that attention and launch successfully through that time as well. But I think, again, we've reflected what we expect to be the GTA 6 impact really in our planning and in our guidance for this fiscal year, I'd say.
Speaker #7: Very good. Thank you for those answers.
Speaker #1: My pleasure.
Speaker #3: As a reminder for questions, please press star and one. Ladies and gentlemen, that was the last question from the phone. I would now like to turn the conference back over to Phil Rogers.
Speaker #1: Well, thanks, everyone. And thank you, operator Sherry. Thanks for joining our conference today. Thanks to our teams around the world for working hard and delivering. We look forward to joining you again at our next quarterly meeting.
