What's happening at Embracer: $166 million net loss, 22 game write-downs, 1,387 layoffs, and focus on own IPs

Embracer Group has released its financial report for the third quarter ended December 31, 2023. The Swedish holding company is approaching the final stage of its restructuring program, which has already resulted in nearly 1,400 job cuts, while also making adjustments to its game development strategy.

Financial highlights

• According to its Q3 interim report, Embracer Group reached SEK 12 billion ($1.14 billion) in revenue, up 4% year-over-year.
• The company ended the third quarter with a net loss of SEK 1.74 billion ($166.4 million), compared to net profit of SEK 1.5 billion ($143 million) in the same period last year. This is a decrease of SEK 3.2 billion ($305 million).
• Tabletop was the biggest segment by revenue, with SEK 4.42 billion ($422 million). This is up 7% year-over-year.
• It is followed by the PC/Console segment, which saw its revenue fall 5% to SEK 3.38 billion ($323 million), and Mobile — SEK 1.64 billion ($156.7 million), up 4% year-over-year.

Game sales: Risk of Rains Returns outperforms expectations

• New game releases for PC and console generated SEK 470 million ($45 million) in the third quarter, up 2% year-over-year.
• Last Train Home, Wildcard Football, and Arizona Sunshine 2 underperformed, with their sales being below management expectations. Hot Wheels Unleashed 2: Turbocharged performed worse than previous games in the series, but had a positive ROI.
• The only new title that exceeded expectations and had a strong ROI was Risk of Rain Returns, a remastered version of Hopoo Games’ roguelike platformer.
• Although revenue from back catalog titles decreased by 2% year-over-year, it still accounted for the lion’s share of the segment’s Q3 total at SEK 2 billion ($197.4 million).
• The top 10 revenue drivers were Remnant 2, Dead Island 2, Chivalry II, Deep Rock Galactic, Payday 3, Goat Simulator 3, Star Trek Online, Wreckfest, Risk of Rain 2, and SnowRunner.

Net sales of Embracer’s PC/Console segment in Q3

• Speaking about its Mobile segment, Embracer announced that its mobile catalog reached 236 million MAU and 30 million DAU, also generating 258 million downloads in the third quarter. The top titles by revenue were Sudoku.com, Alien Invasion, BlockuDoku, Art Puzzle, and Jigsaw Puzzles.

Prioritizing own IPs over third-party publishing

• Over the past 12 months, Embracer Group invested SEK 6.5 billion ($621 million) in PC/Console game development, of which SEK 1.49 billion ($142 million) was invested in Q3 alone.
• The problem is that the value of completed games (those already released) is SEK 3.2 billion ($305.8 million) — half what the company spent on development. But Embracer still plans to invest more in its pipeline, “laying the foundation for future organic growth within PC/Console.”
• “Business leaders from different areas of the organization are contributing with their vast experience and knowledge, which coupled with a clear and simple game investment greenlighting model lays the foundation for increased future cash flow return on investment,” CEO Lars Wingefors said.

• As of Q3, the company had an average ROI (return on investment) of 2.2x across all released games. However, titles from third-party developers or studios that Embracer has closed down have the ROI of 1x, while first-party games have the much higher ROI of 3.2x on average.
• That’s why the company decided to be more picky when it comes to publishing third-party games and focus more on its own IPs to increase return on investment across its portfolio in the future.
• “While we will still do third-party publishing in the future, we will be considerably more selective,” Wingefors said. “Our future games portfolio will be more focused around established, owned IPs and studios which we are confident will generate better predictability as well as increased ROI and profitability going forward.”

Restructuring enters its final stage, but more divestments in plans

• Embracer is now in the “final stretch” with its restructuring program, which was announced in June 2023 after the $2 billion deal with (likely) Savvy Games Group collapsed. Its main goal is still to reduce net debt to at least SEK 8 billion ($760 million), but the company now says this target is “unlikely to be reached.”
• According to Wingefors, the company has plans for “certain divestments” that could “significantly reduce net debt” after the program ends on March 31, 2024. He didn’t go into details, but this could mean more job cuts and studio closures/divestments in the next fiscal year.
• As part of the cost-cutting process, Embracer Group laid off 483 employees in the third quarter. So a total of 1,387 jobs were cut between Q2 and Q3 (July 1-December 31, 2023), or 8% of the workforce.
• Overall, the company’s headcount has decreased by 1,473 employees since the end of the previous fiscal year — from 16,601 in March 31, 2023 to 15,218 in December 31, 2023.
• During the Q&A session, Wingefors shared his thoughts on the reasons for layoffs not only at Embracer Group, but across the entire industry:

There's less investment made from the industry into content. I think the underlying consumer market is solid and is still growing, but there were also a lot of underlying changes made to the industry. That obviously affects all of us. Looking at the 8% reduction in workforces — I don't know the numbers for the whole industry — it's something that everyone needs to get through. It's more driven by overinvestment in the previous years, because everyone just put all capital into gaming. And perhaps it was a bit too much capital in a few instances.

Lars Wingefors

CEO of Embracer Group

• Embracer Group has already closed seven internal studios as part of the restructuring program, including Campfire Cabal, Volition, and Free Radical Design. The total number of in-house teams has decreased from 139 in June 2023 to 132 at the end of 2023.
• In Q3, seven mainly unannounced projects were written down* across Plaion, THQ Nordic, and Gearbox. In total, 22 titles were written down in 2023, including 15 projects in the second quarter.

*These are projects “affected by the ongoing restructuring program, where the studio or team has been discontinued.”

• Embracer Group currently has 179 games in its pipeline, of which 124 are unannounced projects (compared to 153 in Q1).
• The total number of unannounced titles has decreased by 29 since June 30, 2023. This likely includes the write-downs mentioned above, games eventually announced during that period, and projects canceled for reasons unrelated to the ongoing restructuring.