Deep Dive: Embracer Group
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(Ryan) What they do: Embracer Group is an international video game conglomerate. They’re headquartered in Sweden, but they essentially go out and buy a bunch of independent franchises or publishing companies and consolidate them into one. A bit like Aterian. So embracer is the parent company, then they have ownership of a bunch of different decentralized businesses that publish games for consoles, PC’s, and mobile (Some Nintendo Switch).
Embracer is now home to 240 owned franchises. Might not recognize some of them but there’s Saints Row, World War Z, Borderlands, Wreckfest, and tons of others. They’ve broken down the company into 8 separate operative companies and each one has their own CEO. Some are just for mobile, some are more deeper experiences, it totally ranges. But within that there are 63 internal game development studios and they have more than 7,000 employees. For reference, ATVI has ~9,500.
61% of their game sales come from Europe, 26% from the US, then about 10% from the rest of the world. But with the most recent acquisition that will probably change. Main point: This is an M&A company, they generate cash flow from their existing businesses and through equity raises and try to buy new developers, publishers, or IP owners.
(Ryan) History: Lars Wingefors grew up in rural Sweden with a single mom and when he was 13 he actually started a used comics business and by the age of 15 he had the largest mail order comics business in Sweden which he then turned into a used games business. He dropped out of high school because this thing was doing like $14 million in sales.
When he was 22 he sold the company for ~$10M USD, but it was in shares of this public company which imploded with the dotcom bubble. Eventually it sounds like he bought it back and restarted with a different model and made their market with some Karaoke games for the Wii in 2007. In 2011 they began to start buying these other studios, mostly nordic studios. Went public in 2016 and changed their name in 2019.
Video game market worldwide is estimated at around $160 billion in 2020. Estimates are for the industry to grow at a double-digit rate or high single-digit rate indefinitely, and I think unless something materially changes worldwide that is something you can be highly confident in
Tons of competitors, but largest include: Tencent, Activision Blizzard, Electronic Arts, Ubisoft, Take Two Interactive, Microsoft, Sony, Niantic, Zynga, Epic Games
Some companies in the industry that do not compete with them right now, but are something to watch: Nintendo, Roblox.
(Ian) Management and Ownership:
Lars Wingefors (Viggensforsh) is the co-founder and CEO
I like the structure of the company. Giving each of these units autonomy to work on their own.
Does not like to think of it as a roll-up. Really wants to build a group of great, leading entrepreneurs and creators. Sees embracer as identifying great brands and leaders and providing the capital and ecosystem to make them successful
Says he is “super-long term,” loves what he is doing, says he has already made his money, just loves this space. Investing as much of the cash flow as he can into the future.
I also like that Lars writes a letter accompanying the report
Transitioning to standard IFRS reporting (18-36 months) to be listed on a regulated market.
Lars owns about 25% of shares outstanding, down a bit recently
Great to hear a management team saying the right things, but not a guarantee of future success
Getting market cap of $14.2 billion using Koyfin share count of ~500 mil, Swedish price of $236.60, and 0.12 Krona to USD exchange rate (complicated, I know)
P/S of 14.9 (calendar year 2020 for all of these)
P/OCF of 37.7 (FCF is negative if you include acquisition costs)
P/EBIT of 52.6
(Ryan) Earnings: Very confusing trailing earnings. Some is organic, some is through acquisitions. Then they had a 15 month 2018-2019 fiscal year, so it made the YoY comps look worse than they were. I’m just gonna do the trailing 9 months that they provided
$796M LNM Sales, up 69% YoY
$338M in LNM Ebitda, up 112% YoY
42% EBITDA Margin
$100M in FCF vs negative FCF a year ago
Investments in intangibles (or M&A) was roughly double their FCF
Operational EBIT Margin was 30%
Pulled back on Q4 guidance, looks like most of the game launches are coming next year.
Expecting next year to be their strongest ever with more than 70 premium game developments set to launch.
This is still a lumpy business btw. It’s not decyclified like we’ve seen with some of these free-to-play games. It’s still develop, distribute, and hope to grab some hits.
Last fiscal year digital sales made up 73% of overall sales, vs 51% from the prior year.
(Ian) Balance sheet and liquidity:
$833mm in cash
Recently raised $890mm in cash
About $1.8B in goodwill, not crazy given the acquisitions, but it could provide some
$240mm in debt
Product Experience/Anecdotal Evidence:
(Brett) Don’t play many video games, but anecdotal people love Borderlands
(Ryan) The studios get a parent to kind of help out when needed. The independent companies get access to growth capital, distribution, marketing, and development support. Kind of like Match Group. Quote from the Gearbox CEO, “Lars’s vision of Embracer as an allied partner group committed to fueling and accelerating the ambitions of a series of decentralized, successful entrepreneurial member companies while magnifying the collective value and advantages of diversification across the entire group is the most brilliant strategy and design for short, medium, and long-term success in this industry that I have worked in during 30 years”
(Brett) Within gaming/entertainment, a lot of the time it comes down to the IP you acquire. Embracer is working to create a diversified library of gaming IP. Sounds simple, but it is a black-and-white competitive advantage.
(Ian) Cost synergies, between marketing, distribution, back office work, even developing games and having a wide-variety of talent within the company can provide cost savings
Future growth opportunities:
(Ryan) Investing in existing studios. At some point just buying more and more studios isn’t that great. These gaming studio consolidation plays are a competitive market especially in Sweden. Leveraging existing IP is where the growth comes from, that’s why ATVI has been so successful. Invested $63M in ongoing development just this quarter, keep that up.
(Brett) Acquisition of Gearbox. This was announced post-latest earnings. Founded in 1999, bringing on over 500 employees to Embracer Group. They helped build games like Borderlands, Counterstrike, and according to the presentation they’ve worked on Halo before. Borderlands is the big IP here, with over $1 billion in net bookings. Lionsgate is investing in a Borderlands movie too. $363 million EV with payout incentives
(Ian) Acquisition of Easybrain. Educational games, like duolingo or lumosity could be a really interesting direction to go. Not currently going that direction (these are more like sudoku and puzzles), but it does not seem to be a huge leap in my mind.
Highlights and lowlights:
(Ryan) Highlights: I like Lars. Looks like they’ll be listing on a major index within a year and a half to 3 years. Sweden feels like a burgeoning tech hub, maybe it already is one. Lowlights: I’m generally not a fan of this scorched earth acquisition strategy. It gets difficult to track as a shareholder. You have to do the math and say how much are they really paying, how much am I getting diluted because growth isn’t free and not all acquisitions are good acquisitions.
(Brett) Highlights: payout incentives over 6 years based on financial targets for acquisitions aligns incentives, business model seems highly scalable, especially if you consider it more as an entertainment conglomerate, love Lars/management structure, reading that he dropped out of high school and then ended up 30 years later running this thing is funny/cool. Lowlights: dilution from acquisitions, no audit yet (coming in 18 months), just raised close to $1 billion in March makes it feel like they may be moving too quickly.
(Ian) Highlights: Management and the structure, organic revenue growth, 21% organic growth Lowlights: no audit, not on a public market
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Disclosure: The authors and podcast guests are not financial advisors. Brett Schafer and Ryan Henderson are portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this podcast.