Embracer Group AB

STO:EMBRAC B

Q3-2025 Earnings Call

[Amar Galijasevic, analyst]

So, good morning, everyone, and welcome to Embracer's Q3 2024/'25 presentation. My name is Amar Galijasevic. I'm an equity analyst at Carnegie Investment Bank here in Stockholm, and I will be moderating the Q&A session after today's presentation.

Embracer reported solid organic growth in the quarter and after the quarter's end also had a very successful release of Kingdom Come: Deliverance II, which I hope we'll hear more about in a couple of minutes.

As always, we'll start off with a presentation by CEO, Lars Wingefors; and CFO, Muge Bouillon, and potentially will also have a secret guest with us today. I'll come back for the Q&A session where you can ask questions in the room, on the teleconference and also through the web.

Without further ado, I'll hand the word over to you, Lars.

[Lars Wingefors, executive]

Thank you so much, and hello, everyone, and welcome to this beautiful morning in Stockholm. Let's dive straight into the business highlights for the quarter. Yes. I'm trying to solve a technical problem here. Perhaps the technical team could change the slide for me.

Meanwhile, I could start telling you what happened in the quarter. The quarter exceeded our expectations. The organic growth amounted to 7% with net sales of SEK 7.4 billion. Adjusted EBIT came in at close to SEK 1.2 billion, a more limited decline of 11% year-over-year compared to management expectations before the quarter, impacted by tough comparison figures in mobile games.

Really pleased to announce that we had free cash flow of SEK 900 million in the quarter with positive effects from PC console and previously executed CapEx savings. Muge will talk more about the financial performance later in the presentation.

But first of all, we saw a healthy organic growth in Q3, as well as improved margin in PC console. The organic growth was driven primarily by Entertainment & Services, and a much improved organic growth trend for Mobile to 3% from minus 7% in the preceding quarter. The profitability was supported by a strong performance in PC console games, which had a 21% adjusted EBIT margin despite limited new releases in the quarter.

And now worth reminding with limited new releases in the quarter, I'm really looking forward to the future. We have SEK 7 billion in invested games pipeline by end of December. And we will talk very soon about Kingdom Come II. That's part of that SEK 7 billion.

And talking about Kingdom Come: Deliverance II, it was successfully released after quarter end. The medieval role playing game has been initially successful, not only in terms of player critics and reception, but also in terms of financial performance. This reflects the dedication and hard work of our development studio, Warhorse Studios, and our publisher, Deep Silver.

The game sold over 1 million copies in the first 24 hours and is fast approaching 2 million, with an especially strong performance on Steam with over 250,000 peak concurrent players during last weekend.

Our strong belief is that the game will continue to generate substantial revenues over the coming years, highlighting the exceptional quality immersion and appeal of Kingdom Come: Deliverance II.

And looking back when Warhorse joined us 2019, I remember that they very much and they already back then had been working on the game. And now 6 years later, I'm glad that we have been allowing them to really create the game they wanted to create. I think we allowed them more than -- 2 years more than the original plan. And I've been asked many times about our interference in the game. And obviously, we let the creative team make their game, and we have not been dictating that game from Sweden. I never try to dictate our products from Sweden, by the way.

Martin is our secret guest, the CEO of Warhorse Studios, and he will join us in a minute.

But before that, thirdly, I would like to say our -- a highlight in the quarter is our strong financial position post the divestment of Easybrain. Over the past 18 months, we have created a stronger foundation for long-term value creation with lower CapEx and a significant net debt reduction. With a pro forma net cash position of around SEK 5 billion as of end of the quarter, we have a strong financial position, and we are also reassured by the performance and free cash flow generation in the quarter.

With that said, we have a continued focus on operational efficiency and to unlock value. We remain dedicated to creating additional publicly listed companies with the separation of Coffee Stain & Friends from Middle-earth & Friends during the calendar year of 2025.

We have a strong commitment from our -- all our management teams to drive strategic execution and continuous operational improvements, continuing to address our fixed operating costs and improve our profitability. We expect those efforts to accelerate ahead of next spin-off.

And finally, really pleased to see the successful spin-off and listing of Asmodee at NASDAQ Stockholm. Asmodee is now trading as a separately listed public company, and it's a testament to the dedication by our teams the past year from or within Asmodee, Embracer and its advisors.

I will remain a long-term and committed shareholder and look forward to contributing as a Chairman of the Board, working closely with the CEO, Thomas; and CFO, Andrea.

With that said, now let's hand over to my friend, Martin at Warhorse, for some further commentary on Kingdom Come II. Martin?

[Martin Fryvaldsky]

Yes. Hello. Thank you for the very warm introduction, Lars. Indeed, this is very personal to me. And you were right. I actually presented at an investor call back in 2019, the very next day after Embracer acquired Warhorse. And at that time, we were already working on KCD2, and I know you wanted us to create a great game. And I know you put a lot of trust in us. And as a result, we were able to create what is probably a gem or perhaps a piece of art. So, truly thank you very much. Thank you.

[Lars Wingefors, executive]

Thank you, Martin. It's a pleasure having you.

[Martin Fryvaldsky]

Thank you. So now let's talk about the Kingdom Come, about some hard facts. Kingdom Come: Deliverance II release has been a great success for Warhorse Studios, Plaion Publishing and then Embracer. The title has achieved critical acclaim from press, influencers and players with a metacritic rating at 88% of all 3 [ formats ], an 89% open critic score and a very positive review rating on Steam with 90% rating with the game positively from our more than 20,000 players.

At the release, the game peaked with just under 160,000 concurrent players on Steam. And each day, the peak player count has increased and peaked at over 250,000 this weekend, which is almost 3x more than the original KCD1 and beyond other iconic games. And that is really a lot. Having nearly 260,000 concurrent players means that KCD2 is now 15th most played single player game of all time and made it into top 50 games ever being published on Steam.

The release of KCD2 also set a new record for Twitch with the largest peak viewership at nearly 470,000 viewers. This is notable since the last time a new game broke the usual top 5 titles on Twitch was Marvel Rivals in January with about 400,000 peak viewers, and before that it was Path of an Exile II in December 2024. By the way, neither title was a single player RPG. With such viewership, we made it into top 60 of all ever [ Steam ] games on Twitch.

As Lars said, Kingdom Come: Deliverance sold over 1 million copies in under 24 hours, making it the fastest ever selling title for Plaion Publishing and is now approaching the 2 million mark quite quickly. We see strong player conversion from existing KCD2 -- KCD1 owners with a large potential for ongoing retention. More than a 1/3 of KCD2 players are new to KCD universe and expanding the audience. We have a robust post launch content pipeline and will deliver engagement and acquisition strategies for further drive and audience growth.

Well, besides the hard facts and sales data, let me share also some soft data or rather fun facts about how gamers actually play KCD2. Our telemetry has shown that gamers spend over 35 million hours in the game, which is about 20 hours for each player. That's also quite a lot over 1 day, or a bit more than 5 hours per day, in other words. And that is a lot. And that indeed, we wish them to have great experience in under [ tens ] of hours that are still ahead of them because KCD2 is indeed a very, very large game.

Another landmark worth mentioning is 1.5 million [ drunken ] hours, which is 4% of the time played. Well, I hope that they all are back [ sober ] again now. In the spec of 600,000 sheep killed already, it's important to say indeed that no animal was hurt or killed, and they are all doing well indeed.

But back to facts -- business facts. Our focus now is to maximize the full life cycle potential of this flagship IP to further capitalize on the market opportunities.

There are 3 premium DLCs coming in the course of 2025. All of them are currently well in a very advanced production, and we believe that we will be adding strong new content that besides other will increase the replayability of the game and enhance an experience of newcomers.

So, yes, that's all from me. Thank you for your attention. Thank you very much.

[Lars Wingefors, executive]

Thank you so much. Thank you so much, Martin. Fantastic job you and the team have done. So thank you so much. We look all forward to this.

Right. I wish all our releases were like Kingdom Come II. That's our ambition.

Now, back to business and looking at the PC Console segment. Again, it was a low quarter, soft quarter on PC console. The organic growth amounted to minus 1%.

However, adjusted EBIT increased 17% year-over-year and the margin were 21%. The actual new releases in the quarter did not contribute a lot. We had much less new releases in revenues this quarter than the previous -- the similar quarter last year.

The releases of -- the release in the quarter was Let's Sing, Metro on VR, The Remastering of Legacy of Kain 1-2 and Goat Simulator Remastered. We did a number of subscription deals, primarily related to Goat Simulator franchise and Dead Island 2. And the actual amount of that was the exact same amount as last year. We do these kind of deals regularly and every quarter basically.

The whole -- the catalog performed very well during holiday. And looking at the top 10 back catalog titles, again, Dead Island 2, but also very pleased to see Epic Mickey in the second quarter in a lifetime performed very well. Also the full release of Satisfactory 1 contributed much in the quarter. And also glad to see that the MX versus ATV Legends franchise continues to go from strength to strength, and it had, I believe, its best month ever in December.

The ROI chart still looks somewhat depressing with 2.1 average, which is not good enough, and I'm not happy with that in average, but that's a reality based on everything we had in -- over the past years. And I've been telling you many times that in the future, we would improve this number, and I'm confident we will. Obviously, a title like Kingdom Come II would have a notable impact on the base of this ROI chart. But overall, the pipeline of our future games would improve this ROI.

Looking at this specific quarter, we just had one title actually recouping full investment in the quarter. And I have to say that obviously, we have a pipeline of many games that were initiated many years ago. And for example, the Metro VR game. It's a really good VR game, one of the best games actually released in that quarter. But the VR market is not what it used to be. And it did perform well compared to other VR games, but it would require many quarters or even years to recoup the full investment.

But as long as you make really good games and high-quality games, they would continue to perform quarter-over-quarter. So as mentioned, we will continue our ongoing work to increase ROI and improve efficiency.

Looking at the investments. Investments were around 40% higher than the book value of completed games, meaning our releases in the quarter. So we're still investing more than the value of the games releases in the quarter. But I'm happy that despite this, we delivered a solid margin and cash flow in the quarter, obviously, driven by the catalog.

The book value of completed games development now in Q4 is now expected to reach around SEK 1.4 billion, obviously improving this ratio. So Kingdom Come II, Wreckfest, Killing Floor and a number of other titles. And again, at the end of December, we had SEK 7 billion of ongoing game development across 120 game development projects.

Now looking forward, I believe we will have much more balance over the coming year and years between investments and completion of our game releases, and that would obviously also improve our cash flow generation. We have some imminent releases in this quarter. And actually, tomorrow, we are releasing the next remastering or remastered Tomb Raider IV to VI. There's a lot of fans waiting for that to be released. The last one we did last year was exceeding our expectations, and I have no reasons to believe that this won't please fans either.

A bit later in the quarter in March, we are expecting to release Wreckfest 2 finally from our friends at Bugbear in Finland to start on PC early access, and we will develop the game together with the community to be released as a full version next financial year as it looks right now, on all formats.

Wreckfest has been one of our most successful franchises over the past years.

And finally, Killing Floor 3 from Tripwire. Tripwire is an iconic developer that joined the group now 4 years ago. And they've been working on this game since then. It's a sizable team in North America, and I'm confident in their ability to ship high-quality products.

Pleased to see some early previews on the game from fans. And I know they next week have a [ beta ] running with the community. And we all look forward to the full release on March 25th on all formats.

Looking on the Mobile Games segment. Obviously, the reported numbers, including Easybrain. But post quarter end, they have been divested. So next quarter, we would only report CrazyLabs and DECA. But organic growth reported improved significantly to 3% year-over-year from minus 7% in preceding quarter.

The adjusted EBIT margin amounted to 24%, which is lower year-over-year, driven by, as you see here, higher user acquisition costs and with a tough comparison from last year's record high profitability. Last year, we had 37% EBIT margin in the quarter, which was amazing. Now we have 24%, which I still think is okay.

But when you're looking at mobile games, it's very difficult to look at the individual quarter. What's important is obviously, the long-term trend and the more you invest in user acquisitions, the more return you will have later. So if we invest a lot in user acquisitions, that's a good signal, because if you have good management teams, they know what they do. So that investment will pay off later.

And very pleased to see, if you look at the net sales drivers now including the Easybrain titles, really pleased to see a new title from our friends at CrazyLabs, Bus Frenzy, actually being #2 already as a new hybrid casual game.

Bus Frenzy, alongside another successful game they had, Alien Invasion, but also continues to perform, which I know they're working on for the future, alongside 2 other hybrid casual titles that actually in the end of third quarter continue to perform and they are now doing significant user acquisition investments. So we're really looking forward to the CrazyLabs growth in the coming year.

However, the profitability -- reported profitability will be impacted of [ high user ] acquisitions now also in the fourth quarter, and as we see now first half of next financial year at least.

Moving to Entertainment & Services, which had a really strong quarter, showed 19% organic growth, and it was primarily driven by Plaion Partner Publishing, which had several successful releases from partners in the quarter. Then the largest one being Undisputed, a new boxing game made in -- developed in the U.K. that we supported them with publishing. So this business segment also had a notable digital revenue, but it's accounted as Entertainment & Services revenue.

The adjusted EBIT margin were 9% compared to 12% last year, and the lower margin is explained by the product mix effects. Last year, we had notable royalty revenues within Middle-earth Enterprises. So that's the difference.

We did have high expectations or we did have expectations at least on the new The Lord of the Rings cinematic movie -- The War of Rohirrim. And the performance so far has been financially soft. I personally enjoyed watching the movie. And hopefully, there is more fans of Middle-earth and Lord of the Rings that will enjoy the movie on cinema and streaming services in the future, generating more revenues.

So with that said, I would like to hand over to Muge.

[Muge Bouillon, executive]

Thank you, Lars. Good morning, everyone. It's a pleasure to be here. I'm very happy to report our financial performance.

Well, before we plunge into the numbers, it's worth mentioning that all the numbers we'll be talking about today exclude Asmodee following the spin, as we said. And the numbers are in line with the preliminary numbers we had provided as part of the trading update in the end of January.

You will see that the net sales of SEK 7.4 billion in the quarter represent a 3% shortfall versus the same period last quarter -- last year. The main driver of that is the perimeter change as part of the divestments of Gearbox and Saber the same period last year. So once you exclude the effect of those perimeter changes, as Lars mentioned, we have an organic growth of 7%.

And the main reason of the 7% organic growth comes from our entertainment and services activity, which actually grew by 19% and in particular, the Plaion Partner Publishing, thanks to several successful releases, but also including the boxing game that Lars mentioned, Undisputed.

Mobile also grew slightly, 2% year-on-year, but supported by the user acquisition cost that we just also mentioned.

As far as PC console element, it was only slightly down by minus 1% on a pro forma basis, impacted by a few notable releases that amounted like SEK 250 million for the quarter compared to 50% higher the same quarter last year.

If you were to look at the gross margin, you'll see a drop of 7 points compared to the same period last year. So I would say there are 2 main drivers to that. Half of that comes from the perimeter changes again as part of the divestments of Saber and Gearbox, therefore, lower PC console contribution in the margin. And the remaining part is really other mix effects, particularly the net sales growth in lower-margin partner publishing activities in our Entertainment & Services segment.

Moving on to the right side. If we were to look at our marketing expenses, you will see that our marketing expenses as a percentage of net sales grew by 3 points to 14% compared to the same period last year. The primary driver is really the increase of user acquisition costs. As mentioned again, these are investments that we expect to benefit in the coming quarters, years.

The user acquisition cost that you'll see increased by around SEK 200 million, from SEK 646 million to SEK 840 million in the period. And we did enjoy, as Lars mentioned, some new releases coming from our CrazyLabs studio.

I'm very happy to look at the evolution of our operating expenses. You will see that compared to the same period last year, we benefit an improvement of 7 points. We are all proud because almost entire improvement comes from the restructuring program and the benefits that we have put in place over the last quarters.

The adjusted EBIT represents almost SEK 140 million lower with SEK 1.2 billion for the quarter compared to the same quarter last year. It's worth mentioning that PC console contribution was more than SEK 500 million, and it exceeded management's expectation for the quarter's performance.

Our Mobile segment, however, limited that impact with significant investments, as we mentioned, in the user acquisition costs, but again, that we hope to benefit in the coming quarters.

Let's move on to the next slide. Well, I'm very happy to report this slide, our cash flow, where you will see a nice change of pattern, as we had previously communicated, where the free cash flow after net working capital amounted to SEK 907 million, which is considerably higher, more than SEK 600 million higher than the same period last year.

There are 2 main reasons explaining the improvement and the cash generation. One is the benefits, again, of the restructuring and perimeter change leading to lower CapEx. And the second one is working capital improvements, primarily our Plaion studio with proper steering in place. So, very happy to see these numbers.

Looking at the net cash flow from acquired divested companies, they primarily related to the earnouts. As a result, overall, you will see that the cash flow for the period amounted to SEK 242 million, which is SEK 1.9 billion higher than the same period last year. So a nice reason to be happy with what we see.

Now let's maybe look at the right-hand side. You will see that the net debt at the end of December was SEK 3.2 billion. It's worth mentioning that by February 7th, the total available liquidity of our group amounted to SEK 12.7 billion, of which SEK 7 billion cash. So, another reason to be happy.

But let me give you a bit more color. And let's take a look at the net cash earnout on a pro forma basis as well.

You would recall after the quarter on January 23rd, Embracer announced at the closing of Easybrain divestment. Post the transaction, we have also announced a capital injection of SEK 400 million into Asmodee. So on a pro forma basis, if you were to take into account the net proceeds from the divestment of Easybrain of SEK 12.8 billion and the equity investment in Asmodee for SEK 4.6 billion, we have a net cash position of SEK 5 billion.

Looking at the earn-out obligations of SEK 2.3 billion at the end of the period, it's worth mentioning that a very modest part is expected to be paid in the course of next year, only SEK 0.5.

Let's now move to the next slide. But before talking about Q4 '24-'25, I think it's worth that we take a look at the left side of the chart and talk about Q4 '23-'24 due to all the perimeter changes we have been exposed and we enjoyed. You will see that the reported Q4 '23-'24 numbers amounted SEK 1.4 billion of EBIT at group level. The divestment and spin-off, so the perimeter change effects represent a total of over SEK 700 million. So the comparable base going forward for the same quarter is SEK 717 million. So it's worth mentioning that the base itself is subject to an important change of perimeter.

So on that perimeter change, when we were to look at Q4, on the PC console, we expect a higher adjusted EBIT year-on-year, primarily driven by the key releases, Kingdom Come: Deliverance II as well as Killing Floor 3 that we expect to be released at the very late of the quarter. However, the quarter is expected to be negatively somehow impacted by Hyper Light Breaker released in early access on PC in early Q4.

Looking at mobile, we expect, as mentioned, limited EBIT contribution due to investment in user acquisition costs. For Tabletop segment, the financials are no longer to be a part of the group. So nothing to say. As far as Entertainment & Services, we expect a limited EBIT contribution as well, simply just no notable product releases expected during the quarter and in a seasonally softer quarter.

So with that said, I'd like to hand over back to you, Lars.

[Lars Wingefors, executive]

Thank you so much, Muge. I would like to provide some color on the years ahead, or we call it comments here. So looking ahead, in the 3 coming financial years, we are currently scheduled to have 10 to our definition, more than 100 game developers at peak, at least, AAA games, and we already have all those 10 in active development. [ Whereof ] 2 currently are scheduled to be released in the end of the upcoming financial year '25-'26.

I have to -- I would like to reemphasize that I don't dare, or we don't dare to, if needed, put more time and resources into game releases in the end of the cycle to improve the quality and the performance ultimately. Obviously, we always plan to make fantastic games from the beginning, but plan changes sometimes.

In addition, next year, we have a slate of -- I would say, a very sizable slate of exciting in terms of investment size, midsized releases, including the Gothic 1 Remake, REANIMAL from our friends in Malmo, Fellowship, developed here in Stockholm, we have Deep Rock Galactic: Rogue Core in Denmark, we got Titan Quest II, Screamer, made at our -- with our friends in -- at Milestone in Italy, we've got Satisfactory finally on console, and we are expecting to have the full release of Wreckfest 2 across all platforms.

On top of this, we have a similar amount of unannounced titles scheduled to be released next financial year, currently scheduled to be released. Worth highlighting in the first quarter next financial year, we are not expecting to have any notable PC console game releases. And in the first half of next financial year, we expect the Mobile Games segment to be in growth mode, implying high user acquisition to sales, however, obviously, with a positive ROI post that period. We also expect continued -- the efforts addressing the operating cost and improved efficiency to have some impact in the next financial year.

Yes. So to give you some closing remarks before handing over to Amar and the Q&A. I would like to say that I'm very proud standing here today. Our people have made enormous achievements transforming the group since 2023. Embracer Group has never been in a better position. Through restructuring, divestments and spin-offs, we have put ourselves in the driver's seat again.

With a strong net cash position and a cash flow generating business, we are ready to continue our value creation journey one step at a time. Embracer Group consists of unique and [ in replicable ] set of IPs, studios, talents and companies with attractive path for future value creation.

The Lord of the Rings and Tomb Raider are amongst the most well-known and iconic transmedia IPs, while our IP catalog consists of more than 300 game IPs. Our Scandinavian games, Coffee Stain, Ghost Ship, Experiment 101, Tarsier, Tuxedo Labs are amongst the global leaders in the game development.

4A Games, Crystal Dynamics, Dambuster, Eidos-Montreal, Gunfire Games, Tripwire, Warhorse Studios, are recognized developers of high-quality AAA games. Bugbear and Milestone create racing games for dedicated audiences. CrazyLabs and DECA Games execute very successfully on their mobile games strategies. This is just to name a few fantastic companies within Embracer, supported by our talented individuals that I'm confident will deliver great value for many years to come.

On the back of the successful listing of Asmodee, I'm more confident that spin-offs creates value. Regardless of precise future asset splits, I would like to emphasize what matters the most to make sure our product stands out in terms of innovation and quality, driven by dedication and talent of our teams, just like Warhorse has proven with Kingdom Come: Deliverance II. This delivers value to all our stakeholders, gamers, employees and shareholders that will benefit from all this.

Today's market is tough and consumers rightfully have high demand to spend their hard-earned cash. Our industry continues to be under huge transition, driven by consumer demand, inflation, [indiscernible], lack of risk capital, new technology, AI and different tools. As the rest of the industry, we will continue to adapt and optimize to remain an efficient and entrepreneurial force within gaming.

Today, I'm getting approached for more consolidation opportunities around mergers, acquisitions and divestitures than for many years. We will stay prudent and firmly committed to maximize shareholder value.

So to conclude, I'm still standing here. I still believe in the vision we set out to provide a home and support for entrepreneurs and creators and to have them strengthen each other. For me, it has been a long journey over 32 years since I first started my business within gaming.

Today, I feel more energized and empowered than ever going into the future. We have many of the best gaming IPs companies and for most people. I know they will deliver fantastic games and create value, and I can't wait to see what the future holds.

So, thank you, all.

[Amar Galijasevic, analyst]

Welcome back to the Q&A session. And I would just like to remind you all that, you're allowed to ask questions here in the room. If you have any questions, just raise your hand and we will pass a mic along. Then we'll take the question from the teleconference and also you can send in your questions through the web chat. But I think I'll warm up the stage a bit with a couple of questions from my side.

And I guess the big topic today and also over the past couple of weeks has been Kingdom Come: Deliverance II, 1 million copies in less than 24 hours, approaching 2 million as we speak. How has this played out compared to your expectations? Are there any learnings you can take away from Warhorse and from this success to the rest of your studios?

[Lars Wingefors, executive]

Yes. So I think I always said that, I have high expectations on Warhorse and Kingdom Come. I know they were a fantastic team, and they had some good on their hands. Comparing it to the actual budget and forecast we had within Plaion and Warhorse, they are exceeding expectations. Are they exceeding perhaps my own a little bit higher expectations? They are. I think the game is just outstanding. I'm really pleased to see that. And it seems to be performing a bit better than even my own high expectations. What gives me really confidence it's a very high-quality, unique, almost unique game that I'm confident will sell for many, many years to come. That's important so.

[Amar Galijasevic, analyst]

And are there any kind of specific learnings you can do from Warhorse? What are they doing that's creating this success?

[Lars Wingefors, executive]

I think Warhorse is organically set up studio with some absolute amazingly creative people that knows how to make fantastic games. So if you allow them to take their time to make their vision and not interfering, outcome something fantastic. And I think that magic, obviously, we see across many other teams. And I'm confident that we have many other teams and IPs that would create -- also create some very high-quality products over the coming years. So I think that's the learning.

And another learning is obviously to allow them -- from the beginning, I guess it was like 2 years more. But the game was -- we were discussing was it to be shipped prior to Christmas in November or -- and then we decided, okay, let's put another 3 months of polishing, bug fixing and everything. And I think it really played out very well, that it's a very good experience for the consumer buying the product. So I think we did a similar thing with Dead Island and also with the first Metro release. And I think putting that extra energy and resources in the last mile of development is worthwhile.

[Amar Galijasevic, analyst]

Good. And if we -- I mean, today, we've got some more color on the pipeline. You have 3 AAA projects for the coming 3 years, 2 scheduled for next year at least. Can you tell us anything more about the size of those games coming out next year, the AAA games in relation to maybe Kingdom Come: Deliverance or Dead Island or anything you've released in the past?

[Lars Wingefors, executive]

Well, they are -- it's 2 very big titles. I think the base budget forecast is potentially at the same or a higher level than Kingdom Come. Now, let's see how much Kingdom Come do, it's overperforming. So in the end of the day, it's always hard. But it's 2, I think, already really good-looking games. In terms of invested amounts, it's one of them being a bit smaller and one of them being a bit bigger. So...

[Amar Galijasevic, analyst]

Okay. I hope to get more information during the coming quarters. And how do you yourself think about the ROI for next year? I mean, you have these 2 potential then AAA games, a bunch of midsized games. But I guess most of these games have been in development for a couple of years. You shut down game projects and studios over the past 18 months. These games have remained, have the budget -- I mean, is there a risk that the budgets have increased too much that the ROI gets a hit? Or are you expecting an ROI improvement already next year?

[Lars Wingefors, executive]

Well, it's a bit mechanical that ROI, because it's obviously based off, is it SEK 25 billion or so. So it takes a while to move the needle. I think we will move the needle driven by Kingdom Come and those titles and other things, but it will take some time. I think looking at one of the titles, without disclosing too much, I need to be careful, I know for a fact that their previous game had a fantastic ROI. So I'm very confident that this one will do well as well.

[Amar Galijasevic, analyst]

Okay. And maybe a more broader question for both of you. Are you now satisfied with how the group looks in terms of studios, cost structure, pipeline? Or is there still work to do here to shape the group up in the coming years?

[Lars Wingefors, executive]

First of all, I don't like the word happy. As an entrepreneur, you're never happy as such, are you? No. But obviously, we have a lot of efficiency measures and consolidation that is ongoing. We have done a lot over the past years. Muge has been part of the teams doing it and come a long way, but there is more to be done. As I said just before, the industry is in a change, and it's a brutal market. And you just need to have the right IPs size, you need to be efficient. And -- but if you do, you make a lot of money. So stay focused, do the right things and then you make a lot of money. And we have a plan doing it. So I'm confident.

[Amar Galijasevic, analyst]

Okay. Maybe a similar follow-up question. You've divested Easybrain now. How do you kind of reason about the rest of the mobile business remaining within Embracer? And what's the logic behind that?

[Lars Wingefors, executive]

No, they're great entrepreneurs. [ Sagi ] and the team is fantastic entrepreneurs that has been in mobile for, I imagine, almost 20 years, 15 years and Ken at DECA and his team is also really good. So it's a great platform for us to be mobile and to potentially continue growing, deploy more capital in the future.

If we are to start any sort of new deployment of capital, I think it will be in mobile where we see a lot of very accretive opportunities, smaller, acquiring certain IPs or smaller assets that we could integrate with strong synergies. So no, it's 2 fantastic companies. Easybrain was larger, also an amazing company, really good management team. I've been honored to -- they've been part of the group. Now they are with a good home, but I think I have a deep love for CrazyLabs and DECA.

[Amar Galijasevic, analyst]

Okay. Time is flying. And before we let in the room and the teleconference, I just want to take one question, if I may, from the chat here, which struck me here. It's related to Asmodee actually and the spin-off. And the question is, Asmodee costs related to its listings were over EUR 28 million, quite a lot of money. How is that possible?

[Lars Wingefors, executive]

To start, I think we need to look back 1 year where were we. We had a lot of debt. We had not executed the spin-off. We have not announced the plans. We have not done all the divestments. We were in a difficult position. I know we had a plan, but we still haven't executed on that plan.

Now then we need to -- the plan was, obviously, we need to refinance. We need to negotiate with new banks, get new terms loans. And fantastic banks, they've been very supportive, but obviously, banks are here to make money. So part of that deal is you get -- you have some interest rates, but you also have some commitments to use them as advisers to do certain things, including the listing. So your power of negotiating are a bit more limited when you are in the -- back leaning. If I would negotiate today, it could be cheaper.

[Amar Galijasevic, analyst]

I understand. Should we leave maybe for some questions from the room, if we have any, just raise your hand. People are a bit shy today. Maybe we'll open up for the teleconference before we get back to the chat here.

[Operator]

Yes. We have a few from the teleconference. And the first one is from Martin Arnell from DNB.

[Martin Arnell, analyst]

Lars, can you share some light on Coffee Stain in the quarter and the key drivers, how you see the growth profile and margins in this business throughout the year and potentially also after the planned spin-off?

[Lars Wingefors, executive]

Are you talking about, Martin, Coffee Stain & Friends or Coffee Stain as a business?

[Martin Arnell, analyst]

Actually, Coffee Stain as a business, yes.

[Lars Wingefors, executive]

Yes. So Coffee Stain had one of the strongest quarter ever in the third quarter with an amazing adjusted EBIT result driven by actually Goat Simulator franchise and a very strong performance on Satisfactory. So Coffee Stain always have solid quarters, but this quarter was really strong. It's not -- obviously, every quarter they have deals with platforms. So it depends on product releases and so on.

On the long-term, I'm confident in the team and their ability to create more content and great games that will drive growth. I know they are very committed to bring high quality and to work with their communities. So they will take their time to really do the right things that would ultimately create also financial success.

[Martin Arnell, analyst]

Do you feel positive on their growth outlook in the new fiscal year?

[Lars Wingefors, executive]

Yes. I'm always -- on the long-term, I'm positive. I think it's -- I think we should always be cautious about growth outlooks in general. It's difficult to say. It obviously depends on when certain games are releasing and certain versions of game, for example, coming as a full game release, as Satisfactory did last year, it had a notable impact.

So, I don't know. I just -- I'm cautious to say that -- any strong words about their growth, but I'm just in general very positive. If everything hits next year, it will be a good year.

[Martin Arnell, analyst]

And on the other part of Coffee Stain & Friends, the mobile business, you had a lot of comments in the report about the outlook for mobile. Are you confident in the strategy here with the UA -- increase of UA investment and that that's going to pay off? Can you share some more color on those comments?

[Lars Wingefors, executive]

Yes, 100%. I talked to [ Sagi ] the other day, and I meet the team next week actually and I have looked at the data. They have very solid teams working on monetization and they know what they do. So if they invest a lot, that's a good thing for shareholders.

So ultimately, that will bring a positive cash generation on the long-term. But the profitability would be very muted in the fourth quarter, and as we see right now in the first half of next year. Because of reporting practice, we can't capitalize investment into user acquisitions.

[Martin Arnell, analyst]

Got it. Okay. And my final question is on your discussions around asset allocation. Could this include alternatives to this planned next coming spin-off? Do you have any alternative tracks to the planned spin-off of Coffee Stain and mobile?

[Lars Wingefors, executive]

When you have a plan as a public listed company, you have that plan until you have a different plan. So now we have one plan, and that plan is the Coffee Stain & Friends in the end of this calendar year. So I don't want to create any headlines, Martin. So that's the plan.

[Operator]

[Operator Instructions] The next question is from Simon Jonsson from ABG Sundal Collier.

[Simon Jönsson, analyst]

So maybe you touched a bit on this already, but I'm interested in your view, Lars, on the size of both Coffee Stain & Friends and Middle-earth & Friends with the next spin-off here. And if you think that both will be of sufficient size, as they are currently, as publicly listed companies? Or if you think one or both of them could be sort of better off doing some kind of M&A?

[Lars Wingefors, executive]

Now again, we have a plan. Obviously, there is many alternative ideas and things. But I think both have the scale. It's obviously down to what growth cash flow generation would the business have to be, and what kind of asset would it be. I think there's many factors why it could be a good public company on its own. I think both of them has those parameters.

So I'm not overly concerned about that. So -- but back -- we have one base plan, Simon, and it's hard really to give too much color whether we are thinking around any kind of further acquisitions or mergers or different parameters. We have a base plan.

[Simon Jönsson, analyst]

Also just on Lord of the Rings IP, just wondering if you can share a bit what you think about the pipeline here for games, and also other kind of potential royalties for Lord of the Rings the coming year here? I know we have the movies, but that's a bit further ahead.

[Lars Wingefors, executive]

Yes. No, I think it would be not -- it would be not a growth year as such. There is not a lot of new products coming. Let's wait and see how the products are performing that are coming. There is a number of products, including games. But I think the long-term, it's still way too early. Well, start talking about significant royalties coming in or new games developed by Embracer Studios. We are still years away from that, many years. So it's -- we are still fairly early in those processes.

[Operator]

And the next question is from [indiscernible] from Barclays Bank.

[Unknown Analyst]

I have 3 questions. So the first one, for the subscription development deals in third quarter, what are the cash dynamics? Will they be paid -- will you pay the cash over time? Or will it all come during FY '25? And the second one...

[Lars Wingefors, executive]

Sorry, could we take one question at a time? I'm becoming a bit old and my memory is a bit short. So the first question on cash, did you hear that, Muge?

[Muge Bouillon, executive]

Yes.

[Lars Wingefors, executive]

Okay. Could you answer it?

[Muge Bouillon, executive]

It's about the subscription, whether the cash is going to come in immediately. So while we do capture the cash in the course of the quarter, there is also a remaining bit, which is continued -- supposed to continue in the coming quarter as well, but we do already translate in the course of the quarter.

[Unknown Analyst]

And my second question is also related to this. So in terms of next year, do we expect -- do you expect any one-off subscription or development deals next year? Or is the boost you saw in third quarter, I believe a profit hold that needs to be filled in FY '26?

[Lars Wingefors, executive]

Well, perhaps I can give some color on that. I think there is less of those deals in the industry nowadays. There is services that we are providing content to if we think it's commercially right. The platforms are not paying any crazy amounts anymore, but they haven't done for the past 12 months either. And when I look at the quarterly numbers of such deals in the past 12 months, each quarter, it's fairly similar actually.

So the comparison numbers would be those lower level numbers that we have seen in the past year. And we are not -- I'm not expecting to have any crazy big deals on subscription programs coming through over the coming year. So there will be, I think, the continued business as usual that we had in the past 12 months basically.

[Unknown Analyst]

And my final question. So given the track record of delays across the industry in the last few years, how are you thinking about the risk of the 2 AAA games in FY '26 being delayed into FY '27? What will you factor into guidance for FY '26 when it comes to that? Or is it accounted in any way?

[Lars Wingefors, executive]

Well, we don't provide guidance to the market. So -- that's the first statement. No, but obviously, the 2 big titles next financial year is coming in the end of the year. And I would say it's a risk, could be even a higher risk that at least one of them are [ slipping ].

Now we have a plan and the plan is they are shipping. That's what everyone is working against, and I would like that to happen. But just learning from our past years and the industry in general. The incremental return you are getting by putting the extra mile, as we did with Kingdom Come or Dead Island and other releases, is enormous. So I don't dare for a second to do it if we have to do it or should do it. But that is not the plan right now.

But as a long-term shareholder, that's why I would like to give some color over the coming 3 years. If things are moving between quarters, between years, it doesn't matter so much. The cash flow is more or less the same on the long-term. Hopefully improved a bit.

[Operator]

There are no more questions from the telco.

[Amar Galijasevic, analyst]

Okay. I think we can take a couple of questions here before we round up from the chat. A lot of questions on Wreckfest actually, yes.

[Lars Wingefors, executive]

Wow! One of my favorites.

[Amar Galijasevic, analyst]

There's been a lot of emphasis on Wreckfest 2 in the presentation, some people think. And the questions are really, how important is the game for next year? Is it THQ's biggest title? And how is development doing next year, or now?

[Lars Wingefors, executive]

I think looking at -- well, to start, Wreckfest is a fantastic game by my fantastic team that joined very early in the Embracer journey. And I know they put all their energy to create something really good. And they have done it for many years now, that Wreckfest 2 thing. So -- and Wreckfest has been an absolute top. It's a top 3 or top 2 franchise within THQ Nordic over the past years.

So obviously, there is a huge community. So if we do this right, they could have a success on their hand, I believe. But it's never easy to make games. So let's wait and see, and should be humble.

Looking at their forecast, the bottom up, it's not their biggest titles as such financially next year. It's a big title. It's a sizable title for THQ Nordic. In the greater scheme of all our releases, it's important, but define as mid-sized in terms of revenue and investment.

[Amar Galijasevic, analyst]

And another question on PC console here. Following the success of Kingdom Come: Deliverance, the question is basically, will there be a shift in focus from you as a company putting more emphasis towards AAA and kind of big budget games? I know you announced the pipeline here with 10 AAA games. Or will you continue as usual?

[Lars Wingefors, executive]

No, it's been no shift. Our team do what they do best, and we will continue doing that. So there is no shift in strategy.

[Amar Galijasevic, analyst]

And finally then, a question here in regards to the organizational changes you've done. You have a slimmer organization in place. Would you say you have more resources now to allocate and spend towards the back catalog?

[Lars Wingefors, executive]

Interesting question. I think there is plenty of opportunities on our catalog, but also porting older products and IPs back to modern formats again. So we have a gold mine we are -- of IPs we are working through.

We could improve those efforts. I was really pleased to see the work Aspyr have done with Legacy of Kain, Happy to see Tomb Raider tomorrow. There's many other things coming over the coming year, but we can do even more. So -- and financially, it's also obviously something you already own and have invested into. So I think with modern technology and experienced teams, we can do even more.

[Amar Galijasevic, analyst]

Okay. Good answer. And time flies. I think we'll wrap it up here. Do you have any final words, Lars, to round this presentation up?

[Lars Wingefors, executive]

No. Well, I'm energized for the future. So I can't wait until the reporting in May.

[Amar Galijasevic, analyst]

Good. Thank you all for coming and listening into the presentation.

[Lars Wingefors, executive]

Thank you.

[Muge Bouillon, executive]

Thank you.