Embracer cuts forecast after collapse of "groundbreaking" $2 billion partnership deal

Embracer Group boss Lars Wingefors says the company has endured a "challenging" year due to game delays, weak consumer demand, and lackluster reception for notable releases.

Those struggles continued until the very end, with Wingefors explaining that a "groundbreaking strategic partnership" Embracer had been working on for several months fell through at the very last minute.

The CEO claims the partnership would've "set a new benchmark for the gaming industry," and said Embracer had already struck a "verbal commitment" with its would-be partner back in October 2022.

"The specific deal included more than $2 billion in contracted development revenue over a period of six years. The deal would have enabled a catch-up payment at closing for already capitalized costs for a range of large-budget games, but also notably improved medium-to-long-term profit and cash flow predictability for the duration of the game development projects," he said.

"All documentation was finalized and ready to go as of yesterday. We asked for the execution of the agreement before our Q4 announcement. However late last night we received a negative outcome from the counterparty. This decision was unexpected to the management and the Board of Directors of Embracer."

The sudden collapse of that partnership caps a mixed year for Embracer, which has become famous for spending big on companies and brands such as THQ Nordic, Gearbox Entertainment, and Lord of the Rings in a bid to realize its video game and multimedia ambitions.

The one that got away

According to Embracer's fiscal report for the year-ended March 31, 2023, consolidated net sales increased by 121 percent to SEK 37.6 billion ($3.5 billion).

Breaking that number down, PC and console game sales pulled in for SEK 13.4 billion, representing an increase of 58 percent year-on-year, while mobile game sales rose by 19 percent to SEK 5.8 billion. Tabletop Games contributed SEK 13.1 billion, an increase of 2,199 percent year-on-year (driven by the acquisition of Asmodee).

Although Embracer saw an upswing in PC and console game sales, the company noted that new releases like SpongeBob SquarePants: The Cosmic Shake and Scars Above performed below management expectations.

Dead Island 2, however, managed to exceed expectations and has now sold over 2 million units, becoming the largest launch in the history of Deep Silver and Plaion. Valheim, which launched on Xbox Game Pass in March, also delivered a "notable contribution," while the Metro franchise continues to be a mainstay for Embracer–with Metro: Exodus achieving a "significant increase in revenue" after selling 500,000 copies in Q4 alone.

At the time of writing, Embracer currently has 11,426 developers working on 221 game projects.

Looking ahead, Embracer says the collapse of its "transformative" partnership means that several titles with the potential to generate more than SEK 1 billion in net sales will now release in FY2024/25. As a result, the company feels that FY2023/24 (the current fiscal year) won't be the year when it manages to "maximize the value in Embracer."

Those factors mean the company now expects to generate SEK 7 billion to SEK 9 billion in adjusted earnings before interest and taxes (EBIT) during FY2023/24, representing a downward revision on the previously communicated forecast of SEK 10.3 billion to SEK 13.6 billion.