“Lord of the Rings” owner Embracer Group has reported a 13% increase in net sales year-on-year in Q2, in part thanks to its intensive restructuring program.
Sales were also up slightly (by approximately $36 million) from Q1 to Q2, the latter of which covers July to September 2023.
“In Q2, we delivered a stable quarter, with adjusted EBIT of SEK 1.8 billion [U.S. $170 million] and we expect to reach the forecasted range for this year,” said CEO Lars Wingefors. “The free cash flow of SEK 0.4 billion [U.S. $38 million] shows a clear improvement compared to Q1. Our restructuring program is making good progress, with opex savings ahead of plan and capex savings expected to contribute notably in the second half of the year. We continue to take important steps for the future and I am confident that we will emerge as a stronger company.”
The most profitable sector of the Swedish company in Q2 was the Entertainment & Services division, which includes “Lord of the Rings” holding company Middle-Earth Enterprises, where sales jumped up by 76% to SEK 1,381 million (U.S. $130 million). By comparison, the PC/Console games division was down by 5%, mobile games was up by 2% and tabletop games up by 25%.
During a presentation of the report on Thursday morning, investors and analysts peppered Wingefors with questions. One, from City, said it was a “key concern” that the performance in Entertainment & Services might be an anomaly.
“Middle Earth Enterprises has a very strong lineup for the future,” Wingefors replied. “Now they had some good momentum, we had ‘Magic the Gathering’ licensing revenues coming in this year [from a cross-branded card game titled ‘The Lord of the Rings: Tales of Middle-Earth’] but there is, I would say, a very strong business plan that will generate significant licensing revenue both this year but especially the years thereafter.”
“And on top of that, obviously, we will bring potentially more product to the market throughout our own channels of Embracer in the coming years. Again, Middle-Earth is a very long-term investment and I think it’s one of our absolute greatest assets and I wouldn’t define the second quarter performance as a one-off but it would be a volatile business because of the nature of the business.”
The past year has been incredibly rocky for Embracer, who announced a significant restructuring program in June that has resulted in multiple games studios being shuttered, widespread layoffs and dozens of high-profile project cancellations.
The Q2 report shows that there are 36 fewer games in development year-on-year in Q2 2023 and the number of games developers owned by the group has dropped from 10,899 to 10,654 in the same period.
The report also confirmed a 5% reduction in Embracer’s headcount, a total of around 900 people, of which Wingefors said in a statement: “It’s never easy to part ways with talented individuals. I would like to put on record a special thanks to the people who have left Embracer in the quarter. These are difficult decisions and we do not take them lightly. For me, personally, it is crucial that the program is carried out with compassion, respect and integrity.”
Big IPs in the video game world have been impacted by the maelstrom, including “Star Trek Online” developer Cryptic Studios, which has seen significant layoffs according to Gamesindustry.biz while fans fear a long-awaited re-make of Star Wars title “Knights of the Old Republic,” which is theoretically being developed by Embracer’s Saber Interactive, has quietly been scrapped. (The latest report for Q2 shows that, as of Nov. 16, the game is still on Embracer’s slate for PC and Playstation, although no release date has been /confirm/ied.)
Embracer’s cost-cutting measures followed a wild two-year spending spree, which saw them snap up dozens of games studios as well as heavyweight IP incubators including Middle-Earth Enterprises (the holding company behind the “Lord of the Rings” and “Hobbit” franchises) for $395 million, publisher Dark Horse Comics (which owns titles including “The Mask”) and Anime Ltd, a U.K.-based distribution company for Japanese animated content. Embracer also bought the rights to the “Tomb Raider” franchise from developer Square Enix among other titles.
Splashing the cash was fine while interests rates were low and audiences, stuck at home for two years during the COVID-19 pandemic, flocked to computer games and TV — but with the pandemic effectively over and a global economic downturn making money more expensive, Embracer last year started looking for a way to mitigate its reported $1.5 billion worth of debt, with a current target of halving it to $750 million. The initial solution — a $2 billion deal with a mystery partner (believed to be the Saudi-owned Savvy Games Group) — collapsed in May at the last moment after months of negotiations and directly led to Wingefors announcing the emergency restructure program.
In the latest report, Wingefors reiterated that the J.R.R. Tolkien stories are a crucial element of Embracer’s ongoing success. “Our strong IP portfolio is a key part of our long-term strategy, and we have exciting plans for the ‘Lord of the Rings’ IP across our segments in the years ahead,” he said. In February, Warner Bros. Discovery confirmed the two media giants had struck a deal for new “Lord of the Rings” films with New Line Cinema and Warner Bros. Pictures. With most of the year hampered by industry strikes, no further details have emerged since then.
