Last year, the Saudi government-backed Savvy Games Group invested $1 billion in the Swedish gaming giant Embracer Group. Eleven months later, in May, Embracer drastically adjusted its guidance due to a $2 billion development deal with Savvy falling apart. As a result, Embracer’s stock crashed, and the company was forced to redraw its plans.

Just three weeks later, in June, Embracer revealed its restructuring program. Furthermore, the company raised 2 billion SEK ($182 million) in July with a directed share issue.

Last week, Embracer released its interim report for the quarter ended June 30th.

The report sheds light on Embracer's next steps regarding its cost-cutting goals:

Embracer aims to reduce its net debt from $1.53 billion to $729 million.
Embracer is targeting a total yearly cost reduction of $337 million ($264 million in capital expenditure and $73 million in operational expenditure).
Studio closures have already started, with more to come before the end of the year.

There's no way around it: cost savings in the hundreds of millions means cutting thousands of employees and multiple studio closures. On the earnings call, Embracer CEO Lars Wingefors stated that the first closures are underway. The company has stayed silent about the details, although Campfire Cabal’s closure became public earlier this month.

Wingefors stated the company has 215 projects in development, out of which 62 are announced. He added that unannounced games planned far into the future are more likely to get cut. According to Wingefors, Embracer is working on finding new partners for some of their games or new homes for certain studios.

Studio closures and layoffs are always a tragedy. Yet, in a way, the Savvy deal falling apart was merely the triggering event for the restructuring. Considering Embracer's expansion speed and the increasing cost of capital, it might have only sped up the inevitable. Between 2019 and 2022, Embracer made more than 60 acquisitions. By the end of 2022, the company had over 15,000 employees in over 130 internal studios spread across the globe. In 2023, acquisitions came to a halt.

Some of Embracer's studios build and operate hugely successful games in various shapes and sizes, such as Borderlands (Gearbox), Deep Rock Galactic (Ghost Ship Games), and Star Trek Online (Cryptic), to name a few. Unfortunately, this isn't the case for all 100-plus studios, as some focus on porting and outsourcing work, and an alarming number have failed to ship commercially successful games in the past few years.

Not all studios joined the group as healthy businesses. Embracer has brought in quite a bit of raw development capacity in addition to the widely reported heavy hitters. This capacity was going to turn into revenue with the Savvy deal, but without utilization, capacity is just cost.

The interim report also revealed Embracer taking new-product decision making to the group level. When companies end up in trouble, they tend to increase central control. Embracer is no exception, as it’s rolling out a centralized greenlight system for new games.

Finally, the quarter’s key figures in brief:

Embracer’s net sales were SEK 10.5 billion ($951 million), up 47% year-on-year.
By segment, the net sales were:
- PC/Console: SEK 4.0 billion ($363 million), up 74%.
- Mobile: SEK 1.438 million ($130 million), down 3%.
- The rest of the revenue came from tabletop (SEK 3.2 billion, or $289 million) and entertainment (SEK 1.8 billion or $167 million) divisions.
EBIT amounted to SEK 421 million ($38 million) with an EBIT margin of 4%.

All in all, the core business of Embracer is here to stay as long as the company can deleverage to gain some much-needed breathing room.

This post appeared in the Sunday, August 22nd version of Naavik Digest. If you enjoyed it, please consider forwarding it or sharing the piece with your followers. Also, remember to subscribe to Naavik Digest here.

#2 Gaming Market Update: August 11th - August 18th

By Mario Stefanidis, CFA, Naavik Contributor

For the week ending August 18th: The average return for gaming companies tracked by Naavik with a market capitalization exceeding $500 million was -3.7%. The S&P 500 returned -2.1% and the Nasdaq-100 returned -2.2%. Full access to the Naavik Gaming Company universe is available here.
The challenging week for the gaming sector was emphasized by Sea Limited’s (NYSE: SE) Q2 FY2023 earnings. The stock fell -29% after earnings and nearly -33% on the week after reporting a lower-than-anticipated 5.2% revenue growth in the second quarter. The deceleration was driven by a substantial drop in revenue from the company’s gaming unit Garena, as well as slowing growth at ecommerce business Shopee. Garena, which is the developer and publisher of the mobile battle royale title Free Fire, saw $443 million in bookings, down 38.2% year-over-year and 4.1% compared to the previous quarter. This is the seventh consecutive quarter where bookings have fallen for the segment, down 64% from a peak of $1.22 billion in Q3 FY2021.
The company’s flagship game has been banned in India, one of its largest regions, since February 2022, with no clear timetable on when it may return. The popularity of the battle royale genre has waned in recent years, which has affected Free Fire’s player base. Some glimmers of hope for Garena include a rise in both quarterly active users and quarterly paying users from the previous quarter. CEO Forrest Li pointed these out on the earnings call, where he stated that “Free Fire showed sustained signs of improvement in user retention and engagement.” Adjusted EBITDA for digital entertainment fell from $334 million to $240 million from the quarter a year prior, while the other two major segments swung from net losses to gains amid cost-cutting efforts.

Notable Venture Financing Deals

Embracer ZTX — *Source: Polkastarter Gaming*

ZTX, a web3 virtual world creation platform, has secured $13 million in seed funding. The company is a joint venture between South Korean metaverse platform Zepeto, which is valued at over $1 billion, and Jump Crypto, a division of Jump Trading Group. The round was led by Jump Crypto and saw participation from firms including Parataxis Capital, Everest Ventures Group, and Collab+Currency. Zepeto has recently partnered with brands like Gucci and Starbucks to participate in its virtual worlds. It also partnered with K-Pop girl group BLACKPINK in 2020, which saw the group participate in a virtual fansign event that rewarded participants with digital cosmetic items.
- The team behind ZTX consists of veterans from gaming giants like Roblox, Epic, and EA, as well as from established web3 ecosystems such as Cosmos, Flow, and Solana. Chris Jang, Co-CEO of ZTX, shared the team's enthusiasm about the funding round and stressed their dedication to building a robust foundation for creators. In the coming months, ZTX is planning to launch the Genesis Home Mint, which will consist of a collection of 4,000 distinct 3D District Homes. Owners of the homes will receive various benefits within the platform’s ecosystem.
Play Ventures, a Singapore-based venture capital firm, has secured a minimum of $78 million for its third gaming fund, as reported in a filing with the U.S. Securities and Exchange Commission dated June 22nd. Since its inception in December 2018, Play Ventures has made investments using two prior funds and is gearing up to deploy its third, called Play Ventures III. To date, Play Ventures has targeted over 100 companies spanning gaming studios, content providers, tools, and gaming platforms, with a primary emphasis on early-stage startups. The firm disclosed a net internal rate of return of 66% from its first fund and highlighted significant exits such as Reworks, acquired by Playtika in 2021, and Savage Game Studios, which was purchased by PlayStation Studios in 2022. Current portfolio companies include Gamefam from the first fund, and Odeeo and Original Games from the second fund.
Krafton has announced its intent to inject an additional $150 million into the Indian gaming and entertainment sector over the next two to three years. This comes three months after the South Korean publisher gained approval to test its battle royale game Battlegrounds Mobile India (BGMI) in the country, after previously being banned twice. The publisher’s recent pledge adds to its earlier investments amounting to $140 million across 11 Indian companies, comprising startups such as Nodwin Gaming, Loco, Pratilipi, and Kuku FM. BGMI is a modified version of PUBG Mobile adopted for compliance with the Indian market, in an attempt to capitalize on one of the largest mobile gaming markets in the world.

Notable Strategic Investments

Embracer Match Masters — *Source: CTech*

Candivore, the creators of the popular Match 3 mobile game Match Masters, received a $100 million strategic investment from private equity firm Haveli Investments. The deal will be financed through the Haveli VC Gaming Fund I, L.P. Candivore employs about 70 people and is headquartered in Tel Aviv, Israel. The company’s hit title, Match Masters, has been downloaded over 50 million times on Android and iOS, and has generated over $300 million in revenue. With the new investment, which gives Haveli a minority stake in the company, Carnivore seeks to launch additional casual game titles while expanding further into the U.S. market. CEO Gal Goldstein commented on the investment, highlighting the advantages of the capital injection, which allows Candivore to tap into Haveli’s “top-tier investors and operating partners.” Carnivore has raised $122 million to date, including a $12 million round in February 2021 and a $10 million round in May 2022.
Indian mobile adtech and digital marketing firm InMobi acquired Quantcast Choice for an undisclosed sum. Quantcast Choice is a leading consent management platform (CMP) for mobile game and app publishers. CMPs are software tools aiding in the collection and management of personal data in compliance with data protection laws such as the EU’s GDPR, California’s CCPA, and Brazil’s LGPD. Kunal Nagpal, InMobi Advertising's Chief Business Officer, stated that the acquisition would allow them to incorporate a globally acknowledged CMP into the in-app environment. Quantcast Choice is already affiliated with 40,000 mobile apps, but post-acquisition InMobi will guarantee the platform remains free for existing users. The Quantcast Choice CMP will be merged with InMobi’s publisher SDK.
Sega officially closed its acquisition of Angry Birds developer Rovio, in a deal worth $775 million. In January, Israeli game company Playtika showed interest in acquiring Rovio for $737.5 million, but negotiations between the two companies concluded without finalizing a deal, allowing Sega to step in with a slightly higher purchase price. The deal paves the way for potential crossovers between Angry Birds and Sega's many franchises, including popular characters like Sonic the Hedgehog. The deal is the latest in a string of large mobile gaming acquisitions that have included EA’s purchase of Glu Mobile and Playdemic in 2021, and Zynga’s purchase of Peak in 2022, to name a few.

Notable Studio Updates & Partnerships

NetEase Games has revealed its newest game development studio, named T-Minus Zero Entertainment and operating out of Austin, Texas. The studio will be overseen by industry veteran Rich Vogel, who has been involved in notable projects like Ultima Online and Star Wars: The Old Republic. He will be joined by Mark Tucker, who will take the role of game director, Jeff Dobson, who will be the studio’s art director, and Scott Malone, who will serve as the VP of operations and production. The team's combined pedigree spans companies including Bioware, Bethesda, and Zenimax. T-Minus Zero Entertainment's inaugural project will be a multiplayer sci-fi third-person action game. Vogel stated the studio's goal is to develop immersive gaming worlds promoting global player communities.
Savvy Games Studios, a subsidiary of Savvy Games Group, announced its rebranding to Steer Studios, aiming for a more autonomous direction. While the studio will continue as a subsidiary of Savvy Games Group, the rebranding is reportedly designed to differentiate it from its parent company and align with its new vision. Brian Ward, CEO of Savvy Games Group, stated that the change highlights Steer Studios' commitment to “charting new territories within the gaming industry.” Headquartered in Riyadh, Saudi Arabia, Steer Studios has over 50 employees and is a key component of the kingdom’s Vision 2030.

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