Embracer Group

Home , 4A Games, DECA Games, List of THQ Nordic games, New World Interactive, Saber Interactive

Update

Equity Research 4 September 2020

Embracer Group

Sector: Gaming

Many Power-Ups Gained FAIR VALUE RANGE

BEAR BASE BULL Redeye believes the increased number of studios in the group, the growing IP portfolio, and 95 205 260 especially the increasing quality in the games released are key drivers for Embracer’s continued success. Despite what many investors think, Embracer Group is not a one-man show, it is a family effort of doing something great in the gaming industry. EMBRAC.ST VERSUS OMXS30 OMXS 30 Embracer Group 200 Positive Chain of Events Two of the three major acquisitions following the Q1-report were composed by the two 150

founders of Saber Interactive (currently Embracer’s second largest shareholder) One of the 100 crucial reasons for 4A Games and NWI to “join the family” was in fact to consolidate with Saber Interactive. The effect of the acquisition of Saber Interactive resulted in two other 50

acquisitions of high-quality studios. We expect this positive chain of events will continue in 0 Embracer Group which will enable continued earnings growth for the company. 04-sep 03-dec 02-mar 31-maj 29-aug

REDEYE RATING

Improving the Quality

One of our concerns over the years has been that Embracer’s games score relatively low in 5 ratings (Metascore and user score). Embracer has the last year communicated its “Quality 4 4

First” Strategy which has shown good results. Many of last quarter’s multiple games released has a Metascore of over 80. High quality products will always be a competitive advantage and will increase Embracer’s prospects we expect. People Business Financials

Continued Momentum in Game Sales

We believe Embracer will continue its momentum with solid backlog-sales and a strong KEY STATS

pipeline of games. During Q2 we already know “Destroy All Humans”, “Wasteland 3” and Ticker EMBRAC.ST Iron Harvest has shown solid sales numbers and more successful releases will come. Market Nasdaq

Share Price (SEK) 161.4

Increased estimated sales and earnings (mostly in a long-term perspective) and a higher Market Cap (MSEK) 60098 conviction in Embracer prospects overall has resulted in an increased fair value range of Net Cash 20E (MSEK) 3651 SEK 95-260 (65-170) with a base case of SEK 205 (130) per share. Free Float 50 %

KEY FINANCIALS (SEKm) FY20 FY21E FY22E FY23E Net sales 5754 8248 9549 11016 ANALYSTS

EBITDA 1592 3417 3937 4738 Tomas Otterbeck

Op. EBIT 880 2180 2645 3048 [email protected] EPS (adj.) 2018 2019 2020E 2021E 2022E EV/Sales 9.8 7.2 6.3 5.5 Jonas Amnesten

EV/EBITDA 13.8 17.6 15.2 12.7 [email protected] EV/Op.EBIT 24.3 27.5 22.7 19.7

Important information: All information regarding limitation of liability and potential conflicts of interest can be found at the end of the report Redeye, Mäster Samuelsgatan 42, 10tr, Box 7141, 103 87 Stockholm. Tel. +46 8-545 013 30, E-post: [email protected]

REDEYE Equity Research Embracer Group 4 September 2020

Three Major Acquisitions

Embracer announced eight acquisitions. The largest of them is 4A Games, New World Interactive, and Deca Games.

4A Games

4A Games is the developer of the Metro series. This is an acquisition we have been hoping for a long time. Embracer has now acquired both Warhorse and 4A Games developers of their two top-grossing games in recent years.

Some facts about the transaction: Upfront purchase price: USD 36 million (cash and Embracer-stocks) Earnout of EUR 35 million maximum. 2020: Net Revenue of EUR 20 million, adjusted EBIT of EUR 12 million (margin 60%)

New World Interactive (NWI)

IP-owner of the critically acclaimed game series called “Insurgency”. Fanbase 10 million users, 7 million units sold of Insurgency only on PC. The last game in the series called Insurgency Sandstorm to be released on console in H1 2021 (in collaboration with Saber Interactive).

Purchase price: Undisclosed (Cash and Embracer-stock)

We expect at least two FPS multiplayer games are expected based on Metro and Insurgency. The FPS-genre is highly lucrative and competitive. But this type of popular game IPs is a very good start to compete in this genre we believe. The combination of Sabre Interactive, 4A Games, and NWI will make Embracer a powerhouse in the FPS shooter genre, typically high (or mid to high) budget games. We also believe that Embracer will try the free-to-play multiplayer business model (like Remedy and Microsoft recently) in at least one of the upcoming multiplayer games. A few weeks ago, we stated that listed Nordic Gaming companies lack social multiplayer games based on popular franchises. These acquisitions will give Embracer a good start.

Deca Games

Daily Active Users (DAU): 1.5 million. An impressive number. For example, G5 Entertainment has a DAU of 1.8 million. With some research on Sensor Tower, the major game from Deca is called Dragonvale. According to the same source, the game is almost ten times larger (in revenue) than the second and third top-grossing games in the portfolio.

We believe the acquisition of Deca Games adds an interesting flavor to the Group. This new business area will also give the group opportunities in the highest growing gaming market of them all. We also can stop ourselves to start speculating about more free-to-play games in amongst the PC and Console games fueled by the knowledge from Deca Games.

Some facts about the transaction: Upfront Purchase Price: EUR 25 million (Embracer-stocks). Earnout of EUR 60 million maximum.

2 dsfdsf REDEYE Equity Research Embracer Group 4 September 2020

Powerhouse of Entrepreneurs In Sweden, many investors explain the investment case in Embracer as an investment in the founder and CEO Lars Wingefors. However, since the acquisition of Koch Media in 2018 and especially since the acquisition of Saber Interactive at the beginning of 2020 the group has become a powerhouse of entrepreneurs that seeks beneficial acquisitions to become a better company and create shareholder value. Lars Wingefors and Erik Stenberg still have 51% of the votes and 35% of the capital in Embracer, but they nowadays also have well-needed help and knowledge from entrepreneurs and major shareholders in the other business areas.

To keep it simple, Embracer Group is not a one-man show, it is a family effort of doing something great in the gaming industry.

Two of the three major acquisitions following the Q1-report were composed by Andrey Iones and Matthew Karch the owners of Saber Interactive and currently the owners of 11.2% of the capital in Embracer Group. One of the crucial reasons for 4A Games and NWI to “join the family” was in fact to consolidate with Saber Interactive. The effect of the acquisition of Saber Interactive resulted in two other acquisitions of high-quality studios at a reasonable price. We expect this positive chain of events will continue in Embracer Group which will enable continued growth for the company. It is also positive that Lars Wingefors during the earnings presentation mentioned that more owners in the acquired companies prefer Embracer-stocks instead of cash as payment.

Improving the Quality One of our concerns over the years has been that Embracer’s games score relatively low in ratings (Metascore and user score). Embracer has the last year communicated its “Quality First” Strategy which has shown good results. The last month's multiple games released has a Metascore of over 80.

Of course, a high Metascore is not a guarantee for commercial success. For example, two of the recent games from Embracer, namely Desperados 3 and Huntdown that have received the highest Metascore (85) amongst them all has been far less commercially successful than for example SpongeBob and Destroy all Humans. The recipe for top-grossing games is therefor strong IPs in popular genres that are good enough we believe.

Saints Row needs something fresh

A game series that Embracers asset care has gone too far is according to us (many game critics and users would agree) is Saints Row. According to our data sources, the last remaster (released in Q1) was likely profitable due to the strong IP and popular genre, but fans weren’t that happy because it was not good enough. We expect a new installment in the game series will be released next year and hopefully regain what is lost.

Saints Row is one of Embracer strongest IPs, it is a successful Grand Theft Auto (GTA) clone, simply explained. We expect one of the planed AAA games (a budget above USD 30 million) released next year is a new Saint Row game. GTA5, released seven years ago has an online mode that still is one of the top 10 grossing games globally. It would be a good guess to expect an online mode in the next installment of Saint Row.

3 dsfdsf REDEYE Equity Research Embracer Group 4 September 2020

Financial projections

We believe Embracer will continue its momentum with solid backlog-sales and a strong pipeline of games. During Q2 we already know “Destroy All Humans”, “Wasteland 3” and Iron Harvest has shown solid sales numbers according to official sales data (steamspy, gamstat)

Notable Releases July-September Business Area IP Date Genre Saber WWE Battlegrounds Developer License 18-9-20 Beat Em Up

Deep Silver Wasteland 3 Publish 3rd party 27-8-20 Strategy Iron Harvest Publish 3rd party 1-9-20 RTS

THQ Destroy All Humans Pub/Dev Own 28-7-20 Strategy Kingdoms of Amalur Pub/Dev Own 8-9-20 RPG

Partner/Publishing Marvel's Avengers Distribution License 4-9-20 Action/Looter

Q2 (July-September)

THQ Nordic we expect will show strong sales driven by two major remasters, namely "Destroy all Humans" and "Kingdom of Amalur", where the company in both cases owns the IP and is the developer and publisher.

Deep Silver: Wasteland 3 and Iron Harvest have also been released in Q2 with a good sales start on Steam. The developer of Wasteland is however owned by Microsoft and the game is released on its subscription service Gamepass, which will dampen the revenue we expect.

Embracer is the physical distributor in Europe of the expected blockbuster game ”Marvel’s Avengers”, this will be the single most important release from partner/publishing we estimate. The free beta of the game was played by six million people in total and for the Playstation 4, it was the most downloaded beta ever. Even though we do not expect high rankings for the game we believe it will be ”good enough” to achieve super strong sales.

Q3 (October-December)

During Q3, the only known major release is Ride 4 (Milestone). The lack of major releases during a seasonally strong quarter means that we have somewhat conservative estimates.

Q4: (January – March)

We have followed the development of Biomutant for many years and the game has, in our opinion, made great progress (in play sessions) during the journey.

With no announced release date, we expect it to be released in the first quarter of 2021. One competitor in terms of release window, we believe is the ”Zelda-inspired” game from Ubisoft previously known as ”Gods and Monsters”. This game has recently been delayed, changed its name, and is planned to be released during the first half of 2021.

4 dsfdsf REDEYE Equity Research Embracer Group 4 September 2020

When we sum up FY21, we thus expect THQ Nordic to be the business area that generates the most revenue and profits.

Detailed estimates Embracer Group

Period FY21-Q1 FY21-Q2E FY21-Q3E FY21-Q4E FY21E Net Sales 2069 2058 2063 2059 8248 THQ Nordic 488 485 443 696 2111 Deep Silver 613 526 504 437 2080 Coffee Stain 173 105 139 119 535 Saber Interactive 349 269 317 289 1224 Deca Games 0 22 54 47 123 Games Subtotal 1622 1406 1457 1588 6074 Partner Publishing/Film 447 652 606 470 2175 CoS -760 -935 -905 -826 -3425 Gross profit 1309 1123 1158 1233 4823 Other OPEX -292 -255 -314 -276 -1137 Staff cost -379 -397 -437 -449 -1662 EBITDA 950 787 773 906 3417 Depreciation -362 -340 -320 -340 -1361 Op. EBIT 712 448 454 567 2180 Amortization -507 -512 -497 -522 -2038 EBIT 205 -64 -43 45 142

Gross profit margin 63% 55% 56% 60% 58% EBITDA margin 46% 38% 37% 44% 41% Op. EBIT margin 34% 22% 22% 28% 26% EBIT margin 10% -3% -2% 2% 2% Source: Redeye Research, Embracer Group

Estimate changes

Q2: Net Sales: SEK 2,058 million (1,947), Op. EBIT: SEK 448 million (513)

FY 21: Net Sales: SEK 8,248 million (7,390), Op. EBIT: SEK 2 180 million (1 959)

Estimates for the next 2-3 years

High-quality games take time to develop, often at least three years. It is therefore realistic to have more optimistic estimates in a more long-term perspective according to us. The growing number of studios in the group, the major IP portfolio, and the increasing quality in the games are key drivers for increased earnings according to us.

For the financial year of 2022 (the calendar year 2021-2022), we estimate net sales of SEK 9.549 million (8,721) with an operational EBIT of SEK 2.645 million (2,403).

For the financial year of 2023 (the calendar year 2022-2023), we estimate net sales of SEK 11,543 million (10,269) with an operational EBIT of SEK 3.275 million (2,944).

REDEYE Equity Research Embracer Group 4 September 2020

Investment Case

• A large part of the IP portfolio is still not generating any income, this will change in the coming years • Embracer's IP portfolio grew significantly following acquiring Koch Media, Saber Interactive and more acquisitions, the asset care possibilities and thus value enhancement is vast • Owner operator with a highly skilled management team with the right focus on long-term value creation • The core strategy is to acquire IPs at depressed prices and then enhancing their value

• Title risks of larger releases – Despite Embracer's extensive portfolio there is always some title risk when releasing larger Disappointing releases and/or reviews could dampen investors’ enthusiasm and hurt the company’s financials. • Rising competition in bidding for acquisitions – As the Group is entering a new level as a company, so will the future acquisitions in terms of size and target reputation. Going from an unknown player to a more established company might make it harder to find cheap deals. • Management is paramount – Just as much we love a strong and committed management team, it is also a fact that relying on a few key individuals also poses a risk.

Valuation

Bear Case 95 SEK Base Case 205 SEK Bull Case 260 SEK CAGR of 11% during forecast period CAGR of 19% during forecast period CAGR of 21% during forecast period Average Op. EBIT margin of 20% Average Op. EBIT margin of 28% Average Op. EBIT margin of 33% Terminal growth 2% Terminal Op. Terminal growth 2% Terminal Op. Terminal growth 2% Terminal Op. EBIT margin of 25% EBIT margin of 28% EBIT margin of 30%

In our Bear-case, we have used In our Base-case scenario, we In our Bull-case we assume a larger much more conservative model that the investment in new success for the upcoming major assumptions regarding the success releases continues at a high phase releases during 2018, 2019 and of the larger upcoming releases. the coming years.. Profitability wise 2020 the company then reinvest we believe it is possible that the those cash flows into even greater We also model a much slower gross margins will expand as the projects, which also works out well. growth long-term of new release revenue streams from the own IPs revenue, as in this scenario the will grow faster than the publishing In this scenario, some sales and earlier disappointments makes the revenue and that the Group turns cost synergies between Koch Media company more cautious of new their profitable asset care focus on and the “old” THQ Nordic creates larger projects. However, the Koch Media IP asset. There is of higher margins and sales growth. catalog revenue continues to course also the inherent scalability Our assumptions in the Bull-case develop at a healthy pace. of THQ Nordic’s business model regarding commercial success for that will come into play. We state the larger upcoming releases should that a quality company, in a growth not be seen as any “Blue-sky” The lower assumed growth leads to industry, with highly capable less operational leverage, and we scenario with overly positive management seldom trades at the estimates. model a less aggressive margin cheap. Our valuation is only based uptake and that no real synergies on the organic development and do between Koch Media, Saber, and not factor in future acquisitions. But THQ Nordic manifest. as the company has shown when done right they can create massive amount of value

REDEYE Equity Research Embracer Group 4 September 2020

Summary Redeye Rating

The rating consists of three valuation keys, each constituting an overall assessment of several factors that are rated on a scale of 0 to 1 points. The maximum score for a valuation key is 5 points.

People: 5

The management team of Embracer Group is by our measures highly competent with extensive experience from the Gaming industry. The company continuously puts emphasis on a shareholder focus to generate long-term value creation by keeping to their core strategy; acquiring IPs at the cheap and increase their value by asset care. Lars Wingefors, the CEO and co-founder, is an entrepreneur by heart; he started his first business at the age of 13 and has been selling video games for more than 20 years. We find the management of Embracer as trustworthy as they have never tried to misguide the market; instead, they always make conservative statements and educate the market about their business. The ownership structure of Embracer Group is, in our view, one of its key strengths. All the key personnel has substantial holdings in the company with the co-founder Lars Wingefors controlling more than 50% of the votes. The significant holdings create a focus on long-term value creation and not meeting short- term financial goals that a company led by “hired guns.” In addition to the substantial holdings of the management team, some of the most renowned institutional owners show up on the shareholder's list of Embracer Group.

Business: 4

Embracer Group has an extensive portfolio of game franchises with multiple streams of income and a massive player base. Some of the IPs, like Darksiders, Spellforce, Red Faction and MX vs. ATV, Saints Row, Dead Island, and Metro has a large following and good reputation in the gamer community; this creates a pricing power and demand for new products. Following the acquisition of Koch Media, Embracer has become a power-house, but as the gaming industry is so massive, they are still a relatively small player. The Partner Publishing business has lower margins than “Games”, but still generates a substantial EBIT contribution and acts as a “funnel” for further business development relationships and possible acquisitions.

Financials: 4

Embracer is a company with a strong cash position. One of the company’s core strategies is to acquire game IPs from companies in financial distress; this has led to a conservative approach regarding putting on debt. The income streams are diversified with a large portfolio of IPs and different games. Overall the video game industry is not sensitive to the business cycle which dampens the financial risk of downturns. During the past years, Embracer has been growing heavily and still producing more than satisfying margins and return on asset. The future profitability levels will vary due to game release schemes as the business model inherits a high degree of scalability. Long-term increasing margins as the company continue to grow and the revenue streams from their own IPs increase even further.

REDEYE Equity Research Embracer Group 4 September 2020

INCOMEPlease STATEMENT comment 2018 on the 2019changes 2020E in Rating2021E factors……2022E DCF VALUATION CASH FLOW, MSEK Net sales 5,754 5,250 8,248 9,549 11,016 WACC (%) 9 % NPV FCF (2020-2021) 3699 Total operating costs -4,162 -3,428 -4,666 -5,612 -6,277 NPV FCF (2022-2028) 19526 EBITDA 1,592 1,822 3,582 3,937 4,738 NPV FCF (2029-) 56653 Depreciation -23 -30 -41 -47 -53 Non-operating assets 2510 Amortization -995 -1,446 -3,399 -3,115 -3,486 Interest-bearing debt -1491 Impairment charges 0 0 0 0 0 Fair value estimate MSEK 80898 EBIT 575 345 142 775 1,200 Assumptions 2020-2026 (%) Share in profits 0 0 0 0 0 Average sales growth 19.3 % Fair value e. per share, SEK 205 Net financial items -33 57 -41 -47 -53 EBIT margin 15.1 % Share price, SEK 161.4 Exchange rate dif. 0 0 0 0 0 Pre-tax profit 542 403 101 728 1,147 PROFITABILITY 2018 2019 2020E 2021E 2022E Tax -183 -110 23 -182 -287 ROE 11% 5% 2% 8% 11% Net earnings 359 293 124 546 860 ROCE 17% 5% 1% 7% 13% ROIC 100% 9% 3% 6% 10% BALANCE SHEET 2018 2019 2020E 2021E 2022E EBITDA margin 28% 35% 43% 41% 43% Assets EBIT margin 10% 7% 2% 8% 11% Current assets Net margin 6% 6% 2% 6% 8% Cash in banks 2,929 2,510 2,887 955 1,102 Receivables 1,297 1,468 1,980 1,910 2,203 DATA PER SHARE 2018 2019 2020E 2021E 2022E Inventories 323 353 495 573 220 EPS 3.50 0.83 0.33 1.47 2.31 Other current assets 0 0 0 0 0 EPS adj 3.50 0.83 0.33 1.47 2.31 Current assets 4,549 4,331 5,361 3,438 3,525 Dividend 0.00 0.00 0.00 0.00 1.04 Fixed assets Net debt -28.58 -2.89 9.81 5.19 -1.92 Tangible assets 156 185 211 236 258 Total shares 102.49 352.43 372.35 372.35 372.35 Associated comp. 0 0 0 0 0 Investments 0 0 0 0 0 VALUATION 2018 2019 2020E 2021E 2022E Goodwill 0 0 0 0 0 EV 18,594.7 25,060.3 63,748.9 62,031.9 59,381.4 Cap. exp. for dev. 1,887 3,065 8,027 6,157 4,309 P/E 59.9 89.1 483.6 110.0 69.9 O intangible rights 1,820 2,806 3,557 4,679 5,288 P/E diluted 59.9 89.1 483.6 110.0 69.9 O non-current assets 196 251 251 251 251 P/Sales 3.7 5.0 7.3 6.3 5.5 Total fixed assets 4,059 6,307 12,046 11,322 10,105 EV/Sales 3.2 4.8 7.7 6.5 5.4 Deferred tax assets 0 0 0 0 0 EV/EBITDA 11.7 13.8 17.8 15.8 12.5 Total (assets) 8,608 10,637 17,407 14,760 13,630 EV/EBIT 32.4 72.6 448.8 80.0 49.5 Liabilities P/BV 3.8 4.1 9.2 8.5 7.6 Current liabilities SHARE PERFORMANCE GROWTH/YEAR 18/20E Short-term debt 0 1,491 6,538 2,889 385 1 month 10.5 % Net sales 19.7 % Accounts payable 2,018 1,288 2,887 3,342 3,855 3 month 37.2 % Operating profit adj -50.3 % O current liabilities 0 0 0 0 0 12 month 98.1 % EPS, just -69.1 % Current liabilities 2,018 2,779 9,425 6,231 4,241 Since start of the year 128.0 % Equity 6.8 % Long-term debt 0 0 0 0 0 SHAREHOLDER STRUCTURE % CAPITAL VOTES O long-term liabilities 211 222 222 222 222 Lars Wingefors 29.0 % 42.2 % Convertibles 0 0 0 0 0 S3D Media Inc 10.8 % 14.6 % Total Liabilities 2,229 3,001 9,647 6,453 4,463 Cbny-Citibank N.A.-Private Bank 8.6 % 4.7 % Deferred tax liab 0 0 0 0 0 Swedbank Robur Fonder 7.1 % 3.9 % Provisions 667 1,241 1,241 1,241 1,241 Erik Stenberg 6.3 % 9.1 % Shareholders' equity 5,712 6,395 6,520 7,066 7,926 Handelsbanken Fonder 4.3 % 3.0 % Minority interest (BS) 0 0 0 0 0 Didner & Gerge Fonder 3.1 % 1.7 % Minority & equity 5,712 6,395 6,520 7,066 7,926 Första AP-fonden 2.9 % 1.6 % Total liab & SE 8,608 10,637 17,407 14,760 13,630 State Street Bank And Trust co 2.3 % 1.2 % CMB Holding AB 2.2 % 3.1 % FREE CASH FLOW 2018 2019 2020E 2021E 2022E SHARE INFORMATION Net sales 5,754 5,250 8,248 9,549 11,016 Total operating costs -4,162 -3,428 -4,666 -5,612 -6,277 Reuters code EMBRAC.ST Depreciations total -1,018 -1,476 -3,440 -3,162 -3,538 List EBIT 575 345 142 775 1,200 Share price 161.4 Taxes on EBIT -126 -94 33 -194 -300 Total shares, million 372.4 NOPLAT 448 251 175 581 900 Market Cap, MSEK 60097.7 Depreciation 1,018 1,476 3,440 3,162 3,538 Gross cash flow 1,466 1,727 3,615 3,744 4,438 MANAGEMENT & BOARD Change in WC 310 -930 945 447 573 CEO Lars Wingefors Gross CAPEX -4,504 -3,724 -9,180 -2,439 -2,321 CFO Johan Ekström Free cash flow -2,728 -2,927 -4,620 1,752 2,690 Chairman Kicki Wallje-Lund

CAPITAL STRUCTURE 2018 2019 2020E 2021E 2022E ANALYST Redeye AB Tomas Otterbeck Mäster Samuelsgatan 42, 10tr Equity ratio 66% 60% 37% 48% 58% [email protected] 111 57 Stockholm Debt/equity ratio 0% 23% 100% 41% 5%

Net debt -2,929 -1,019 3,651 1,934 -716

Capital employed 2,783 5,376 10,171 9,000 7,210 Capital turnover rate 0.7 0.5 0.5 0.6 0.8

GROWTH 2018 2019 2020E 2021E 2022E Sales growth 1,034% -9% 57% 16% 15% EPS growth (adj) 100% -76% -60% 340% 57%

REDEYE Equity Research Embracer Group 4 September 2020

Redeye Rating and Background Definitions

Company Quality

Company Quality is based on a set of quality checks across three categories; PEOPLE, BUSINESS, FINANCE. These are the building blocks that enable a company to deliver sustained operational outperformance and attractive long- term earnings growth.

Each category is grouped into multiple sub-categories assessed by five checks. These are based on widely accepted and tested investment criteria and used by demonstrably successful investors and investment firms. Each sub-category may also include a complementary check that provides additional information to assist with investment decision-making.

If a check is successful, it is assigned a score of one point; the total successful checks are added to give a score for each sub-category. The overall score for a category is the average of all sub-category scores, based on a scale that ranges from 0 to 5 rounded up to the nearest whole number. The overall score for each category is then used to generate the size of the bar in the Company Quality graphic.

People

At the end of the day, people drive profits. Not numbers. Understanding the motivations of people behind a business is a significant part of understanding the long-term drive of the company. It all comes down to doing business with people you trust, or at least avoiding dealing with people of questionable character. The People rating is based on quantitative scores in seven categories: • Passion, Execution, Capital Allocation, Communication, Compensation, Ownership, and Board.

Business

If you don’t understand the competitive environment and don’t have a clear sense of how the business will engage customers, create value and consistently deliver that value at a proﬁt, you won’t succeed as an investor. Knowing the business model inside out will provide you some level of certainty and reduce the risk when you buy a stock. The Business rating is based on quantitative scores grouped into five sub-categories: • Business Scalability, Market Structure, Value Proposition, Economic Moat, and Operational Risks.

Financials

Investing is part art, part science. Financial ratios make up most of the science. Ratios are used to evaluate the financial soundness of a business. Also, these ratios are key factors that will impact a company’s financial performance and valuation. However, you only need a few to determine whether a company is financially strong or weak. The Financial rating is based on quantitative scores that are grouped into five separate categories: • Earnings Power, Profit Margin, Growth Rate, Financial Health, and Earnings Quality.

REDEYE Equity Research Embracer Group 4 September 2020

Redeye Equity Research team

Management Editorial Björn Fahlén Mark Siöstedt [email protected] [email protected]

Håkan Östling Gabriel Höglund [email protected] [email protected]

Technology Team Life Science Team Jonas Amnesten Gergana Almquist [email protected] [email protected]

Henrik Alveskog Oscar Bergman [email protected] [email protected]

Havan Hanna Anders Hedlund [email protected] [email protected]

Erika Madebrink Ludvig Svensson [email protected] [email protected]

Fredrik Nilsson Niklas Elmhammer [email protected] [email protected]

Tomas Otterbeck Mats Hyttinge [email protected] [email protected]

Oskar Vilhelmsson Forbes Goldman [email protected] [email protected]

Viktor Westman Nima Faroghi [email protected] [email protected]

Forbes Goldman Filip Einarsson [email protected] [email protected]

Mark Siöstedt Fredrik Thor [email protected] [email protected]

Nima Faroghi [email protected]

REDEYE Equity Research Embracer Group 4 September 2020

Disclaimer Important information Redeye AB ("Redeye" or "the Company") is a specialist financial advisory boutique that focuses on small and mid-cap growth companies in the Nordic region. We focus on the technology and life science sectors. We provide services within Corporate Broking, Corporate Finance, equity research and investor relations. Our strengths are our award-winning research department, experienced advisers, a unique investor network, and the powerful distribution channel redeye.se. Redeye was founded in 1999 and since 2007 has been subject to the supervision of the Swedish Financial Supervisory Authority. Redeye is licensed to; receive and transmit orders in financial instruments, provide investment advice to clients regarding financial instruments, prepare and disseminate financial analyses/recommendations for trading in financial instruments, execute orders in financial instruments on behalf of clients, place financial instruments without position taking, provide corporate advice and services within mergers and acquisition, provide services in conjunction with the provision of guarantees regarding financial instruments and to operate as a Certified Advisory business (ancillary authorization).

Limitation of liability This document was prepared for information purposes for general distribution and is not intended to be advisory. The information contained in this analysis is based on sources deemed reliable by Redeye. However, Redeye cannot guarantee the accuracy of the information. The forward-looking information in the analysis is based on subjective assessments about the future, which constitutes a factor of uncertainty. Redeye cannot guarantee that forecasts and forward-looking statements will materialize. Investors shall conduct all investment decisions independently. This analysis is intended to be one of a number of tools that can be used in making an investment decision. All investors are therefore encouraged to supplement this information with additional relevant data and to consult a financial advisor prior to an investment decision. Accordingly, Redeye accepts no liability for any loss or damage resulting from the use of this analysis.

Potential conflict of interest Redeye’s research department is regulated by operational and administrative rules established to avoid conflicts of interest and to ensure the objectivity and independence of its analysts. The following applies: • For companies that are the subject of Redeye’s research analysis, the applicable rules include those established by the Swedish Financial Supervisory Authority pertaining to investment recommendations and the handling of conflicts of interest. Furthermore, Redeye employees are not allowed to trade in financial instruments of the company in question, from the date Redeye publishes its analysis plus one trading day after this date. • An analyst may not engage in corporate finance transactions without the express approval of management and may not receive any remuneration directly linked to such transactions. • Redeye may carry out an analysis upon commission or in exchange for payment from the company that is the subject of the analysis, or from an underwriting institution in conjunction with a merger and acquisition (M&A) deal, new share issue or a public listing. Readers of these reports should assume that Redeye may have received or will receive remuneration from the company/companies cited in the report for the performance of financial advisory services. Such remuneration is of a predetermined amount and is not dependent on the content of the analysis.

Redeye’s research coverage Redeye’s research analyses consist of case-based analyses, which imply that the frequency of the analytical reports may vary over time. Unless otherwise expressly stated in the report, the analysis is updated when considered necessary by the research department, for example in the event of significant changes in market conditions or events related to the issuer/the financial instrument.

Recommendation structure Redeye does not issue any investment recommendations for fundamental analysis. However, Redeye has developed a proprietary analysis and rating model, Redeye Rating, in which each company is analyzed and evaluated. This analysis aims to provide an independent assessment of the company in question, its opportunities, risks, etc. The purpose is to provide an objective and professional set of data for owners and investors to use in their decision-making.

Redeye Rating (2020-09-04) Rating People Business Financials

5p 16 12 3

3p - 4p 109 86 35

0p - 2p 4 31 91

Company N 129 129 129

Duplication and distribution This document may not be duplicated, reproduced or copied for purposes other than personal use. The document may not be distributed to physical or legal entities that are citizens of or domiciled in any country in which such distribution is prohibited according to applicable laws or other regulations. Copyright Redeye AB.

CONFLICT OF INTERESTS

Tomas Otterbeck owns shares in the company : Yes Jonas Amnesten owns shares in the company : Yes Redeye performs/have performed services for the Company and receives/have received compensation from the Company in connection with this.