Embracer CEO says layoffs are "something that everyone needs to get through"

Embracer CEO Lars Wingefors said that the current reduction in workforce at the company and across the industry is "something that everyone needs to get through," later adding that the group's strategy has been to cut the things that have "the lowest chance of success going forward" and to only keep "the most iconic studios."

This conversation was part of the Q&A portion of the company's earnings call yesterday, as it announced its Q3 results.

Answering a question about the underlying games market, Wingefors said that the whole industry has been feeling a "significant shift" since last summer.

"More or less all companies are [going] through a restructuring program," he said, as transcribed by Seeking Alpha. "There is less investments made from the industry into content. I think the underlying consumer market is solid and is still growing, but the underlying changes – there's a lot of underlying changes made to the industry. That obviously affects all of us in the industry.

"I think looking at the 8% reduction in workforce [at Embracer], there is obviously – I don't know the number for the whole industry, but I think it's something that everyone needs to get through. I mean, as I said, it's more driven by the overinvestment in the previous years because everyone just put all capital into gaming and perhaps a bit too much capital in a few instances."

"You can debate the speed we went to build organic growth, but the ambition was to aggressively organically grow the company. Now, we need to adjust for that and that's basically the core of the issue that we are addressing"

Embracer Group's chief strategy officer Phil Rogers told us in November that he considered the human cost of Embracer's restructure "significant" but "necessary." Since the restructuring program began in June, the group has laid off more than 1,400 people.

During the earnings call, Wingefors was asked about the company's contribution to the industry-wide situation, as the company went on a M&A spree in 2020 and 2021 before announcing its restructuring last year following the collapse of a $2 billion deal, leading to a wealth of studio closures.

One analyst highlighted how Embracer's number of projects in development dropped by 20/25% following the restructure and how, "looking back, that was clearly contributing to the industry's overinvestment."

"I think we follow with a very clear strategy onboarding great entrepreneurs and backing their business plans," Wingefors replied. "I think everyone has been delivering according to those plans. The thing is, in the capital allocation, we put organic first, meaning the first investment came to organic growth, which we now see the outcome of. And then secondly, we made M&A.

"So it's kind of, okay, we had that strategy back then. Now, we need to adjust that, because the cost of capital has increased. So it's just the overinvestment into content that is not supported by the cash flow from the operations or external capital. You can debate. You can debate the speed we went to build organic growth, but the ambition was obviously to aggressively organically grow the company. Now, we need to adjust for that and that's basically the core of the issue that we are addressing here."

Embracer announced in the earnings call that the restructuring program will end in March but Wingefors said he expects "to continue adapting, adjusting the business forever."

The CEO was also asked about whether there will be "higher thresholds" going forward when it comes to the company's investments and M&As.

"Yes," Wingefors replied. "Obviously, when you are expanding so much and you're taking business risk both setting up new studios, building new IPs, acquiring game developers that you are investing into, that [don't] necessarily [have] the track record. If you change that, you need to cut the things that has the highest, what you believe has the lowest chance of success going forward. And that's what we are doing now, keeping the most iconic studios and IPs under development."

Finally, Wingefors mentioned how "bringing an all-time high net sales" in the middle of a restructuring program is "an achievement [Embracer] should be proud of."

"We are approaching the finalisation of the restructuring program. It's been a challenging time and we have worked hard with group-wide efforts to get where we are today. For that, I'm very thankful. Everyone has put in extra effort. We are determined to deliver in the final stretch. Many decisions are not taken lightly, especially parting ways with team members. And it's important to ensure that affected employees are informed first; and that actions are carried out with compassion, respect and integrity.

"We are adapting to a new reality. The Embracer model is being adjusted and improved, but our long-term vision is still unchanged. Challenging times are also learning times that will strengthen us into the future. I'm confident that the decisions we make today, set the foundation for the coming decade."