Thank you operator. Good morning everyone. Welcome to MTG's Q2 2019 interim report presentation. My name is Lars Torstensson, and I am responsible for communication and IR at MTG AB. Today, we will start with a formal presentation, followed by a Q&A. Please remember that it's not possible to ask questions via webcast and only through the telco. With me today I have Jørgen Madsen Lindemann, our Group President and CEO, and Maria Redin, CFO of MTG AB. Without any further delay, please Jørgen, can you take us through the formal presentation of our quarter?
Yeah. Thank you Lars, and good morning everyone, and welcome to our second quarter report. I would like to start by saying that we at MTG believe that esports and gaming is the future of entertainment. That is why we invest and partner with the best entrepreneurs, most promising publishers, and leading brands in these industries. There's a good reason for it. The number of gamers worldwide is expected to grow to 2.9 billion in 2022, up from 2.4 billion in 2018. The global esport audience is also expected to grow to 645 million by 2022, up from 395 million in 2018. That is defined as fans who watch esport games more than once a month. Games whether played in the home, by the commuter on the go, or in an esport arena by a professional esporter, represent a major commercial opportunity.
We have set ourselves up to deliver on this opportunity, a strategic operating whole co-executing a buy and build strategy, investing in companies with great potential, and then operating them to add value and achieve that potential. In short, esports and gaming together, they offer the future of entertainment. MTG is now uniquely positioned to capitalize on that exciting development. Let's move on to our quarterly results. If I can ask you to go to slide number 2, then you will see that MTG's second quarter of 2019 show good progress on the strategy laid out across our verticals. We delivered record sales and record adjusted EBITDA for the quarter and continued to deliver on our operational strategic direction with sales growth in our two verticals of 14%. Reported net sales was up 11% to SEK 1.1 billion for the group.
Adjusted EBITDA was SEK 71 million, and the adjusted EBITDA margin was 6%. Sales on an organic basis were up 7% year-on-year. Within the esports vertical, our own operated sales were up 15%, and total revenue was up 8% of which organic sales represented 4%. A new record, sorry, in both our sponsorship revenue and ticket sales show that our esports vertical is starting to take over the natural role of traditional sports and evolving into the global arena. The gaming vertical showed exceptionally good results with organic sales up 14% and adjusted EBITDA margin at 29%. As a highlight, ARPDAU grew by 27% compared to the same period last year, showing that we are delivering when it comes to publishing and creating engaging mobile games.
In the quarter, the MTG VC fund has completed several exciting seed and Series A investments into gaming and esports startups with a high risk, but also a potential for high rewards. Our VC fund complements our strategy to buy and build companies in the esport and gaming vertical since it allows us to enter early into promising startup and growth companies. The investments either remain financial investments or the beginning of a longer relationship, which can also result in the company becoming part of the MTG group of companies in which we invest a majority stake. We have now also closed the sale of Nova, the last of our East European broadcast businesses. The sale of Nova allows us to go forward, focusing purely on the two vertical business segments, esport and gaming.
It also provides us with around SEK 1.8 billion of cash to pursue acquisitions and implementing our strategy. Our operational focus during the quarter has been on creating a platform for future growth, both in esport and gaming, and we have brought ESL and DreamHack closer together to build a leading esport ecosystem and create the best product. This is both exciting and necessary, and I will return to this topic later in the presentation. A challenge that we have discussed with you before is the monetization of media rights in esport. This is taking time and the lack of qualitative data from our properties is still hammering our effort to sell and price media rights and compete effectively with traditional sports. Due to a slower development in this area, we have revised our 2019 revenue ambition for esport to better reflect this short-term reality.
With that said, this is not changing our medium to long-term view that there is a strong commercial product for esport media rights and we are now making some necessary structural changes. MTG has all the assets to be able to take the lead in this area and to further commercially professionalize esport in the future. I'll also get back to that later. All in all, we believe that the second quarter was a solid quarter and showing that our sole focus on esport and gaming is yielding results. The split of MTG and the sale of Nova are behind us. We have a clear growth strategy in place that includes acquisitions, and we see the performance improvements starting to come through in both esports and gaming. With that said, let's move on to what we are doing more specifically in the esport vertical.
If I can ask you to turn to slide number 3. In the second quarter, our strategic decision to focus on our own and operated properties are being more demanding with respect to esports services continue to yield positive results, and the business vertical grew by 8%. Sales in owned and operated properties increased by 15% in the quarter to SEK 380 million, while the ESS revenue declined by 6%, SEK 227 million, representing 29% of total Esports revenue. We have witnessed several positive indicators for the longer-term business case for Esports being reached. First, the trend of improving operational metrics for our market properties continue. ESL One in Birmingham and DreamHack Dallas were a good example of this, with more fans visiting and higher viewership compared to the same events last year. Let me be a little bit more granular.
ESL One Birmingham was our most-watched ESL Dota event ever, with 24,000 fans over the course of the weekend in the arena of Birmingham, 9.8 million hours watched, and the fastest-selling ESL Dota event ever. DreamHack Dallas was the largest success for DreamHack so far, with higher ticket sales than anticipated and very strong reviews from visitors. The property produced 51 hours of broadcast that resulted in 3.5 million hours watched according to the esc.watch. We do experience and can begin to document that the eyeballs and brands, the value for esports, are a reality. The market is there for the ones who can demonstrate some concrete commercial propositions around those eyeballs and document the effect. Second, as a result of the growing fan base and increased viewership, more sponsors got involved in both our master and challenger properties.
In the quarter, our sponsorship revenue grew strongly compared to the same period last year, and we landed several new and extended many existing partnerships such as Pepsi, Mountain Dew, AT&T, Vodafone, Euronics, Chipotle, and more. Endemic brands are now being complemented by more general brands. Thirdly, DreamHack's newly launched eFIFA League in Denmark and Sweden delivered strong incremental revenue and showed promise for the prospect of a broader launch of E- Leagues in traditional sports. These E- Leagues run in parallel to the football leagues, and of course, this means they will be seasonal, but they attract great viewership and in some cases, higher viewership than the actual football broadcast. These leagues demonstrate that esports can be delivered successfully as a mainstream media product. esports adjusted EBITDA loss of SEK 55 million was broadly flat year-on-year. The revenue growth meant that our margin improved somewhat in the quarter.
Top-line growth remain our priority in Esports, and owned and operated is a scalable business. As this revenue stream grows, we expect margins steadily to improve. With that said, we'll continue to expand and invest in our esports vertical, both in the amount of properties and the geographical reach, which will hold back the pace of margin improvement. As an example, in the quarter, we had our first ESL One in India, and we introduced 10 more challenger properties in countries such as Australia, New Zealand, Malaysia, and Thailand. As I said in my introduction, there's more to do to make this emerging esport become a more commercially attractive product.
In our strategic efforts to commercially professionalize the sport even further, we all, and that meaning the fans, the teams, the media partners, the sponsors, of course, ESL and DreamHack, have been asking for a schedule already now for 2020. We will be able to deliver on that important objective for the sport by combining our ESL and DreamHack 2020 inventory of major tournaments and leagues to create a globally integrated product offering, which will make it easier for fans and relevant stakeholders around the world to follow the sport and professionalize commercial opportunities. Just as a cliffhanger, we reveal that full product after summer in August. Another key initiative going forward is to produce and demonstrate more qualitative data for the product in order for the sport to articulate the value proposition to the media partners and sponsors, just like all other entertainment products.
We are therefore close to announce a global partnership with one of the leading research and consulting companies in order to establish a commercial currency for Esports. Measures are being taken, but as stated earlier, this will be a key challenge to tackle going forward and one we will work within the long-term perspective. If we then move on and turn to slide number four in the gaming, which was the stellar performance in the quarter. Reported net sales in the second quarter increased by a solid 19% to SEK 648 million, and the organic growth was 14%. Mobile sales grew even stronger, 24% to SEK 330 million, which was 51% of the total net sales of the gaming vertical. InnoGames delivered another exceptionally strong performance in the quarter as Forge of Empires maintained its momentum and primarily driven by the successful in-game events in Q2 2019.
The new game, God Kings, started to show early and promising results following soft launch in Q1, and we will increase our marketing effort for it in the second half of 2019. Our work to make Warlords a future success is ongoing. Forge of Empires continued to impress, as I said, in June we saw the title breach the EUR 500 million lifetime value milestone. This shows that InnoGames has not just best-in-class ability to develop and launch the title to the market, but perhaps more importantly, the team has the ability to keep a successful title relevant and its player community thriving year after year.
At Kongregate, the turnaround started to yield improvements in revenue and adjusted EBITDA, both of these reflecting Kongregate's focus on a smaller number of more successful games, such as the newly acquired Bit Heroes. If we move on to slide number 5, the action that we have taken to turn around the performance of Kongregate by focusing the company resources on a smaller number of more compelling games, as well as the continuous strengths of InnoGames' main title, paid off in the quarter and reflected in several of the main strategic KPIs. DAU remained stable and decreased markedly by 1% compared to the previous quarter. The quarter-on-quarter decrease in MAU was 5%. That was mainly due to the seasonality and the ongoing expected decline of browser users.
Compared to the same quarter last year, DAU declined by 3% and MAU declined by 16%, and that was mainly driven by Kongregate that had more games featured in app stores and traffic generated from platforms it no longer uses. ARPDAU increases to SEK 2.8 from SEK 2.2 in Q2 2018, growing by 19% year-on-year at constant currencies. The positive development was driven by better game monetization on new and existing users in our top games, as well as lower DAU in Kongregate. There was no material change in the proportion of gaming revenue generated by the top three title, which is Forge of Empires, Elvenar, and Animation Throwdown, which was broadly flat at around 74%. Adjusted EBITDA in the gaming vertical was SEK 186 million, and the margin was 29%.
Looking forward into the third quarter, I would like to emphasize that marketing spend will increase as a result of especially InnoGames promoting both classic and new titles. Regarding our classic games, we feel confident that their lifetime value is higher than we historically have assumed, leading us to making more marketing investments today to realize that value tomorrow. If we move on to see what we've been doing in our VC fund and turn to slide number six. Let me just give you a brief recap of the purpose of our VC fund. It complements our majority stake investments with seed and Series A rounds, investment in early stage start-ups in gaming and in esport. Granted, as often with venture capital, we're talking high-risk investment, but with potential high returns for the right bets made.
Over time, these will either remain financial investments or be a greater entry into companies that might become members of our growing esport and mobile gaming network. Our ambition is to make 10 deals in esport and gaming per year through lead or through co-investment with other top VCs. With that said, investment in first half amounted to a total of SEK 103 million, including capital commitments and span start-ups, and growth companies in the United States and Germany. Among the investments are Redwood, city-based Dorian, its Austin-based game developer Tonk Tonk Games. It is gamer platform Playfull from Los Angeles, a German gaming studio, Sviper, which actually is founded by ex-InnoGames and San Diego-based GoMeta.
To date, we have made 20 investments in 16 companies totaling SEK 195 million thus far, and our largest holding in the fund are BITKRAFT funds, it's AppOnboard, it's Phoenix Labs, and Play Ventures Fund and Sviper. That concludes my comments. I'll now hand the call over to you, Maria, to take us through the numbers in more detail.
Thank you, Jørgen, and good morning, everyone. Please feel free to move to slide 7. Let me start with the revenue and adjusted EBITDA. Net sales in the second quarter of SEK 1.1 billion were SEK 130 million higher than last year, with 4% positive FX impact supporting the 7% organic sales growth. As Jørgen mentioned, esports and gaming both report higher revenues in Q2. Together, the two verticals achieved SEK 136 million higher sales than in the second quarter last year. This was partially offset by an adverse movement of -SEK 50 million in our other operations, principally Zoomin, which reported sales down 4% to SEK 23 million. Our revenue recovery and cost reduction initiative in Zoomin is continuing, and we're also exploring other strategic options, so you should not expect this level of losses to continue for the rest of the year.
Adjusted EBITDA in the quarter was a record SEK 71 million, which was SEK 97 million higher than in the second quarter last year. This resulted in adjusted EBITDA margin of 6%, to be compared with -3% for the same period last year. If excluding the positive impact on IFRS 16, the adjusted EBITDA margin was 5%. The margin in the quarter was driven by the exceptional strong performance mixed with relatively lower marketing costs in InnoGames. As Jørgen mentioned, we will increase our marketing expense in our gaming vertical going forward. Thus, you should expect the margin in the gaming vertical to go down in the second half of the year to more normalized levels, and margin improvements will rather be seen in the esports vertical.
If I can have you turn to slide 8 we will look at the rest of the income statement in a bit more detail. Within the adjusted EBITDA, our central operation costs in the quarter were SEK 43 million, which is in line with the post-split run rate that we flagged at the Capital Markets Day. There were three adjustments to the EBITDA in the quarter. The first was a one-off cost related to the Zoomin restructuring of SEK 4 million , that has been reported as an item affecting comparability. The second was a charge for the cost of the long-term incentive program, which was SEK 23 million . The third was an M&A cost of SEK 4 million , primarily relating to activities in our VC fund and the purchase of the Bit Heroes IP by Kongregate.
In the quarter, there were no impairment of previously capitalized game development costs. The total adjustment was SEK 32 million, with EBITDA before adjustments of SEK 39 million. Depreciation amortization was SEK 74 million and included purchase price amortization of SEK 32 million. Depreciation amortization excluding the PPA was SEK 30 million higher than in the second quarter last year, and almost all of this accounted for in the change in IFRS 16 that I already mentioned. Group EBIT was -SEK 35 million, which was a SEK 90 million improvement versus second quarter last year. Net financial items was SEK -10 million, this is predominantly due to exchange rate changes. Group tax cost was SEK -26 million, the net loss for the period from continuing operation therefore amounted to SEK -71 million.
As you have seen, we completed the sale of our 90% shareholding in Nova Broadcasting Group to Advance Media Group in April. As a result, we recognized a capital gain of SEK 1.4 billion. Nova has been reported as an asset held for sale since the first quarter of 2018, and from the first quarter of 2019, was reported as a discontinued operation. If I could then have you turn to slide 9, at the cash flow and the balance sheet. CapEx in the quarter was SEK 67 million, higher than in the second quarter last year following the acquisition of the Bit Heroes IP. Above and beyond acquisition, most of our CapEx is still in the gaming vertical, where we capitalize the game's development cost up until the game goes live, after which all the costs are expensed and the pre-launch CapEx starts to get depreciated.
We invested SEK 22 million in our VC fund, comprising one new investment and two follow-on, and we have now invested over SEK 195 million in 16 companies into the VC fund out of the SEK 300 million target that we have indicated. All of the fund's investments are still carried at cost. Cash flow from continuing operation was an outflow of SEK 40 million, and in addition, we had SEK 29 million working capital outflow. Following the sale of Nova, we closed down a SEK 1 billion credit facility and we subsequently also repaid the SEK 130 million that was drawn. We ended the quarter with a net cash of SEK 2.1 billion. That concludes my comments, so thank you, and I will now hand back to Jørgen.
Thank you, Maria. As I said at the start, we have delivered on the strategy with a strong Q2 2019 performance in both our core verticals. Esports growing, the driver is our owned and operated properties, and these are getting bigger and better and drawing in the eyeballs. Most important of all, these viewers are attracting sponsors and media as well as new publishers. Still a lot of work to be done in shaping the different revenue streams, especially, as mentioned, media rights. In gaming, we are happy with development in Kongregate, with player numbers and sales going the right direction again. InnoGames remains a really solid performer. Forge is going well in mobile, which today is the most played and chosen platform for its user base, and the classic browser games are still delivering sales.
Work is ongoing with Warlords roadmap, and the soft launch game, God Kings, shows early and promising development. The gaming vertical is in good health. In the quarter, MTG VC fund has completed several exciting seed and Series A investment into gaming and esports startups, and we closed the sale of Nova, providing us with around SEK 1.8 billion of cash to pursue acquisitions and implementing our strategy. Lastly, we are taking important steps to commercially professionalize the industry through the combination of ESL and DreamHack's 2020 inventory of major tournaments and leagues to create a global integrated product offer and through creating a standard for the esport industry when it comes to qualitative data around events in order for the sport to articulate the value proposition to media partners and sponsors.
This is also an opportunity for DreamHack and ESL to work more closely together to realize the scale benefits that are there. To conclude, MTG is set up to build the future of entertainment. We are a unique combination of a strong operator and investment company with an outspoken buy and build strategy.
Thank you, Jörgen, and thank you, Maria. That ends our formal presentation for the second quarter 2019, and we are now ready to take any questions that you might have. Operator, could we have the first question, please?
Thank you. As a reminder, ladies and gentlemen, if you wish to ask a question, please press star and one on your telephone keypad. Your first question comes from the line of Predrag Savinovic from Nordea. Please go ahead, your line is now open.
Good morning, and thank you very much. Trying to see what happened here with the guidance. What was the base of the guidance of 15% organic growth versus now, and what has changed since? It is almost as if you had anticipated an order which was part of the guidance and which didn't follow through. Is this the case?
Thank you for the question. It's around the guidance and what are the drivers behind that change. Jørgen, would you have a first stab and Maria follow on?
Yeah. First of all, I think it's quite important what we have laid out here and discussed with you already, of course, the ambitions for the revenue streams that we are having. We see, as I said earlier, that sponsorship is doing well and continue to grow. That is also reflect the 15% owned and operated growth in Q2. The media rights as such. That is not one big order. It is in general, of course, that we are professionalizing that revenue stream as well. The way to do that is, of course, to have a fixed schedule that people can relate to.
If you are selling this as a global product, which we are doing, there's different demands, there's different time zones, there's different areas the sponsors would like to participate in, and media partners would like to see events in their area with local teams and so forth. There's many components which we now will be able to articulate for the 2020 by merging the DreamHack and the ESL schedule. Instead of like we have seen in the second quarter, we have events both for DreamHack and ESL, in the same quarter, we will now make sure they spread out over the year and also articulated so where we would have those events and what kind of events it is. That is part of the way to professionalize the revenue stream around the media right.
I think 2017, media right was forecasted to stand for 14% of the revenue in esports. Sponsorship, of course, the vast majority. Sponsorship, we do see materialize, as I said, with a lot of prolongation for different sponsors. Also, the case stories we have for media rights today with the companies in the Nordics, to take an example like Yle and TV 2 Denmark and so forth, who's broadcasting these events or Discovery broadcasting the FIFA product, it's very strong. The case stories are there, and those we of course need to now translate to become global currency so people understand the value of those media rights. Esports are there. Esports continue to grow. Also, as I mentioned for the events that we are having.
All the assumptions are there actually to create something meaningful, but we need to put into more system, and that is what we are doing right now. That is on a general basis. That was a long answer to your question, but that was on a general basis and not that one deal will make it up for us. That is not going to be the case. It is a lot of deals globally with a lot of partners.
Thank you, Jørgen. Do you want to do a follow-up there, Predrag?
Yeah. A couple more, if I may. If we try to bridge the growth going forward, where do you see the biggest growth here? Is it from adding new properties, from growing the existing ones, or from adding media rights partners? Where is the growth going to come from going forward?
Yeah.
Just to repeat that one for everyone's benefit. When it comes to the growth target that we have set out, what are the bridge there when it comes to driving forces there? Jørgen, would you like to start with that one?
Again, the events that we're having, the big master events, there we see very strong traction. Yeah. We see, of course, many more data points. We are much stronger in articulating the value. Nielsen made a research around Katowice which demonstrated very strong, big double-digit number, euro number, million euro number in terms of media value. Unfortunately, we didn't reach all the way up there. It is the existing event, the master events, where you will see us grow. Of course, we are adding more challenger events. Just this quarter, we added 10 more events. It was in Thailand, it was New Zealand, it was in Australia, around the world. That is both the sponsorship part and of course the media part as well.
Ticketing is also increasing, but of course it's not the same scale as you have when it comes to sponsorship and the media rights. Do you want to add anything, Maria?
Somebody's also adding more games.
Yeah.
the events that we're doing. It's a combination of the three, I would say, that would drive the growth.
Yeah.
It is to drive the monetization of existing events, add more events into new territories, and also add more type of games into our events.
We have quite an interesting pipeline for the second half as well with potential new games coming in. Already now this quarter, we launched together with Riot, we launched the League of Legends tournaments with the colleges in U.S. We had the biggest global mobile esports event, and the final will take place in gamescom with Vodafone. That's, to Maria's point, a lot of new products coming in as well. A lot of new publishers hopefully will come into us as well.
I guess we can say that we are creating a lot more logic and structure around it as well. It's not just ad hoc events, but there's much more like a world league that is going to be presented.
Yeah. Also based on dialogue with sponsors and media partners also to discuss where do we see a need, in what regions of the world and where do our partners want to expand? That, of course, also we see a lot of interest around the 5G networks as well, so AT&T, Vodafone and so forth, and particularly the mobile game event, as I said, was around also the concept of 5G. A new area, of course, is esports as well, which we're looking at, and that is the FIFA event that we have talked about in the Nordics, where we have kickstarted, and there we see hopefully more events coming in there as well.
There's a lot of interested parties who have seen what we have delivered there, have seen the results, both in terms of sponsorship revenue and also the media impact, where sometimes those events have had higher ratings actually than the actual football games, which, of course, we are happy about. A very interesting product, of course, which is also an opportunity for us to do more of globally.
Thank you, Maria and Jørgen. Predrag, do you have another follow-up?
Yeah, just one more follow-up. On your new guidance, how confident are you on delivering on these targets you have set out today?
First of all, it's important to say that we are giving out an ambition. It is a super young sport, particularly the esports part. When we look at the pipeline, some of the things will materialize and some of the things we might not want to materialize because we don't get paid. The ambition we are having around the 8%-12% is something that we believe that we will be able to deliver. Again, it's more important for us to make long-term good deals than make a good deal which will do good in a quarter. Still, we grew 15% on the owned and operated in the quarter on the back of very strong sponsorship and ticket sales. It is a long-term game, just to be clear. The sport is growing, more audience is coming in.
There's no reason why we shouldn't grow the business. We also do foresee to grow esports much faster in the second half than we did in the first half. Should not forget either, the second half last year, I think we grew the esports part with 40% and the owned and operated with 60%. To grow, what did I say, Q2?
Yeah, that was the Q2 one.
Yeah, sorry. To grow 15% in owned and operated is of course also quite strong on the back of tough comps from last year.
Thank you, Predrag. Operator, we could have the next question, please.
Certainly. Thank you. The next question comes from the line of Martin Arnell from DNB Markets. Please go ahead. Your line is now open.
Hi, good morning, everyone.
Hi there.
My first question I have is, based on what you see in terms of viewership and usage, do you think this around 10% organic growth is a sustainable level, looking a bit further out?
The question is around viewership and usage, and the impact on long-term growth prospects for esports, I would assume. Jørgen, sounds like a question for you.
I think when you look at it, also the growth rates that, as I said, we have seen in some of the revenue streams, obviously, it looks strong. I was also saying the second half is going to be stronger than the first half. Looking forward, that is also why we want to establish a currency to make sure that the forecast for the industry is somewhat professionalized. Again, there's more people who have a say on that. It is still a very young sport, and I think it fluctuates from everything from 20%-23% CAGR the next couple of years from the different reports that you read.
We want to make a strategic deal with one of the big analyst research companies also in order to make sure that we have a say on that, since we are very big in the industry, and therefore we also want to make sure that we understand the growth rates and what we can express going forward. Looking at the eyeballs, the amount of eyeballs in the industry, there's no reason why this shouldn't be growing and continue to grow as long as we are able to articulate something meaningful around those eyeballs. More case sources coming in, more prolongation. That is, of course, what we see. The more data you have, you should be able to price differently and price better. We do see the sport continue to grow, and there are different views out there on how fast it will grow.
I think right now ranged between 19% or 20% up to 23%, as I have seen the latest ones.
Martin, would you like to do a follow-up?
Yeah, thanks. You talk a lot about these initiatives to improve monetization in esports. What of these would you say are the most important for you?
Yeah, sorry about that. When it comes to monetization of esports, what are the biggest factors to realize that, Jørgen?
That is, as I said earlier as well, particularly around the media rights where we see fantastic opportunities, and that is to professionalize the schedule, to make sure that our partners understand what they get and when they get it, and what areas, what time zones and so forth. Just like all other sports that you're more proactive on your scheduling. Today, the Champions League schedule is set, the Premier League schedule is set, the Formula One schedule is set for 2020 and so forth. Now the esports schedule will be set as well. That means also you can have a different dialogue because obviously your customers, your partners will have a different approach. You can hopefully make sure you fit into the schedule because you can demonstrate some interesting KPIs for the media part.
That is something which I think will yield great returns when we can do that. Everybody's been asking for this to happen. Again, it is a very young sport with a lot of opportunistic interest as well. I'm very happy that we finally managed to get this made now, and we'll be able to announce that in August.
Jørgen, do you expect payoff from this next year?
Yeah. That should be the case that you already now can start to sell. Right now we will actually be able to start to sell an event in December 2020. That is a different, I think in Swedish it's called or whatever it's called. It is a different way of looking at it than we have done historically, where you have said, "Oh, by the way," to the extreme, you might have understood in April there's good opportunity for an event in November. Obviously, the big dollars, the sponsor dollars, wherever, will be allocated. It's not that you as a marketing director sit on a big pile of cash in the end of the year, probably. The same goes for the media investments as well.
That from our history, of course, is that hopefully you have a better view on what you would like to show than within two months notice. Stuff like that we believe is going to professionalize the sport much more, commercialize the sport much more, to the benefit of teams and the fans, of course, as well, and therefore also sponsors and media partners.
I mean, our view on media rights or the potential media rights have not changed. It's just a question of the need to commercially professionalize it. That's what we're talking about here. Martin, do you have a follow-up?
Just a final one on gaming. Thanks for clarifying that on esports. On the gaming vertical, your EBITDA margin is quite high in the first half of the year. You talk about marketing spend increasing in the second half. Does that come together that you probably have a higher EBITDA margin for InnoGames this year than last year?
When it comes to the development, especially for InnoGames then and EBITDA margin, how this year's EBITDA margin will compare to last year, 2018, then I think that's a question for you, Maria.
Hi, Martin. You should expect that the Q2 was exceptionally high, though, because you have the combination of very successful in-game event for our established events together with proportion lower marketing in the second half. As both Jørgen and I said, we will ramp up marketing both on the established games because we see the long lifetime value of our customers, and as well we are rolling out in both God Kings and Warlords in the second half of the year. You should see margins go down in the second half of the year. It's still likely that you see a small margin improvement year-on-year.
Very good. Thanks a lot, Maria.
Thanks, Martin. Operator, could we have the next question, please?
Certainly. Your next question comes from the line of Oskar Erixon from Carnegie. Please go ahead. Your line is now open.
Thank you. Good morning, guys. Just a quick follow-up here on the tying together of ESL and DreamHack. If you could elaborate a bit on what benefits you see, is it cost synergies partly, or is it mainly better sponsorship deals and media rights deals that is the long-term potential here? Thank you.
Thank you, Oskar. When it comes to ESL and DreamHack, then working closely together, what kind of results are we assuming there, Jørgen? Is it scale benefits, commercial benefits? What can you elaborate on?
Obviously it is both, meaning that first of all, we will combine two very strong and relevant esports companies and their schedule. Also they complement each other fairly well, where we have the DreamHack company who's doing a lot of these festivals, which we called in our structure the open tournaments. That is something where we will see that eventually take place also at ESL events. You can merge the two products. You can for sure make sure that we don't have events the same weekend, that goes without saying, but you can articulate a much stronger customer journey and much stronger customer proposition by combining those two products. They are very complementary to each other.
Yes, of course, by being smarter, obviously we do believe that we also will be able to realize or to do things a bit smarter, that goes without saying. To begin with, it is mainly focused on the products to make sure that those two very strong esports companies have one unified schedule. I think that will render a lot of commercial opportunities in better sponsorship sales. Just imagine what we can offer the sponsors now and better media rights sale. Just imagine now again, what we can offer the media companies globally.
Oskar, do you like to make a follow-up question?
Yes, please. Thank you. More of a sort of, not necessarily a philosophical question, but a long-term question on media rights and the potential there. Given how people watch esports today, your history with Facebook, et cetera, how do you consider this in terms of, is this a viable large revenue stream going forward? Thank you.
The way I look at it is I look at the eyeballs, and I look at that young demographic, which of course for many advertisers and media as such, is difficult to get hold of. That is something we can supply then in the esports part. That is of course commercially very interesting, and that of course should render or should yield great opportunities if we can demonstrate the returns. The investments that sponsors are making with us, like Mercedes and Pepsi or AT&T, DHL, whatever, is a significant amount. Of course, that means that they need to make a decision as well to go with us or to do something else, which they've done in the past, which have been probably successful for them. We do need to demonstrate that there's a better return with us. We have those case stories already.
You can also find them online. DHL is one of them, which are talking about a great return on the dollar invested into esports. That is what we can articulate now better and better, is that there is a good return so we can be a part of the media planning or the media campaign like everything else. We do have the audiences, and I think that is quite important to focus on is of course there are so many eyeballs in this industry. Obviously if you are able to package those into interesting commercial opportunities, you will be able to do better and to create a real sport out of it. We are benefit, as I said, with the fact that we have so many young audiences as well, which are very scarce for many advertisers.
Obviously if you want the dollars that we want, you need to be more sophisticated in articulating the returns. That is what we're working on. Also, as I said, with this research company, which we also will announce after summer. It will become a complete moment entertainment product. It is just in very young and very opportunistic, and that is something you just have to bear in mind, but the audiences are there. I hope that we are smart enough to be able to present some interesting commercial opportunities around these eyeballs.
Oskar, would you like to make a follow-up?
Yes. Thank you, Jørgen. One question for Maria as well, perhaps. You mentioned regarding the profitability in the gaming segment will be lower, of course, from a very strong quarter now in Q2. Could you say something more perhaps about sort of the mix in margins here in the second half of the year, given the quite high activity you will have in Q3, I suppose? Thank you.
Yeah. You also need to put it in high, by the way. You need to put it in perspective as well. The phasing of some of our events was a little bit different last year. You come into this year having quite tough comps Q1, Q3, and then Q2 and Q4 was slightly easier comps due to the phasing of events last year. What you should expect is of course a drop in margin in Q3 now as you wrap up marketing and then a gradual improvement in Q4. If you look holistically, second half versus first half, you should not expect a major difference in the margin if you look in the average in H1 versus H2. Hopefully that helps a little bit.
That's helpful. Thank you very much.
Thank you, Oskar. Operator, could we have the next question, please?
Certainly. Your next question comes from the line of Rasmus Engberg from [Handelsbanken]. Please go ahead. Your line is now open.
Yes. Hi, good morning. Can I ask two questions about the esports in particular? Your losses are a little bit up in the first half of the year. Do you anticipate that the losses decrease in the second half, or are they going to be roughly flat-ish? That's the first question.
Yeah. When it comes to losses then for the quarter, slightly up. How does it look for the second half, Maria? That's definitely a question for you.
Yeah. No, I think that is what I said is when I briefly talked about the outlook on the margin is you should not expect margin improvement in gaming. You should rather expect that into esports, which means of course, then losses should gradually go down, and you will see that more skewed to Q4 than Q3.
Okay. Thank you. Now that you guide only for the two verticals, gaming and esports, I presume that you believe that esports will grow faster than games for the year due to strong second half, right?
Yes, that is the correct assumption.
Yes. Thank you. That's all for me.
Thank you, Rasmus. Operator, can we have the next question, please?
Certainly. Your last question comes from the line of Julia Matoshchuk from Morgan Stanley. Please go ahead. Your line is now open.
Hi. Good morning. Thank you for taking my question. I do apologize, I will repeat again these things, but I'm a bit confused on precisely what should we expect in Q3 and in Q4. From what I understood, that we are looking at the improvement in margin in esports, but worse margins in gaming. However, in Q4, there will be a reverse again. Is it right or not. Second, when you look at the full year guidance, could we please have a bit more color? What should we expect by verticals? Thank you.
Okay. Just to repeat, Julia, when it comes to margin development for the two verticals, what to assume when it comes to how gaming will look in Q3, Q4, and the same thing for esports Q3, Q4. What kind of trajectory are we looking at? Also how the sales guidance then is broken up between the two verticals as well. Did I understand you correctly there, Julia?
Yes. Thank you very much.
Yeah, thank you. I think that is for you to start, Maria, maybe add some color, then if Jørgen needs to.
If you start with the margin improvements, what we said was, in gaming, we will increase marketing, which then ultimately directly relates to lower margins because that's a payback over two years' time, which means that that will benefit predominant 2020, the marketing effects that we will do now in Q3 and Q4. Yes, margins will go down in Q3 in gaming, and then you will see some monetization starting in Q4. That's the phasing on the gaming. If you look more specifically on esports, we'll see a small improvement in Q3, but the big ramp-up and improvements will be in Q4. That the weighting of scaling esports will start in Q4 when it comes to the bottom line. If you look at the sales growth, what we do is we guide for the two verticals.
It's our core gaming and esports, and that stays in the range between eight and 12, which means that, of course, second half growth rates will be higher than the first half of growth rates and esports will grow faster than gaming. I think that's basically what we've said.
Julia, would you like to follow up?
Yes, please. I have two follow-up questions. The first one is about Facebook deal. I recall you had a big Facebook deal from ESL. Was there any updates? Is this deal renewed? I'm asking because again, that was predominantly media rights revenues. That's the first question. The second, again, it's a bit of a philosophical one, but we've already been through , I think, three or four guidance downgrades in esports. Could you please just give a bit more color on how do you see the nature of the revenues? How short-term they are? Do you have exposure to one big sponsorship deal that we should be aware of? Thank you very much.
To repeat, it's around the commercial end of esports, Facebook deal number 1, when it comes to esports development over historically, if we are exposed to any major sponsorship agreements, for example. Jørgen, that's-
The Facebook deal, we are in a partnership with Facebook, that partnership has changed from being an exclusive deal to a non-exclusive deal with them on a global scale. Obviously deals like that and others, as I said earlier, are something we are negotiating, discussing, understanding what is the best media window for us, the media rights window globally. Then when it comes to the esport partners and specific big commercial, reliable customer or important customer, I think we do have significant sponsorships, but many now. In the old days, we had eventually one or two, but now you have multiple sponsorships also depending on what products that we are having. Also to combine DreamHack and ESL's customer base of sponsors, of course, you get even bigger. That means also that you don't have one sponsor that you are fully reliable.
I think that is quite important. We are defining what categories we want to have at each of our events, and now as well as global sponsors and regional sponsors and whatever, and also for the different games that we are having. You will see us add more different sponsors on as well. We'll prolong hopefully the ones we have, and also you will see that more will come into the space.
For example, as you mentioned earlier, Jørgen, we'd go from maybe being dependent on typical endemic brands now to moving to more non-endemic, so to speak.
Yes. That is a consequence, of course, of the non-endemic seeing the eyeballs, as I said earlier, for them having difficulties or not difficulties, but we have so many of those interesting eyeballs around our event, and that, of course, should be a task for us to make sure that we can articulate them an interesting commercial proposition around those eyeballs. That is what we believe we do now with the schedule for 2020, where people can have a much longer horizon instead of having these eventually half-year things you need to look at, because it is also about activation of a sponsorship. It is not just to go in with a billboard, whatever, it is also how you activate it. Mercedes is a good example of that. Our professionals there have activated it, DHL the same. The same goes for the media partners as well.
I know that from our part, to have a six months contract or whatever, or to get something told six months in advance is difficult to market. We do believe that it is a commercially even stronger product in 2020 now that we can combine the two schedules.
Thanks. Julia, would you like to follow up?
Yes, thank you very much. The last question, I promise. Again, I understand that you're doing this groundbreaking, essentially, job with establishing the industry. However, industry is expected to grow by just 22% per annum. It's not that much. The question is, assuming that ESL will continue growing within the industry, will it be enough to turn the business profitable?
It's back to if the growth rate that we're currently seeing, both in the industry as well as with ESL, then, is enough for us to reach the necessary scale to break even or to make money, so to speak. I believe that is for you, Maria, to elaborate on.
Yes. I think that we have not changed our midterm outlook when it comes to our sales growth and our margin ambition, which means, of course, that means that you will drive esports into profitability. However, we will not do that in the near term future. Our ambition right now is to grow and set this industry and then start scaling and monetizing it. We still do believe that we will make esports profitable.
Thank you very much.
Thank you, Julia. Operator, could we have the next question, please?
Certainly. We have another question from the line of Predrag Savinovic from Nordea. Please go ahead. Your line is now open.
Thank you very much. Just one follow-up on the amount of activated properties you will have in Q3 and Q4. Can you give me a reminder on that?
Yes. Jørgen, would you like to give a reminder on the properties we're going to have in Q3 and Q4?
I think aggregated, you will see us having around seven, or not around, but seven of the Master events in Q3, Q4 combined. You will see us having 23 Challenger events as it looks right now, plus, minus, and you will see four, five, six of these open events as well. ± 40 events is something that we would expect to have in Q3 and Q4. As I said earlier, there are some interesting opportunities which might come on top of that. We are, of course, constantly negotiating with publishers, and we have had deals we've been working on for some time now, which we would like to see materialize also now for the second half. We hope that we will be able to announce those.
In all fairness, full speed ahead. That is also what we discussed, that the events that we have had historically for some time now, they're doing extremely well and doing good in terms of viewership and monetization. We are doing more. We are launching more new events as well and new areas like India. We had the Master event and the 10 new Challenger tournaments we had this quarter. Unfortunately, not everybody was sold out of these events, to put it mildly. It is investments obviously that we are doing, but we are interested in having these Challenger events in order to fulfill our objective, having this zero-to-hero strategy where we are taking people in on the bottom level and in the end, they hopefully can play the final in either New York or Katowice or whatever our big event.
Also clarification on the DreamHack event and when that is taking place. Maria?
Yeah. Basically, we moved this quarter the DreamHack event. It was Q3 last year, and Stockholm this year will be in Q4. I think that's the difference. You should just think about that on the phasing, and that is revenue for DreamHack. That will be phased differently year on year.
Is that answering your question, Predrag?
Yeah. Super. Thank you very much.
Thank you, Predrag. Operator, do we have any more questions?
We have one further question from the line of Mathias Lundberg from SEB. Please go ahead. Your line is now open.
Good morning. My question relates to the Esports segment, and in particular, if you could give us some more information about the revenue mix in Esports, because you've been speaking a lot about sponsorship agreements and broadcasting rights. Can you share with us how your revenue split is in the Esports segment right now? Is it mainly sponsorship revenues or ticket sales, stuff like that? Thank you.
Thanks, Mathias. Coming down to how we then break up revenue and the revenue mix. Would Maria like to start and then follow up with Jørgen if necessary?
Hi. If you look at it, we have defined rather than look at actual revenues, we looked at own and operate properties and Esport Services, which is how we define how we then monetize our properties, and that is roughly 70/30 split, you can argue. The actual revenue streams that goes into that, what you have is this sponsorship, which is also going to news as the biggest bucket. You have media rights, you got publishers fee, ticketing, and merchandising. That's the same revenue bucket that we have. Of course in own and operate, the biggest proportion is then sponsorship followed by media rights, those are also the scalable revenues, and that's why we spend a lot of time discussing that.
What we now saw in this quarter and what we've seen this year is very strong revenue growth on the sponsorship side, but we still need to do more work on the media side to make sure that is catching up. Of course, the growth of these two revenue streams is what's going to make our business scalable. That's why we're focusing a lot on those two items.
Mathias, would you like to do a follow-up?
Well, is it correct to assume that the incremental revenue growth then would come at a very high margin? If you succeed in growing your broadcasting rights, that comes to a high incremental margin.
As I say, you're going to see three drivers of revenue growth. There is one that's to monetize existing properties better. That should come with a high incremental margin because that is then driving revenue growth, in particular sponsored media rights on existing properties. You also grow adding new locations. That is, we've discussed before, that is not possible the first time you do an event, so that would then not have a high incremental profit. The third revenue growth is also adding more games, and depending on how that partnership looks like, that depends on also the gross margin. The longer term of agreement that we have, and of course, the more investment we are willing to do on our side, the shorter term the agreement, of course, the less investments we are willing to put down.
It is a hybrid in the three different revenue stream buckets, you can argue.
Mathias, would you like to do a follow-up?
I can do one last one.
Yes.
When you sell new advertising spots, do you mainly push more ad spots or is it the price that increases?
We're not certain if we got that question because you're saying when we are selling media rights, how that is broken up. Is that what you mean, Mathias? Could you just rephrase it so we get it?
Yeah, I can rephrase it. In regards of sponsorship and advertisements, the increase in that sort of revenue, is that mainly stemming from increase in ad spots, number of advertisers, sponsors, and so? Is it driven by higher prices?
It is both, as I said, actually, when it comes to the sponsors. You will see us onboarding more sponsors. When you have a sponsor on board, you are able to articulate the outcome of that sponsorship. The sponsor is able to articulate the return on that sponsorship. Of course, that justifies better pricing. That is what we have said several times is the data that we are collecting right now. It is data that we in our old business had for 30 years or whatever, more or less. That is what we are building up now to get those case stories that a telco operator or whatever is actually able to generate X, Y, and Z with this activation. That will help when we are out selling in other areas of the world, to have those documentation, those case stories.
That is how you sell these sponsorships. More will come and at better prices. That is the idea. As I also said, at our general tournaments, we were not sold out for sure, at these new launches. There are a lot of sponsors who like to see it. That is probably not marketed well enough. There's a lot of work to be done there as well. The markets we are talking about are huge. Of course, over time, you'll be able to have a very relevant tournament there with very relevant commercial streams around it as well, local media, or local sponsors as well even, and not necessarily global. We are expanding our opportunities constantly also by having these general tournaments.
Okay, Mathias. Sorry. Are you happy with that answer or would you like to do another follow-up?
Great. Thank you.
Thank you, Mathias. Operator, could we have the last question, please?
There are no further questions at this time. Please continue.
Thank you. I will hand over or back to Jørgen for some concluding remarks.
Yeah. Thank you very much. All that concludes the presentation for MTG's second quarter 2019 interim report. We look forward to staying in touch until we release the next quarter report. With that set to Q3 2019 will be presented the 23rd of October. Have a great day, have a great summer, and see you soon.