Good morning, ladies and gentlemen, and thank you for holding. Welcome to MTG Q1 Earnings Call. At this time, all participants are in a listen-only mode. After the presentation, participants will have the opportunity to ask questions, at which time the instructions for the question and answer section will be given. If any participant has difficulties hearing the presentation, please press star followed by zero for operator assistance. Presentation slides to accompany the call are available via the link on the homepage of mtg.com. I will now hand the call over to your host, President and CEO, Jørgen Madsen, who is joined on today's call by EVP and CEO of Nordic Entertainment Group, Anders Jensen, and CFO Maria Redin.
Thank you, operator. Good morning, everyone. Before we get into the numbers, let's take a few minutes to discuss the strategy and direction of MTG. We have in recent years been managing the transformation of a leading traditional broadcaster into a global digital entertainment provider. We have invested significant time and money to become the number one entertainment provider in the Nordics. We have the leading streaming services in the region with Viaplay and Viafree. We also have the best and broadest content offering, which spans a mix of premium sports, acquired content, and originals. We have divested all of our broadcasting businesses outside the Nordic region in order to fund our investment in MTGx in general and in esports and online gaming in particular, two businesses that are global by nature.
We are today the world's leading esports company. Our ambition is simply to build a super brand in the world of sport up there with the NFLs, the Formula 1s, and the UFCs. We have two proven concepts in the online gaming space. This is an area where we are looking to expand further through M&A. We are today a combination of a Nordic entertainment powerhouse and a global digital entertainment player. This model has worked well. The world keeps changing. We want to continue to reinvent MTG in order to make sure that we capture the opportunities that new consumer behavior is creating. This is why we are preparing to split MTG into two separate listed companies. Please move on to slide two.
We are a big believer that a split will accelerate growth and create additional shareholder value through a sharper strategic focus, increased flexibility when it comes to capital allocation, and faster decision-making. This will be to the benefit of all stakeholders and will also provide investors with two separate, attractive, and different investment cases. The work to establish the Nordic Entertainment Group is ongoing and is expected to be finished in the H2 of this year. We have, during recent weeks, announced leadership appointments for the Nordic Entertainment Group. We have established a number of work streams relating to the carve-out. The plan is for the shares in the Nordic Entertainment Group to be distributed to MTG shareholders and listed on Nasdaq Stockholm in Q4 this year, after approval by the shareholders at an EGM to be held in Q4.
We'll keep you regularly updated on our progress and hope to speak to as many of you as possible throughout this process. Turning to slide three, you can see that the rising demand for our products that we have seen for some time now continued into Q1. Sales were up 9% on an organic basis, which marked the seventh consecutive quarter of organic growth of at least 5%. The strategic investments that we have made in the expansion of our digital products and content offerings have clearly paid off, and our products and services are more popular than ever before. Our digital sales were up 88% in Q1 and accounted for 35% of total sales. Profits were up 73%, which was driven by healthy underlying performance, as well as the contribution from InnoGames.
Moving on to slide four, you can see the group reported sales were up 26%, driven by the organic sales growth of 9%, as well as the consolidation of the InnoGames and Kongregate online gaming businesses. The very positive trend in the performance of our Nordic and international entertainment businesses continued into Q1 as both segments reported higher sales and profits. MTG Studios reported slightly lower sales and losses as the season is a small quarter. MTGx sales were up 27% on an organic basis, and EBITDA loss of SEK 71 million last year was turned into a SEK 45 million profit this year and was fully consolidated the result of InnoGames. I will now hand the call over to Anders for his comments on the Nordic Entertainment and MTG Studios businesses.
Thank you very much, Jørgen. A very good morning to you all. Can I ask you to please turn to slide number five. The total Nordic Entertainment sales were up 6.2% on an organic basis. This is indeed a very strong performance in a quarter where we were up against 11% comparison from last year, and also the fact that the Winter Olympics was covered on competing channels. Free-to-view radio sales increased as the decline in audience shares and linear viewing were more than offset by higher prices and continued double-digit growth in Viafree. We have, during the quarter, added Disney to our existing sales cooperation with Viacom, Fox, and History. We have also launched a new product concept with thematic content verticals such as classic TV series and sports for Viafree.
Our Swedish radio business has continued to deliver double-digit organic growth following solid underlying market conditions and share gains. It is obviously very promising given the new licenses coming into action later this year. Nordic pay TV sales were up, and Viaplay continues to be the main driver of this growth. Continued very high, very healthy subscriber intake and higher prices. We have continued to see strong growth in our dual and triple play fiber offerings in Sweden. Our satellite and third-party products have also performed well. While losing some 11,000 satellite subscribers, we managed to offset this significantly by a record net intake of 43,000 third-party subs. This follows the successful introduction of new packages in general, and with YouSee in Denmark in particular.
We want to expand our product offerings in each market, and VOW and the recently groundbreaking deal with Telia in Finland around ice hockey are two perfect examples of just that. Viaplay broke a new record in February in terms of subscriber intake for our series and movies packages, and a lower churn following continued product improvements and investments in content and marketing. We also started the year by setting a new viewing record already on January 1, and then we went on to beat the record four times during the Q1. We launched two new Viaplay originals, "Sthlm Rekviem" and "Advokaten." "Advokaten" is the strongest performing original on Viaplay to date, which obviously is very encouraging given the strong lineup we have for the coming years.
The average usage continues to grow quickly, which clearly demonstrates that our customers love the product, and the product is about to get even better. We have during Q1 released support for the new EU portability regulation, allowing Viaplay customers in Sweden, Denmark and Finland to bring their Viaplay account with them wherever they are traveling within the EU. The profits in Nordic Entertainment were up 4% to a new all-time high for Q1. This was also now the sixth consecutive quarter with profit growth, which solidly demonstrates that we have a solid underlying business that is set to continue to deliver on our profitable growth ambition. We're now very much looking forward to the World Championship in ice hockey, broadcasted from Denmark, and it will be broadcasted exclusively in Sweden and now also in Norway on our linear channels and streaming services during the Q2.
If I ask you to please move to slide number six, where we have a look at the MTG Studios. The sales were down a modest 2% on the organic basis. Solid growth in non-scripted segment was offset by lower event sales and timing differences in the production schedule for the scripted drama. The underlying demand for scripted drama remains very strong and the pipeline looks very promising. Q1 is a seasonally weak quarter and therefore typically loss-making, which was the case again this year, but the operating loss did slightly decrease compared to last year, despite some start-up costs for Atrium TV. Now it is the biggest content production company in the Nordics. I see material benefits from having these fantastic storytellers in the Nordic Entertainment Group, and it's absolutely my clear ambition to gradually increase the share of in-house productions across all products and genres.
Also, I see significant opportunities to accelerate our digital-first production capabilities with a significantly closer cooperation between Nice One and Splay Networks. That's it for my comments for now. Back to you, Jørgen.
Thank you, Anders. If I can ask you to turn to slide number seven. You can see that sales for the International Entertainment segment were up 14% on an organic basis and driven by double-digit growth in both Nova Group and Trace. Total segment profit almost doubled compared to the last year as both businesses reported improved profitability. We have, as a part of our ongoing transformation, announced agreements earlier this year to sell our interest in both Trace and Nova, which are the remaining businesses in the International Entertainment segment. Both transactions are expected to close during Q2 after receiving all necessary regulatory approvals. Turn to slide number eight. We can see that MTGx sales were up 27% on an organic basis and 226% on a reported basis.
We have turned an EBITDA loss of SEK 71 million a year ago into a profit of SEK 45 million this year. Our Esports business delivered 32% sales growth in the quarter. ESL's revenue from owned and operated events, ESL key focus area, were up 17%. We had the same number of events as last year, so the growth came from increasing involvement of key distributors and sponsorship like Facebook, Vodafone, Mercedes, and Intel. ESL's white label events revenues were down as we had one less major event than in Q1 last year. DreamHack sales were up in constant currency. We signed a number of important multi-year distribution and sponsorship deals in Q1, including with the likes of Twitch, Monster Energy, and Komplett. Q1 is a small quarter for DreamHack and was even quieter this year as DreamHack Masters was moved from March to April.
The key Esports event for the quarter was Katowice. 169,000 fans attended the stadium event and surrounding festivals. We had 2.2 million peak online viewers during weekend one and 1.7 million for weekend two. These figures were up 80% and 26% respectively compared to last year. A total of 3.4 billion minutes of content was watched from this year's Katowice event. We have made significant investments in Esports over the last year in order to professionalize the organization, upscale the events, and build the brands of our own and operated tournaments. The combination of these investments with seasonally small revenue quarters for both ESL and DreamHack resulted in higher combined losses for our Esports business. We will have more ESL mega events in Q2 this year than last year. It is 4 versus 2. We expect higher sales growth in what is also a seasonally stronger sales quarter.
All of these large-scale events are owned and operated. We will invest further, but we will still expect total Esports losses to be down in Q2 compared to Q2 last year and Q1 this year. ESL announced a reorganization last week in order to create a simpler, more focused, and more efficient company. As the industry has grown, so has the number of service providers and the ecosystem around Esports, which enable us to contract rather than staff a number of functions in areas such as studio operations. We are doing this in order to both benefit from economics of scale and to increase the quality of our products and events by concentrating on the actual entertainment experience. This is how we will continue to be preferred choice for fans, players, partners, and publishers. We are reducing our investment in non-core areas so that we can invest where it matters.
We will therefore have a one-off restructuring charge of approximately SEK 30 million-SEK 50 million in Q2, which will be reported as an IAC and therefore not impact the segmental numbers or what I just said about improving profitability. We do then expect the combined esports business to be profitable in the H2 of this year. If we move to the online gaming, the combined sales for InnoGames and Kongregate totaled to SEK 577 million, and were up approximately 25% on a pro forma basis. Forge of Empires and Elvenar continued to perform very well, and the soft launch of Warlords has received great user ratings, which is promising ahead of the marketing launch in Q2. Kongregate has continued to develop according to plan across both the developer and publishing businesses. The combined sales of our digital video content business were up 19% in the quarter.
The competition for talent has heated up, and the market in general remains very competitive. We see opportunities to accelerate the growth in our digital-first production business via closer cooperation between Nice One and Splay, which Anders talked about earlier. Meanwhile, Zoomin.TV continues its gradual transformation from a traditional YouTube model into a broader content provider and branded entertainment creator. To sum up MTGx, we see esports continue to grow and improving profitability. We are building a sports super brand here, and we are very well-positioned. Our online gaming businesses continue to perform well with the established games providing the growth and profitability platform for promising new title launches. Our digital video network have continued to generate double-digit sales growth despite challenging market conditions. We therefore expect continued high growth levels and rising profits for MTGx in Q2 and the H2 .
That concludes my comments, I'll now hand the call over to you, Maria, for your comments.
Thank you, Jørgen, and good morning, everyone. If you please turn to slide nine. Reported sales were up 26%. This includes 9% organic growth and a 15% contribution from acquired businesses, primarily driven by the consolidation of InnoGames and Kongregate. The currency impact was a positive 2% in the quarter. Operating income was up 73% compared to last year. Our entertainment businesses and InnoGames continued to be the key profit drivers. Q1 was burdened by SEK 12 million of M&A costs. If you then turn to slide 10, cash flow from operations almost tripled in the quarter, this was offset by a significant swing in the working capital development. The working capital build is a function of normal prepayment patterns, with some timing differences in receivables between the quarters.
We expect the working capital development to improve significantly over the coming quarters, but we still expect a negative change for the full year. Our net debt increased to SEK 2.3 billion, following the working capital buildup that I just mentioned. This corresponds to 1.4 times trailing 12 months EBITA before Items Affecting Comparability. I would, in this context, also state that we are yet to receive the payments for our shares in Nova and Trace, which amounts to approximately SEK 2 billion. That is it for my comments, and back to you, Jørgen.
All in Q1 was another quarter of organic sales, profit, and margin growth for the group. Our Nordic entertainment business performed very well against very difficult comparisons. MTGx reported healthy organic sales growth and a SEK 160 million positive EBITDA swing, and we expect continued good growth and improving profitability moving forward. We have continued our strategic transformation by announcing the disposal of the remaining international entertainment businesses, and we have also announced our intention to split MTG into two separate listed companies by distributing Nordic Entertainment Group to our shareholders. This will drive further growth and shareholder value for both businesses, and we look forward to keeping you updated on our further progress. That concludes our commentary on the results. Over to you then, operator, to start the Q&A session, please.
Thank you, ladies and gentlemen. We are now ready to register questions. If you would like to ask a question, please press star one on your telephone keypad and you will enter a queue. Should you wish to cancel, please press star two. The first question comes from Victor. Your line is open. Please go ahead, sir.
Hi, I could not hear, but maybe Did you say Victor? Yes?
I think so, Victor. You go ahead.
Okay, thanks. Just the first question here, you comment a bit around the profile for MTGx and how you see the margins improve here. Could you maybe just comment on when you think that, I understand it's a bit premature maybe, when we can expect the whole MTG to be the new MTG, so the old MTGx to be cash flow neutral? That's the first question. Given the gaming launches in InnoGames, if you can just give some thoughts on how we should model the growth and margin profile for InnoGames this year, that would be very helpful. Any pointers you can give would be appreciated on that. I have a question for Anders on, or any of you really, on the Nordics here.
Is there anything special that boosted the Q1 free TV that we should keep in mind, or is this a lasting strong effect because it's very good numbers given the comparisons?
Yeah, thank you, Victor. If I just start with your question on Nordic Entertainment and free TV for the Q1. The main driver for the strong result is the fact that we're stable despite the Olympics, on our main channels, TV3, both in Norway and in Sweden. That's a sign of strength of the stability in that product. The main driver for the increase in sales is Viaplay, where we see a very healthy uptake of both ad sales and usage on the platform. That combination is a strong one, and we see that we can resist fairly tough competition like the Olympics in the Q1 with that combination. You can expect some robustness coming from that going forward.
Do you-
Yes.
I'm sorry.
No, you're good.
You expect to continue and outgrow the market this year than driven by Viaplay. That's how we should interpret.
Well, I think what we can see now is that we're concluding the yearly negotiations for the ad sales prices, they look very encouraging. You can expect us to land in a higher single digit or low double digit number on that. That's a good solid foundation for offsetting the put. That in combination with strong performance in the products and growth in Viaplay gives us a good outlook for the year and in the free TV radio and Viaplay segment, yes.
Perfect. Thank you.
Victor, to your question on MTGx and the cash flow, what we are focused on this year and what Jørgen also guided on or gave our ambition on is on the EBIT level to make sure that we will drive a profitable EBIT for the segment and then also H2 improve profitability for the esports. That is what focus on cash flow, as you could see for 2017, it was a negative cash flow from the business. As we also stated, the key cash contributors, of course, InnoGames, and in that business we own 51%, which is important to note as well when you look at the cash flow modeling of the new MTG AB. Of course, that is something that we will focus a lot on.
On the InnoGames, can you repeat your question there so I fully get the question that you had on InnoGames?
Yeah, just wondering when you launch the new games and the marketing initiatives, et cetera, around that, do you expect margins to come down first and then up again, or is it more stable, or how do you view just the trends for InnoGames basically this year?
No, what you should expect is that marketing should go up in Q2. As we announced, we will then anticipate to have the launch of Warlords in Q2. We have done soft launch, which looks very promising in Q1, but of course, behind the soft launch, you have very little marketing behind them. We did, however, launch Elvenar mobile extension in late Q4. Still, the big ramp-up you will see in Q2. That's also why you saw slightly improved margins in Q1 because you have less marketing behind it, because there was in particular the existing games which drove the performance, which is of course very good as well because then you see the traction of both existing and new games.
Okay. Perfect. Thank you.
Thank you. We will take our next question from Rasmus.
Yes. Hi.
Your line is open. Please go ahead.
Hi. I think that's me, Rasmus with Handelsbanken here. Can you give us some sort of pointer relating to the cash flow? What is the CapEx requirement now in this changing entity we have compared to last year?
Yes, as we said, you should expect CapEx for the full year 2018 to go up versus 2017 as we fully consolidate InnoGames and Kongregate, which do have a higher CapEx level than what we have seen before. Those assets are otherwise asset light. It is CapEx that's going to be the key driver on the build on the cash flow. You also have, of course, in the Nordic Entertainment Group, which is the other entity, you have the new radio licenses coming into play in Q3 which will also, of course, drive CapEx investments in relate to those.
It is going to be a bit higher than last year. Okay.
Yes, including with the radio licenses, which I look at as a sort of one-off.
Yeah
It will be significantly higher this year. The run rate is also higher with InnoGames and Kongregate as a part of the portfolio.
Yeah. Jørgen, did you say that the esports were going to be profitable in the H2 of the year? Is that what you said? I sort of lost it a bit there.
That is the ambition that the esports business as standalone should be possible in the H2 of the year.
Not in Q2, right?
No.
Q2 is going to be better than Q1, right? That was the comment, wasn't it?
That is what we said as well. Of course, that is one-offs.
Yeah, exactly. Good. Finally, for the group this year, where do you think we would have the group central or overhead costs? If you can give us any sort of indication of where that would be, although it would be separate companies next year, but any kind of indication on where we should see that?
Yes. For this year, you should expect them to be up year-on-year because we do have the cost as part of the split. We are not ready yet to give you the firm breakdown on the costing and the cash flow impact on the split. We will come back shortly with that as well. For the full year, it will be up. Also for the two new separate entities, the same goes there. It's currently in the workings. To give you some sort of high-level estimates, what you should look at is an approximate for the new MTG AB, I would say between SEK 150 million-SEK 200 million, and that also includes overhead that we today have sitting in the MTG AB. For the new Nordic Entertainment Group, around SEK 250 million. Again, we will come back with more details there as well.
Okay. Thank you.
The next question come from Mika. Your line is open. Please go ahead.
Hello. Hi. Mikaela Fin here. Morning, Guy.
Hi.
Yeah, thanks. Can you say something about the growth for InnoGames year-on-year, and also Kongregate on a pro forma basis, how they performed, those two companies?
Yes. As a total, the growth for the gaming segment was 25%. Of that, of course, InnoGames is the larger part, and they grew slightly below the 25%, and Kongregate had a faster growth. That's how we look at the two businesses.
Okay, great. It would be interesting to hear comments about the ESL side within the esports area versus the white label development, how much they are approximately in Q1, and the outlook for those two areas.
I think the outlook is pretty clear, meaning that our focus is of course on our owned and operated products. We see the biggest value creation in that. That doesn't mean that we don't want to do white label. I think that is a very efficient way for us to introduce new publishers to the world of esport, by having a one-off event or a few events which we are producing for them so we can show the value which can be created. We see more focus on the owned and operated, and also, as you can see from the result in Q1, that is also where we see the growth of the 32% is actually related to the events that we are having as owned and operated, and we are declining in the white label. That is the focus area going forward, more owned and operated.
Can you say something about the profitability difference in Q1 between these two areas?
No, I cannot say specific about Q1, in general, of course, you will have the white label is more a production, where you would have a certain margin where you just produce something for a given client. I think the owned and operated is where we go in and we invest a lot into the content part, into the experience or into the tournament creation. That's a different ballgame right now, where you have seen us investing a lot with new partners such as PUBG as well, which were present at our Katowice event. That is long-term for us, where these white label, we are very happy about them, but that is more as a production of output production facilities.
Okay. I'm curious regarding the ad prices for your gaming businesses, marketing sort of cost, how that is impacted by ad prices on social media. Have you noticed significant changes in Q1 or Q4 there, or is it sort of generally higher and higher?
Yeah. It depends, of course, what regions, because it fluctuates quite a lot, actually, and also what media you are into. We have seen increases, obviously, in free TV in many areas. We see strong traction there, of course, also for our products. Of course, we do see some of the social medias as well. That depends on where we are, it depends on what kind of campaigns that we are producing. We don't have a general view on that, to be fair.
Okay. Fair enough. The last question is about the subscriber growth for the third-party networks grew significantly quarter-over-quarter. Can you explain why?
Yeah, there are a couple of drivers behind that. Specifically two that sort of adds a lot of value, and that's the YouSee deal with new packaging that we've made in Denmark. That has driven a very good, solid growth for us. The second one is new packaging in Sweden, where we have added C More to the portfolio.
Those two combined has given a very good traction in Viasat giving a net growth of 43,000.
This is not a one-off, this is a sustainable improvement?
It's not a one-off. These are two new product offerings. We get a ramp-up from the YouSee deal, given that it's a completely new one. You can expect that one sort of ramps up and then flattens out. Obviously, C More is also a new proposition and product for us in Sweden, but very encouraging results on the back of the launch. We hope that one to continue to grow. Obviously you get a ramp-up when you launch two new products to the market.
Okay. Excellent. Thanks.
Thank you. Once again, if you would like to ask a question, please press star one on your telephone keypad and you will enter a queue. To you wish to cancel, please press star two. The next question from Per Rick. Your line is open. Please go ahead.
Thank you. Good morning, everyone. Coming back to the question here about subscribers in the third-party network, in the YouSee deal and C More. Remind me, when were those products launched?
They were launched during the Q1. The YouSee deal quite recently. C More we launched gradually with the start in February. Basically you have roughly a month and a half effect on both of them in the Q1.
Okay. Thank you. Also staying with the third party, how did the ARPU develop in that segment in the quarter?
The ARPU on third party networks were fairly stable year-on-year. We also see some increased stability in our traditional DTH segment year-on-year. Looking forward to the rest of the year, we expect to be fairly stable on ARPUs on both third party and core networks for us.
Okay. Thank you, Anders. If we move on to esports, I know you mentioned you have a strong pipeline in Q2 compared to Q2 last year. I think you said four events versus two last year. If we compare it to Q4 2017, how does the pipeline compare then?
I think the events were planned, as you can say, gradually you get more customers in. That means you get more sponsors in and you get more media companies in over time, obviously. The events were planned when we discussed in Q4, they were planned for being launched in Q2.
Okay. What I'm trying to understand here is if the event sort of roster or the number of events and the magnitude of the events is on par with Q4. I understand that you have increasing revenue basis and from different parts of your revenue streams there, the pipeline as such of the events, are they on par with Q4?
In terms of the product? Sorry, I can't hear you properly. In terms of?
In terms of the products, yeah.
Events?
You mentioned you had four events in plan for Q2.
Yes.
How many big events did you have in Q4?
Yeah. I need to come back to you on that one. I actually don't have it here.
Okay.
It will fluctuate over the years. As you see, the DreamHack moved again from Q1 into Q2. The same, we have then two more events into Q2 here, which we didn't have last year.
Okay. Just to explain, I'm trying to understand if it is reasonable to expect revenues to be on par or even beat what you achieved in Q4. We can come back to that later. Coming back to Nordic Entertainment as well. You mentioned investments pressuring profitability in that segment. Can you elaborate a little bit on what these investments are and what the costs are and how we should look upon them going forward?
Come again, please. I didn't get that question.
I think I read somewhere that you highlighted the margin was pressured by investment in the offering. Can you elaborate exactly what you've been investing in that pressures the margin year-on-year?
Yeah. Got it. Predominantly two main reasons. One, we had the Handball European Championships. That put a little bit of pressure on the sports cast, or added a little bit of pressure in the sports cast. We had sort of the ramp-up of marketing activities for these new offerings that we launched with YouSee and with C More in Sweden, and also some increased stack driven by that to make sure we get off to a good start. Those are investments that we consider as one-offs.
Okay. Thank you very much.
If you find that your question has been answered, you may remove yourself from the queue by press star 2. Once again, if you would like to ask a question, please press star 1. We will take our last question from Rasmus. Your line is open. Please go ahead.
Hi. It is Rasmus here. Can you explain again the reorganization cost you are taking in MTGx? Was that related to ESL, or is it the overall MTGx company, or what is it that you were doing?
No, it is related to ESL in particular and the reorganization that we are doing there. The span, as you could hear, it is quite broad. That is because we have just now started to roll it out. We will come back with more precise numbers. That is to make sure we get it sized right based on the focus as we are running it right now.
Yeah. The final question, this stronger dollar that we have seen, when would that impact your Nordic business, roughly, if it stays here? The strong dollar.
Okay. The stronger dollar. It will have a small positive impact. It is marginal. What you should expect high level is to see sort of in 2018, 2019, marginal positive impact.
Positive impact from FX?
Marginal plus, based on the current rates, I've seen that it's increasing up, but you have hedge dates on a 16-month rolling basis.
Okay. 16 months. Yep. All right. Thank you.
Thank you. That concludes the question and answer section. I will now hand the call back to Jørgen Madsen for this concluding remark.
Yeah. Thank you all for your time today. We will announce our Q2 results on July the 18th and hope to see many of you at our AGM on May the 22nd. We also look forward to keeping you up to date with our progress on the split of MTG. Thank you for your continued interest in MTG, and we look forward to talking to you and meeting with you all soon. Thank you.
That concludes today's conference call. Thank you for your participation.