Good morning,
ladies and gentlemen, and thank you for holding. Welcome to MPG 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 instructions for the question and answer session will be given. Presentation tries to accompany the call are aware labeled via the link on the homepage of mpg.com.
I will now hand the call over to your host, President and CEO, Jordan Reardonmoth, who is joined on today's call by EVP and CEO of Lotte Entertainment Group, Adam Stasen and CFO, Maria Reddin.
Thank you, operator, and good morning, everyone. Before we get into the numbers, let's take a few minutes to discuss the strategy and direction of MPG. We have in recent years been managing the transformation of a leading digital 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 Via Free, and we also have the best and poorest 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 MPGX in general and in esports and online gaming in particular, 2 businesses that are global by nature. We are today the world's leading esports company. Our vision is simply to build a super brand in the world of sport up there with the NFLs, the Formula Ones and the UFCs. We have 2 proven concepts in the online gaming space, and this is an area where we are looking to expand further through M and A. So we are today a combination of a Nordic entertainment powerhouse and a global digital entertainment player.
This model has worked well, but the world keeps changing and we want to continue to reinvent NTG in order to make sure that we capture the opportunities that new consumer behavior is creating. This is why we are preparing to split NTG into 2 separate listed companies. Please move on to Slide 2. We are a big believer that a split will accelerate growth and create additional shareholder value through a sharp and 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 2 separate attractive and different investment cases.
The work to establish Nordy Entertainment Group is ongoing and is expected to be finished in the second half of this year. We have during recent weeks and a half leadership appointments for the Nord Entertainment Group and we have established a number of work streams relating to the cover. The plan is for the shares in the volume statement group to be distributed to MTT shareholders and listed on NASDAQ's dotcom in Q4 this year, after approval by the shareholders and 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. Now turning to Slide 3, 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 7th 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. Harvest were up 73%, which was driven by healthy underlying performance as well as the contribution from Erudines. Moving on to Slide 4, 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 Comfort Inn 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. MHD Studios reported slightly lower sales and losses in seasonally small quarter. MCDX sales were up 27% on an organic basis and EBITDA loss of $71,000,000 last year was turned into $45,000,000 profit this year and was fully consolidated the result of Innogates. I will now hand the call over to Anders for his comments on the VORI Entertainment and XPG Studio Businesses.
Thank you very much, Jurgen, and a very good morning to you all. Can I ask you to please turn to Slide number 5? 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 TV and 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 Via Free.
We have, during the quarter, added Disney to our existing sales cooperation with Viacom, Fox and History Channel. We have also launched a new product concept with thematic content verticals such as classic TV series and sports for Via Freak. Our Swedish radio business has continued to deliver double digit organic growth following solid underlying market conditions and share gains, and this is obviously very promising given the new licenses coming into action later this year. Nordic Pay TV sales were up and Viableay continues to be the main driver of this growth, continued very high, very healthy subscriber intake and higher prices. And 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. And this follows the successful introduction of new packages in general and with Wow in Denmark in particular. We want to expand our product offerings in each market and Wow and the recently groundbreaking deal with Telia in Finland around ice hockey are 2 perfect examples of just that. ViaPlay broke a new record in February in terms of subscriber intake for our series and movies packages and the 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 4 times during the Q1. We launched 2 new Via Play Originals, Stella Blomqvist and Avakarten. Avakarten is the strongest performing original on Via Play to date, which is 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 6th 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. And we're now very much looking forward to the world championship in Aisokie broadcasted from Denmark, and it will be broadcasted exclusively 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 6, where we have a look at the MTU Studios. The sales were down more than 2% on the organic basis.
Solid growth in non scripted segments 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, very promising. Q1 is a seasonally weak quarter and therefore typically loss making, which was the case again this year, but the operating loss is slightly decreased compared to last year despite some start up costs for Atrium TV. Now I see it's the biggest content production company in the Nordic. 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 1 and Splay Networks. That's it for my comments for now. Back to you, Jorg.
Thank you, Anders. And if I can ask you to turn to Slide 7. 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 the place and Nova, which are the remaining businesses in the international entertainment segment.
Those transactions are expected to close during Q2, as they're receiving all necessary regulatory approvals. Turning to Slide 8, we can see that NPG sales were up 20 7% on an organic basis and 2 26% on a reported basis, and we have turned an EBITDA loss of 71,000,000 dollars a year ago into a profit of $45,000,000 this year. Our e store business delivered 32% sales growth in the quarter. ESL's revenue from owned and operated events, ESL key focus area were up 70%. We had the same number of events as last year, so the growth came from increasing involvement of key distributors and sponsorship like Facebook and Vodafone and Mercedes and Intel.
ESS white label events revenues were down as we had 1 less major event than in Q1 last year. Treemax sales were up in constant currency and we signed a number of important multiyear distribution and sponsorship deals in Q1, including with the likes of Twist, Monster Energy and Complex. Q1 is a small quarter for Dreamhack and was even quieter this year as Dreamhack Masters was moved from March to April. The key sports event for the quarter was Cut to Picture. 169,000 fans attended the same event and surrounding festivals, we had 2,200,000 peak online viewers during weekend 1 and 1,700,000 for weekend 2.
These figures were up 80% and 26% respectively compared to last year. A total of 3,400,000,000 minutes of content was watched from this year's Castle Beach event. We have made significant investments in e sport over the last year in order to professionalize the organization of scale 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'll have more ESL mega events in Q2 this year than last year, it's 4 versus 2.
So we expect higher sales growth in what is also a seasonally stronger sales growth. All of these large scale events are owned and operated, so we will invest further, but we still expect total e sport losses to be down in Q2 compared to Q2 last year and Q1 this year. ESL announced the 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 Seaspore, which enabled us to contract rather than start a number of functions in areas such as studio operations. We are doing this in order to both benefit from economies 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're reducing our investment in non core areas so that we can invest where it matters. We will therefore have a 1 off restructuring charge of approximately DKK30 1,000,000 to DKK50 1,000,000 in Q2, which would be reported as an IAC and therefore not impact the segmented numbers of what I just said about improving profitability. We do then expect the combined e sports business to be profitable in the second half of this year. And if we move to the online gaming, the combined sales for InnoGames and Kongregate totaled to 577,000,000 and were up approximately 25 percent on a pro form a basis.
Force of Empire and Elvenar continued to perform very well and the soft launch of Warlords has received great user ratings, which is promising head of the marketing launch in Q2. Complicated 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 percent in the quarter. The competition for talent has heated up and the market is in general remains very competitive. We see opportunities to accelerate the growth in our digital first production business by a closer collaboration between NICE Monnex Bay, which Anders talked about earlier.
Meanwhile, Somin continues its gradual transformation from a traditional YouTube model into a broader content provider and branded entertainment creator. So to sum up at GX, we see e sports 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. And 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 progress for VGX in Q2 and the second half. That concludes my comments. So I will now hand the call over to Euneliya for your comments.
Thank you, Jurgen, and good morning, everyone. If you please turn to Slide 9, reported sales were up 26%. This includes 9% organic growth and a 15% confusion 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 $12,000,000 of M and A costs. If you then turn to Slide 10, cash flow from operations almost tripled in the quarter, but this was offset by a significant swing in the working capital development. The working capital build is a function of normal prepayment pattern, but 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 $2,300,000,000 following the working capital buildup that I just mentioned. This corresponds to 1.4 times trailing 12 month EBITDA before items affecting comparability. I would, in this context, all state that we are yet to receive the premiums for our shares in Nova and Trade, which amounts to approximately DKK 2,000,000,000. So that's it for my comments. And back to you, Jurgen.
Thank you, Maria. And now on to Slide 11. So overall, 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. EPGX reported healthy organic sales growth and a 160,000,000 dollars 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 NTG into 2 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. So that concludes our commentary on the results. Over to you then, operator, to start the Q and A session, please.
Thank you, ladies and gentlemen. We are now ready to register questions. The first question comes from Victor. Your line is open. Please go ahead, sir.
I could not hear, but maybe it's did you say Victor, yes?
I think so, Victor, you go ahead.
Okay. So just the first question here. Your comment a bit around the profile for MTJX and how you see the margins improve here. But could you maybe just comment on what you think that I understand it's a bit premature maybe, but when we can expect the whole MTG to be the new MTG, so the old MTG X to be cash flow neutral? That's the first question.
And then 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. And then I have a question for Anders on or any of you really on the Nordics here. Is there anything special that boosted Q1 free TV that we should keep in mind? Or is this lasting strong effects because it's very good numbers given the comparison?
Yes. Thank you, Victor. If I just start with your question on Nordic 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, GB3, both in Norway and in Sweden. So that's a sign of strength of the stability in that product. But the main driver for the increase in sales is Via Free, where we see a very, very healthy uptake of both ad sales and usage on the platform.
So that combination is a strong one, and we see that we can resist fairly sort of tough competition like the Olympics in the Q1 with that combination. So you can expect some robustness coming from that going forward.
So you yes, sorry.
Sorry, go ahead.
Just asking on you expect to continue and outgrow the market this year then driven by Via 3, 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 and they look very encouraging. So you can expect sort of us to land in a high single digit or low double digit number on that. And that's a good sort of solid foundation for offsetting the put. And that in combination with strong performance in the products and growth in ViaPre. Via Pre gives us a good outlook for the year in the free TV, radio and Via Pre segment, yes.
Perfect. Thank you.
And then, Victor, to your question on MTG X and the cash flow, I mean, what we are focusing this year and what Jorgen also guided on or gave our ambition on is on the EBIT level to make sure that we will drive profitable EBIT for the segments and then also second half improved Esports. So that is why it's focused on cash flow, as you can see for 'seventeen, I mean, it was a negative cash flow from the business. And as we also stated, I mean, the key cash contributor is, of course, Innogames. And in that business, we earned 51%, which is important to note as well when you look at the cash flow modeling of the new MTG AVE. But of course, that is something that we will focus a lot on.
And then on the Inu games, can you repeat your question? I probably get the question that you had on Inu games.
Yes. Just wondering when you launched the new games and marketing initiatives, etcetera, 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 Inogen specifically this year?
No. What you should expect is that marketing should go up in Q2. As announced, we will then anticipate to have the launch of Warlords in Q2. I mean, we have done soft launch, which looks very promising in Q1. But of course, behind SoftBank, you have very little marketing down on.
We did, however, launch Elvenar mobile extension in late Q4. But still, I mean, 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 fee, 100% versus in particular the existing games, which drove the performance, which is, of course, very good as well because you see the traction of existing and new games.
Okay, perfect. Thank you.
Thank you. We will take our next question from Rasmus.
Yes, hi. Your line
is open.
Hi. I think that's me, Rasmus with Handelsbanken here. Just on can you give us some sort of pointer on relating to the cash flow? What is the CapEx requirement now in this changing entity that we have compared to last year?
Yes. I mean, as we said, I mean, 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 had seen before. Those assets are otherwise asset light. So it is CapEx that's going to be the key driver on the balance of common cash flow. And then you also have, of course, in the Nordic Entertainment Group, which is the other entity, you have the new radio license that's coming into play in Q3, which will also, of course, drive CapEx investments related to those.
So it's going to be a bit higher than last year?
Yes, including with radio licenses, which I look at as a sort of one off, it will be higher this year. But the run rate is also higher with InnoGames and Kongregate as a part of the portfolio.
Yes. And then can you Jorgen, did you say that the esports were going to be profitable in the second half of the year? Is that what you said? I sort of lost it a bit there.
Yes. No, that's the ambition that we that the Esports business as stand alone should be profitable in the second half years.
But not in Q2, right? Q2 was going to be better than Q1, right? That was the comment, wasn't it?
Yes. That is what we said as well. Of course, net lease 1%.
Yes, exactly. Good. And then finally, for the group this year, where do you think we would have the group central or overhead costs? And 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 of where we should see that?
Yes. I mean, for this year, you should expect them to be year on year because we do have the cost as part of the split. I mean, we are not ready yet to give you the firm breakdown on the costing and the cash flow impact on the split, but we will come back shortly with that as well. But for the full year, it will be up. And then also for the 2 new separate entities, the same that there is currently in the workings, but to give you some sort of high level estimates, I mean, what you should look at is in approximate for the new FPGA, I would say between $150,000,000 to $200,000,000 and that also includes overhead that we today have sitting in the NPGA.
And then for the new Nordic Entertainment Group, around sort of $250,000,000 But again, we will come back with more details there as well.
Okay. Thank you.
The next question comes from Mick Ke. Your line is open. Please go ahead.
Hello. Hi. Nick Ellifin here. Good morning, Guy.
Hi.
Yes. Thanks. Can you say something about the growth for indie games year on year and also congregate on a pro form a basis how they performed, those 2 companies?
Yes. I mean, as the total growth for the gaming segment was 25%. Of that, of course, Inigo is a larger part and they grew slightly below the 25% and Congreve had a faster growth. So that's how we look at the 2 businesses.
Okay, great. And it would be interesting to hear comments about the ESL side within 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 own and operated products. We see the biggest value creation in that. But that doesn't mean that we would like so 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 e sports by having a one off event or few events which we are producing for them, so we can show the value which can be created. So 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 open and operator, and we are declining in the white label. So that is the focus area
going forward, more open and operator.
Can you say something about the profitability difference in Q1 between these two areas?
No, I cannot say specific about Q1. But 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 owner operator is where we go in and we invest a lot into the content part, into the experience or into the tournament creation. So that is a different ballgame right now where you have seen us investing a lot with new partners such as PUBT as well, which were present at our Cazopeci event. So that is long term for us. Where these white label, we are very happy about them, but that is more as a production of the production facilities.
Okay. I was thinking about the I'm curious regarding the ad prices for your gaming businesses, marketing, so of course, 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?
Yes. It depends of course what regions because it fluctuates quite a lot actually and also what media you are into. What we have seen increases obviously in frequency in many areas. We see strong traction there, of course, also for our products. And of course, we do see some of the social medias as well.
But that depends on where we are, depends on what kind of campaigns that we are producing. So we don't have a general view on that, to be fair.
Okay. Fair enough. And the last question is about the subscriber growth for the 3rd party network grew significantly quarter on quarter. Can you explain why?
Yes. There are a couple of drivers behind that, specifically 2 that sort of adds a lot of value and that's the Wow deal with new packaging that we've made in Denmark that has driven a very good solid growth for us. And the second one is new packaging in Sweden where we have added Seymour to the portfolio. So those 2 combined has given a very good traction in Phase II V, giving a net growth of 43,000.
So this is not a one off, this is sustainable improvements?
It's not a
one off. These are 2 new product offerings. Again, we get a ramp up from the Wow deal, given that it's a completely new one. So you can expect that, that one sort of ramps up and then flattens out. Obviously, Seymour is also a new proposition and product for us in Sweden, but very encouraging results on the back of the launch.
So we hope that one to continue to grow. But obviously, you'll get a ramp up when you launch 2 new products to the market.
Okay. Excellent. Thanks.
Thank The next question from Harry
Coming back to the question here about subscribers in the 3rd party network in the Wow deal and see more. When remind me, when were those products launched?
They were launched during Q1. The Wow deal quite recently, Seymour, we launched gradually with the start in February. So basically, you have roughly 1.5 months effect on both of them in the Q1.
Okay. Thank you. And also staying with the 3rd party, how did the ARPU develop in that segment in the quarter?
The ARPU on 3rd party networks were fairly stable year on year. We also see some increased stability in our traditional DTH segment year on year. So 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.
And then 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 4 events versus 2 last year. But if we compare it to Q4 2017, how does the pipeline compare then?
Yes. I think when you the events were planned, as you can say. And gradually, you get more and more customers in. That means you get more sponsors in and you get more media companies in over time, obviously. So spot events were planned when we discussed in Q4.
They were the plan for being launched in Q2.
Okay. But 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. And then I mean, I understand that you have increasing revenue basis and from different parts of your revenue streams there. But the pipeline as such, just the event, 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 product, yes.
So events?
Yes. I mean you mentioned you had 4 events in plan for Q2. How many big events for how many big events did you have in Q4?
Yes. I need to contact you on that one. I simply don't have it here. It is it will fluctuate over the years. We set the event calendar.
And as you see, the Dreamhack moved again from Q1 into Q2. And the same, we have then 2 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, but we can come back to that later. Coming back sorry, 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?
The improved come again, please. I didn't get that question.
Yes. So 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?
Yes, got it. Now the margin was slightly down predominantly to two main reasons. 1, we had the handball European Championships that put a little bit of pressure on the sports cost or added a little bit of pressure in the sports cost. And then we had sort of the ramp up of marketing activities for these new offerings that we launched with Wow! And with Seymour in Sweden, and also some increased SAC driven by that make sure we get off to a good start.
So those are investments that we consider as one offs. Okay. Thank you very much.
We will take our last question from Raymond
Your line
is open.
Please go ahead.
Hi, it's Rasmus here. Can you explain again the reorganization costs you're 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 relating to ESL in particular and the reorganization that we're doing there and the spend as you could hear it is quite broad and that is because we have just now started to roll it out and we will come back with a more precise number. So that is to make sure we get it right based on the focus as we're running it right now.
Yes. And then the final question. This stronger dollar that we have seen, when would that sort of impact your Nordic business roughly if it stays here?
The Drucker dollar, it's I mean, it will have a small positive effect, it is marginal. So what you should expect high level is to see sort of in 2018 and 2019 marginal positive impact. So
Positive impact from FX?
Marginal, I mean, based on the current rates, I've seen that it's been creeping up, but you have hedged it on a 16 month rolling basis.
Okay, 16 months, yes. All right. Thanks.
Thank you. That concludes the question and answer section. I will now hand the call back to Jordan Messon for this concluding remark.
Yes. Thank you all for your time today. We will announce our Q2 results on July 18 and hope to see many of you at our AGM on May 22nd. We also look forward to keeping you up to date with our progress on the spin off of MGD. Thank you for your continued interest in MGD, 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.