Good morning, ladies and gentlemen, and thank you for holding. Welcome to MTG's Q3 earnings call. At this time, all participants are in 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. If any participant has difficulties hearing the presentation, please press star followed by the 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, MTG President and CEO, Jørgen Lindemann, who is joined on today's call by CFO Maria Redin.
Thank you, operator. Good morning, everyone. Before we get into the numbers, let's take the usual step back and look at the MTG strategy. Please click through to slide number two. We are transforming MTG from a traditional national broadcaster into a global digital entertainer, while aiming to deliver long-term sales and profit growth, and return cash to shareholders at the same time. If I can ask you to turn to slide number three, you can see that the rising demand for our products that we have seen for some time now continued into Q3. Sales were up 7% on an organic basis with growth in all four of our business segments. I am particularly pleased that the momentum is so broad-based and driven by the strategic investments that we have been making in both our Nordic and global businesses.
Profits were up 83%, driven by healthy underlying performance, the contribution from InnoGames, and the absence of last year's coverage in Sweden of the Rio Olympics. We have continued to invest in content, as that is what drives consumer interest, conversion, and engagement. We have premiered a number of Viaplay original drama series during the quarter, including "Hassel," which is top of the streaming list right now. The success of this pipeline is clear with Hulu now picking up "Veni Vidi Vici" in the U.S. after Pop TV U.S. bought the rights to Swedish "Nobel." Our sports portfolio is more attractive than ever after we extended the Nordic media rights to the KHL Ice Hockey League and German Handball-Bundesliga, as well as securing the Swedish and Norwegian rights to ATP World Tour Tennis.
Q3 also included our successful pay-per-view coverage of the Mayweather-McGregor showdown, as well as the first quarter finals of the World Boxing Super Series, of which we are part owners. On the esports side, we have added new games such as PUBG, the most watched game on Twitch in August, as well as the new League for Paladins, and also started producing exclusive content for the likes of Hulu and Disney. We have also continued to realign our portfolio by completing the acquisition of Kongregate during the quarter and then Synapse in October, and completing the sale of our Portugal operation in the last few days. Moving to slide four, you can see that the group reported sales were up 17% with higher sales in all segments and the first full quarter full consolidated contribution from InnoGames.
Nordic Entertainment, International Entertainment, and MTG Studios all reported higher organic sales, higher profits, and higher margins. Losses in MTGx were down due to the consolidation of InnoGames, but up on a like-for-like basis. To slide five, where the Nordic Entertainment sales were up 3% on an organic basis. Sales for our free TV operations were up in Norway and Denmark, but down in Sweden due to the tough comparison of last year's coverage of the Summer Olympics and World Cup of Hockey. Linear viewing continues to fall in all markets, but continues to be offset by higher advertising prices, growing sales for Viaplay, and the benefit of extending sales agreements with the likes of Fox. Viaplay set a new weekly record in terms of started streams in September, while programs such as "Unga Mammor " and "Paradise Hotel" were the most watched online exclusives in Sweden.
Our radio sales were up in both Sweden and Norway. The Nordic pay TV sales were up again, and Viaplay continued to be the main driver of this growth with continued subscriber intake and higher prices. We also generated pay-per-view revenues from the Mayweather-McGregor fight and very encouraging growth in our package sports bundle offering in the Swedish fiber market. We have continued to see subscriber erosion in our traditional platforms, but the revenue effect was mitigated by the distribution agreements for new premium sports channels in Sweden and the previously introduced price increases. Viaplay churn reached a new all-time low, and our NPS score reached a new all-time high during Q3. As I mentioned before, we have premiered a number of new Viaplay originals such as "Hassel" and "Occupied," improved our functionality with Apple TV, and released improved payment solutions, amongst other initiatives.
Competitors have put up their prices for their TV and movie products, and Viaplay has followed as before. Viaplay offers fantastic value for money and the best content offering, which is reflected in the very high customer satisfaction levels that we continue to see. You will see some small effects from the price rise in Q4 already, with the full effect coming from the start of 2018. Profits in the Nordic Entertainment go up 38% due to this positive underlying performance, as well as the fact that last year's numbers included the investment in the Rio Olympics. Turning to slide number six, you can see that the sales for International Entertainment segment were up 12% on an organic basis. Our Bulgarian business delivered another quarter of double-digit sales growth.
Trace grew with sales while profits continued to be impacted by the launch of global Trace Play streaming service, but closer segment profits were up 55% compared to last year. Moving on to slide number seven. You can see that MTG Studios sales were up 15% on an organic basis following continued high levels of demand for scripted drama and branded entertainment. Nice Drama produced "Hassel." It premiered on Viaplay, and the first episode was the most watched of any series opener ever in Sweden. Nobel picked up another prestigious award, winning the Rose d'Or for the best drama series. We have announced a worldwide distribution deal for Supersonic, our first original documentary feature film with IM Global Television, and we have sharpened our original content and script writing through the acquisition of Matador Film. The higher sales flow through the P&L and resulted in 17% higher operating profits.
Turning to slide number eight, you can see that MTGx sales were up 39% on an organic basis and 149% on a reported basis. This was the first full quarter of fully consolidated results from InnoGames, which reported 17% sales growth and 54% EBIT growth and a 21% operating margin before purchase price amortization of approximately SEK 20 million. The total operating loss for MTGx amounted to SEK 38 million, compared to SEK 53 million in Q2 and SEK 69 million a year ago, and including a SEK 57 million positive contribution from InnoGames, as well as SEK 6 million of M&A costs, mainly related to the Kongregate acquisition. We have no contribution from Kongregate in Q3, but will include five months of their results in Q4 when they have adjusted to our accounting standards.
Our esports business delivered 49% organic growth in the quarter, meaning that we are on track to generate more than 40% organic growth for our esports business during the second half of the year. Players continue to perform well, while streaming sales are stabilizing as the company gradually transforms from a traditional YouTube model into a broader content provider and branded entertainment creator. When excluding the gaming activities and M&A costs, our losses increased sequentially in Q3. That is due to the fact that Turtle has continued to scale its operations and launch new products, but the higher margin sponsorship and distribution revenues are only just beginning to come in. We have new deals with Intel, which is great, but non-endemic advertisers like Mercedes are only just taking their first steps. What is clear is firstly, viewing numbers are growing very fast.
Just look at the new record set by ESL One Cologne and New York this quarter. Secondly, the publishers are, and developers are more focused than ever on esports as a means of driving player engagement, which is why we have been working with PUBG at Gamescom and the upcoming IEM in Oakland. Not to mention what Hi-Rez is doing with the new Paladins League. Thirdly, we also see more and more interest from the likes of Hulu and Disney, for whom we are now producing content. Clearly, the new deals with Twitter and Facebook and YouTube are only just beginning to unlock the media rights potential. The opportunity is clearly huge, which is why we are investing.
We do expect the higher margin sales to come through increasingly as we move forward, and the sales growth that we are seeing is evidence of the popularity of our events and leagues, as well as demand for white label work from the publishers. Based on the Q3 performance and our ongoing investments, we now expect the full-year NGGH EBIT loss, including InnoGames and Kongregate, to be higher than the SEK 251 million last year. For the year to date, this loss stands at SEK 275 million and includes SEK 18 million of M&A costs. We have reduced our expectations for NGGH profits in Q4, but it is still our ambition to deliver a profit. We do have some potential non-cash receivable writedowns in ESL in Q4, which Maria will describe in a minute. This outlook excludes these potential impacts.
It also remains our ambition to deliver a full-year profit for NGGH in 2018. Remember that there is seasonality in this business. I think that concludes my comments. I will now hand the call over to you, Maria, for your comments.
Thank you, Jørgen. Good morning, everyone. If you can please turn to slide 11. Reported sales were up 17%. This included 7% organic growth and a 10% contribution from acquired businesses, primarily driven by the consolidation of InnoGames. The currency impact for the quarter was negligible. Operating income was up 83% compared to last year. Nordic Entertainment and InnoGames are the key profit drivers, which only partially was offset by the investment in our esports businesses and higher group common costs. The transactional headwind from the US dollar amounted to SEK 18 million in the quarter, which was offset by translational gains. We continue to expect a negative transactional impact of approximately SEK 75 million from the US dollar for 2017, which means that we expect a headwind of approximately SEK 15 million for the fourth quarter. If you can turn to slide 12.
Our cost transformation is on track. We generated incremental savings of SEK 20 million in Q3, taking our run rate so far to SEK 575 million. We continue to expect annual savings of approximately SEK 600 million from the program. The cash flow impact from the restructuring was approximately SEK 15 million in the quarter, taking the cost so far to SEK 495 million. Looking forward, there is around SEK 25 million of cash still to be paid out, which would take the total cash cost approximately to SEK 520 million, which is slightly lower than our initial forecast of SEK 550 million. If you turn to slide 13.
This change was, in addition to the normal seasonal pattern driven by advanced payments relating to new and prolonged sports contracts, prepayments made due to the change in accounting systems and timing of receivables. Working capital based on contracted commitments can easily swing between the quarters and sometimes years. I'll say this quarter, roughly 30% of the working capital buildup was carried forward and predominantly positively impacts 2018 cash flow results. You should therefore expect a higher-than-normal working capital buildup for the full year, as we also have some further prepayments for 2018 due in Q4, albeit they are not on the same magnitude as in Q3. Our net debt increased to SEK 3.3 billion, following the acquisition of Kongregate and the working capital buildup I just mentioned. This corresponds to 2.2 times trailing 12-month EBITDA before items affecting comparability.
Q4 is a seasonably strong quarter for us, and we now will also receive the SEK 1 billion from the Baltics disposals. Finally, let me address the bad debt issue in MTGx that Jørgen just mentioned. ESL has, during the year, been in discussion with some key distribution partners regarding receivables relating to 2016. ESL has so far in 2017 tried to limit the share of these receivables with respect to our P&L. If the remaining share is not paid before the end of the year, it could give rise to a further write-down of up to SEK 35 million in the Q4 results. Again, to confirm, this relates to 2016 and not 2017. That is it for my comments, and back to you, Jørgen.
Thank you, Maria. Now to slide number 12. All in all, Q3 was a quarter of organic sales, profit, and margin growth for our Nordic and our international and studio businesses. We are seeing lower losses in MTGx due to the very positive impact from the consolidation of InnoGames. We have continued our portfolio realignment through the closing of divestments of our Portugal operation and the acquisition of Kongregate and Synapse Games business. Our objective remains to deliver profitable full-year growth for the group's continuing operation, as well as for the Nordic Entertainment segment. We have trimmed our expectation of MTGx, we are still aiming to deliver a first quarterly profit for MTGx in the fourth quarter, when excluding the potential write-downs just described. That concludes our commentary on the results. Over to you now, the 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, you will enter a queue. Should you wish to cancel, please press star two. The first question comes from the line of Martin Arnell of DNB Markets. Please go ahead.
Hi. Good morning.
Morning.
My first question is on this near-term outlook on MTGx. If you just could elaborate some further on why you have sort of lower expectations now than you had before on the near-term profits. I guess that revenue mix is pretty key here. If you could elaborate some on that as well in esports. Thank you.
Yeah, I think what we are saying and what we are seeing, of course, is that it takes a bit longer time for some of the high-margin products to get traction. We have invested in a range of products, and we have seen now Disney coming in, Hulu coming in, Mercedes coming in, but it takes a bit longer time for convincing the big sponsors and so forth that the returns in esports are as good as where they are today. I think important for us is that we continue to see this massive inflow of online viewing and customers or participants to the event. The underlying assumptions for the sponsors to start to invest even more with us is, of course, there, and that is what we are working on articulating and are just making more sophisticated.
At the same time, obviously, we have invested as well in some new leagues. As you can see, the PUBG league and so forth. When somebody comes to us with now the biggest league in the world and say, "Can you do the league for us?" Of course, we say yes, and there you have some initial investments. Some of the products we believe we should have priced differently, and it turned out that we didn't get the money short term, which we expected because people would like to see the return as well for some of the product, which is fair. Hopefully they will then see that these products can move the needle for them and therefore continue to invest with us. Basically, it is a delay in some of the high-margin products and sponsors, which we are seeing right now.
49% revenue growth in the sector despite that shows, of course, that there's great interest.
Okay, great. Thanks, Jørgen, for that. Also, did you say you still have an ambition for full-year profit for MTGx next year? Is that excluding InnoGames?
Yes, we have a full-year ambition for profit next year when excluding InnoGames. I think the idea or the ambition is, of course, that the products as well, like the MT segment, less InnoGames on the product level should be profitable as well.
Thank you. Just finally, a question on you're in ad negotiations now, I guess, or soon in the Nordics. So far, what's the negotiation saying about the outlook for advertising next year?
That is a bit early in all plans. I think still, as you can see, we are growing our shares, you can see Denmark had a good ride and as well it goes for some of the different content that we have invested in as well. It is all about making sure that we stay relevant as an advertising media, it is a bit early to predict about the prices for next year. When we look at the market outlook for this year and look how we are seeing it, I think that we believe that Denmark has been up in the third quarter. We believe that the Norwegian market has been flat to down. I think IRM looks at flat. Sweden, we believe, has been down. That is also what here IRM are saying, -1%. We have no forecast for next year.
Okay, thanks. Then just finally, if you look at your subscriber base, do you still see total sub intake in the Nordics next year with Viaplay offsetting the decline in the older platforms?
Yeah, that should be the ambition. Yes.
Okay. Thank you.
Yeah. I think I just had one correction, sorry, just clarification to what I just said when you talked about MTGx. It's very important, again, MTG as a whole in 2018, we believe, will be profitable, and the products should be profitable as well. Obviously, just to remind you that we have headquarter costs as well. On the product level, they should be profitable in 2018, and the same goes for MTGx as a whole.
Thank you.
We will now take our next question from Viktor Haglöf of SEB. Please go ahead.
Yes, good morning. I just had one. First here, if you can repeat what you said on FX, how much it hit this quarter, how much it's hitting Q4, and also how the latest U.S. dollar movement, how that affects 2018 and potentially 2019. Any thoughts on that, again, would be great. In the Mayweather fight, was that a big thing for Nordics or just like a smaller thing? Just to understand the magnitude of that. On one more question on the Nordics, if possible. If you can talk a bit about the growth tools you have for growing top line and EBIT for 2018. If you can mention what you see as the drivers for that. Yeah, I think I stop there for now. Thank you.
Yes. Just on the currency. What we had in the quarter was SEK 18 million negative impact from the U.S. dollar. You had positive translation effects, which actually neutralized this on a total aggregated level. Going forward into Q4, we anticipate another SEK 59 million negative impact from the U.S. dollar, which takes on the total for the full year, approximately SEK 75 million negative impact from the U.S. dollar. Based on the current rates that we're seeing, the U.S. dollar has gone down now far in mid-summer and onwards. We actually don't see an incremental cost next year based on the current U.S. dollar levels. In 2019, we have not forecast yet because it's too immature.
Yeah. On the Mayweather-McGregor fight, it was a good fight. It turned out well for us. I think that was also the view in the rest of the world. It was quite a hype and interesting match. We had a good pay-per-view event there. When you talk about the drivers next year for the Nordic business, there luckily it is more or less all over. Of course, we believe that Viaplay should continue to do well as it's doing today. We are investing in originals in Viaplay. We have a very good sports lineup as well, as you know. That should continue to grow. The same goes, of course, Viafree, where we see very strong traction right now as well. As you know, the ad market is, of course, a very interesting market.
Radio goes the same, very strong radio business as well, both in Norway and also in Sweden, as you can see from the results. The markets there are also very healthy. The free TV business as well, we do expect to continue to deliver relevant stories on free TV and to grow that business and also take our fair share of the advertising market. Last but not least, the pay TV as such, also due, of course, to ARPU and so forth, we still believe will increase. We will still see DTH decline, going forward, but we do have traction as well when you look at the third-party network and also our own fiber product we have right now in Sweden, which actually had a very good third quarter.
The ambition is, which we are seeing right now as well, that the Nordic team, the management team there can continue to grow the different segments that we are investing in.
Okay, great. May I also just ask your view on Bulgaria as a unit. Is that strategically important for you? More growth potential there into 2018, or is that something you're looking over what to do? Lastly, on the sponsoring and the distribution deals there, is it that the deals in itself has come with a lower value than you thought before or that they have come slower than you thought before?
Yeah. On Bulgaria, obviously, we are very happy with Bulgaria. It has a very strong digital presence as well. As you know, our plan is growing much faster than the market as you can see, double-digit growth. Bulgaria is a very interesting opportunity for us as well and is doing very well. When it comes to the Esports, it is a combination, but mainly it is that it takes longer time than we anticipated to get these high-margin deals in, and people are, or companies are, you can argue, tiptoeing a bit more than anticipated. We do see smaller deals here and there and from new sponsors coming in, and that has just taken a bit longer time than we anticipated. But again, still, even with that, we are growing organic 49% in the business, and we see more customers coming to these events and watching online.
DreamHack, when they had the event in Melbourne, had four times as many online viewers as they had last year. Obviously these underlying KPIs should cater for a strong sponsor or advertising story. It is just up to us to convince that is actually something that sponsors should invest in. Also when it comes to our programming, we have invested in unique programming, which we are discussing with a range of parties as well. Last, as you have seen, is Hulu coming in, where they're taking our programs for Esports.
Okay, thank you very much.
Thank you. We'll now take our next question from Rasmus Engberg of Handelsbanken.
Yes. Hi, good morning. Just coming back to the MTGx situation here. Can you explain again, it seems to me that you're some SEK 40 million below expectations on EBIT if we exclude InnoGames compared to what you guided for. How is that possible in just one quarter? Does that mean that you thought your revenues would be SEK 50 million higher? Is there something on the cost side, which you didn't plan for three months ago, that also helps explain this huge gap?
Yeah, I think there's, again, several things, Rasmus. One of them, as we said, is the delay. That is, as we have discussed, one of the items that deals that we have in the pipeline thought would come in, it's not materializing as we expected in Q3. Obviously, as well, we had new investments in, for instance, the PUBG League, which we invested in order to get that contract signed. We think that is a product now which is the biggest on Twitch. It is bigger than Dota 2 and Counter-Strike. We're happy we got that contract on board. Then, yes, we have to spend a bit more money here and there on all the events that we had in Q3. Again, I think with a purpose.
The purpose is to make sure that we have such a strong product that we can continue to convince advertisers, sponsors, and distributors that Esports is interesting. It is, again, as I said, if we wouldn't see the strong trends into the different events, then of course we should say, do we want to continue to invest in these areas? When you see, luckily, importantly, these very strong trends when it comes to consumer behavior around these products, then I think it is a very interesting opportunity for us.
On the guidance for the fourth quarter, if you have to take that write-down, then MTGx will be loss-making in Q4 as well. Is that how we should interpret it? It might be, so to speak.
Yeah, the write-down sits between SEK 0-SEK 35 million, depending on where we are in this negotiation. If we would take the full hit, it is likely to see that yes, loss-making for the entity.
Okay, good. Just one more question, a bit of a nitty-gritty, but compared to last year, you have this contribution in your pay TV business from the operators. What is the difference compared to last year? Did you have half a quarter last year and a full quarter this year, or how big is the difference there? Hello?
Mr. Engberg, one moment, please.
Hello? Are we on again?
Yes.
Okay, very good. Sorry for that. Yes, for this quarter, we will have a three-month impact versus two-month impact last year.
Was it a two-month last year?
Yes.
Okay, thank you.
Thank you. We will now take our next question from Henrik Nilsson of Nordea Markets. Please go ahead.
Hi. Good morning, everyone. Thank you. One question from me, please. It's on seasonality in InnoGames and Kongregate. I know you've been saying that Q3 is normally the weakest quarter, and I think you've said Q4 is the strongest quarter. Is it possible to elaborate a little bit more on how big this seasonality is? Roughly how large share of annual sales and EBIT from these companies are assumed to be in Q3 and Q4 respectively?
I don't think we have been so detailed into splitting the different quarters in percentages. What we've said is that normally Q2 and Q4 are the seasonally strongest quarters. It also, of course, depends on, especially for Kongregate, we have new game releases and so forth, and also around marketing campaigns. We did have, as you saw for InnoGames, this quarter we had sales was not as strong, but we had a very high comps last year, and we had a very high EBIT contribution. It was a very strong quarter for InnoGames this quarter, which we did not see on the EBIT line the previous year.
Okay, thank you.
Thank you. If there are no further questions in queue, that concludes the question and answer session. I will now hand the call back to Jørgen Madsen for his concluding remarks.
Thank you all for your time today. We will announce our Q4 results on February the 1st, I would like to take this opportunity to invite you all to our Investor and Analyst Focus Day on November 29th in Stockholm, which will also be webcasted live. We'll be focusing on the Nordic business, ESL, and InnoGames. Thank you for your continued interest in MTG, and we look forward to talking to you and meeting you soon in person. Thank you.
That concludes today's conference call. Thank you for your participation.