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.
Presentation slides to accompany the call are available via the link on the homepage of ntg.com. I will now hand the call over to your host, NTG President and CEO, Jorgen Lindeman, who is joined on today's call by CFO, Maria Reddin.
Thank you, operator, and good morning, everyone. Before we get into the numbers, let's take the usual step back and look at the NGG strategy. So please click through to Slide number 2. We are transforming MGG 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 3, 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'm particularly pleased that the momentum in the is so broad based and driven by the strategic investments that we have been making in both our Nordic and Global businesses. Products were up 83%, driven by healthy underlying performance, the contribution from Inu games 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. Have premiered a number of Fireplay original drama series during the quarter, including Hassle, which is top of the streaming list right now.
The success of this pipeline is clear, with Hulu now picking up Benebirici in U. S. After possibly the U. S. Bought the rights to Swedish Dick.
Our sports portfolio is more attractive than ever after we extended the Nordic media rights to the KHL Ice Hockey League and German Hamburg Bundesliga as well as securing the Swedish and Norwegian rights to ATP World Tour Tennis. Q3 also included successful pay per view coverage of the Mayweather McGregor showdown as well as the Q1 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 Comregate during the quarter and then Synapse in October and completing the sale of our boarding operation in the last few days. Moving to Slide 4, you can see that the group reported sales were up 17% with higher sales in all segments and the 1st full quarter full consolidated contribution from InnoGames.
NORD Entertainment, International Entertainment and Gd Studios all reported higher organic sales, higher profits and higher margins. Lodges in NGDx were down due to the consolidation of Immogames but up on a like for like basis. Now to Slide 5, where the Nordic Entertainment sales were up 3% on an organic basis. Sales for our free shipping operations were up in Norway and Denmark but down in Sweden due to the tough comparison of the last year's coverage of the Summer Olympics and Ice Hockey World Cup. Linear viewing continues to fall in all markets but continues to be offset by higher advertising prices, growing sales for VIA3 and the benefit of extending sales agreement with the life of Fox.
Viaprix set a new weekly record in terms of style streams in September, while programs such as Omri Mammor and Paralyze Motel 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 via Play 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 flight and very encouraging growth in our packaged broadband 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 buyer play originals such as HESL and OCCUPY, improved our functionality with Apple TV and released improved payment solutions amongst other initiatives. Competitors have put up their prices for the TV and movie products, and so 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 Norwegian segment grew 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 6. 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 continue 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 7. You can see that NTT Studios sales were up 15% on an organic basis following continued high levels of demand for scripted drama and branded entertainment. NICE produced Hassel, premiered on fire play, and the first episode was the most watched of any serious opener ever in Sweden. Nobel picked up another prestigious award, winning the Rostorp for the best drama series. We have announced a worldwide distribution deal for Super Sweet, our first original documentary feature film with I'm Global Television.
And we have sharpened our original content and script writing through the acquisition of Mazzadore Film. The higher sales flow through the P and L and resulted in 17% higher operating profits. Turning to Slide number 8. You can see that NCD sales were up 39% on an organic basis and 149% on a reported basis. This was the 1st 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 DKK 20,000,000.
The total operating loss for MTGX amounted to DKK 38,000,000 compared to DKK 53,000,000 in Q2 and DKK 69,000,000 a year ago and including a $57,000,000 positive contribution from InnoGames as well as $6,000,000 of M and A costs, mainly related to the Complegate acquisition. We have no contribution from Complogate in Q3 but will include 5 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 the more than 40% organic growth for our eSport business during the second half of the year. Sprayers continue to perform well, while zoom in 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 and A costs, our losses increased sequentially in Q3.
That is due to the fact that Turbine has continued to scale its operations and launched new products, but the higher margin sponsorship and distribution revenues are only just beginning to come in. Have new deals with Intel, which I feel is great, but nonacademic advertisers like Mercedes are only just taking their first steps. What is clear is that, first, reviewing numbers are growing very fast. Just look at the new record set by ESL 1 Cologne in 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 Dokji at Cape Town and the upcoming IEM in Oakland, not to mention that Visa is doing what Visa is doing with the new Paladin league.
Thirdly, we also see more and more interest from the likes of Hulu and Disney for whom we are now producing content. Still, 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 leads 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 MTGX EBIT loss, including Innogames and Compligates, to be higher than the $251,000,000 last year.
For the year to date, this loss stands at $275,000,000 and includes $18,000,000 of M and A cost. We have reduced our expectations for GX profits in Q4, but it is still our ambition to deliver a profit. We do have some potential noncash receivable write downs in ESL in Q4, which Maria will describe in a minute. So this outlook excludes these potential impacts. It also remains our ambition to deliver a full year profit for MDDx in 2018.
Remember that there are very seasonality in this business. I think that concludes my comments. So I will now hand the call over to you, Maria, for your comments.
Thank you, Jorgen, and 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 Innogain. The currency impact for the quarter was negligible.
Operating income was up 83% compared to last year. Nordic Entertainment and In games are the key profit drivers, which only partially was offset by the investments in our esports businesses and higher group common costs. The transactional headwind from the U. S. Dollar amounted to SEK 18,000,000 in the quarter, which was offset by translation of gains.
We continue to expect a negative transactional impact of approximately $75,000,000 from the U. S. Dollar for 20.17, which means that we expect a headwind of approximately $60,000,000 for the 4th quarter. If you could then turn to Slide 12. Our cost transformation is on track, and we generated incremental savings of CHF 20,000,000 in Q3, taking the run rate so far to SEK 575,000,000, and we continue to expect annual savings of approximately SEK 600,000,000 from the program.
The cash flow impact from the restructuring was approximately SEK 50,000,000 in the quarter, taking the cost so far to SEK 495,000,000. Looking forward, there is around SEK 25,000,000 of cash still to be paid out, which would take the total cash cost approximately to SEK 520,000,000, which is slightly lower than our initial forecast of CHF 550,000,000. If you then turn to Slide 13. Cash flow from operations was up in the quarter. However, the net cash flow was impacted by a significant swing in the working capital development.
This change was, in addition to the normal seasonal pattern, driven by advanced payments relating to new and prolonged work contracts, prepayments made due to the change in accounting systems and timing of receivables. Working capital based on contractual commitments can ease the swing between the quarters and sometimes years. And I would say this quarter, roughly 30% of the working capital buildup was carried forward and predominantly positively impacted 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 3,300,000,000 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. However, Q4 is a season strong quarter for us, and we now also receive the DKK 1,000,000,000 from the Farfetch disposal. And then finally, let me address the bad debt issue in MPGX that Jorgen just mentioned. Persol has during the year been in discussion with some key distribution partners regarding receivables related to 2016. Persol has so far in 2017, we paid a limited share of these receivables with respect to our P and L.
If the remaining share is not paid before the end of the year, it could give rise to further write down of up to €35,000,000 in the Q4 results. Again, to confirm, this relates to 2015 and not 2017. And that is it for my comments. And back to you, Jorgen.
Thank you, Maria. And now to Slide number 12. So all then, Q3 was a quarter of organic sales, profit and margin growth for our Nordic and our International and Studio businesses. We have seen lower losses in GX due to the very positive impact from the consolidation of InnoGames. We have continued our portfolio realignment through the closing of divestments of our Board operation and the acquisition of Congregate and Synapse gaming business.
Our objective remains to deliver profitable full year growth for the group's continued operation as well as for the Nord Entertainment segment. We have trimmed our expectation in GX, but we are still aiming to deliver a 1st quarterly profit for GX in the 4th quarter excluding the potential write downs just described. That concludes our commentary on the results. Over to you now, the operator, to start the Q and A session, please.
Thank you. Ladies and gentlemen, we are now ready to register The first question comes from the line of Martin Arnell of GMV Markets. Please go ahead.
Hi, good morning.
Good morning. So my first question is on this near term outlook on MPGX. And 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. And if you could elaborate some on that as well in esports.
Yes. 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. And 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 e sports 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.
So the underlying are are just making more sophisticated. Then at the same time, obviously, we have invested as well in some new leagues, as you can see, the PUBG league and so forth. So when somebody comes to us, which is now the biggest league in the world and say, Can you do the league for us? And then, of course, we say yes. And there you have some initial investments.
Some of the products we have 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 there. And hopefully, they will then see that these products can move the needle for them and therefore continue to invest with us. So basically, it is a delay in some of the high margin products and sponsors, which we are seeing right now. 49% revenue growth in this sector despite that shows, of course, that there's great interest.
Okay. Great. Thanks, Jorgen, for that. And also, did you say you still have an ambition for full year profit for MPDX next year? And is that excluding Inogames?
Yes. We have a full year ambition for profits next year when excluding InnoGames, I think the idea or the ambition is, of course, that the products as well like this segment, less Innogames on the product level should be profitable as well.
Thank you. And just finally, a question on you're in ad negotiations now, I guess, or soon in the Nordics? And 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, and you can see them again a good ride and as well as growth for some of the different content that we have invested in as well. So it is all about making sure that we stay relevant as an advertising media, but it is a bit early to predict about the prices for next year. When we look at the market outlooks for this year and look how we are seeing it, then I think that we believe that Denmark has been up in the Q3. We believe that the Norwegian market has been flat to down.
I think the EIM looks flat. And Sweden, we believe, has been down. That is also what EIM are saying, minus 1%. But we have no forecast for next year.
Okay. And 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?
Yes. That should be the ambition, yes.
Okay. Thank you.
Yes. I think I just had one correction, sorry, to just a clarification to what I just said when you talked about MTG X. And it's very important, again, to MTG X as a whole in 2018, we believe, will be profitable, and the product will should be profitable as well. Obviously, just to remind you that we have headquarter costs as well. And but on the product level, they should be profitable in 2018, and the same goes for MBPX as a whole.
We will now take our next question from Victor Haublak of MTG. Please go ahead. Yes,
good morning. So 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 dollar movements, how that affects 2018 and potentially 2019? Any thoughts on that again would be great. And then in the May order 5, was that a big thing for Nordics or just like a smaller thing?
And just to understand
the magnitude of that. And again and then on one more question on the Nordics, if possible. You can talk a bit about the growth tools you have for growing top line and EBIT for 2018. Is that if you can mention what you see as the drivers for that? And yes, I think I'll stop there now.
Thank you.
Yes, let's start on the currency. I mean, what we had in the quarter was SEK 18,000,000 negative impact from the dollar. Then you have positive translation effect, which actually neutralized based on the sort of total aggregated level. Going forward into Q4, we anticipate another NOK 50,000,000 negative impact from the dollar, which takes on the total for the full year approximately NOK 75,000,000 negative impact on the dollar. Based on the current rate that we're seeing, the dollar has gone down now far in sort of mid summer and onwards.
We actually don't see an incremental cost next year based on the current dollar levels. And in 2019, we have not forecasted yet because it is too immature.
Yes. On the May with the 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 heightened interesting match.
So we had a good pay per view event there. When you talk about the drivers next year for the Nordic business, and there is luckily, it is more or less all over. So of course, we believe that ViaPlay should continue to do well as it's doing today. We are investing in originally in ViaPlay. We have a very good sports lineup as well, as you know.
So that should continue to grow. The same goes, of course, ViaFree, where we see very strong traction right now as well. And as you know, the Abbott 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. And the markets there are also stores on 3 TV and to grow.
And continue to deliver relevant stories on 3 TV and to grow that business and also take our fair share of the advertising market. And last but not least, the pay TV as such, also due, of course, to ARPU and so forth, we still believe it will increase. We will still see BGH decline going forward, but we do have traction as well when you look at the 3rd party network and also our own fiber product we have right now in Sweden, which actually had a very good third quarter. So the ambition is, and which we are sure see 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 are looking over what to do?
And then lastly, on X on the sponsoring and 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?
Yes. On Port Gary, obviously, we are very happy with Porgeri. He has a very strong digital presence as well. And as Northland is growing much faster than the market. As you can see, it's double digit growth.
So Bulgaria is a very interesting opportunity for us as well and is doing very well. When it comes to the e sports, it is a combination. But mainly, it is that it takes longer time. 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.
So we do see smaller deals here and there and from new sponsors coming in, and that is just taking a bit longer time than we anticipated. But again, still, even with that, we are growing organic 49% of in the business, and we see more and more customers coming to these events and watching online. Dreamhack, when they had the event in Men'sville, had 4x as many online viewers as they had last year. So obviously, these underlying KPIs should cater for a strong sponsor or advertising story. It is just up to us to convince that, that is actually something that sponsors should invest in.
And also when it comes to our programming, we have invested in unique programming, which we are discussing with a range of parties as well. And last, as you've seen, is Hulu coming in where they're taking our programs for Eastbourne. Easter.
We'll now take our next question from Rasmus Engeberg of Handelsbanken.
Yes, hi, good morning. Just coming back to the MTGX situation here. Can you explain again what I mean, it seems to me that you're some EUR 40,000,000 below expectations on EBIT if we exclude InnoGames compared to what you guided for. How is that possible in just 1 quarter? And does that mean that you thought your revenues would be SEK 50,000,000 higher?
Or is there something on the cost side, which we didn't plan for 3 months ago? That also helps explain this huge gap.
Yes. 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 will come in. It's not materializing as we expected in Q3.
Then obviously, as well, we had new investments in, for instance, the PUBG Lease, which we invested in in order to get that contract signed. And we think that is a product now which is the biggest on Twitch. It is bigger than Delta 2 and Counter Strike. So we're happy we got that contract on board. And then yes, we have spent a bit more money here and there on all the events that we had in Q3.
But again, I think with a purpose. And the purpose is to make sure that we have such a strong product that we can continue to convince advertisers, sponsors and distributors that e sport is interesting. So 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. But when you see, luckily and 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.
And on the guidance for the Q4, 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? Or it might be, so to speak?
I mean the write down fits between EUR 0,000,000 to EUR 35,000,000 depending on where we are in negotiation. So if we would take the full hit, it is likely to see that we have not making for the entity.
Okay. Good. And then 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?
Is it did you have half a quarter last year and a full quarter this year? Or how big is the
Mr. Engelberg, one moment please.
Yes. Okay. Very good. Sorry for that. Yes, for this quarter, we will have a 3 month impact versus 2 month impact last year.
Was it the 2 month last year? Yes. Okay. Thank you.
Thank you. We will now take our next question from Henrik Nielsen of Nordea Markets. Please go ahead.
Hi, good morning, everyone. Thank you. One question for me, please. It's on seasonality in games and Congregate. 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? Like roughly how large share of annual sales and EBIT from these companies are assumed to be in Q3 and Q4, respectively?
Splitting the different quarters in percentages. But what we've said is that normally Q3 and Q4 are the seasonally strongest quarters. It also, of course, depends on, especially the content, new games releases and so forth and also around marketing campaigns. But we did have, as you saw for in the games, this quarter, we had sales were stronger. We had a very high comp last year, and we had a very high EBIT contribution.
So it was a very strong quarter for Inogen 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 Madsen for his concluding remarks.
Thank you all for your time today. We will announce our Q4 results on February 1, and I would like to take this opportunity to invite you all to our Investor and Analyst Focus Day on November 29 in Stockholm, which will also be webcasted live. We'll be focusing on the Nordic business, ESL and InnoGames. So thank you for your continued interest in NTG, 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