Good morning, ladies and gentlemen, and thank you for holding. Welcome to the MTG's conference call to discuss the MTG's investment in Innogames. At this time, all participants are in a listen only mode. After the presentation, participants will have an opportunity to ask questions, at which time instructions for the question and answer session will be given. I will now hand the call over to your host, NTG President and CEO, Mr.
Joergen Madsen Lindeman, who is joined on today's call by NTG's CFO, Maria Reddin and NTGX CEO, Arnd Benkoff. Please go ahead.
Thank you very much, operator, and good morning, everyone, and thank you for joining us today. This is an exciting day for us as we enter the multibillion dollar online gaming industry and we invest in our company with a great operational and financial track record. This creates our 3rd vertical 30 GX and completes the circle in terms of our engagement in e sports and gaming, which is now very fast in terms of usage and revenue. It's growing very fast in terms of usage and revenue. Media Besho's latest report here in Sweden underlines the clear consumer trends that we are embracing.
Consumers now watch more e sport and gaming online than they do traditional sports, an hour and a half a day. And I can tell you that so far this year, InnoGames' active players have played over 500,000,000 hours, 1 hour a day or over 50 years in total. If I could ask you to look at the slides that we have put on ntg.com as that is what I'm going to include during the call this morning. The press release we put out this morning also has linked to videos, which will provide you with an insight into the exciting products that we are talking about today. So please now turn to Slide 2 of the presentation.
Looking at the agenda for this morning's call, we will start with the transaction highlights and then talk about the gaming market in general and particular before ending up with a strategic rationale of why InnoGames fits perfectly into our instant strategy. So if I could ask all of you to turn to Slide 3 of the presentation. As you can see from the slide, Innogains is projected to deliver revenues of €125,000,000,000 in 2016 with an EBITDA margin of around 20%. And we'll give more flavor on the company itself later in the presentation. We acquired 35 percent of Immigrant at an enterprise value of €260,000,000 equivalent to 2.1x sales and 10.4x EBITDA based on the projected performance for 2016.
We also have the right to acquire a further 16% of Innogames by the end of September 2017 at the same valuation as the first 35% and thereby move to 51% ownership and consolidate the company's results. As I said in the release, we have been focusing on the online gaming market for a while now, and we have found a company with great products, great people, great performance and which managed to translate the success of the product into strong revenue growth and profit. Innovate has been able to grow its sales at a compound rate of over 20% for 3 years and with good margins, which means that the acquisition would be EPS accretive from year 1. Inogames is also a key milestone in our ongoing transformation as it creates a 3rd digital vertical with significant cost promotion opportunities with our e sports and Indian businesses. The closing is subject to local merger an approval before the end of the year.
If I could ask you to turn to Slide 4. So let me now hand over to Arnd in order for him to go through the gaming market in general and of course in games in particular. So if I could ask you all to turn to Slide 5 and pass over to you.
Yes. Thank you, Jorg, and good morning, everyone. So most of you are already familiar with our leading positions in esports and the multi channel network, multi platform network vertical. So today, we are entering the gaming market, which is a much, much bigger market and also mature with proven business models. The global gaming market is already a €92,000,000,000 market and much bigger than the movie market, one of the biggest entertainment market in the world.
It's growing by 10% per year, and it's expected to reach €113,000,000,000 by 2018, as you can see in the left column. And the online element, so mobile and browser, is worth €37,000,000,000 and expected to grow to €51,000,000,000 by 2018. And that's exactly 50 or it's roughly 50x the size of the esports market. This fastest growing segment of the gaming market is exactly targeted by Inu games and its games portfolio. And the growth is driven by 3 factors: more players, more paying players and a higher spend per year.
So please turn to Slide 6, where you can see in the left column that we already have more than 2,000,000,000 gamers in the world, and they're growing by 7%. So this growth overall is fueled by both volume and value, where mobile plays a key role. And as you can see in the middle column, even more mobile players are willing to pay up to 50% right now. And they also spend more on games through the free to play business model. So this is exactly why the free to play segment has been and is expected to continue to be the hotspot of the gaming market.
But let me introduce you to InnoGames. Please turn to Slide 7. InnoGames was founded in 2007 in Hamburg by 2 brothers, the Klimpert brothers and their friend, Michael Zuma. And in a nutshell, you can describe InnoGames as a large scale games developer and publisher with a strong focus on strategy and role playing games, all of which are operated under 100% free to play business model with revenues coming from in game purchasing. To give you an example, that means people start playing the game for free and then they start buying virtual items like virtual currencies, diamonds, swords and so forth.
InnoGames has never needed any venture capital. They were profitable from the start, from year 1, and they generated a top line growth of more than 20% for the last 3 years. The company is expected to generate revenues of approximately €125,000,000 in 2016 with an anticipated EBITDA and EBIT margins of approximately 20% 16%, respectively. If you look at the revenues per region or per territory, as you can see at the right bottom of the slide, U. S.
Is already the biggest market, followed by Germany. So InnoGames is indeed a global player and they're focused on the Western territory. But let's look at the games portfolio of InnoGames. So please turn to Slide 8 of the presentation. As most of you probably wonder when it comes to gaming business, is this a hit to the business and what kind of portfolio are they running?
So the big USP in minogames is that they have established a successful portfolio of gaming brands with a highly loyal customer base. The company has launched 6 successful cross platform games. Cross platform means you can access the games with one account from mobile, browser, all various mobile platform and play the same game and have the same game experience. So that combined, these 6 games has over 150,000,000 registered players. And there are several more games in the pipeline, which are focused on mobile.
So InnoGames' strength is in the mid core segment. And just let me explain what means mid core segment because, yes, the gaming business is highly fragmented, but why isn't it core so attractive? So mid core in general are strategy games, role playing games. And it's fastest growing segment of the market. It is easily described as games that are easy to learn and allow you advancement with a short gaming session, but they are more engaging and more competitive and more challenging than other social and casual games.
Casual games are these games like card games or where you can easily play, but much shorter game sessions. And we also call these strategy RPG games massive multiplayer online games. That means 100, thousands of players are playing with each other in one world. The characteristics are high engagement and longer play time and also longer lifetime of the game. So to summarize, Inogen is running a well balanced games portfolio.
They're not dependent on one hit, and they have successfully proven over the last years that they can continuously launch new successful game titles. But now since this all sounds a bit difficult, let's look at at the products. And I don't know if you came across this phenomenon of mobile games. Yes, recently with Pokemon GO, where literally everyone is running along with a game, mobile phone playing games. But here, if you look at Slide 9 and the InnoGames portfolio, Forged Empires is a lighthouse game of InnoGames.
It is a cross platform strategy game where you build your own city through the centuries. So you play with all the other players in one world. You're tasked with leading a city to prosperity, you can research new technologies, build impressive historical buildings, And really, you can play all the content for 3 years in a row. So it's so much content, and they release every week fresh content. There's a games update of every 2nd week.
And they collect all the data and develop customized content for each player, and that's how they steer the player to the paywall where they start purchasing virtual items. There's more than 45,000,000 registered players in these games worldwide. And every day, there are more than 6,000,000 messages sent, more than 2,500,000 sites and more than 5,000,000,000 buildings built. And I think the most interesting KPIs that an average gameplay is for one day, 1 hour per player. So there are 5 sessions, 12 minutes per session, and it's highly sticky.
The other game, which was the first one they launched when they dropped out of university in 2003, and when I met them 10 years ago, these 2 shy brothers and their friends, they already killed all the servers with the Tribal Wars, which is the massive multiplayer online game, yes? You lead the tribe, you fight other tribes, And this game has already generated more than €100,000,000 in lifetime revenue, have 65,000,000 players. And it is as is more than 13 years old, but it's still generating profits and revenue, and it's still stable. And then there's Elvenar. And as you can see, Elvenar is an fantasy setting, but it's also a city builder game.
So that's exactly the focus they keep on the strategy games. And that's why they deliver such great product. And what is next, if you turn to the next slide, now they focus on mobile. So the next upcoming games are all mobile first games. From on the left side, as you can see, the successful concept of massive multiplayer online strategy games where you battle with other gamers on mobile.
Then you have action role playing games. And also very interesting concept on the right side, survival role playing game. A bit like survivor where you land on an island and then you don't experience adventures on this island. So and then let's go to Slide 12. And I just want to elaborate a bit on the free to play business model because this is key to the success of the online and mobile business.
Free to play means you can register like here in the example in Tribal Wars, you get some free coins, the virtual currency, and then you start playing. And if you look at the top 100 grossing ranking, there's only one title, which is not the free to play title. That's Minecraft. So and with the time you play in the game, collect all these data points and learn what content you like, what you prefer, when you drop out of the game and then they start steering you towards the pay boundary, yes? And where you then start buying virtual items, yes, to shorten the gameplay, to get more resources and so forth.
So and on mobile, as you know, more than 50% of the players are open to pay for the game. And so this is an intelligent game monetization and it's driving InnoGames revenues. If you please turn then to Slide 12, where you can see that they're heavily growing on mobile. Already more than 50% of the new registered users come to mobile and more than 25% of the revenues come to mobile. So this is the key growth area for InnoGames.
And if you turn and let's look at the management team of InnoGames. If you turn to the next slide, number 13. So as I mentioned, Henrik and his brother, Eike and Michael, dropped out of university 2000 and 3 when they realized that this first game they've launched is so successful. And then they built a company and launched it officially in 2007. And as I said, they're super focused on product and product quality.
So they have a highly sophisticated development process. And then they added over the years experienced managers who has also been in the industry for more than 10 years. So, Marco Slipp, former CFO Digital of ProSieben is now running the finance department, an experienced product Chief of Product, that's Armin Boussens. And they brought a board former marketing manager from Zalando, who developed a data driven marketing approach. That's Christian Peer.
And this management team is highly committed, and there's no plan to leave. And they will still run the business over the next years. So let's now go to the strategic rationale why you're investing into gaming, why we believe if you want to become a relevant digital entertainer, you have to be in the gaming business. Because if you follow the eyeballs and you look at the industry trends, gaming is, I think, one of the most attractive entertainment products. So we are building 3 verticals and further investing in the 3 verticals.
And these 3 verticals are all characterized by the criteria that it should be always a complementary scalable global presence. It should be digital verticals with a global potential. And as I said, gaming is a truly global industry. It should be highly relevant content and products for millennials and digital natives because that's the audience we want to target and we want to follow. And we want to own and create content IP and build communities around this.
So there are significant opportunities to leverage the audience that we have in each of these verticals drive the performance. And our overall positioning is to become a leading digital entertainment company. But if you turn to the next slide, there I just want to show how the customer journey in gaming happened. So we were already active, as you know, in esports, where games are the foundation and also in the multichannel digital video network world or now we call it multiplatform because now we distribute short form videos to YouTube, Facebook, Snapchat and various platforms. 25% in the middle pillar is already around gaming content.
So people sharing their gameplay, commenting on gameplay. So the next logical step is to grow where everything starts into the gaming vertical, where people download the games, start playing the game, they might pay, and then they create content, which is shared on multiplatform networks. And then if you spend hours in playing these games and you're very skilled, yes, then naturally you want to compete. And therefore, we offer the esports vertical where we organize leagues and tournaments. So you can see there is a clear threat.
There is a customer journey where you start playing, then your skills, then you compete. And then again, you share your content. And that's why I believe there are synergies between the verticals, but also within the verticals. That's why we believe in this vertical logic and want to further invest and explore opportunities in this gaming vertical. So now I would like to hand over the call back to and ask you to turn to Slide 17.
Thank you, Hans. So if I then could ask you to turn to Slide 18. So in summary, we are today announcing another key milestone in our transformation of NGG as the leading digital entertainer, we are entering into a multibillion dollar online gaming market, which would create a 3rd vertical for NGG X. This is a complementary business with great products, great people and great potential. Innovative has shown that they have a very robust business model with healthy sales growth and good sustainable margins.
We now have 3 building blocks that we can cross promote each other and we are very excited to have found a company that shares our values and ambitions. And I would like you to turn to Slide 19. Then I just want to end this presentation with a reminder of our story, which really is quite simple. We are managing a transformation from a traditional broadcast into a leading digital entertainment provider. We intend to do this by growing both sales and profits and returning value to our shareholders.
The strategic transformation started 7 years ago and has accelerated significantly since the middle of 2015 and now again with another step in our portfolio realignment.
That was all when
it comes to this presentation. And I would now like to open the call for questions. So operator, let us have the first question, please.
We We'll now take our first question. It comes from Stefan Gauffelin. Please go ahead.
Yes, hello. Good morning. Could I just ask why you are investing in steps and why you're also stopping at 35% now with the option to go to 51%, why not take control directly?
I think the selling approach reflects the desire of the farmers to gradually release the shares. And of course, our desire is to acquire also 51% and even potentially 100% of the business, while still maintaining the incentive for the talented founders managers to stay involved.
Okay. Another question. You talked about the 3 different verticals. What would you say that NTG is bringing to the table in this transaction? What are you bringing to the founders?
So it was really important that they understand. First of all, we have an incentive gaming business. That was super crucial because they want to build a big business. Secondly, we have promotional power through the other verticals. So the reach, the 2,000,000,000 video views we are delivering in the multiplatform network world can be utilized for promotions to drive installs on mobile games.
Then they might also look in the future into building into developing esports functions features in the games. So that was the foundation was super important, the understanding of gaming. Then they spend a huge part of also their marketing budget in TV. So they know how to drive events and how important TV is in the market index, and we can have them to optimize this. And then, sure, in the end, if you look at this new mobile games format, which is similar to Survivor, and we were there 1st in the Nordics who has aired Survivor, it's about great storytelling.
It's about the passion for products. And that's why it's so important to be first a strong relationship with the founders.
A final one. With this step, you're competing with other game publishers. Couldn't that be a threat to the position within esports? So
it's a great question because we were super careful and talked to all the games publishers and also the esports team. It is key that our esports business stayed neutral because they are the league provider, they are running some town tournaments. But since if you look at the gaming products and at the market, it's so fragmented. So InnoGames is not really competing with our esports partners. If you look at these AAA sports games, which are hardcore games like Riot, League of Legends or Blizzard games or even Valve Counter Strike, So this is a totally different category we are now investing in, and there's no direct competition.
So from this perspective, it's not a threat to them. It's not a direct competition. I think that's how we separate also the businesses.
Okay. Thank you.
We will now take our next question from Rasmus Engelberg from SHB. Please go ahead. Your line is open.
3 different verticals. Why is it that you don't focus on one of them? Isn't there a risk now that you become sort of subscale to compete in all the areas? Why don't you offer leadership in one of the other categories?
I think key to our digital transformation strategy is to have a better balanced portfolio with synergy and also to diversify a bit around some core products and that's gaming. So as I said, esports is still the early beginning. It's a €500,000,000 business compared to gaming, which is a €90,000,000,000 market. So that's why we are the one who have 3 strong pillars where we have balanced investments instead of just betting on 1. That's one reason.
And the other and certainly also to diversify our business model. So we have app funded business models, which are the dominant business models and pillar esports and video. And now we have the transactional business models where we're independent from the ad market and vertical number 3.
But aren't you going to be a really small fish in the games development? It's you're saying it's going to be over €100,000,000,000 and you have really just a fraction here.
Yes, sure. But I mean, I'd rather be a profitable, highly profitable small profitable small fish with really nice stable revenues where we were protected. There's focus on the mid core strategy genre. And there's so much room to grow. And believe me, if if as I said, it's not about 1 month to hit in InnoGames business.
But if they publish 1 month to hit with the mobile games, then suddenly, we'll be a much bigger fish. So I think we found the right positioning in this market to grow further. And for me, it's important that we're not dependent again on one hit because most of the really big publishers, if you look at the competitors, yes, they are just dependent on one hit.
Can I ask a follow-up question? Yes. Can I just pose a question to Jorgen as well? Should we within all these verticals, you have quite significant minority shareholders. Should we see these companies as companies that tend to control to 100% in the longer run?
I mean, it's called ventures. Does that mean you're going to sell businesses? Or is this businesses that should sort of be 100% owned by MTG Group?
Yes. There is a path in all the businesses where we are going up to 100%. So that is a direct trading process, of course, to make sure that we, over the long run, will be 100% owner of big majority owners of these businesses. So yes, this is quite important that it is operations. It's business that we would like develop.
And I think just very important to also to state that this does not exclude us to or does not mean that we cannot continue to invest heavily into the other businesses. It's very important that we continue to invest in the ESL into Esports business, which we are doing. And of course, the same goes for our digital content business as well, Rasmus. So this does not exclude us. It does not exclude us from continue to investing in e sports and also in the digital content business.
And then it is not called ventures, it is MTGX. No, it is a business which we have made in order to make sure people understand that these are the areas where we put our digital efforts. So for us, it is complementary. And also if you saw as well, as with the media we show, the last research made as well, which came out in Q2, you can see that esports gaming combined now has higher viewership than normal sports and also higher reach, which is quite remarkable. So it is growing like 40%, 50% from Q2 'fifteen to Q2 'sixteen.
So it is something which definitely complement each other in a very good way. So that is the motivation for entering this very big market with a super strong product, and we have a strong track record as well.
Can I ask you, coming back to the games? Obviously, these games have been out for a while, but you do say that you're going to launch a number of mobile only games in the coming 12 months. When should we expect those to sort of hit the market roughly?
I mean, there's a well structured launch process. And one of the games is also already in soft launch mode in Poland and Netherlands, Benelux. That's how they test the market, and then they start scaling the marketing investments. So expect them to come out over the next 12 to 15 months. So the first one is already launched, will be followed next year by the next game, end of the year, probably sometimes a bit delayed, probably 4, 8 weeks.
But they are also they're all fully developed and now they go into the launch phase over the next 12 months.
All right. Thank you.
Our next question comes from Michael Larsen from Carnegie. Please go ahead. Your line is open.
Hi. Good morning. I have a few questions. First of all, can you say something about the revenue per platform and the development track record there, PC, mobile, maybe consoles and so on?
Sure. So
games are multi platform games, but meaning can play them on browser and various mobile platforms like iOS and Android. And we see definitely the shift to mobile game play. So it means they access the games to mobile. Depending on the game, like Forge of Empire, we're seeing now more than 75% of the new registrations coming through mobile. And as I said, the share of mobile revenues is already at 25% and constantly growing.
That only happened over the last 3 years. They don't publish any console games. And when we talk about PC games, we mean downloadable clients, but their games are all sit on the browser. So you can immediately stay play start playing the game without downloading any software.
Okay. And of the 150,000,000 players, registered players, how many are active the past year?
Yes. So what we don't share any monthly active and daily active player numbers, but they are market leading. And as you can also see also, they have a longer lifetime and higher spend. But we don't have to we don't disclose the breakdown of active payers per gain because this is a highly sensitive number to the competitors.
Okay. And can you say something about the revenue per product? Is it spread across all these six titles? Or is it very focused on the capital of them?
No. As I said also said earlier, it's a well balanced portfolio. Although you always have a strong Lighthouse product. In this case, it's Forge of Empires. But the recently launched game Elvenar, which has been launched late last year, is already showing stronger KPIs than Forge of Empires.
So for us, it's important if you look at the life cycle of the product. They have 4 products still in the early phase and not already peaked. And then you have like trial awards, the first one, the end of the life cycle, but still generating profit. So that's why it's a well balanced portfolio, not depending on just one hit.
Okay. Can you also comment on the capitalized development expenses that they have maybe? Or maybe a couple of comments on the balance sheet, anything standing out there?
No. We don't disclose anything on this because as you also understand, the investments into game developer are also highly sensitive and interesting to the competition. Okay.
I'm not capitalizing a lot here. So it's
Yes. I think it's industry standard. And what I can say is maybe 1 for game studio. So all the IP is in house developed. That's important.
And I think that's the success factor that they control the IP. And as I said, they never used need any venture capital. So that's the strength to drive a profitable growth.
Okay. So the EBIT margin is 3%, 4%, maybe below the EBITDA margin roughly?
Yes. As we have published, 3%, 4% and very stable.
Okay. Okay. And how much does the management take out of this?
I'm sorry, but that's what Arvind said there. I mean, I think what you should look at is a company with very strong both EBITDA and EBIT margin. Which should give you a sense that they have a prudent approach to the capital investments as well.
Okay. And the ownership situation for the management team and the founders? That's my last question.
Yes. Yes, sure. So it's us now then when we step up to 35% and the owners, the founders, the 2 brothers and the friend, they are on the rest of the shares.
Okay. Thanks.
Our next question comes from Rasmus Enberg from SHB. Please go ahead. Your line is open.
Yes. Just some of the more kind of boring number stuff here. This will this contribute to earnings in the Q4? Is that what you're thinking? When you said it's going to be profitable year 1, I assume that you mean 2017 given the acquisition related costs you will have in Q3 and Q4.
Is that correctly understood?
I mean, for Q2 and isolation, I think it depends on closing. But for the minute we consolidate, it's got to be accretive because it's a cost
of the business. Yes. I mean, for the year, we're now going to add some transaction related costs, I guess.
And they will be a little bit larger.
And then
the remainder will come in Q4.
And is that going to be sort of nonrecurring or is that something you put into the business line just to understand how we should think about the upcoming Q3?
It will stick in the business line.
On the business line. Okay. All right. Thanks.
That concludes the question and answer session. I'll now hand the call back to Madsen Lindeman for concluding remarks.
Yes. Thank you very much for all your questions. As you can hear, we are very excited by this investment, which adds a key third vertical to FDX and perfectly complement our existing businesses. Please do have a look at the videos in the presentation and try out these games when you have a chance. We're now present in global multibillion dollar digital media entertainment market, so the opportunity is clear.
And just also to make sure you all understand, this is enhancing our focus on the esports and gaming space. It is quite important that it is not distracting in any way on the contrary. Thank you for your time today. Next up are our Q3 results next week on Thursday. So we look forward to speaking to you again then.
That's it from me, so goodbye for now.
That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.