Good morning, ladies and gentlemen, and thank you for holding. Welcome to MTG's conference call to discuss 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. If any participant has difficulty hearing the presentation, please press star followed by zero for operator assistance. I will now hand the call over to your host, MTG President and CEO, Jørgen Madsen Lindemann, who is joined on today's call by MTG CFO, Maria Redin, and MTGx CEO, Arnd Benninghoff. 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 online gaming industry, and we invest in a company with a great operational and financial track record. This creates our third vertical for MTGx and completes the circle in terms of our engagement in esports and gaming, which is now very fast in terms of usage and revenue. It's growing very fast in terms of users and revenue. Mediapulse's latest report in Sweden underlines the clear consumer trends that we are embracing. Consumers now watch more esports 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 million hours, one hour a day or over 50 years in total.
If I could ask you to look at the slides that we have put on mtg.com, as that is what I am going through during the call this morning. The press release we put out this morning also has links to videos, which will provide you with an insight into the exciting product that we are talking about today. So please now turn to slide number two 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 InnoGames in particular, before ending up with the strategic rationale of why InnoGames fits perfectly into our business strategy. So if I could ask all of you to turn to slide number three of the presentation.
As you can see from the slide, InnoGames is projected to deliver revenues of EUR 125 million in 2016 with an EBITDA margin of around 20%. Arnd will give more flavor on the company itself later in the presentation. We acquired 35% of InnoGames at an enterprise value of EUR 260 million, 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 15% 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 products into strong revenue growth and profit. InnoGames has been able to grow its sales at a compound rate of over 20% for three years and with good margins, which means that the acquisition will be EPS accretive from year one. InnoGames is also a key milestone in our ongoing transformation as it creates a third digital vertical with significant cross-promotion opportunities with our esports and MPN businesses. The closing is subject to local merger approvals, but we do expect an approval before the end of the year. If I could ask you to turn to slide number four.
Let me now hand over to Arnd in order for him to go through the gaming market in general and, of course, InnoGames in particular. If I could ask you all to turn to slide number five, and Arnd, over to you.
Thank you, Jørgen, and good morning, everyone. Most of you are already familiar with our leading positions in esports and the multi-channel network, multi-platform network vertical. 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 EUR 92 billion market and much bigger than the movie market, one of the biggest entertainment markets in the world. It's growing by 10% per year, and it's expected to reach EUR 113 billion by 2018, as you can see in the left column. The online element, so mobile and browser, is worth EUR 37 billion and expected to grow to EUR 51 billion by 2018. That's exactly 50 or roughly 50 times the size of the esports market. This fastest-growing segment of the gaming market is exactly targeted by InnoGames and its games portfolio.
The growth is driven by three factors: more players, more paying players, and a higher spend per year. Please turn to slide six, where you can see in the left column that we already have more than two billion gamers in the world. They're growing by 7%. This growth overall is fueled by both volume and value, where mobile plays a key role. As you can see in the middle column, even more mobile players are willing to pay, up to 50% right now. They also spend more on games through the free-to-play business model. 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 seven.
InnoGames was founded in 2007 in Hamburg by two brothers, the Klindworth brothers, and their friend, Michael Zillmer. 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 one, and they generated a top-line growth of more than 20% for the last three years. The company is expected to generate revenues of approximately EUR 125 million in 2016, with an anticipated EBITDA and EBIT margins of approximately 20% and 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. InnoGames is indeed a global player, and they're focused on the Western territory. Let's look at the games portfolio of InnoGames. Please turn to slide eight of the presentation. As most of you probably wonder, when it comes to the gaming business, is this a hit-driven business, and what kind of portfolio are they running? The big USP in InnoGames is that they have established a successful portfolio of gaming brands with a highly loyal customer base. The company has launched six successful cross-platform games. Cross-platform means you can access the games with one account from mobile browser, all various mobile platforms, and play the same game and have the same game experience.
That combines these six games as over 150 million registered players. There are several more games in the pipeline which are focused on mobile. The InnoGames strength is in the mid-core segment. Just let me explain what means mid-core segment, because, yes, the gaming business is highly fragmented, but why is mid-core so attractive? Mid-core, in general, are strategy games, role-playing games. It's the fastest-growing segment of the market. It is easiest 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 gaming sessions. We also call these strategy RPG games massively multiplayer online games.
That means 100,000s 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. To summarize, InnoGames 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. Now, since this all sounds a bit theoretical, let's look at the products. I don't know if you came across this phenomenon of mobile game, recently with Pokémon GO, where literally everyone is running around with a game on their mobile phone playing game. Here, if you look at slide number nine, and at InnoGames portfolio, Forge of Empires is a lighthouse game of InnoGames. It is a cross-platform strategy game where you build your own city through the centuries.
You play with all the other players in one world. You are 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 three years in a row. It's so much content, and they release every week fresh content. There's a game update every second 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. They have more than 45 million registered players in this game worldwide, and every day there are more than 6 million messages sent, more than 2.5 million fights, and more than 5 million buildings built. I think the most interesting KPI is that an average gameplay is for one day, one hour per player.
There are five 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 two shy brothers and their friend, they already killed all the servers with the Tribal Wars, which is the massively multiplayer online game. You lead the tribe, you fight other tribes, and this game has already generated more than EUR 100 million in lifetime revenue. Have 65 million players, and it is more than 13 years old, but it's still generating profits and revenue, and it's still stable. There's Elvenar, and as you can see, Elvenar is in a fantasy setting, but it's also a city builder game. That's exactly the focus they keep on the strategy games, and that's why they deliver such great products.
What is next? If you turn to the next slide, now they focus on mobile. Their next upcoming games are all mobile-first games. From on the left side, as you can see, the successful concept of massively multiplayer online strategy games, where you battle with other gamers on mobile. 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 further experience adventures on this island. 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.
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. 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 paid boundary. Where you then start buying virtual items to shorten the gameplay, to get more resources, and so forth. On mobile, as you know, more than 50% of the players are open to pay for the game. This is an intelligent game monetization that's driving InnoGames' revenues. If you please turn to slide 12, where you can see that they're heavily growing on mobile.
Already more than 50% of the new registered users come through mobile, and more than 25% of the revenues come through mobile. This is the key growth area for InnoGames. If you turn, and let's look at the management team of InnoGames. If you turn to the next slide 13. As I mentioned, Hendrik and his brother, Eike and Michael, dropped out of university 2003 when they realized that this first game they've launched is so successful. They built a company and launched it officially in 2007. As I said, they are super focused on product and product quality, so they have a highly sophisticated development process. They added over the years, experienced managers, who has also been in the industry for more than 10 years. Markus Lipp, former CFO Digital of ProSiebenSat.1, is now running the finance department.
An experienced Chief of Product, that's Armin Busen. They brought aboard a former Marketing Manager from Zalando, who developed a data-driven marketing approach, that's Christian Pern. This management team is highly committed, and there's no plan to leave, and they will still run the business over the next years. Let's now go to the strategic rationale why we'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. We are building three verticals and further investing in the three verticals. These three verticals are all characterized by the criteria that it should be always a complementary, scalable global presence. It should be digital verticals for the growth potential.
As I said, gaming is a truly global industry. It should be highly relevant content and product for millennials and digital natives, because that's the audience we want to target and we want to follow. We want to own and create content IP and build communities around this. There are significant opportunities to leverage the audience that we have in each of these verticals to drive the performance. Our overall positioning is to become a leading digital entertainment company. If you turn to the next slide, there I just want to show how the customer journey in gaming happens. We were already active, as you know, in esports, where games are the foundation, and also in the multi-channel digital video network world, or now we call it multi-platform because now we distribute short-form videos through YouTube, Facebook, Snapchat, and various platforms.
25% in the middle pillar is already around gaming content. People sharing the gameplay, commenting on gameplay. The next logical step is to go where everything starts into the gaming vertical, where people download the game, start playing the game, they might pay, and then they create content, which is shared on multi-platform networks. If you spend hours in playing these games and you're very skilled, yeah, then naturally you want to compete. Therefore, we offer the esports vertical where we organize leagues and tournaments. You can see there is a clear thread. There is a customer journey where you start playing, then you're skilled, then you compete, and then again, you share your content. 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. Now I would like to hand over the call back to Jørgen and ask you to turn to slide 17.
Thank you, Arnd. If I could ask you to turn to slide number 18. In summary, we are today announcing another key milestone in our transformation of MTG as the leading digital entertainer. We are entering into a multibillion-dollar online gaming market, which will create a third vertical for MTGx. It is a complementary business with great products, great people, and great potential. InnoGames has shown that they have a very robust business model with healthy sales growth and good sustainable margins. We now have three 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. Could I ask you to turn to slide number 19, 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 seven 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, I would now like to open the call for questions. Operator, let us have the first question, please.
Thank you. Ladies and gentlemen, we are now ready to register questions. If you would like to ask a question, please press star one on your telephone keypad and you will enter a queue. Should you wish to cancel, please press star two. We'll now take our first question. It comes from Stefan Godwin. Please go ahead.
Yes. Hello, good morning. Could I just ask why you are investing in steps? Why are you also stopping at 35% now with the option to go to 51? Why not take control directly?
I think the stepping approach reflects the desire of the founders to gradually release the shares, of course, our desire is to acquire up to 51% and even potentially up to 100% of the business while still maintaining the incentive for the talented founders and managers to stay home.
Okay. Another question. You talked about the three different verticals. What would you say that MTG is bringing to the table in this transaction? What are you bringing to the founders?
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 to the other verticals. The reach, the 2 billion video views we are delivering in the multi-platform network world can be utilized for promotions to drive installs on mobile games. They might also look in the future into developing esports functions features in the games. That was the foundation, was super important, the understanding of gaming. They spend a huge part of their marketing budget in TV. They know how to drive events and how important TV is in the marketing mix, we can help them to optimize this.
Sure, in the end, if you look at this new mobile games format, which is similar to Survivor, and we were there first in the Nordics who have aired Survivor, it's about great storytelling. It's about the passion for products. 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?
It's a great question because we were super careful and talked to all the games publishers and also to the esports team. It is key that our esports business stay neutral because they are the league provider, they are running some town tournaments. Since if you look at the gaming products and at the market, it's so fragmented. 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. This is a totally different category we are now investing in, and there's no direct competition. 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.
As a reminder to ask a question, please press star one. We'll now take our next question from Rasmus Engberg from SHB. Please go ahead, your line is open.
Yes. Hi, good morning. You now are in three 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 go for leadership in one of the other categories?
I think key to our digital transformation strategy is to have a well-balanced portfolio with synergy and also to diversify a bit around some core products, and that's gaming. As I said, esports is still the early beginning. It's a SEK 500 million business compared to gaming, which is a EUR 92 billion market . That's why we are the one who have three strong pillars where we have balanced investment Instead of just betting on one. That's just one reason, and certainly also to diversify our business model. We have ad-funded business models, which are the dominant business models in Pillar Esports and video. Now we have the transactional business models where we're independent from the ad market in vertical number 3.
Aren't you going to be a really small fish in the games development? You're saying it's going to be over EUR 100 billion, and you have really just a fraction here.
I'd rather be a highly profitable small fish with really nice stable revenues where we were protected, this focus on the mid-core strategy genre, there's so much room to grow. Believe me, as I said, it's not about one month ahead in InnoGames business. If they publish one month ahead with the mobile games, suddenly we'll be a much bigger fish. I think we found the right position in this market to grow further. 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, they just depend on one hit.
Can I ask a follow-up question? Can I just pose a question to Jørgen as well? Within all these verticals, you have a quite significant minority shareholder. Should we see these companies as companies that MTG controls 100% in the longer run? 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?
There is a part in all the businesses where we are going up to 100%, that is a direct strategy for this, of course, to make sure that we, over the long run, will be 100% owner of big majority owners of these businesses. Yes, this is quite important that it is operations. It's business that we would like to develop. I think just very important 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 the esport business, which we are doing. Of course, the same goes for our digital content business as well as. This does not exclude us.
It does not exclude us from continue to investing in esports and also in the digital content business. It is not called ventures. It is MTGx. 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. For us, it is complementary, also if you saw as well, Rasmus, the Mediapulse 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. It is growing like 40%, 50% from Q2 2015 to Q2 2016. It is something which definitely complement each other in a very good way.
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 investment. Expect them to come out over the next 12-15 months. The first one is already launched, will be followed next year by the next game, end of the year, probably. Sometimes with this delay, probably four, eight weeks. 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 Mikael Laséen from Carnegie. Please go ahead. Your line is open.
Yeah. 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?
InnoGames' games are multi-platform games, but meaning you can play them on browser and various mobile platforms like iOS and Android. We see definitely the shift to mobile gameplay. It means they access the games through mobile. Depending on the game, like Forge of Empires, we're seeing now more than 75% of the new registrations coming through mobile. As I said, the share of mobile revenues is already at 25% and constantly growing. That only happened over the last three years. They don't publish any console games. When we talk about PC games, we mean downloadable clients, but their games all sit on the browser, so you can immediately start playing the game without downloading any software.
Okay. Of the 150 million registered players, how many are active the past year?
Yeah. We don't share any monthly active and daily active player numbers, but they are market leading. As you can also see, they have a longer lifetime and a higher spend. We don't disclose the breakdown of active players per game because this is a highly sensitive number to the competitors.
Mm-hmm. Okay. Can you say something about the revenue per product? Is it spread across all these six titles or is it very focused on a couple of them?
No, as I 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." For us, it's important, if you look at the life cycle of the product, they have four products still in the early phase and not already peaked. You have "Tribal Wars," the first one in the end of the life cycle, but still generating profit. 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? Maybe just 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 also are highly sensitive and interesting to the competition.
Okay. They're not capitalizing a lot here.
Yeah. I think it's industry standard. What I can say is maybe we run four game studios, all the IP is in-house developed. That's important, and I think that's a success factor that they control the IP. As I said, they never need any venture capital. That's a strength to run and drive a profitable growth business.
Okay. The EBIT margin is 3%, 4%, maybe below the EBITDA margin, roughly.
Yes. We have published 3%-4% and very stable.
Okay. How much does the management take home of this?
That's what Arnd said there. I think what you should look at it is a company with very strong both EBITDA and EBIT margins, which should give you a sense that they have a prudent approach to the CapEx investments as well.
Okay. The ownership situation for the management team and the founders? That's my last question.
Yeah.
Thanks.
It is us now, when we stepped up to 35%, the owners, the founders, the two brothers and their friend, they own the rest of the shares.
Okay, thanks.
As a reminder, to ask a question, please press star one. Our next question comes from Rasmus Engberg from SHB. Please go ahead, your line is open.
Just some of the more boring number stuff here. Will this contribute to earnings in the fourth quarter? Is that what you're thinking? When you say it's going to be profitable year one, I assume that you mean 2017, given the acquisition-related costs you will have in Q3 and Q4. Is that correctly understood?
For Q4 in isolation, I think it depends on closing, from the minute we consolidate, it's going to be accretive because it's a profitable business.
Mm-hmm. Yeah. For the year, we're now going to add some transaction-related costs, I guess.
Yes.
They will.
We will take it in Q3, and then the remainder will come in Q4.
Is that going to be non-recurring or is that something you put into the business line just to understand how we should think about the upcoming Q3?
It will sit in the business line.
On the business line. Okay. Right. Thanks.
That concludes the question and answer session. I'll now hand the call back to Jørgen Madsen Lindemann for his concluding remarks.
Yeah, 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 MTGx and perfectly complements 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 the global multi-billion dollar digital business entertainment market, the opportunity is clear. 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, we look forward to speaking to you again then. That's it from me, goodbye for now.
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.