Earnings Call: Q1 2019

May 7, 2019

Thank you very much. Good morning, everybody, and welcome to NEM Group's Q1 Conference Call, this being our first as a separately listed company. I'm joined here in Stockholm today by our President and CEO, Anders Jensen Chief Financial Officer, Gabriel Catriona and our Head of Investor Relations, Stefan Licker. During today's earnings call, Anders will provide comments on the quarterly results, key strategic developments and the progress we are making towards being the leading streaming entertainment and content production company in the Nordic region. After this, Gabriel will comment on the financial performance and position of the group, and then we will open up for a Q and A session. Slides are available on nentgroup.com for your reference, but we will not be following them side by slide. With that, I turn the call over to our CEO, Anders Jensen. Thank you very much, Matthew, and a very good morning, everyone. Today is clearly a very important and historic day for Nant as we are publishing our 1st quarterly report as a standalone and separately listed company. It's almost a year now since we operationally split from MCG, and we are today stronger than ever with more content than ever, more customers than ever and an even more compelling story. It's also an exciting day as we have some good numbers and some great stories to share with you all. First of all, though, I would like to thank start by thanking everyone that has worked so hard on the split, establishing our purpose as a company, our values, our strategy and starting to build our culture together. I also want to send a special thanks to our friends at the MTG team headed by Jurgen and Maria. All the work on the split has been done while continuing to deliver on our key operating and financial objectives, which clearly demonstrates that we are building a company that is both well positioned and agile enough to both seize opportunities and deal with challenges as and when they occur. March was a big month for us. We started off by publishing our prospectus, which was followed by our Capital Markets Day that was attended by 150 analysts and investors. We then spent 3 weeks on the road meeting investors on both sides of the Atlantic before our shares were listed and started trading on NASDAQ in Stockholm on March 28. We have so far received a lot of positive interest from the market and that is because our story, strategy and performance is very different from those of our so called peers. We are the leading streaming entertainment and content production company in the Nordics, We have continued to deliver on our profitable growth commitment while driving long term value by scaling our unique and very well positioned streaming business. In terms of the Q1 highlights, our sales were up almost 6% on an organic basis and profits for our combined operating segments were up 11% to a new all time high for our Q1. ViaPlay and also our Swedish Radio business have continued to be key product drivers. Our reported net income was, as predicted, impacted by transaction costs related to the split as well as the higher central operation costs now that we are a separate unlisted company, which will be at full run rate in Q2. 1 of the most important performance indicators for our business is ViaPlay subscriber intake. Put simply, capturing the streaming opportunity is the key factor in driving long term sustainable value for our shareholders. ViaPlay added a net 99,000 subscribers in Q1, which continues the performance that we saw in Q4 and has been supported by our investments into our content, our tech and our people. If I then turn to the Broadcasting and Streaming segment as a whole, sales were up 5% on an organic basis and the EBIT was up 7%. When you include the prior report when we were part of MTG, this was our 10th consecutive quarter of profitable growth, and it clearly demonstrates the positive effect of our early and proactive investments into taking a leadership position in the Nordic streaming markets. Subscription and other sales were up 9% on a reported basis and accounted for over 70% of the segment sales. The ViaPlay subscriber base increased to 1,357,000. This continued growth was driven by high gross intake and again low churn levels. ViaPlay now accounts for just under 60% of the total subscriber base. Our investments in the VIA PLAY platform and content offering are clearly yielding results, both in terms of customer intake and retention. The BioPlay originals are a key part of this, and we have announced 9 more so far in 2019. We have premiered 3 new ones. We now have a total of 27 originals premiered on the service, 14 more announced. It is this high quality content, diverse, local and relevant as it is, together with sports that are the key differentiators for us. The growth in other sales relates to the sub licensing of content to other third party distributors. The combined ViaSat direct to consumer and third party subscriber base declined slightly to 953,000 as growth in our broadband TV offering in Sweden was offset by the gradual decline in the satellite base. Our 3rd party base was broadly stable, so the total subscriber base was therefore up 92,000 to 2,300,000. Advertising sales were up 2% on a reported basis and accounted for less than 30% of segment sales. TV advertising sales were down due to the softer ad markets in general and Norway in particular. Linear viewing has continued to be under pressure as viewing moves online, but prices have also continued to rise as per our expectations due to the high demand levels, and we increased our audience shares in both Sweden and Norway. Our Swedish Radio business has continued to perform very well and took further audience and market shares. This is a combination of great execution from our Smashing Radio team and the benefit of the new radio licenses that we won last summer. Our audience share of 46 percent was up from the 38% we had last year. The Swedish performance was then largely offset by a a slightly weaker development in the Norwegian radio business following the introduction of new audience measurement systems as well as the mentioned overall softness in the Norwegian ad markets. Via Free reported healthy growth levels in Q1 and was positively impacted by new partnership deals such as the one with YouTube in Sweden and improved sold out ratios. The Via Free app is now available also on Android TV across the region. I would like to take this opportunity to address the ongoing debate around betting advertising. In Sweden, the Swedish Minister For Public Administration has expressed his concerns about both the content and the volume of betting advertising and his disappointment at the industry's self regulation initiatives to date. The minister has therefore launched a gambling market investigation, which is due to present its findings at the end of October next year and could require changes in constitutional law if limitations are to be introduced. Norway and Denmark are also currently considering what actions they will take, but there is no clear outcome and likely to be further broad ranging debate and consultation in the near future. There are many things to say about this, but I will try to be as brief as possible. As always, we as a company, of course, always comply with the laws and regulation in the markets that we operate in. We are following this very important discussion carefully, but we are not a regulator nor should we assume the responsibility of being 1. It is also important to remember that this discussion should be about all forms of advertising, not limited to TV, including print, radio, but also all times of online media. Clear, sustainable regulations, clear roadmaps and time lines are always good for everyone in all industries. So we look forward to the conclusion of this investigation. There is huge demand from the betting industry for advertising right now as could be expected, and you can see that across all media. And to be very clear, following the recent changes in the Swedish licensing laws, we have taken the proactive decision to only work with gambling gaming companies that have a license in Sweden. Today, approximately 25% of our Nordic advertising revenues are from betting. The issue that TV is facing today is not a lack of demand from advertisers, but rather the shortage of inventory supply. So I do not expect any changes in the future to have a major impact on our sold out ratios or our pricing power. Please do remember that the growth in our subscription business means that advertising becomes an even smaller part of our business. Then moving on to the Q1 content highlights. We announced 9 new originals in Q1, including Face 2 Face and the large international venture, Margo. And we premiered another 3, including Belsom Drepper or Those Who Kill, which is our most successful original to date. It also topped the charts as the most series with the most unique viewers during Q1. We have also announced several important new content partnerships, including new multiyear deals with NBCUniversal and MGM, which will significantly strengthen our position when it comes to acquired series and movies, both in terms of first runs, but also very importantly, the library titles. MGM secured us the very attractive Bond franchise just as the unnamed Bond 25 enters production ahead of next year's premier. We extended our agreements for the IndyCar Motor Racing Series and the Golf's iconic Open Championships. And most significant of all, we signed a landmark 5 year exclusive Pan Nordic deal for all of the hugely popular Alpine and Cross Country Skiing Championships starting in 2021. We have seen very good viewing across our extensive sports portfolio in general and football in particular, which is the major contributor to the very low churn levels that we're seeing. We had our 2 most viewed Premier League games ever on ViaPlay in Q1, and the year started off really well on January 3 with a much anticipated and what could turn to could turn out to have been the title deciding clash between Man City and Liverpool. It's been a thrilling season, and it's going right to the wire on Sunday, so make sure not to miss the action on ViaPlay and on ViaSat. The Premier League viewing was only beaten by the Champions League knockout games between PSG and menu and also Bayern versus Liverpool. We have also had big live audiences for the quarter finals and the first legs of the semifinals with the decisive games that will decide this year's final is being played later today and tomorrow. So make sure not to miss those games too. Please do remember that we do expect Via Play turn rates to pick up slightly in Q2 as usual when the big sports seasons come to an end. If I then move on to NAND Studios, I'm very pleased to report that the positive trend shift seen in Q4 accelerated as predicted into Q1 with organic sales up 23% due to more scripted drama productions as well as higher distribution and digital sales. Q1 is normally a seasonally weak sales quarter and therefore typically loss making in our Studios business. This year was no exception, but the losses were significantly lower than in both 2017 2018. The forward pipeline of signed development deals and contracted productions looks very healthy and should fuel further growth in 2019. The ambition is to gradually increase the number of productions being done for our own channels and services. And internal sales accounted for 10% of total in Q1 this year compared to 6% last year. So it's moving in the right direction. At this point, I would like to hand over the call to our CFO, Gabriel Katrinha, who will walk you through the financial performance and position. So Gabriel, over to you. Thank you, Anders, and good morning, everyone. Starting with the P and L, sales increased by 8% on a reported basis and were driven by higher organic sales for both business segments of 6 percent as well as 1.9% contribution from currency. Net Studios accounted for 11% of sales, advertising sales were 26%, and the remaining 63% is from subscription and other related sales. The combined operating profit for our business segment, that is before central operations and items affecting comparability, was up 11%. The negative EBIT contribution from central operations was up from CHF 16,000,000 to CHF 43,000,000 as a result of us now being a standalone and separately listed company. The costs will be at full run rate in Q2 and subject to approval by the AGM will include the cost for the new long term incentive plan. We also have additional costs related to the lifting, in particular related to launching our values, purpose and culture. So in Q2, you will see a high negative contribution for 2019. However, this is in line with our previous guidance that the negative EBIT contribution from Central Operations will be approximately EUR 250,000,000 for the full year. Total EBIT before items affecting comparability was therefore up slightly from SEK 271,000,000 to SEK 274,000,000 The modest year on year change does not, of course, reflects the underlying strength of the operating businesses. The costs we had into the split and listing were SEK 56,000,000, and that is in line with the SEK 55,000,000 previously communicated, and this was reported as items affecting comparability. Net interest amounted to a positive $2,000,000 Net was financed by MTG up until the listing, and this was replaced by external financing just before the listing, which therefore led to a very low interest cost in Q1. You should expect interest cost to go up in Q2 and moving forward. The effective tax rate in the quarter was approximately 25%. We expect that normalized tax rate to be approximately 20%, but you will see quarterly and even yearly swings. So while both segments are reporting improved profitability, we still see a drop in our basic earnings per share, and this is a result of building up our central operations as well as the reported transaction costs. Moving on to the cash flow, which you can find in Slide 11 of our presentation. Net operating cash flow improved significantly in the quarter and reflected the changes in working capital. We typically tie up a lot of working capital in Q1 due in particular to the timing of prepayment of sports rights. Working capital will swing between quarters, but we still expect the full year movement, as I mentioned at the CMD, to be roughly in line with last year's movement. This is due to the strategic investments in originals as well as the increase in internal sourcing of content from our own studios. Our CapEx amounted to $33,000,000 and our operating free cash flow, therefore, totaled a negative $190,000,000 versus a negative €417,000,000 a year ago. Our net debt ended the quarter at €3,500,000,000 or 4,200,000,000 including operational leases. And this is 2.2 times our trailing 12 months EBITDA before items affecting comparability. The financial net debt was lower than the SEK 3,900,000,000 that we previously indicated in the prospectus, and this is largely reflecting the timing differences of the payments that I talked about earlier and a better and active management of payment schedules. We have had several questions regarding the IFRS 16 accounting standard, which has now come into effect. So I would like to take a few minutes to run through the impact with you. Firstly, we have applied the simplified transition approach and therefore have not restated any historic report. So as of March 31, the net present value of the group's operating lease commitments was 897,000,000 dollars In addition, we have top leases totaling $240,000,000 So our net debt from leases increased by 657,000,000 The EBITDA impact was a positive SEK 30,000,000 in Q1, while depreciation is up SEK 26,000,000. So that the EBITDA impact of applying IFRS 16 was a small positive effect. Finally, let's take a look at the business outlook, which you can see on Slide 12 of our presentation. We do expect to continue to generate positive organic growth, and this is primarily fueled by volume growth at Bioplay. We remain committed to delivering high profits for our business segments in 2019. But do remember that we will have higher sensor cost this year, which is why we have only committed to deliver total group EBIT growth from 2020 and onwards. We continue to expect a substantial headwind on approximately SEK100 1,000,000 from the appreciation of the U. S. Dollar, which will start to impact from Q2 and onwards. That's it for my comments. So now back to you, Anders. Thank you very much, Gabriel. Time to wrap up and we look forward to your questions. But before taking those, let me end by reminding you of our equity story and the investment case. NENTI is very well positioned to benefit from the shift to on demand and online consumption. We invested early into streaming. We today have much higher online viewing and market shares than we have offline. One of the reasons behind this is that we have the most relevant content offering based on the unique mix of sports acquired and now a growing base of original programming. Also have a highly experienced and very motivated team that love winning every day. We have the right skill sets and enabling culture and embedded values. We have invested heavily in our people and in tech in order to make sure that we have the right capabilities to be able to capitalize on the huge value potential that we're seeing in streaming in general and for us via Play in particular. And then finally, we have a very clear capital allocation strategy. We are committed to profitable growth, but we're not focused on maximizing profits. The key long term value driver will be to drive volume growth for ViaPlay by investing in content and technology platforms, but also through the increasing business to business partnerships such as the very important ones that we have announced in Denmark in Q1 with TDC, Boxer and Stofa. We have also committed to paying a progressive dividend as we deleverage and drive higher profits. All of this concludes our commentary on the results. Over to you, operator, to start the Q and A session, please. Thank you. Ladies and gentlemen, we are now ready to register questions. The first question comes from the line of Joanna Alquist from SEB. Your line is now open. Thank you. A few questions, if I may. First question relates to a license revenue within the broadcast of some €200,000,000 plus If you can comment what that relates to, it would be very helpful. And secondly, I've seen congratulations to the very strong way of play intake in the quarter. Can you give any sort of details how much of this is sports related and non sports and how you see ARPU within Via Play developing? Thank you. Yes. Good morning, Johanna. Thank you very much for your questions. The revenues that we're seeing relates to us optimizing our content portfolio and selling some content, some of it with margin to other distributors. And that's a way of us to for us to optimize the value that we have by buying a lot of content. And some of it, we feel we can actually sell with a little bit of profit instead of keeping it ourselves. This typically relates to sports. To your second question, we don't give the splits between sports and TV series and movies customers for competitive reasons. The development what I can say is that the development in Q1 is similar to the one we have seen before, but very strong in sports. As I mentioned in the remarks, a very strong Premier League and Champions League viewing. So you can expect sort of the sports side of things to have strengthened somewhat. But we also see very good intake on the back of all the new originals in TV series and movies. So it's sort of a well balanced mix, nothing sort of radical that has changed from what we've seen before. And just on the license revenues, is this sort of a level that we should expect going forward? Because I realized it was quite significant from last year. So just how to think of that going forward? No, It will fluctuate depending on when we see opportunities, what kind of rights we buy. Just to sort of address it a little bit further to give you some flavor, when we buy rights and the big rights, they typically come with a number of smaller rights. Some of them we want to capitalize on and use and some of them we want to sell. You can also see going forward that we will be doing partnership deals like the announced one that we have with UC in Denmark when we will be producing and sharing the Premier League rights with them. And obviously, we do that with the margin. So this is a new part of how we capitalize on our business, but the levels will fluctuate and not be significantly more than what you have seen now in this Q1. Thank you. Thank you. And your next question comes from the line from Rasmus Enberg from SHB. Your line is now open. Hello. Hi. Good morning. Given the limited history of NEM, it's kind of difficult to see how your historic performance has been. But if I try to reconcile it from MTG and so on, it seems to me that your growth rate would be expected to be somewhat back end loaded this year given how it's been Yes. Good morning, Rasmus and Wel. No, I wouldn't say that that's the case. Being part of MTG has always meant that you have sort of managed sort of the quarters in a different way because there were international and you had Nordics part of delivering a complete result. Now we are a stand alone company. So we will work with our business in a slightly different way. So I would I appreciate sort of the difficulty in trying to make reasonable comparatives, but avoid trying to restate too many things from our MTG history. Q4 is a big quarter for us, but I wouldn't say that things are backloaded, no. And in terms of the growth rate, how do you see that during this year? Well, we are looking at staying with our outlook for the year to deliver a 5% organic sales growth and that will fluctuate between the quarters depending on seasonality. But our Q1, so for us, it tells us that we are confident that, that sort of expectation is to be delivered on. Thanks. Thanks, Ralf. Thank you. Your next question comes from the line from Mikael Larsen from Carnegie. A couple of questions. First one regarding ViaPlay and if you can say something about the seasonality and churn that could happen now in Q2, Q3? So help out a bit with that. Yes, absolutely. On the seasonality, what we have seen historically and what we expect also to see this year is that we get seasonal churn as a consequence of the sports leagues ending and then kicking off again mid Q3. The difference between the history more and more in original content and spread that over the year, so that we get less of an impact from that seasonal churn. But you should expect a flattish development in the second quarter. And our first strong quarter, again, sort of reiterates our expectation to grow in line with the market and maybe slightly ahead and in line with what we have done the previous 2 years, around 200,000 new subscribers for the full year. But you should expect seasonality and lower growth rates in Q2 and to some extent also in Q3. Okay. Excellent. And can you say something about how ViaPlay is developing per country, strongest countries where you have more potential? Elaborate it. Well, if you look at it from a percentage point of view, Sweden and Denmark are the largest markets. So we see good growth. But percentage wise, Finland and Norway coming from lower levels is doing very well. And on the back of the slightly slower ad markets in Norway, that is then sort of driving online transformation. We have fairly high hopes for those markets where we are smaller than we are in the 2 larger markets. But in general, I would say that we have seen this Q1 being spread fairly equally across the countries. Okay, great. Maybe you answered this before, I might have missed that, but how much contribution do you have from B2B agreements approximately? That's a good question. It's actually almost virgin territory for us. We haven't ventured into that for a number of, as we see it, good reasons in the past. We have started now. We've announced very good B2B agreements in Denmark, and we're now in dialogue in the other countries. The first one we did was actually with D and A in Finland. And we want to sort of pursue this opportunity, but we have been very mindful about staying in control of the user experience and making sure that our content is consumed in a similar way on a distributor's box as it is in our online environment, so that Via Play brand experience is preserved. Now we're pursuing this opportunity full speed ahead. So hopefully, you can expect more from us on that account. Okay. Thank you. Thanks. Thank you. The next question comes from the line from Tom Singlehurst from Citi. Your line is now open. Good morning. It's Tom here from Citigroup. I do apologize, I missed the very beginning of the call. So I hope I'm not going to ask a really stupid question. But I just wanted to get some sense of quantification on the sort of third party sort of content licensing sort of growth impact in the Q1 within Broadcasting and Streaming, just to get a sense of what the sort of underlying growth rate is? And a similar question on studios. I mean, obviously, there's that phasing impact, but how should we think about the sort of the true trend rate of growth in those two areas? That would be wonderful. Thank you. Yes. Thanks. Good morning, Tom. Starting with the licensing revenues, as I mentioned before on Johanna's question, they will fluctuate between the quarters if and when we see opportunities to monetize our fairly large content portfolio. And that's the way of working with our ecosystem to make sure that if and when we see slowdown in one area, we can accelerate in another area to make sure that we stay firm on our growth outlook, but also continue to invest in content the way that we see necessary to capitalize on the streaming opportunity. So it's a way of maximizing our portfolio. It will fluctuate. The levels that you have seen in the Q1 will not go up significantly. So you shouldn't sort of remodel anything on the basis of that. And your second question relating to Studios, well, I think it's actually a matter of us now catching up on what we saw towards the tougher later part of last year, when we had a very good pipeline of development in Studios, but it hadn't materialized into actual productions. Now we see that the conversion ratio on the development projects into actual commission productions is very high. It gives us good sales in Q1, and it gives us a very sort of firm and solid outlook for this year for our Studios business. And also distribution in Studios is picking up nicely in our DRG business. Gabriel, do you maybe you want to comment any further on Studios? No. I think just to say this is probably the if you look at the individual segment, the best Q1 that they had in the last probably 3 years. So I think we're and we have when we look at the commitment when it comes to commissions for the year, we're looking at higher percentages versus last year. So we feel confident on the outlook. And one follow-up on that. You talked about quite a sort of sharp sort of divergence in growth between scripted and non scripted. Is that just because of the impact of the internal sort of emphasis on original commissions and some of that working through to your own production businesses? No, it's a combination of that and in general higher demand for scripted content in the market. And it's not non scripted. In our case, non scripted is not going down. It's actually quite strong. It is scripted that comes on top of that. So it's an overall sort of increased demand for good content. We have some very strong franchises in the non scripted that are being recommissioned in a good way. But the majority of our development projects sit in the scripted side of things, so that's where we expect the higher growth rates going forward. That's super clear. Thank you very much. Thanks so much. Thank you. And that concludes the question and answer session. I will now hand the call back to Anders Jensen for his closing remarks. Thank you, operator, and thanks all for taking the time today and for your continued interest in Nordic Entertainment Group. We hope to see as many of you as possible on the coming roadshows in Stockholm, London and New York. And at the coming AGM on the 22nd May. Thank you very much and goodbye for now.