Good morning, and welcome everyone to the Viaplay Group Q3 results webcast and conference call. My name is still Matthew Hooper, Chief Corporate Affairs Officer, and your host for today. As usual, I'm joined today in our Stockholm studio by our President and CEO, Anders Jensen, and for the first time, by our new CFO, Enrique Patrickson, who joined us in August. Welcome, gentlemen.
Thank you.
As usual, presentation materials are available from the investor relations section of our website, and you can post questions at any time on the message board by clicking on the Ask a Question tab at the top right-hand corner of the webcast window. You can ask questions yourself by registering through your phone keypad, but more about that later. Let's get started, and first of all, over to you, Anders.
Thank you very much, Matthew, and a very good morning, everyone. Q3 was another important step along the path towards our strategic goals. 78% Viaplay subscriber growth with a record 879,000 new subscribers added in the last quarter alone. Those are the headlines. The international markets performed particularly strongly in the third quarter as we added more than twice as many subscribers as we did in the second quarter. Both Poland and the Netherlands ended the quarter with over a million subscribers each. This is well ahead of the schedule and shows the popularity of our content offerings, as well as the strength of our local B2B partnerships in both the Netherlands and Poland.
With over 6.4 million subscribers, we have now more than double the number of subscribers than we had at the beginning of our five-year strategy period in January 2020. We are now more than halfway towards our five-year target of 12 million subscribers after only two of the five years. As a group, our organic sales growth has accelerated again, this time to 25% compared to 18% last quarter and 10% for the first quarter this year. Viaplay, which now accounts for almost half of our total sales, was the main driver, with 64% organic sales growth up from 42% in Q2 and 26% in Q1.
This accelerating growth not only reflects higher levels of subscriber growth, but also the price in the Netherlands, effectively increasing by 40% and the Norwegian premium price point more than doubling. In August, we added the English Premier League to our sports coverage. We added the English Premier League rights in Poland too, but are not raising prices until next spring when we also bring Formula 1 to the Polish audience. The addition of the English Premier League coverage in Norway, combined with continued B2B sales growth, helped us deliver 28% growth in the Viaplay Nordics subscriber base. The extraordinary and record-breaking success of Norwegian local hero Erling Haaland starting the Premiership is building a large fan base.
It takes time, especially in the current economic environment, but our ambition remains high as we expect to attract more subscribers than the previous right-holder of the rights. The price increase in Norway will continue to drive ARPU further once the larger base is installed. Nordic Viaplay sales were up 27% in Q3, and we expect the growth to accelerate further in Q4. Viaplay is a clearly differentiated product with a unique and universal appeal due to the mix of live sports, local original content, international series and movies. This is why it's so attractive to both consumers and distributors, and we believe will remain so as the consumer spending comes under pressure due to the economic situation we all find ourselves in.
We do not demand a high price compared to other forms of out-of-home entertainment when you consider that a month subscription to Viaplay costs less than taking the family to a single sports event or a trip to the cinema to watch a single movie. We have previously seen how sticky or resilient pay TV is during such times, and churn rates are continuing to decline in the Nordics, which proves this point. This is also why we will continue to raise our prices moving forward, as we have recently announced in Sweden, for example, with a 22% increase in the top tier. We have maintained our target of having 7.3 million subscribers by the end of the year, which would be equivalent to 82% growth this year. Remember that we started the year with a target of 6.5 million.
We have shifted the mix, so we have raised our international expectation from 2.5 million to 2.7 million to reflect the addition of Premier Sports while reducing our Nordics expectations from 4.8 million to 4.6 million. The reduction in the Nordics reflects the slower current direct-to-consumer growth, as well as the termination of the Telia agreement in Sweden. Our decision regarding Telia is a strategic one, and we do not expect a new agreement to be signed. We have partnered with all other major distributors in each of our markets on a long-term basis, finding common ground, value, and objectives that work for both parties and ensure that consumers get what they want, great content at an affordable price. Now, Telia has decided to pursue a different strategy, and if we can't create mutual value, well, then there is no deal to be made.
We're now moving on to ensure those subscribers who have lost access to our content to get it either directly from us or from one of our other distribution partners. Our linear subscription and other sales accounted for just under 1/3 of group revenues, and we're up 9% on an organic basis. This is an acceleration compared to 7% in Q2 and 4% in Q1. Wholesale channel sales were up 13% and reflected the new distribution agreements that we have signed and the price increases in Norway in particular. We have had limited sub-licensing sales currently. We expect a similar level of growth in Q4, which would then result in a mid-single digit organic sales growth for the full year. Our advertising revenues accounted for just over 20% of the total revenues and were down 3% on an organic basis.
All three TV ad markets were down in Q3 while the Swedish radio ad market grew and the Norwegian radio ad market was stable. On a combined basis, we estimate that the market was down mid-single digit percentage points. The relative strength of the radio market is not unusual in a situation where TV sold-out ratios are high. We took significant TV advertising market share in Norway and benefited overall from the sports content that we have showed on our channels, including the Nations League, the English Premier League, and Formula One. Our radio operations in Sweden performed particularly strong, delivering their sixth straight record sales month with an all-time high sales for a single month in September. Looking ahead to Q4, the TV and radio ad markets are expected to be down on an aggregated basis despite the expectations that the radio markets will grow.
However, the environment is very uncertain due to the broader economic context. The Football World Cup will provide a temporary boost to the overall market, but we do expect further volatility. If we were to deliver stable to slightly declining organic advertising sales in Q4, then that would also be the result for the full year. We have the benefit of our annual agreements having been locked in at higher price points this year, and we will enter the negotiations for 2023 next month. In aggregate then, this means that we are reducing our Nordic full-year organic growth target from approximately 20% to approximately 10%. However, such is the outperformance in the international markets that we're only reducing our full-year group organic revenue guidance from at least 28% to approximately 20%.
This implies international revenues of over SEK 1.3 billion, which is significantly ahead of the plan. We do also expect Nordic revenues to grow faster in Q4 than Q3, not least given the fact that Viaplay has brought in more subscribers at a higher ARPU in Q3 and is expected to continue to do so. On the profitability side, profits were down in the Nordics as we added all of the new content in Q3. Our international losses were lower than expected and reflected the strong top-line development. This is expected to be the peak losses quarter for the international operations, and we have not made any adjustments to our expectation for international losses of approximately SEK 1.35 billion this year, having reduced this target from losses of SEK 1.5 billion last quarter.
Nordic profits in Q4 will be impacted by the lower entry point when it comes to subscribers and the fact that we have slightly less premium Norwegian subscribers than we expected at the end of Q3. This is compounded by the short-term impact by the Telia termination and the lower advertising sales expectations. We have therefore reduced our Nordic margin expectations for the year to approximately 7%, which indicates a lower absolute profit number for 2022 compared to last year. All in all, with the income coming from Allente, we expect to be at or around group profitability this year before the very positive SEK 595 million IAC from the Danish court settlement. Please remember that this is our trough earnings year. The changes to our short-term sales and profit guidance do of course have an impact on our longer term guidance.
The international operations are clearly ahead of plan, and the launch in the U.K. next week, followed by the U.S. and Canada early next year, will further accelerate the development. We are looking closely at our plans for the DACH markets, Germany, Austria, and Switzerland, which we have had intended to launch next year, but we are now considering to delay. We will do many more select agreements which add revenue but little cost. We look forward to talk much more about this at our upcoming Capital Markets Day. We now expect the international operations to reach break even already in 2024, with margins to then rise over time. We continue to expect positive group free cash flow in 2024.
In the Nordics, we are reducing our five-year revenue growth target and now expect a compound revenue growth of approximately 10%-12% compared to the previous 13%-15%. This reflects the broader economic outlook and the fact that we will enter 2023 at a slightly lower altitude than planned, both in terms of subscribers and revenues. From a profitability point of view, we now have a lower starting point for the remaining years of the strategy, but still expect to get to the very healthy double-digit margin in 2025, which will then rise over time. Combining these two outlooks give us a group compound revenue growth of approximately 16%-19% over the period, and this includes the Premier Sports acquisition, but with no other M&A assumed. This compared with the previous 18%-20% organic growth target.
The total group revenues would then be approximately SEK 25 billion in 2025, based on the midpoint in the guiding range. From a profitability perspective, we expect to achieve a group EBIT margin of approximately 13% in 2025, which is very close to our original guidance and would imply group profits before ACI and IAC of above SEK 3.2 billion. We will provide an outlook on 2023 once the budget is done and approved, but we do expect group sales growth to accelerate further next year.
International losses are expected to come down closer to the SEK 1 billion mark, and the substantial cost savings program that we will implement in the Nordics will result in higher profits and margins for the Nordic business. Overall, it is quite clear, also in these highly uncertain times, that our decision to expand beyond the Nordics was the right one. The scaling of the group give us many more ways to monetize our content, and it enables us to access even higher growth markets. With the more uncertain market outlook and slower growth in some areas, I also take great comfort in our ability as a company to work swiftly and proactively with our cost base, as we did during the pandemic and will do again, to safeguard both our profitability targets and our ability to continue to invest in our future as a company.
I am very excited about our upcoming launch in the U.K., which is our biggest market yet when it comes to a D2C launch. The acquisition of Premier Sports gives us a head start and some very attractive price points at the launch. The sports offering is well differentiated with good distribution through partners. We will look to build on this with the sports content that we have acquired and our ever-increasing originals catalog that we know is popular in the U.K.. A range of our shows have already been shown in the U.K. through deals with other broadcasters, and we are also now adding content from other Nordic broadcasters and content creators.
Across the group, our content is stronger than ever, with the Viaplay platform delivering a 99.9% service level, even with the huge increase in the volume of content and the number of live hours that we are showing. 12.7 billion minutes of content were consumed on Viaplay in Q3, and together with the new sports events I've talked about, 21 new originals also premiered. That means that we have premiered 44 originals so far this year, and we will have premiered more than 70 by the end of the year. As planned, sports topped our viewing list this quarter, unsurprisingly, giving Max Verstappen's brilliant driving an early crowning as the Formula One World Champion for the second consecutive year, and Erling Haaland's record-breaking start to his first season in the Premier League.
The multi-year and exclusive content partnerships that we've signed with Max Verstappen and Erling Haaland are big viewing drivers for us moving forward. Our originals accounted for three out of the top ten most watched programs on Viaplay globally in the third quarter, with international format Billy the Kid again proving very popular, alongside established favorites such as the Swedish soap drama, Lyckoviken, and the new crime series, Cell 8. Finally, all of our plans and actions are about building a sustainable long-term business together, where financial metrics are only part of the story. Our most recent group-wide engagement survey again demonstrates that we have a very engaged and energized organization. Our new hybrid ways of working are working well, and they are constantly evolving with the world around us.
We are well on track with our primary sustainability objectives, which we were set out together with you and all of our stakeholders. These strategic objectives include our science-based targets to limit climate change, to improve diversity and inclusion in our workforce and our content, and the promotion of physical and mental well-being. That is it for my initial comments. Now, I am very proud to hand over to our new CFO, Enrique, for his comments on our financial performance, position, and outlook. Enrique, over to you.
Thank you so much, Anders, and good morning, everyone. I'm looking forward to taking your questions later, but first, a few comments on our financial performance, position, and outlook. First of all, the weaker Swedish krona has again meant that our reported revenue growth was higher than our organic growth, this time by about 4.5 percentage points at the group level, and 4 percentage points in the Nordics. This also means that our reported costs are higher, actually by the same amount, roughly. Hence, the impact on profits is broadly neutral. Our operating expenses were up by about 41% in the quarter, which was primarily driven by our ongoing international expansion and the new English Premier League agreement, which kicked off in August.
Not only did we extend the rights in Sweden, Denmark, and Finland, but we also took on the rights for the first time in Norway, the Baltics, Poland, and the Netherlands. The international expansion accounted for about 1/2 of the cost increase. We have also continued to invest more in original content, especially in the Nordics. Content is 70% of our total cost, and the vast majority of these costs are fixed for many years to come. We therefore have full visibility over the majority of our costs, and this line of sight means a lot to us. It means that the current rising inflation rates have limited impact. We hedge the majority of our committed U.S. dollar cost on a forward basis, which delays the impact of FX changes and gives us time to plan any measures ahead of FX movements.
We're seeing little EBIT effect this year as dollar hedging rates are more or less the same as in 2021. While gains on the Norwegian krona have been offset by losses on the euro. The dollar has been steadily appreciating against the SEK this year, and we will have a negative impact of approximately SEK 350 million next year. As Anders has said, we will offset this through cost savings, which we will talk more about at our Capital Markets Day in two weeks' time. On Allente. Allente is performing broadly in line with expectations and is also beginning to feel the effects of a slower market in Scandinavia. We now expect the contribution to our earnings this year to be closer to SEK 300 million than SEK 350 million.
We received SEK 100 million dividend this quarter and expect a further SEK 200 million in Q4. This is lower than the SEK 400 million we previously expected, but still at a very, very good level. I would again point out that Allente is a great business generating annual revenues of approximately SEK 6.7 billion with a 15%-20% EBITDA margin, healthy cash flow, good cash conversion, limited leverage, and attractive dividend payout ratios. Over 70% of Viasat subscribers now have Viaplay, and 30% have our V channels as part of their subscriptions. The synergy of the merger is largely accomplished. As before, we know that we are not the best long-term owner of this asset, and we will continue to discuss our options with our co-owner.
Our effective tax rate for the year-to-date when excluding the share in net income from associates was 16%. We now expect the full year rate to be at around this level when excluding that associated company income before returning to a higher level next year as our international losses reduce. Let me elaborate a bit around our cash flow and financial position. Our cash flow from operations reflected the investment in international expansion with a negative change in working capital following the usual seasonal pattern and reflecting our half-yearly sports rights payment in particular. We still expect a negative change in working capital to remain at what we guided before of SEK 3.2 billion for the year, and that means very little change in Q4.
We ended the quarter with SEK 546 million net debt or SEK 215 million if excluding lease commitments, which compares to our Nordic operations trailing t12-month EBITA of SEK 1.4 billion. We had SEK 3.2 billion in cash and cash equivalents and SEK 3.4 billion of total borrowings at the end of the quarter. We have no debt falling due until June 2023, and that's a SEK 150 million bond, and the remaining SEK 3.25 billion doesn't fall due until between 2024 and 2027. As a reminder, all of our bonds are in Swedish krona. We have a very balanced and flexible range of facilities available to us, including access to a SEK 3.5 billion commercial paper program and an undrawn SEK 4 billion revolving credit facility.
We were paying 3.7% on our debt at the end of Q3 and earning 1.3% on our cash deposits. Our net interest and other financial items are expected to total approximately SEK 100 million for the full year. In other words, we have a good line of sight over majority of our operating expenses, our financial and tax expenses. However, in a more challenging environment now, we will embark on a cost-saving program to offset headwinds that we see. We're fully funded for our expansion, and we will adjust to a new economic reality. At the same time, we remain one of the fastest-growing media and entertainment companies in the Nordic and international markets.
We have updated our targets, and delivering on these will create substantial and sustainable shareholder value. Lastly, having been here just a few months, I wanted to say that I'm very proud and humbled to be working with such an engaged and motivated team. That is it for my comments, so now back to you, Matthew.
Thank you very much, Enrique, and thank you again, Anders. We're now ready to take your questions. If you would like to ask a question, please press star one and then one again on your telephone keypad, and you will enter the queue. You can no longer withdraw your question, I'm afraid, so be careful with that keypad. Or you can post questions on the message board by clicking on the Ask a Question tab at the top right-hand corner of the webcast window. Please don't forget to write your name and your company name so that I introduce you correctly. All right, I think first up here, if I could just ask Anders about Norway.
Yes.
I think two questions here. One is, are the ambitions still the same? Secondly, to what do you attribute the somewhat slower start? Is that the macroeconomic situation or is it something specific to the product?
No, I would say first, yes, we are maintaining our ambitions in Norway. No, I don't think it relates to the product. The ramp-up of the new sort of Premier League package and the new total package in Norway went very quickly to a level that sort of equated what we have seen from previous rights holders. In this macro environment, also in Norway, we see that the ramp-up to get to the next level is taking longer than anticipated. We were gonna have to work very focused and very dedicated to get to the level where we need to be to feel comfortable with the kind of growth that we are generating in Norway.
The short and honest answer is, yes, it has been slower than anticipated. I wouldn't call it bad, and I wouldn't call it a failure in any way, shape, or form. We just need to be a bit more patient in this environment.
Great. Okay. Thank you very much. A question, if I may, for you, Enrique. Working capital, is that still at the same level that was previously estimated? Does that play out into still a free cash flow generation in 2024 as previously indicated again?
Yes, actually, Matthew, that's a very, I would say, quite simple question because we expect our cash flow for this year to be as per what we guided in terms of the working capital build-up of SEK 3.2 billion. For 2024 and for the long-term plan sitting at the same level. We expect free cash flow generation in 2024. By the way, we're anticipating the year where we will stop being in loss-making position to 2024.
Okay, great. Just to make the point again on the funding profile, we remain fully funded for all-
Absolutely.
the expansion plans we have.
Absolutely.
Okay, great. Okay, thank you for that. I think what we'll do now is we'll go to the conference call line, so the phone conference line. We will take the first question there from Derek Laliberte, who's calling in from ABG.
Okay. Thank you.
Derek, over to you.
Yeah, thank you very much and good morning. Looking at this week's unexpected performance in Viaplay Nordics in the quarter, I mean, is this basically solely driven by Norway or what are you seeing in the other Nordic markets?
Yeah. Good morning, Derek. No, the answer is that there is a mix of predominantly two things. It is Norway, where the high ARPU packages of course have a direct impact given that it has taken a bit longer, and spills over into Q4 and probably into 2023. That has a significant impact. We've also seen two very important things, a general slowdown in the market, meaning that many households are less willing to sign up to new services than they were in the past. The flip side is that we have also seen lower churn, meaning that the willingness to continue to consume the ones that you have signed up for remains very high.
The combination of that is of course that the growth goes down somewhat, but we have sort of a stable outlook for how we can maximize the value of the base that we have, invest in a smart way so that we can stand strong also when this inflationary and recession-driven environment goes away, as it will at some point. It's a matter of navigating in the smartest possible way. The combination in the Nordic is twofold. It is the slightly slower ad sales, but we think that spills more into Q4. Predominantly slower buildup in Norway and generally slower organic growth, but lower churn.
Okay. Thanks for that clarification. Given that you now don't expect a new agreement with Telia, how long do you think it will take to recoup these lost revenues through the various measures that you're employing? Thank you.
Well, we are anticipating, like you say, that there will be no new contract. We of course are open for discussions, but any agreement, as you know, need to be mutually beneficial for both partners that sees sort of the opportunity to build on the agreement. It looks like there is no agreement currently. For us, that will take something between six months and 12 months to recoup. It very much depends on how many customers that will go to other distributors and how many customers that will sign up directly to us. We saw record high sales the first weekend after the termination of the contract, and we have continued to see high degrees of sales in Sweden.
It's building, but it will take some time. Our decision is of course relying on the fact that we have to have sort of the cost covered and the margin targets in place for any agreement that we do, otherwise it will be dilutive over time. These are quite significant agreements. We haven't reached such agreements with all other distributors in Sweden and in the Nordics. Six months to 12 months is the short answer to your question.
Okay, great. Finally from my side, I was thinking if you could give some comments about the response to the recent price increase that you communicated in Sweden and the connected campaign. I guess it won't be until year-end when you'll see more. After that, you'll see more effects. Any comments on that would be great. Also, I was wondering if you've seen any. What the effects have been, if any, from letting the NFL rights go to Telia. Thank you.
First question on the price increase, if that has sort of manifested itself in lower sales, no, rather the contrary given the sort of the high inflow of customers that are signing up now, on the back of the exit from Telia. The real test only comes, like you also allude to, early next year when the price goes up for existing customers. Remember that we haven't increased our prices for a number of years now. This price point puts us more or less in line where the market has been. We've been slightly below the market average.
I believe and feel confident that our very strong portfolio on the sports side will sort of keep the churn limited also on this new price point. NFL is a sports rights that we've had for many years. We like it, but we have to, given the vast sort of and very big portfolio of sports rights that we have, pick our choices. We can't keep everything. NFL is a niche. It is a niche sport. We've chosen to exit that and rather invest in Swedish women's football instead, which is something that is growing much faster than NFL.
We are managing our portfolio not just here and now, but also to what we believe is the future of sports consumption.
Okay, great. Thanks for that.
Thanks, Derek.
Thanks very much, Derek. Now we'll take a question from the message board, one for you, Anders. You've talked about focusing on Poland, the Netherlands, and the U.K. moving forward. What does that mean in terms of implications for the North American launches towards the beginning of next year?
Yep.
Of course, for the plans around the DACH, Germany, Austria, Switzerland markets.
Yeah. With the launch in the U.K. next week, we will be in 11 markets in Europe, and all of those markets will gradually build up with the U.K. to broad markets, including sports and entertainment. That gives us a rather sort of coherent approach to Europe to begin with. Then we will have two large but nonetheless niche markets in North America, where we will go direct to consumer in the U.S. and Canada during the first quarter next year. We're making plans both with potential distribution partners and campaigns as we speak. That takes us to 13 markets.
Those 13 markets is a good footprint to build on our investments, on the cash, that we expect these to generate and to deliver on our profitability target. In this time to invest in the DACH region, which is extremely hard hit, especially by the energy crisis, is probably not the wisest thing that we can do. We think the region is very interesting, but the region will still be there, and our content remains very strong, and our ability to ramp up and down is very efficient. We can go in, if things change quickly, we can launch very quickly. For now, I think it's fair to assume that we will not launch in DACH during 2023.
Okay, thank you. Then we have a question, a message report from Thomas Singlehurst at Citi. Tom's asking: Can you talk about the scale of the cost savings you anticipate in 2023 next year? You have shown in the past that you have cost flexibility, but can you talk about the cost of achieving the savings and whether costs can be held down permanently or whether this only provides temporary relief?
Now, we will provide more color on that, Tom, in at the coming Capital Markets Day. It is fair to assume that we need to find savings for around SEK 1 billion to deal with the lower in-going EBITA that we have going into 2023 and the headwind that we are experiencing from the U.S. dollar. This billion is a mix of investments that we are delaying with, such as DACH, some variable content investments that we can either just discontinue or push forward as we did during the pandemic. Then there is a bucket of run rate savings that will come at some cost, but not significant cost. It is not a massive IAC snowball that we are sort of rolling in front of us here.
This is a matter of working with the flexibility that we have very deliberately built in our cost base to be able to hit the throttle where it makes sense and pull back when we have to. That should take us to a situation where the mix change between Nordics and international is compensated by cost savings and higher growth in international, and that will lead to the profitability target that we have communicated today.
Great. Thank you very much, Anders. I think the other question we have here from Tom is related to the change from organic to absolute or reported sales growth. The question there is about whether this signals any additional M&A. I think, to be honest, Tom, I can answer that one, which is we were clear on in the script that it's really only including Premier Sports.
Yeah.
That is what we're referring to there. The organic definition takes currency out of the equation, so hopefully makes it a lot easier for everyone.
Yeah, absolutely. To give a little bit more color, I think the use of capital and the cost of capital and how we use our capital in the most efficient way has sort of manifested itself in the relevance of the investment in Premier Sports. At the same time, we're dealing with various headwinds on the currency and other things that we have to deal with. It's better to talk about this is our growth, this is our reported expected growth rather than using organic as a definition going forward. Like Matthew says, I also said previously, this is the M&A activity that we have built in.
Nothing else is assumed, which means that if you expect us to do anything more in the future, that is not part of the current guidance.
Great. Thank you. I think we're gonna take the next question from the telephone line again, please. This time we will have a question from Omar Shaikh from Morgan Stanley. Omar, over to you.
Morning, everyone. I've got three questions, if I could. Maybe first of all on Norway, Anders. You mentioned that, well, you kind of cited the weakness in Norway as being principally macro-driven. Maybe if you could just tell us how you're thinking about the macro to impact developing over Q4 and into next year. That would be the first question. Secondly, on Telia, you said six months-12 months to recoup the subscribers. Could you maybe just talk about whether you expect those to come in D2C or through other distributors and what the revenue impact would be, relative to your Telia revenues, prior to the blackout? Thirdly, maybe one for Patrick. Just wondered if you have the revenue from Premier Sports.
Can you just give us what the revenues were with the business as you acquired it? Then maybe, on your long-term targets, what would your long-term absolute sales growth target have been if you strip out Premier Sports or whatever you're assuming for Premier Sports within that over the 2020 to 2025 period? Hope that last question isn't too complex. Thanks a lot.
No. It is very complex, so I'll ask Enrique to answer that question. No, good morning, Omar. Thanks for the questions. Starting with Norway, we're seeing a slowdown in all markets driven by the high inflation and increasing household cost environment. It is less so in Norway. We have seen a bump in Sweden driven by sort of people coming on board, and I'll come back to that in a sec. Underlying, Norway is performing stronger than the other Nordic markets. The expectations on inflation by all metrics that we're looking at is looking to be lower in Norway. It's not zero. To commit to a EUR 65 price point in this environment takes longer.
I think we have achieved what we set out to do. We have all the core fans on board. We are working to extend the footprint, not just with EPL, but with other content to get people to say, "Well, EUR 65 per month is actually a very affordable way of getting entertainment, and I am sort of fairly interested in Premier League." That one takes a bit longer than we anticipated. We are still on our way to make our targets. We will invest to get there. It takes a bit longer. You know, in a situation such as the current, Norway is at least the least negative market when it comes to inflation and household confidence.
When it comes to Telia, we should remember that there are three buckets of revenues that need to be recouped. Recouping the subs, which is approximately 200,000 Viaplay subs, that will go fairly quickly. Those revenues generated by that part will take less than the indicated six months-12 months. We have the carriage fees for our channels, which we have to build up with other distributors. Remember that we have now signed with all the rest. That will take a bit longer. We have the smallest of the three buckets, we see, which is sort of the reduced reach for our ad channels.
That will then go from a gross impact to a net impact as and when sort of those households are restored with other distributors. It's a different kind of level, but my indication of six months-12 months covers sort of the whole package, all three buckets, where we will be back at the run rate that we anticipated to be before the exit from Telia. To the last not so complicated question on Premier Sports. Enrique, over to you.
Yeah, sure. Thanks, Anders. Good morning, Omar. Your question on the revenue, it's around SEK 450 million-SEK 500 million in revenues. I think the more important part is that how it complements actually our U.K. launch that we start next week. We actually closed the transaction Friday this past week. Essentially it fits perfectly in terms of kind of combining with the Nordic content that we are launching, as well as the sports that they have. That's about the number, but I think it will help us to get faster to profitability as part of the overall U.K. launch.
Yes.
That's very clear. Thanks for that, Enrique.
Thanks, Omar.
Sorry, actually, Anders, could I just follow up very quickly on the Norway-
Yeah, sure.
Are you tempted in any way to modify the prices in Norway? Are you thinking about maybe whether that decision to take the prices to where they are now was the right one? Is there anything you can do on bundling or discounting that might, you know, help that process of you know kind of persuading Norwegian subscribers to take the product?
Yeah, no, I think the decision on the NOK 649 price point was the right one, and remember that is NOK 50 less than the previous rights holder charged for the equivalent sort of package, but with much less content. So the price point is the right one under normal circumstances. Of course, in this environment, it is, you know, a significant investment for any household.
I'm not sort of tempted or considering to take down that price, but we will work more with what you sort of allude to, bundles, campaigns, in various ways, so we keep sort of the run rate at the right level going into hopefully more sort of financially benign environments in the future. We keep track and line of sight to additional and planned price increases over in the future. We don't create a massive delta, then have to do this massive ramp ups in the market that just generates unnecessary consumer dissatisfaction and the risk of churn. We will work with campaigns, with bundles, everything you can think of, but the price point is the right one.
Great. Thanks a lot.
Thanks, Omar.
Thank you very much, Omar. I think just to make the point again, that if you look at the previous guidance midpoint on revenues for 2025, we were sitting at around about SEK 26 billion or so. The current guidance would imply a midpoint of around SEK 25 billion. I think on the profitability side, it's also important to emphasize that then again, looking at the previous midpoints in the guidance, you were talking around probably SEK 3.4 billion or so of EBIT in 2025. Now we're talking between SEK 3.2 billion and SEK 3.45 billion. These are very, very similar levels over the
They are indeed.
which I think is important point to make.
The journey will look slightly different.
Yes.
We have to be quick, nimble, and flexible in this environment. The beauty of our model is that it is. We have a product that scales up and down very quickly. We have variable investment levels that we can work with in a very efficient way. Which means that there is no straight route in this environment. I think most of us experience how difficult it is to navigate these days. Under any circumstances, we have the toolbox to navigate through it and get to where we want to get.
Yeah, no, that's the theme that's coming through the message board, actually, that there seems to be a shift here from, to some extent, from Nordic to international growth, and to some extent from subscriber to ARPU growth.
Yes.
That seems implicit in the discussion.
That is correct. We should remember that the penetration and maturity in the Nordics is higher, and we have more exposure to various revenue streams in the Nordics. In a slowdown environment that we are seeing right now, of course, Nordics will be harder hit. We've gone from zero to top two on streaming services in two of the most significant markets in our expansion, Netherlands and Poland. We continue to grow. Our margin uplift and the operational leverage is significant in those markets. I think this just underlines the relevance and how correct it was to make a decision to broaden the footprint for our company and to use ways of monetizing on our content and to not be exposed just in one region.
Thank you, Anders. I think the next question we'll take is again from the telephone line. This time the question comes from Martin Arnell at DNB. Martin, please go ahead with your question.
Thank you, Matthew, and good morning, everyone.
Good morning, Martin.
My first question is on the churn levels. You mentioned that churn is actually down. If we look into the coming months, do you not expect churn to increase or is an increasing churn included in your guide for the full year?
Yeah. Thanks, Martin. That is a good question and churn is of course a tricky one in a non-commitment environment, meaning that we don't commit our customers to more than one month at a time. But we have some pretty good sort of tools in how we keep our dialogue with our subscribers to make our churn prediction fairly robust. So we know fairly well a couple of months ahead what the kind of churn levels that we are looking into. And they do not indicate any increase in churn towards the end of the year or in Q4. Rather the contrary actually. The only uncertainty that we have, and we should mention it, is of course the Football World Cup in December.
We haven't tried to have a World Cup in December before. Some of the big football leagues will of course be on hold when that happens. There are so many other things going on. With everything that we have available in terms of data and affects, nothing suggests that the churn levels will start to rise and become a bigger problem in the fourth quarter. There is no silver bullet. This is a product that is completely built on the viewers, the consumer's willingness to interact and to commit. If we don't deliver on the content, it's very easy to leave. We are ramping up and we have a number of very strong premieres coming up in Q4.
Content that is related to our sports rights when they go on hold, et cetera. I think we are feeding the platform with as much reason to stay as we possibly can.
Okay. Thanks a lot. A question on your pricing. It's obviously up in many markets, and you have a bit more to do. Can you talk about the gradual impact on growth and margin next year from your pricing initiatives?
Yes. Well, we'll come back in much more detail on that at the CMD when we can talk about 2023 and onwards in a bit more granular way and to sort of dissect the numbers that we're giving today. This outlook and the numbers do anticipate that we continue our work with price increases on a not so dramatic, fairly modest, but nonetheless stable level into 2023 and onwards. As is the case for all companies faced with an inflation environment, and in our case also exposure to the U.S. dollar, we will have to continue to put up our prices, but not at levels where I think we are jeopardizing our ability to keep people on the platform.
Much more will follow on that at the CMD.
Okay. Thanks. Can you just remind us on your free cash flow and your international losses, what do you expect for the full year next year in terms? Do you expect Netherlands to be breakeven end of next year or what about Poland?
Well, Netherlands is well on its way to hit breakeven towards the end of next year. Poland is a lower penetrated market, and it's a much bigger market, which over time gives it a significant operational leverage and upside, but it'll probably take it into 2024 as we sort of alluded to now, that we will go breakeven in international all markets in 2024. This year we've guided for losses of around SEK 1.35 billion. And as mentioned earlier, we expect that to go down to around SEK 1 billion next year and then fall quite dramatically from there into breakeven.
Once we've sort of come over this trough earnings year that we're facing this year, the reduction in losses in international comes quite quickly. We need to align that with managing our ramp up in the Nordics with cost and price measures, so that once those two meet, the upside and the profitability is what Matthew indicated just now.
You mentioned the savings upcoming sizable numbers there that you're gonna talk about at CMD. When we look at your financial position, you have net debt of just about 1x EBITDA, and it looks probably like you're gonna be at a cash burn in next year as well. My question is, firstly, how confident can you be in those working capital guidance for next year? Is there risk here that you expand with a stretched balance sheet at the end of the day?
Enrique, you wanna comment?
Yeah, thanks for the question. I mean, we are quite confident, very confident that I mean, as I indicated before, that we have a good line of sight in terms of what payments we have upcoming. We're in a good position in terms of reaching our targets when it comes to our financial position, and to reach a free cash flow position in 2024.
If those cost savings that you mentioned, the SEK 1 billion, are those necessary for you to sort of?
That's an important part of it, of that equation and the overall guidance that we have as for the total group.
I think, Martin, just to add to that, I mean, the SEK 1 billion is—it's of course a big number and it needs to be a big number so that we prepare accordingly. It may be at the high end of what is necessary, but we now find ourselves in an environment that has gone from bad to worse since February this year. A lot of moving parts in the world around us. What we do now is that we try to take as prudent approach as possible to making sure that we combined our ability to continue to invest with measures that safeguards our balance sheet and our sort of capital position.
That's why we feel fairly confident that we have the toolbox to actually deal with this, and that the growth will continue to be strong. We should not forget that also in this environment, we remain a quite unique growth company in our sector or in general. The line of sight now to the kind of margins that we set out to deliver in 2020, that line of sight has, if anything, strengthened.
Okay. Many thanks, guys.
Thanks, Martin.
Thanks, Martin.
Thanks.
We've got another few calls coming through the telephone conference line. I want to get through these in time. I think we're gonna overrun a little bit, but we'll keep going. We're gonna go next on the telephone conference line to Rasmus Engberg. Rasmus from Handelsbanken. Over to you, Rasmus.
Hi. Can you hear me?
Yes, we hear you. Morning, Rasmus.
Yep, all fine. Morning.
Oh, wonderful. Yeah, so right now, I guess you're probably locking in negative effects from FX also for 2024. I was just wondering whether the billion includes FX effects coming in 2024 as well, or whether you expect to come back to that.
We're looking at the total SEK 1 billion and a part of it as we're looking at it now, but we'll come back more at the CMD, that part of that FX will eat up into that SEK 1 billion. A SEK 1 billion is necessary to offset some of those FX that we're seeing against us. As I mentioned before, we're looking at about SEK 350 million for the U.S. dollar next year.
Yeah. There is furthermore the year after that. That's why I'm asking, right?
Yes. That is likely outcome.
Yeah. Sure. The second question, just, if you can help me get my head around this. You're seeing some problems with monetizing quick enough on the bigger packages in Norway, which is, you know, still a better economy than Sweden, and now you are raising the Swedish price. Is there a risk that we have slower uptake in Sweden as well, or even reduced numbers of the sort of high-end premium subscribers given the situation in the markets? What do you think about that?
Well, it's Rasmus, it's two very different things, 'cause in Norway, we have taken over the arguably largest sports rights in the country, and we're building up a customer base. We have a very high installed customer base on the back of the sports rights that we've had in Sweden for quite some time, and very low churn in that base, and high loyalty. It's two very different equations here. Where the buildup in Norway is slower, but the churn in Sweden is lower. Of course, any price increase drives a degree of churn, and you have to calculate so that you make sure that you strike the right balance, right?
I think we are in a position to say that Sweden is fairly safeguarded. Norway, we need to continue to work with in the coming weeks and months to get to the level where we want to be. One is a maintained case, the other one is a growth case.
All right. Thanks.
Thanks, Rasmus.
Okay, Rasmus. Thank you very much. Taking the one question at a time literally, which is great. Next up is, again, from the telephone conference line, one of our newer analysts, and welcome to him. It's Saim Saeed from Berenberg. Saim, I will hand over to you now, if I may.
For taking my questions. I think the first one is just on the longer term subs targets, the upgraded one. It's just 12 billion now, and you don't disclose split between Nordics and international. I was just wondering that now that you are including Premier Sports within there, you know, clearly it would suggest that Nordics part of it is probably downgraded from the previous 6 million. How much of an upgrade in the international is just driven by Premier Sports? Have you kept your international assumptions for the other markets the same? My second question is just on...
Yeah.
Sorry, if you wanna answer that first.
Yeah, let me take that one.
Yeah
I keep it fresh top of mind. I think we have used some of our capital to buy Premier Sports and invested in 200,000+ subscribers as a quick way to ramp up. The alternative would, of course, to be to go for those organically. We think this is a good way to use our capital. On the other hand, we don't anticipate to launch in the DACH region as we previously set out to do, which means that we're actually compensating for not doing that launch with higher ARPU subscribers in the U.K.. Which then leads us to a sort of maintained and improved case for international.
Yes, the split between Nordics and international will change somewhat. The mix will look slightly different, hence the need to compensate on cost in the Nordics and continue to fuel international. What exactly that split looks like, we will come back to at the CMD, but the aggregate number of 12 million subscribers in 2025 is the same.
Okay, thank you. Just to clarify, did you say that this still includes DACH within the targets at the moment because you haven't made an official announcement on it?
No. These numbers assume that we are delaying DACH. For how long and how it impacts these numbers, we'll come back to. There are various ways of launching our content in the region with various levels of exposure, so we can actually start to monetize in DACH as we have planned, but we don't necessarily need to put our direct-to-consumer offering on the ground in this current sort of macroeconomic environment. For the benefit of simplicity, you can assume that we have. As we have said, we have taken the Premier Sports subs into the number, but we have assumed no DACH to make it sort of a reasonable way for you to calculate.
Okay, thank you. My next question is just on, well, churn international, just how that's performed. The final one, just very quickly, on pricing in the Nordics. Now that the premium tier is kind of, you know, pretty high or above competitors at this point, do you feel like most of your price increases will be on the slightly lower tier packages at this point onward? Thank you.
No. On the price, I think that there will be price increases also on the higher tier packages, but of course they will be less dramatic than they have been in the past. You have to continue to work in this inflationary environment with sort of hedging yourselves against everything that touches cost for any kind of company. That will hit prices and households, but on much more modest levels. The same goes for the TV series and movies or the base entertainment package. Yes, there will be increases, but they will be fairly modest building up on the base, the installed base that we have.
It is, of course, a delicate sort of balance that any consumer goods company have to make these days. Make sure that you get your prices out of the market, but also make sure that you don't price yourself out of the market. It's that balance, but you can assume that there are further price increases in these plans.
Thank you. Just again on churn in international.
Oh, sorry, I missed that. Sorry, my bad. Churn in international is ranging from in line with Nordics to very low. Netherlands is very low. Poland is more normalized compared to the Nordic more mature markets. Baltics the same, where we have had a slightly lower ramp-up than we anticipated, but churn has been low. In Netherlands, we see very low churn rates and very positively high engagement on the platform now from all the Formula One fans that are now finding other ways to stay entertained. We have some really good Max Verstappen content coming up to keep that churn low also in the Netherlands.
Great. Thank you.
Okay. Same. Thank you very much for those questions. I'm gonna keep going on the telephone conference line just to take everyone's questions there. Next up we have Mikael Laséen from Carnegie. Mikael, over to you for your questions.
Yes, hello. Good morning. Just a couple of quick questions. First of all, can you say how much of the Nordic business that is stemming out of Norway, roughly?
How much in aggregate? How much Norway is of the total Nordic business, Mikael?
Yeah.
Is that your question? Well, that's not a breakdown that we have given. So, I can't give you it here on the call today, no.
Okay. I was just wondering about the ARPU improvements sequentially here in Q3. Looked a bit low considering that you have so much higher prices in Norway.
Well, it is a volume question on how much that ARPU increase actually spills over to the total base. The other markets has been doing quite well as well, which means that the ARPU ramp-up that we want to see coming out of Norway slightly diluted by fairly strong take-up also in the other markets. Overall, too low. That's sort of the reason for the mix change that we're talking about. Norway is quickly growing to become our second-largest market in the Nordics.
Yeah. I think it's also a question of timing, right? Because.
It is a timing question, yes.
Actually subscribers come in during the quarter.
Exactly. Yeah.
Sorry, Mikael. Keep going. I think you have other questions.
Yes, I have another one. How should we think about the Nordic EBIT margin in 2023, considering what you have said about advertising demand and Com Hem, Telia, and the churn trends and the cost savings program that you will launch?
Yeah.
Should we assume 7% also for 2023 or is it too low? Will you achieve more savings?
No, I think we are looking at growing our earnings in the Nordics in 2023. As I said, we'll come back and give you more granularity on our guidance for 2023 soon. Our ambition is definitely, and all the numbers that we have support, that we will grow our earnings in the Nordics in 2023 and onwards. There will be at the end of sort of the strategy period in 2025, we are looking at a slight mix change between international and Nordics with sort of more or less maintained profitability expectations, but a slight mix change.
That is not necessarily a bad thing 'cause what it means is that it reduces our exposure to those parts of our business that is more and more structurally challenged, such as ad sales, such as traditional TV distribution. The more we can move to direct exposure to our SVOD business, the better it is, as long as we generate the same kind of profitability.
Okay. Thank you.
Thank you, Mikael.
Thanks, Mikael. Yeah. I mean, rising profits, rising margins is the base assumption here.
Yeah. It is.
for next year, for 2023.
It's gonna take some cost measures to get there.
Yeah.
That's important to say.
Absolutely. We have our final question on the telephone conference line. I have a lot more on the message board.
Yes.
Final question on the
Brilliant
The conference call line comes from Pontus Wachtmeister at SEB. Pontus, please go ahead.
Hi there.
Morning, Pontus.
Just curious to for market participants, kind of, can you make a very short argument for why the margin should increase from 7% in 2022 to 13%, almost a doubling in 2025, given some kind of expectations of content cost inflation and so on? Not so much details, but much more, kind of if you would back out, why is this possible? Is it just scale? You put more subscribers on the same cost base, and that's it? So that we can get some kind of confidence for that 13% number.
Well, it's a combination of the things that you mentioned. There is no content cost inflation that we don't know about in these numbers. That's important to say. We have full line of sight to what the content cost is during the strategy period. We see continued growth of subscribers, both direct to consumer and distribution agreements in our new markets. Which means that the reduction of losses in international from SEK 1.35 this year to approximately SEK 1 billion to breakeven in 2024 to profitability in 2025 is of course adding quite a lot into that 13% number, and then continued growth.
I thought that was for the Nordics, the 13%.
No, the 13% is aggregate for the group.
Right.
Uh, so, uh-
Um-
That's the aggregate number.
That means that the Nordics would have to hit that at least, and we're at 7% today.
Well, the Nordics, which is why we are talking about group level rather than Nordic versus international, is that we have to look at where the drivers are in the various parts of the business. International is going slightly stronger than originally anticipated, and Nordics is going slightly slower than originally anticipated. That sort of accumulated together with the acquisition of Premier Sports takes us to a 13% margin in 2025 on a largely fixed cost base. The way to get there is to continue to deliver on the growth numbers on subs and to continue to deliver on the RPO uplift coming from price increases. That's the way we get to the 13%.
Okay. Thank you. I think it's just important, given the kind of traction and understanding for that number, like to make a clear pathway there. Price and subscribers on the fixed cost base. Okay.
Absolutely. The ramp-up levels are of course we ramped up very quickly in Poland and especially in the Netherlands. We want to continue to ramp up, but we can afford to ramp up on lower levels and still get to the kind of profitability that we're looking at given the operational leverage that we have. The lower than originally anticipated cost of delivery of launching in the U.K., given the Premier Sports investment and the likely delay of DACH takes us to profitability in a good way. We need to continuously cruise in the Nordics and take out some cost to compensate for the slightly more muted market that we have right now. We will get to the 13%.
Okay. Pontus, thank you very much for that question.
Okay. Thank you very much. Bye.
Thank you, Pontus.
Thank you. I think just a couple of questions on the message board to conclude here. The first one is if we can give any ranking in terms of Q4 for the delta versus the consensus or previous guidance. When we think about the factors that are contributing to that.
Yeah
The Telia, the Norwegian growth, the broader economic situation, these various. How would you rank those in terms of impact?
Yeah. That's a good question, of course. I would say that Norway is very important for us. We need to continue to ramp up in Norway. The impact of not achieving that is ranking the highest. We need to get to the levels and get to the right run rate in Norway going into 2023. That ranks the highest. The one-off effects of the exit from Telia would rank as number two, and the slower general organic growth would rank as number three. That's sort of top of mind how it sort of builds up value-wise. It's not like the market has come to a full stop. It's just slower.
Telia, as I've explained before, those sort of money will be recouped over time and with a higher margin. We need to continue to build Norway. Those three are the main elements in why Q4 is looking more muted than we originally set out to deliver.
I think we'll conclude with a question that's a broader industry question, which is coming from Richard Staveley at Ennismore. Richard asks, Having observed the high CPMs that Netflix seems to be achieving in their advertising operation or wanting to achieve in their advertising operation, why not emulate them by adding a cheaper ad-supported package to your lineup, particularly in the context of potentially Norwegians balking at the high prices on the SVOD side?
No, it's a good question, and HVOD is sort of the latest black in the industry. I think the jury is still out whether it will be as accretive as some numbers indicate. We should remember a lot of that is coming from the U.S. for Netflix and others. If you look at our footprint, if we take the opportunity of an HVOD or a hybrid, sort of lower priced entry product in the Nordics, it will just eat into the very high prices that we command on our existing advertising platforms in linear. It would be a matter of maybe moving some money to another platform where we have inferior reach still compared to traditional linear.
The bottom line of that is probably not very positive or it isn't very positive, if you look at the numbers. To add a similar sort of kind of approach in our new markets where we have no legacy, our reach is still inferior, which means that the CPM levels that we will be able to command in those markets, and I think that holds true also for many of our global competitors, that reach will not be significant enough to sort of suggest that that's a better thing to do than continuously work with our prices on the subscription level. I'm not saying it's not a route in the future, it's a matter of timing, and maturity, and penetration.
The discussion around Netflix, Disney+, and others is very much driven by the U.S. I think that it will be difficult on a country by country basis to make money back from downwards trading from the premium prices to an HVOD price in the smaller markets, such as the Nordics. For us, it would be a loss-making venture given the fact that we already have installed high-priced advertising platforms.
Yeah, I think this is also a trodden path for us, isn't it? With, you know, Viafree.
Yes
which now is partnered with Pluto TV.
Yes.
This is something we've done before.
I don't say that it may not be interesting for the future, but if I go out a little bit on a limb here, I would say that this is something that has developed quickly, not necessarily just as a very strategic approach, but necessarily as a reaction to maturity coming sooner than anticipated for some. You have to find new ways of monetizing your content. It's all a matter of timing, I think.
Okay. I think that's it on the questions side, and that concludes the question and answer session today. Thank you very much for your time and your questions, which we, as always, appreciate. We do also appreciate your interest and always welcome your feedback on the format of this session, so please do provide that. We are doing physical and digital roadshow meetings today and tomorrow, so please reach out if you would like to schedule a meeting with us or have any remaining questions. We have our Capital Markets Day, well flagged on the call today, coming up in two weeks on Wednesday the ninth of November, which will be held physically in central Stockholm. We very much hope you can make it, as many of you as possible in person.
We're starting at 2:00 P.M., both so you have time to travel in the morning, and also so that our U.S. owners and followers can join virtually. That is it for today. Thank you very much again. Goodbye for now, and see you on the ninth.
Thank you.