Edited Transcript of MTG B.ST earnings conference call or presentation 28-Apr-20 1:00pm GMT
Lars Torstensson, Modern Times Group Mtg AB – Executive VP and Head of Communications & IR 
Thank you very much, and good morning, and welcome to MTG’s interim report presentation for the first quarter 2020.My name is Lars Torstensson.I’m responsible for Communications and IR here at MTG.I’m joined today by Jørgen Madsen Lindemann, our Group President and CEO; and Maria Redin, our CFO of MTG.
We will start with a formal presentation, as we always do, followed by a Q&A session.Please keep in mind, questions are only enabled for those participating through dial-in.Our webcast is listen-only.Story continues
So without any further delay, please, Jørgen, can you take us through the presentation of our quarter?
Jørgen Madsen Lindemann, Modern Times Group Mtg AB – President & CEO 
Thank you, Lars, and a warm welcome to our Q1 results conference call.I hope everyone on and off this call stays safe and healthy.
The global impact of this pandemic has been severe on societies and markets in which we, our portfolio companies and partners, operate in.While I am and continue to be very impressed with how our companies are navigating and mitigating during this uncertain and extraordinary situation.I would like to extend a few thanks to our customers, to our people, to the esports teams and players and all our partners for your support that has enabled us to maintain business continuity and continue to deliver on our strategy.
If we then go to the next slide.So basically, any company worldwide, as I said, the coronavirus pandemic has also impacted the MTG Group’s companies in the quarter.
The outcome has been different for our 2 verticals.While the interim regulations on international travel, imposed quarantine regulations and restrictions on hosting events with live audience have had a negative impact on our esport business, the game vertical has continued to perform stable towards more positive results, indicating resilience to the current pandemic.
In order to optimize our performance, we have set out 3 key policies to deal with the coronavirus pandemic business impact, focusing on our business continuity; operational efficiency; and last but not least, business opportunities.So in relation to business opportunities, our focus is to deliver our products to the fans and partners, either through moving events online or to reschedule to a later date in the year.
The gaming vertical, we have continued to develop the existing and new gaming product pipeline, games we have scheduled to launch or test in 2020.
In terms of operational optimization, we are taking the measures needed to preserve the financial health of our companies so we can navigate and mitigate the impact to make sure we remain competitive and also learn from the crisis to understand if our companies are set up the right way and that we continue to be fit for purpose.
Looking at business opportunities, we see examples of how we can accelerate growth by investing more on advertising, which is the case for InnoGames.We also discussed new partnerships with relevant industry partners for esport.Throughout the history of MTG, we have improved on our capital structure, so we are also now ready to capitalize and invest in changes in the landscape and in changing consumer behaviors which we see these days.
In October 2019, we initiated a strategic review of our gaming asset.MTG has since then received multiple expressions of interest in the business from both strategic and financial investors.The Board and management continue to believe that a separation of the Gaming and esport businesses, which would allow them to adapt their own financial structures and independent strategic objectives, is the best way to maximize shareholder value.
This separation may be implemented either through a sale of the gaming business or through a listing of the gaming vertical at the Nasdaq First North Growth Market.
The coronavirus pandemic has caused some disruption to the review process and the decision on the best route to separation will be taken once markets have stabilized and we’re able to present 2 strong equity stories in a similar fashion, as we did when we listed NENT back in March ’19.
We go to the next slide, looking at the highlights for the quarter.Our gaming vertical has shown resilience and maintained stable performance, and we have seen an upswing in user activation towards the end of the quarter.We were just an inch from setting an all-time high in daily active users in March.In fact, we broke the record now in April.
While the esport vertical has been negatively impacted, we quickly adapted and changed to ensure business continuity and performance, and we continue to deliver on our strategic agenda.This has been done primarily by successful converting live audience esport events to be online-only, ensuring the shows goes on in a way that is responsible towards the teams, partners, fans and society.
Operationally for esport, we have done slightly better than what we anticipated when we communicate the impact of the coronavirus pandemic in March, delivering an almost flat revenue, development for the whole of MTG.
In esports, sales declined by 11% or 15%, excluding the currency, compared to our assumption of minus 25%, with Own & Operated seeing a decrease by close to 20%.Esport Services enjoyed a growth of 14%, and we expect ESS to grow also in Q2.
Own & Operated continued to be the biggest part of the revenue.However, our revenue pipeline has taken a hit due to many current and potential future partners are holding back on their spending due to the impact of the pandemic has had on their business.
And also late in the quarter, we saw a negative impact from moving events online and postponing 1 Master property to Q2.Having to operate already committed events with no audience or move events fully online meant that there were limited possibilities to reduce the cost base in the quarter, leading to an adjusted EBITDA loss.
The gaming vertical grew in revenue by 3%, supported by an accelerated performance in March by InnoGames.There is a coronavirus effect when it comes to the increasing overall time spent on mobile games as well as downloads and use of browser games when looking at the weeks before and after the lockdown in various countries.
Thanks to a very accommodating ad market, InnoGames increased its marketing investment in the quarter, and the adjusted EBITDA margin for gaming ended at 21% with adjusted EBITDA contribution growing in absolute numbers.Kongregate has been negatively affected by the pandemic due to lower ad spend in their games.
Let’s move on to esport more specifically.And as I said, we have kept on pushing our strategic agenda despite the circumstances.Esport being digital by design creates potential to offset some of the negative impact as we, as fast-growing sport, can continue to deliver great entertainment by moving to pure online competitions and thereby creating new products and business opportunities.
Our work to further professionalize the commercial part of esport has continued in the quarter and let me try to walk you through the main events.If we look at the development of our properties, in the quarter, we made sure that esport as an entertainment form, continue despite the coronavirus pandemic.
DreamHack was also able to follow through with their properties live, while IEM Katowice, ESL One Los Angeles, ESL Pro League Season 11 and its final in Denver were all successfully converted to existing and well-received online events.ESL One Los Angeles and Denver final were moved to Q2 and fully online.
We have been equally active on the Esport Service end.For example, in February, the biggest Rainbow Six event took place in Montreal delivered by ESL.Also, together with Supercell, we conducted a big online Brawl Stars event in the quarter.DreamHack and Riot Games have partnered around a league — their title League of Legends, creating a Northern Europe championship and a U.K.circuit.
Looking into the viewership, the fans behavior — and speaking of the impact of ESL in general and the Pro League Season 11 in particular, we delivered very strong audiences and was topping the Twitch chart the first 3 weeks of the tournament.Also, we broke year-on-year records in viewership.
Overall, during Q1 2020, the spotlight has been on esport providing the industry some well-deserved attention as a compelling and convincing media partner and not to forget, one of the only sports which continued to be live in these difficult times when many other sports, unfortunately, have come to a pause.
Looking at the publisher partnership.We managed during — following the end of the quarter to secure several new publisher deals on the Own & Operated and, together with Blizzard, we will create a Pro Tour circuit around the title StarCraft II and Warcraft III, showcasing the capability of our new format.
For Esport Services’, several key deals have been closed.ESL and Supercell share a newly built ESL studio in Katowice and will produce tournaments around the popular mobile games, Brawl Stars and Clash of Clans.ESL will, in partnership with Tencent and PUBG Mobile, create a world league tournament with qualifiers broadcasted globally.With Bethesda, ESL will create a Quake Pro League with 4 events taking place in Italy, 2 times in Poland and then U.S.Many of the event has been affected by the ongoing pandemic, but the products are intact and will be executed upon either online or postponed to new dates to accommodate live audiences.
Also, ESL and DreamHack strengthened their partnership with the teams, as ESL and DreamHack signed a historical agreement with 13 global leading esport teams.We adopted the Louvre Agreement.
We signed up to the Formula One circle, for whom the Concorde Agreement from ’81 played a pivotal role in shaping the sport.
Between them, the partners of the Louvre Agreement have won 28 ESL and DreamHack Master level competitions and 2 Intel grand slams in the last 4 years.The partners represent all of the top-10 ranked CS:GO teams in the world.
The agreement further established the ESL Pro Tour as a leading esport circuit format globally while also serving yet another example of ESL’s and DreamHack’s shared ambition to build and commercially professionalize the global business of esport.
We onboarded several new media partners such as media [comp] in Russia, TV2 Denmark, TV2 Norway, Polsat, Telia, Mediaset, Sky and so on.Today, we are also thrilled to announce Twitch as a more strategic media partner for DreamHack and ESL.It is a significant deal and a milestone for our esport companies, and it shows the attractiveness of the media product that we have.
Our collaboration with Twitch dates back to 2009 when it still was called Justin.tv.
This new collective media partnership is reconfirming our long-standing collaboration and highlights the importance and relevance Twitch has to ESL and DreamHack communities as well as the value the ESL and DreamHack esport content brings to the global Twitch audience.
On Sponsorships, we saw during the quarter our esport companies prolonging important partner deals with brands such as DHL, AT&T, Corsair and Pepsi and onboarding new partnerships such as Sony Mobile, U.S., Pringles and many more.
Our revenue pipeline has taken a hit due to many current and potential future brand partners are holding back on their spending due to the impact of the pandemic has had on their business, an impact we should expect to continue in 2020.
While ensuring acquisition of new partners remain a priority, we also ensure that our existing partners are pleased and can value the return and therefore, continue to deepen their involvement in esport.
Now let’s look at our esport B2C services, also known as ESL Play, ESEA and BadLion.The B2C part of our business has seen an increasing amongst fans who play online and participate in smaller amateur competition.As a result, when looking at our B2C business, such as ESL Play and our Counter-Strike subscription service ESEA has seen a record-breaking engagement from users during the quarter.We’ve also seen more new and existing user participating, driven in part by our partnership with Sony, where ESL powers the competition, including titles like FIFA and NBA2K.
Even though the current turnover is relatively small, these are very interesting trends.And from a B2C product perspective, viewers spend more time understanding them and opportunities within B2C esport, and last but not least, build a relevant commercial product around these fan-relevant B2C products and results.
We move on to the gaming.Take the next slide, please.
As mentioned earlier, our gaming vertical has been more resilient towards the pandemic, primarily driven by continued positive development for InnoGames.Kongregate, given its focus on more ad-based revenue model, has been negatively impacted during the pandemic.
Also compared to last year, the quarter was negatively impacted by the terminated publisher deal with Huya in April.However, to take the closer look at InnoGames and the uplift in user matrix that started in the month of March, the environment for making marketing investment has been very good, leading us to spend more on user acquisitions.This, together with organic growth and higher user activation, we have seen good traction amongst players across several games, especially Forge of Vampires and Classics.As an anecdote, it is interesting to see that it’s not only new players joining, but also fans from before, enjoying new content that we have created.Elvenar is not yet seeing the same positive trends.
However, we feel that the current work being done with the game on the mobile side should help it to perform better going forward.Because of more registrations and increased activations, our daily active users has increased for InnoGames in March, and we broke a new record for the KPI in April.
The relationship is not 1:1 but this trend should indicate that we are looking at a strong revenue trend for Q2 2020.And we are not just seeing increased DAU, the playing time has also increased quite significantly for InnoGames, close to 30%, and this shows that we see a higher engagement of the whole community.Even though there is not a perfect correlation between DAU and average revenue per daily active users, ARPDAU, we have slowly but surely also seen an improving trend for this matrix.As said, more users that are engaging at a higher level with our games create an interesting platform for future positive revenue development.It needs to be mentioned as a caveat that these positive trends might or might not be temporary on the back of the pandemic.
That needs to be seen.But for now, we are happy to see a surge in users at the InnoGames side.
So if we then look — go to the next slide and look at our top priorities in Q2 and the full year for 2020 going forward, as I started out, we continue to push on our strategy, and we have an opportunity to move our positions forward in both our verticals.We have 3 clear priorities going forward: business continuity, operational efficiency and sizing of new business opportunities.
If you look at the business continuity first, for the esport vertical, we will continue to build our Pro Tour format despite not being able to have live audiences.
Consistency and relevance are key to maintain our growing relationship with all our stakeholders and make esport a commercially interesting and relevant sport for all stakeholders, fans, teams, sponsors, media buyers and publishers.As a result of the current situation, DreamHack and ESL are moving a significant portion of their schedule online.Between ESL and DreamHack, we will cover more or less all days through multiple titles in Q2 2020, providing esport entertainment to fans.
In the gaming vertical, we are maintaining the schedule for 9 new game titles being either tested or introduced across 2020.We also, on the back of an accommodating market, investing in marketing to further grow our user base in the gaming vertical.
For Kongregate, we would like to continue to secure partnership agreement and do rollout.Hence, we’re excited to announce that in continued partnership with Nickelodeon, Kongregate has developed — will be developing a SpongeBob SquarePantss idle game that will be launched in 2021.SpongeBob remains one of Nickelodeon’s biggest franchises, beloved by millions of fans worldwide, and we are very pleased to see that Kongregate will be able to work with such a strong IP.
Staying nimble and efficient during the coronavirus pandemic is, of course, key, especially for our esport vertical which, as mentioned in several instances, is severely impacted by the ongoing pandemic.We’ll also create the possibility to get out of this crisis more stronger than went in with a setup that is more fit for purpose.
For Q2 ’20, ESL and DreamHack are reducing both cost of goods sold and fixed cost.As we have indicated to you, these cost reductions will be at least SEK 150 million and will be predominantly in Q2.The lion’s share of the savings come from us taking down variable cost as a result of our properties moving online.
Examples of cost of this category is what we call venue, build, operate and travel.We’re also making use of furlough agreements with governments in our key markets.We are also looking at a more permanent fixed cost being taken out.This has more to do with the way we are organized and work and will be independent of the pandemic.With what we know right now, we’ll be comfortable of reaching at least SEK 150 million savings in Q2 ’20, maybe even slightly more.
With our strong position in the market, the current situation is also providing us with opportunities in both the esport and gaming vertical.Look at the esport first, as has already been shown in Q1 ’20, we are building closer relationship with the publishers to develop the esport format both online, mobile and live.
Focus is to continue making progress during Q2 2020.In an environment where live sports entertainment is scarce, we will, of course, continue to develop our online format and provide opportunities for both digital and traditional media buyers to engage in esport.Within the gaming vertical, we will continue to push our investments into marketing on the back of significantly improved return on ad spend levels.There’s a window of opportunity to attract even more users and create a larger base for both InnoGames and Kongregate to leverage upon.
Then I also believe that the testing and trial markets for our new games would be excellent, with so many gamers being available as a result of more people spending time at home.As a matter of fact, we will accelerate the launch of 3 Kongregate games to happen already in Q2.With all this in mind, we feel that our guidance for Q2 needs to be slightly adjusted.Earlier, we anticipated revenues in the esport vertical to decline 35% to 45% in the first half 2020 in comparison to the same period for 2019.Now we feel this would be in the range of 25% to 35% instead.
And as I’ve already alluded to, the savings in Q2 ’20 would be at least SEK 150 million.
With that said, over to you, Maria, to walk us through the financials.
Maria Redin, Modern Times Group Mtg AB – CFO 
Thank you, Jørgen.And if we can all then move to the next slide.As Jorgen has presented, we ended the quarter with slightly higher sales than anticipated on the esport side, driving overall group sales to SEK 924 million in the quarter.That is a 2% decline year-over-year or a 6% decline, including currency impact.As the Swedish krona further weakened against both the euro and the U.S.dollars, we continue to see a big impact on both reported revenues and earnings and similar, the balance sheet items.Gaming increased its proportionate revenue contribution in the quarter to account to 2/3 of the turnover, and I expect it to further increase in the second quarter.Adjusted EBITDA losses increased year-over-year, even though we had improved performance in both our gaming vertical and lower costs at our central operations, but this as esport losses increased.
If we then look further into the increased losses in esport, this is a combination of revenue loss and sunk cost.
And with the risk of repeating, the main reason was because of us having to operate already committed events with no audience or to cancel the events at a short notice, which means that there are limited possibilities to reduce the cost base in the quarter.This means that roughly 50% of the increased losses in the esport segment in the quarter is due to sunk costs because of moved and canceled events, and the remaining 50% is a combination of us moving the ESL One Los Angeles event into Q2; not fully monetize the IEM Katowice and the fact that the Katowice this year is not a major as it was last year.Probably this year, we will have the CS:GO Major in Rio, which is moved from Q2 to Q4.
And then finally that the underlying investments we have made into the ESL Pro Tour structure and the operation teams in ESL, DreamHack and DreamHack Sport Games.Several of these cost items will be addressed in Q2 as a part of the SEK 150 million savings that we have identified.And also, in the quarter, the sunk costs will be limited.And as Jørgen also presented, we are working on identifying more permanent savings as we are reviewing our way of working at ESL and DreamHack, and we come back with more details on this as we have concluded the work.
If you can now turn the page.The EBITDA adjustments in the quarter amounted to negative SEK 48 million to be compared to SEK 79 million last year.
And as some of you might have noticed, the cost for the LTIP and MIP was elevated in the quarter.This was mainly due to the management incentive programs in the gaming vertical.And as a temporary effect in the quarter, I expect the run rate to go back to a more normal level going forward.And as we will not launch a new program at the headquarter in 2020, the new expected run rate will be approximately SEK 20 million per quarter.
If we then look at the depreciation and amortization, which increased slightly in the quarter, this reflects the higher amortization within the gaming segment as we both launched and acquired new games, which we’re amortizing on backup.This quarter is also the first quarter with the IFRS 16 comparable numbers year-over-year.
Finally, the net financial items were positive in the quarter, predominantly driven by the exchange rate movements.We should remember that we have our cash balance held in euros.
And given the weakening of the Swedish krona, we do see a positive impact here, partially realized and partially unrealized.
And if I could then have you turn the slide again, we are moving to cash flow statement, and the group reported an improved net cash flow from operations of negative SEK 39 million.The positive contribution versus last year is following the effects in the working capital, where we see a positive improvement, and this is relating to the timing of receipt and the service delivery within our esports vertical.And this — I believe this is a temporary change, and I do expect it to reverse throughout the year.
CapEx was slightly up in the quarter, this as we’re having 9 games in development within both InnoGames and Kongregate, and this is key driver behind that.And we did also back on some of the new publishing agreements in ESL, invest in some studio buildup, also driving CapEx in the esport vertical in the quarter.
Within our VC fund, we did 2 follow-up investments within Bitkraft and PlayVenture, and we also realized our first exit with Phoenix Lab.Thus, net investments into VC fund amounted to SEK 5 million in the quarter.
The group remains well-funded with a net cash position of SEK 1.8 billion as of Q1 2020.Gaming continue to be the cash flow contributing entity, and we are working focused with esport to optimize the current cost structure to minimize the cash outflow.
First quarter end, we did pay the annual dividend to the InnoGames minority.It was later than normal this year due to the strategic review.
Thus the cash balance post-quarter end was immediately impacted by SEK 190 million outflow.
That concludes my financial review.So back to you, Jørgen.
Jørgen Madsen Lindemann, Modern Times Group Mtg AB – President & CEO 
Thank you, Maria.So let’s summarize, and there are 3 things that I would like you to bring with from this session.
So number one, as for most companies, our quarter was impacted by the ongoing pandemic, but we were still able to execute and push our strategic agenda to commercialize esport and grow the user base of our gaming vertical and maintain the time schedule for our new game pipeline.Going forward, we want to mitigate and navigate the impact of the pandemic.Our priorities remain clear: business continuity, operational efficiency and sizing of new business opportunities.
And last but not least, we have a very strong financial position to make this a reality.
We’ll come back with an update on event schedule for Q3 as soon as we have certainty.So despite difficult circumstances, I feel that we’re in a good position to come up stronger and cement our position as the market leader when it comes to tomorrow’s entertainment.
That concludes our formal presentation.
And now over to you, Lars, for any questions.
Lars Torstensson, Modern Times Group Mtg AB – Executive VP and Head of Communications & IR 
Thank you, Jørgen.That ends our presentation for the first quarter 2020, and we are now ready to take any questions that you might have.Operator, could we have the first question, please?