U.S. Markets closed

Edited Transcript of MTG B.ST earnings conference call or presentation 28-Apr-20 1:00pm GMT

Q1 2020 Modern Times Group MTG AB Earnings Call

Stockholm May 4, 2020 (Thomson StreetEvents) -- Edited Transcript of Modern Times Group MTG AB earnings conference call or presentation Tuesday, April 28, 2020 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Jørgen Madsen Lindemann

Modern Times Group Mtg AB - President & CEO

* Lars Torstensson

Modern Times Group Mtg AB - Executive VP and Head of Communications & IR

* Maria Redin

Modern Times Group Mtg AB - CFO

================================================================================

Conference Call Participants

================================================================================

* Martin Arnell

DNB Markets, Research Division - Analyst

* Oscar Erixon

Carnegie Investment Bank AB, Research Division - Financial Analyst

* Stefan Billing

Kepler Cheuvreux, Research Division - Research Analyst

* Thomas A Singlehurst

Citigroup Inc, Research Division - MD & Head of European Media Research

================================================================================

Presentation

--------------------------------------------------------------------------------

Lars Torstensson, Modern Times Group Mtg AB - Executive VP and Head of Communications & IR [1]

--------------------------------------------------------------------------------

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.

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 [2]

--------------------------------------------------------------------------------

Yes. 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 [3]

--------------------------------------------------------------------------------

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 [4]

--------------------------------------------------------------------------------

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 [5]

--------------------------------------------------------------------------------

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?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question comes from the line of Martin Arnell from DNB.

--------------------------------------------------------------------------------

Martin Arnell, DNB Markets, Research Division - Analyst [2]

--------------------------------------------------------------------------------

So my first question is on your change in the first half guidance. If you could please elaborate on what's changed since your update end of March?

--------------------------------------------------------------------------------

Lars Torstensson, Modern Times Group Mtg AB - Executive VP and Head of Communications & IR [3]

--------------------------------------------------------------------------------

Thank you, Martin. So regarding guidance and the change of guidance, that is for you, Maria, of course. Could you elaborate on why we have adjusted the guidance?

--------------------------------------------------------------------------------

Maria Redin, Modern Times Group Mtg AB - CFO [4]

--------------------------------------------------------------------------------

Yes. Martin, as you saw, we came in slightly better in Q1, which is predominantly on back of the growth that you saw in ESS and, similarly, what we're seeing in Q2 now is stronger developments in the ESS side, which is a little bit more of homework, which we have talked about before as well. But we're very happy about it, and it's also a strategic cooperation that we see coming through. So that is a key driver behind the revenue improvement.

--------------------------------------------------------------------------------

Lars Torstensson, Modern Times Group Mtg AB - Executive VP and Head of Communications & IR [5]

--------------------------------------------------------------------------------

And follow-up, Martin?

--------------------------------------------------------------------------------

Martin Arnell, DNB Markets, Research Division - Analyst [6]

--------------------------------------------------------------------------------

Yes, please, if I may. On Twitch deal, can you just please go through what the difference compared to historical deal?

--------------------------------------------------------------------------------

Jørgen Madsen Lindemann, Modern Times Group Mtg AB - President & CEO [7]

--------------------------------------------------------------------------------

Yes. It is -- first of all, the duration of the deal, it's a 3-year deal. And that, of course, means a more strategic partnership where we have the time to develop both products, so both our products, our commercial products and also the Twitch product. And then we will, together with Twitch as well, introduce a range of new commercial opportunities for our partners to make sure that their returns on investing into esport is even bigger. So there's a lot of discussions we have had, how we can make this joint strategic cooperation stronger. So it is very different from Twitch just buying our content, but actually more into a strategic commercial partnership deal as well, a significant one, of course, for both parties, and that, of course, also give some commitment.

--------------------------------------------------------------------------------

Lars Torstensson, Modern Times Group Mtg AB - Executive VP and Head of Communications & IR [8]

--------------------------------------------------------------------------------

Would you like a last one?

--------------------------------------------------------------------------------

Martin Arnell, DNB Markets, Research Division - Analyst [9]

--------------------------------------------------------------------------------

Yes. Just a final question on your communication about gaming, the increasing DAU trends that you see. Is it possible for you to quantify roughly the COVID-19 impact in your DAU trends? Is it sort of 20%, 30%, better than it would have been in a normal situation? Or can you give us some flavor on that, please?

--------------------------------------------------------------------------------

Lars Torstensson, Modern Times Group Mtg AB - Executive VP and Head of Communications & IR [10]

--------------------------------------------------------------------------------

Okay. So a question on DAU then and how that has been impacted by the coronavirus pandemic that we are currently experiencing. I mean, Maria, what can we share with Martin here when it comes to DAU?

--------------------------------------------------------------------------------

Maria Redin, Modern Times Group Mtg AB - CFO [11]

--------------------------------------------------------------------------------

No, I think that on the graph you saw some of those key growth drivers, and we did see, I mean, a quite high correlation in the activity uptake with a further close down of different markets in mid-March. So I mean as you can see, we grew 11% from the beginning of the year to the end of the quarter and then 14% to the peak. And the main part of that is coming towards the end of the quarter.

--------------------------------------------------------------------------------

Lars Torstensson, Modern Times Group Mtg AB - Executive VP and Head of Communications & IR [12]

--------------------------------------------------------------------------------

Okay, Martin, are you happy with those answers? Or would you like to follow up?

--------------------------------------------------------------------------------

Martin Arnell, DNB Markets, Research Division - Analyst [13]

--------------------------------------------------------------------------------

No, I might get back later.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

Your next question comes from the line of Tom Singlehurst from Citi.

--------------------------------------------------------------------------------

Thomas A Singlehurst, Citigroup Inc, Research Division - MD & Head of European Media Research [15]

--------------------------------------------------------------------------------

Tom here from Citi. I missed the very beginning of the call, so you may well have talked about this, so I apologize if I'm covering old ground. Obviously, better trends in esport compared both in the 1Q and by implication in the second quarter as well. And I know in the release, you mentioned better trends, in particular, within ESS. Can you just clarify why ESS is less impacted. And can you talk about sort of regional variations? I presume in the Far East, some of the shows are coming back. And then just -- I think you alluded to this in the end, but in terms of base case expectations, are you assuming that events will get back to normal from sort of July? Is that the base case assumption? Or are you waiting? Do you assume that you'll see disruption all the way through to October?

And then the second question, very quickly, on gaming. I think you said it was 4% growth in the first quarter in terms of revenues. I mean in the current environment with COVID-19-related disruption, anything that's growing is very, very impressive. But if that has been the figure that you sort of were delivering in steady state, would that be a number that you would be pleased with? I sort of had in my mind that we -- you should be delivering consistent sort of high single-digit growth. So some commentary on whether, ex COVID, that would have been a good number, would be very much appreciated.

--------------------------------------------------------------------------------

Lars Torstensson, Modern Times Group Mtg AB - Executive VP and Head of Communications & IR [16]

--------------------------------------------------------------------------------

Thanks, Tom, and thanks for those questions. Let's see if we got them right.

First of all, just to be clear, I mean we have provided guidance for the first half, and we have -- we are not providing guidance for the second half, just so that is clear.

But then back to your question, Tom, ESS growth. The reason why ESS continues to grow versus the Own & Operated and if there are anything we could share there when it comes to reasons for that development. And then gaming and gaming growth, what do we expect going into the second quarter? I guess that -- should we start with you, Jørgen, and then Maria can build on that?

--------------------------------------------------------------------------------

Jørgen Madsen Lindemann, Modern Times Group Mtg AB - President & CEO [17]

--------------------------------------------------------------------------------

Yes. But obviously, when you look at the ESS part there, as we also mentioned on the call in the beginning, we have managed to conclude quite interesting deals with Supercell, Tencent and so forth. So that has -- and also activation on titles like Starcraft and Warcraft. So we have managed to make a range of partnerships in -- or are able to also then ESS. And we also -- which you can see as well, we also -- as we communicate for some time ago as well, that those partnerships should also be with some strategic partners, which exactly can argue that Tencent and Supercell would be. So we are building big global franchises with them, and that has helped our Q1 results. And also, we see more ESS coming into Q2 as well. And as you know, the business model there is, to a large extent, where we are creating the events, we are building the events for the publisher, and then we are getting a fee for that. And sometimes also, you do actually have partnerships as well where we sell advertising on media space and so forth, which would be the case with PUBG. So we are very happy about that development as we always have said that we would like that to continue, the ESS, but with the right partners. So that's one reason.

And then on the gaming part, and whether we would have been happy. I think in all times, when you look at the InnoGames and look at also, as we discussed in Q4, that also we see more and more mobile engagement with the products, then we are happy, but there is no doubt that the COVID impact is very clear that in the middle of March, it is when you see countries are closing down, where we see -- where actually we see a higher engagement. Again, on the positive side, let's hope that will continue, but we see more people who used to be with the game come back in. So they are familiar with what we have right now when it comes to Forge of Empires and we have a lot of new content there. So of course, we do hope that it will be long-lasting, that goes without saying.

--------------------------------------------------------------------------------

Lars Torstensson, Modern Times Group Mtg AB - Executive VP and Head of Communications & IR [18]

--------------------------------------------------------------------------------

Tom, would you like to follow up on that?

--------------------------------------------------------------------------------

Thomas A Singlehurst, Citigroup Inc, Research Division - MD & Head of European Media Research [19]

--------------------------------------------------------------------------------

No, no, that's fine. That's fine. That's very clear for now.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

(technical difficulty)

--------------------------------------------------------------------------------

Unidentified Analyst, [21]

--------------------------------------------------------------------------------

Yes. Can you hear me?

--------------------------------------------------------------------------------

Lars Torstensson, Modern Times Group Mtg AB - Executive VP and Head of Communications & IR [22]

--------------------------------------------------------------------------------

Yes, we can hear you Erik. So fire away.

--------------------------------------------------------------------------------

Unidentified Analyst, [23]

--------------------------------------------------------------------------------

Yes, great. Great. So first question on the Twitch. Having signed this, which areas do you now see the most potentially in signing additional media rights deals?

--------------------------------------------------------------------------------

Lars Torstensson, Modern Times Group Mtg AB - Executive VP and Head of Communications & IR [24]

--------------------------------------------------------------------------------

Thanks for the question, Erik. It's around Twitch and what other on top of Twitch that we could potentially see when it comes to media deals. Jørgen that's...

--------------------------------------------------------------------------------

Jørgen Madsen Lindemann, Modern Times Group Mtg AB - President & CEO [25]

--------------------------------------------------------------------------------

That is actually broad, to be fair. That is -- we have a range of products and also, as you can see, with the golf now, we have added a range of new partners on board like Sky Sports and others. So it is local deals, it is regional deals, it is deals where we know also that the partner will make an effort in making sure that we promote the product. That is quite important for us as well. So we have a range of ongoing discussions and also a range of [key] stores right now, which, of course, is helping also for media partners, linear or online, to understand the impact and return that this fantastic sport has. Now we have the opportunity to showcase it even more, obviously. And that is good news, for us at least, because many of the sports, as I have said earlier, is paused. That means that we are up there beamed live, and we are live more or less every day now in the second quarter. So that is a good showcase window for us as well. So there's no specific priorities as sort of the market where we had big impact, China, we have partnerships already in place, Huya is buying the content as it is right now. And then we have big partnerships as well in other parts of the world. So that is ongoing. We want partnerships for all our different products.

--------------------------------------------------------------------------------

Lars Torstensson, Modern Times Group Mtg AB - Executive VP and Head of Communications & IR [26]

--------------------------------------------------------------------------------

Again, Erik, would you like to follow up?

--------------------------------------------------------------------------------

Unidentified Analyst, [27]

--------------------------------------------------------------------------------

Yes. Sure. Can you talk a bit about what you're seeing with regards to the COVID-19 impact on sponsorship revenues thus far? And how do you see this impacting H2 revenues in esports? And what are your sponsors saying right now?

--------------------------------------------------------------------------------

Lars Torstensson, Modern Times Group Mtg AB - Executive VP and Head of Communications & IR [28]

--------------------------------------------------------------------------------

Yes. Sponsorship is, of course, something that Jørgen knows all about. So please, Jørgen.

--------------------------------------------------------------------------------

Jørgen Madsen Lindemann, Modern Times Group Mtg AB - President & CEO [29]

--------------------------------------------------------------------------------

Yes. But they are, in all fairness, suffering a bit, if you can use that language. Of course, their business has been impacted by COVID-19 as well. So some sponsors where you have an agreement to promote a product, which they can't even sell in the stores because they have been closed down, big magazines or whatever, obviously, it's a difficult situation for them. So we do see a slimmer pipeline coming from brand partners, and that will go throughout '20, I think, to be fair. So we have -- we see our existing sponsors being, of course, hit by the effects of the COVID-19. And also, obviously, future partner, with whom we discussed opportunities, are also being affected. I think that goes for all media, to be fair. Luckily then, we are live, so we can deliver ratings. Still we can deliver shares. We can deliver audiences. So that's, of course, a good discussion to have and not to ask them to pause everything. So we do hope that we can show that we, as a sport, are extremely relevant, and that is what we're showcasing here now as well, of course. But it will -- you will see an impact on sponsors in rest of '20.

--------------------------------------------------------------------------------

Lars Torstensson, Modern Times Group Mtg AB - Executive VP and Head of Communications & IR [30]

--------------------------------------------------------------------------------

Thank you, Jørgen. Erik, any other questions that you would like to raise?

--------------------------------------------------------------------------------

Unidentified Analyst, [31]

--------------------------------------------------------------------------------

Yes. Sure. A final one, if I may. On Kongregate, you said that you saw an impact on lower ad spend. How -- can you say anything on how big this negative impact is?

--------------------------------------------------------------------------------

Lars Torstensson, Modern Times Group Mtg AB - Executive VP and Head of Communications & IR [32]

--------------------------------------------------------------------------------

So Kongregate and gaming, Maria, could you elaborate on how, specifically, Kongregate was affected by the ongoing pandemic?

--------------------------------------------------------------------------------

Maria Redin, Modern Times Group Mtg AB - CFO [33]

--------------------------------------------------------------------------------

Yes. The Kongregate do have the biggest part of their revenues being in-app purchases and ad revenues being the smaller part. But it's still -- it had a dip in ad-based revenues, and that's why we also felt it was worth mentioning so you understand the difference. But given also the positive performance we saw in InnoGames, it's quite important to highlight that we did see a different impact on our more casual idle side of the games in Kongregate. But the positive sign on Kongregate is that it's seeing improved underlying traction when it comes to the usage level on the idle games, but on the revenue side, it is being lower monetized on the games that has an ad revenue component to it.

--------------------------------------------------------------------------------

Lars Torstensson, Modern Times Group Mtg AB - Executive VP and Head of Communications & IR [34]

--------------------------------------------------------------------------------

Thank you, Maria. And Erik, anything else that you would like to ask?

--------------------------------------------------------------------------------

Unidentified Analyst, [35]

--------------------------------------------------------------------------------

No. That's fine for me.

--------------------------------------------------------------------------------

Lars Torstensson, Modern Times Group Mtg AB - Executive VP and Head of Communications & IR [36]

--------------------------------------------------------------------------------

Thank you very much, Erik.

--------------------------------------------------------------------------------

Operator [37]

--------------------------------------------------------------------------------

Your next question comes from the line of Oscar Erixon from Carnegie.

--------------------------------------------------------------------------------

Oscar Erixon, Carnegie Investment Bank AB, Research Division - Financial Analyst [38]

--------------------------------------------------------------------------------

Two questions from me. First of all, regarding the Twitch deal, a follow-up there. Can you elaborate a bit on the nonexclusivity with Twitch during 2020? Will this mean lower revenue this year than the coming 2 years? And could you also explain, in more detail, the difference from Twitch actually buying the content, which I guess would be the more regular approach?

--------------------------------------------------------------------------------

Jørgen Madsen Lindemann, Modern Times Group Mtg AB - President & CEO [39]

--------------------------------------------------------------------------------

Yes. You will see a ramp-up of revenue coming from Twitch in '21, '22 and smaller than in '20 due to the exclusivity exactly. When it comes to the partnership, it is a partnership where you get the opportunity to use eventually the Twitch product for our partners, our sponsors in a different way, where you can activate, you can create products, which today is eventually not even in the market, which we are discussing right now, activation of the players -- sorry, of the viewers and so forth. So the commercial part is very interesting, something that the commercial team has been working a lot with Twitch on, to be fair. We do see the target groups. We understand that it is interesting for media buyers and agencies and partners -- brand partners. We have seen that now. So now it is to make unique products for those partners as well to be competitive towards the other sports as well. What is that we can do for partners which cannot be done on other platforms where the partnership is not as strategic as it is with Twitch right now. So there's, as I mentioned, a exclusivity as well since we will be building something together, which both of us would like to capitalize on and, hopefully, continue, after the years that we have signed up with them now.

And it still allows us as well to go out and make relevant local deals and make relevant deals with linear takers as well and local-speaking countries as well. So it is a very important deal, I think, for both parties spent quite some time on understanding how we could extend our partnership. But it is, to a large extent, on the commercial side, where you should see changes in the next couple of years to make more interesting product for partners. That is as specific as I can be right now.

--------------------------------------------------------------------------------

Lars Torstensson, Modern Times Group Mtg AB - Executive VP and Head of Communications & IR [40]

--------------------------------------------------------------------------------

Thank you, Jørgen. Oscar, would you like to follow up there?

--------------------------------------------------------------------------------

Oscar Erixon, Carnegie Investment Bank AB, Research Division - Financial Analyst [41]

--------------------------------------------------------------------------------

Yes, a follow-up on that question as well. So does this mean that you will be able to perhaps replace lower media rights revenue with that higher sponsorship revenue? And is this what you were looking for? Or if this -- Twitch was one thing to go for? And how does this also compare to other discussions you've had with, for example, YouTube and Mixer?

--------------------------------------------------------------------------------

Jørgen Madsen Lindemann, Modern Times Group Mtg AB - President & CEO [42]

--------------------------------------------------------------------------------

Yes. It's definitely not about replacing, on the contrary, hopefully. It is about adding. So the whole idea is, of course, that we drive those 2 very important revenue streams for us, the media part for the content and also the brand partnership. So I don't want to replace anything. That is quite important. And the deal is a substantial deal for both parties. So there is definitely a commitment to make this work. So it doesn't prevent us from -- as I said, from doing deals with local partners, regional partners as well. And when we had discussions with other global platforms, in all fairness, Twitch came out with a very strong commercial ideas, which we immediately thought resonated well to what we are trying to achieve. And we have a long-standing relationship with them as well. We have been with them for, whatever, 11 years now. So it is something which has built up. So just instead of just doing a normal distribution deal, we really worked hard, or the team did, to make a commercial component on top of that, which was interesting, not only for the viewers, but also for brand partners. So it should be 1 plus 1 equals 3 and not that we are substituting, whatever, media rights with brand partners, whatever. That is not the case. We want more reach, even bigger reach for the sport, and that, of course, would benefit the commercial part as well.

--------------------------------------------------------------------------------

Lars Torstensson, Modern Times Group Mtg AB - Executive VP and Head of Communications & IR [43]

--------------------------------------------------------------------------------

Thank you, Jørgen. Oscar, any follow-up on that one?

--------------------------------------------------------------------------------

Oscar Erixon, Carnegie Investment Bank AB, Research Division - Financial Analyst [44]

--------------------------------------------------------------------------------

Yes. That's very helpful. A final question from me on InnoGames. Could you perhaps discuss a bit more their upcoming release schedule for Q2 and the second half of this year?

--------------------------------------------------------------------------------

Lars Torstensson, Modern Times Group Mtg AB - Executive VP and Head of Communications & IR [45]

--------------------------------------------------------------------------------

So we talk about the release schedule when it comes to InnoGames, but also talk about Kongregate, in that case, I think, Maria, as our gaming expert?

--------------------------------------------------------------------------------

Maria Redin, Modern Times Group Mtg AB - CFO [46]

--------------------------------------------------------------------------------

Yes. If you look to the near term, what we have in InnoGames, we have 2 games going into retention test now in Q2, which we're very excited about, and then you have 2 gains further in development that we're going to retention test in the second half of the year. And then in Kongregate, as Jørgen said, we have been able to accelerate the development on the finalization of 3 games, which we're actually going live now in Q2, and then the rest games would come in the second half in Kongregate. So it is an interesting pipeline that we're having in the quarter to come.

--------------------------------------------------------------------------------

Lars Torstensson, Modern Times Group Mtg AB - Executive VP and Head of Communications & IR [47]

--------------------------------------------------------------------------------

Thank you, Maria. Oscar, any follow-up on that?

--------------------------------------------------------------------------------

Oscar Erixon, Carnegie Investment Bank AB, Research Division - Financial Analyst [48]

--------------------------------------------------------------------------------

That's it for me.

--------------------------------------------------------------------------------

Lars Torstensson, Modern Times Group Mtg AB - Executive VP and Head of Communications & IR [49]

--------------------------------------------------------------------------------

Thank you, Oscar. I appreciate the questions.

--------------------------------------------------------------------------------

Operator [50]

--------------------------------------------------------------------------------

Yes, we do have one question. It comes from the line of Stefan Billing from Kepler.

--------------------------------------------------------------------------------

Stefan Billing, Kepler Cheuvreux, Research Division - Research Analyst [51]

--------------------------------------------------------------------------------

I have a few questions. One is, if you could please share some early indications related to Nielsen's audience measurement and how your new ESL tournament structure on CS:GO and other games have been received by media buyers? That's the first one.

Secondly, I was wondering if you could give some more granularity on your ongoing strategic review on gaming.

Third one is how you see the potential for the so far failed Huya deal to materialize at some point? That's all.

--------------------------------------------------------------------------------

Lars Torstensson, Modern Times Group Mtg AB - Executive VP and Head of Communications & IR [52]

--------------------------------------------------------------------------------

Thank you, Stefan. That was a good set of questions there. We have Nielsen. Any early indications on measurement, strategic review progress? And then the last one, potential for us working with Huya. I think Jørgen, that's your end.

--------------------------------------------------------------------------------

Jørgen Madsen Lindemann, Modern Times Group Mtg AB - President & CEO [53]

--------------------------------------------------------------------------------

Yes. Yes, we do have -- we are measuring all the tournaments. So we do have initial indication. And obviously, they look very positive, just to be clear. And they look positive, of course, because we also have seen very strong viewing on our products from most of them being moved online as we discussed as well. So it is very positive, and it gives us, of course, a build-up to a, hopefully, very strong set of Nielsen's figures after the first half so we can make a deep analysis and make sure that we can articulate our propositions and relevance to brand partners and media partners and media buyers.

And you had a question on the media buyers as well and they are slowly coming on board, and that goes both the online path and also, of course, the linear path. As I said in the call as well, we have made deals now in Russia. We made deals now in Norway. We made deals with Telia. We made deals with NENT, we made deals with TV2 Denmark, ProSieben and so forth. Mediaset's -- the golf has been taken by Sky Sports and so forth. So we have touch points now with more and more publishers -- sorry, more and more media partners. That is, of course, very important because then we also can offer them more and more of our products. So that is going in the right direction, but important to understand as well as we have said, it is reach over revenue. So it's more important for us that we get a good reach so we can analyze the outcome of the property and then long term make sure that we get a good deal for both parties.

When it comes to the strategic review, we gave an update in March, and that is ongoing. So not more to add there. I think the Board was quite clear in their assessment that we believe that -- they believe as well like management that to have true, distinct equity storage will serve both companies or both verticals very well, just like we managed to do with NENT. So that is something that we are exploring when time is right, but it is an ongoing process that we have right now.

Huya, we are having commercial relationship with Huya. They are buying our content. And we are very happy about that. And obviously, there is a dialogue between the 2 companies, and they see very strong traction on the content that we are right now producing and distributing in China. So that is a positive.

Now given everything which is happening in the world right now, it's not that we can fly out to them tomorrow and discuss, but it is a strategic, important part for us to continue to find the relevant partners in different parts of the world and China being one of them. So that is something we will continue to pursue.

--------------------------------------------------------------------------------

Lars Torstensson, Modern Times Group Mtg AB - Executive VP and Head of Communications & IR [54]

--------------------------------------------------------------------------------

Thank you, Jørgen. Stefan, it might be that you would like to follow-up there?

--------------------------------------------------------------------------------

Stefan Billing, Kepler Cheuvreux, Research Division - Research Analyst [55]

--------------------------------------------------------------------------------

Well, maybe if you could outline perhaps other markets or regions than China that could be subject to similar potential deals? And also, I came to think about one more question that's relating to your guidance increase on esports. Since this is related to Esport Services, how should one think about the impact on profitability, please?

--------------------------------------------------------------------------------

Lars Torstensson, Modern Times Group Mtg AB - Executive VP and Head of Communications & IR [56]

--------------------------------------------------------------------------------

Okay. So other markets that could be interesting for media deals above and beyond China. That's really Jørgen. But then when it comes to the second quarter and more ESS coming in and what sort of impact that might mean for the margin for esport, that's more you, Maria. But let's start with you, Jørgen, on...

--------------------------------------------------------------------------------

Jørgen Madsen Lindemann, Modern Times Group Mtg AB - President & CEO [57]

--------------------------------------------------------------------------------

There are extremely interesting markets around the world. There are interesting regions, the whole Southeast Asia part, which you would like to do more. If you go and dwell more into different countries, you have Indonesia, you have Pakistan, India, whatever, which are very big countries, where they also play games and watch esports. So of course, those markets, you're looking at Lat Am, you're looking at the U.S. and so forth. So for us, it is important to find either in local countries or in regions to find partners who can help us accelerate the products. Quite important. So strategic partners who can help us making sure that we become even more relevant with our product. That is the focus and that is globally, in all fairness. Now China was a special case, obviously, because there we were very clear that in order to be successful in China, I think you need a very strong local partner to understand the dynamics in the market, and Huya was, at that time, a very good example of what -- how those partnerships could look like, a JV in the country and investment as well, which they wanted to make in 2 years now. So it is a global phenomenon. It's something we're looking at, not just in, yes, smaller countries, whatever is...

--------------------------------------------------------------------------------

Lars Torstensson, Modern Times Group Mtg AB - Executive VP and Head of Communications & IR [58]

--------------------------------------------------------------------------------

Thank you, Jørgen. Maria, on anything we could share when it comes to ESS and impact on margins?

--------------------------------------------------------------------------------

Maria Redin, Modern Times Group Mtg AB - CFO [59]

--------------------------------------------------------------------------------

Yes. No, I think what we have discussed before on the ESS part, I mean the first and the most important part is, of course, is the strategic partnership that we have with the different publishers that ESS comes with a margin contribution, which is, of course, positive to GM 1 and also then brings a positive contribution to the bottom line. So that should improve then the output for the second quarter as well as we come to the bottom line possibility, which we, of course, are very happy about.

--------------------------------------------------------------------------------

Lars Torstensson, Modern Times Group Mtg AB - Executive VP and Head of Communications & IR [60]

--------------------------------------------------------------------------------

Thank you, Maria. Very clear. And Stefan, would you like to follow up on that?

--------------------------------------------------------------------------------

Stefan Billing, Kepler Cheuvreux, Research Division - Research Analyst [61]

--------------------------------------------------------------------------------

No.

--------------------------------------------------------------------------------

Lars Torstensson, Modern Times Group Mtg AB - Executive VP and Head of Communications & IR [62]

--------------------------------------------------------------------------------

Operator, do we have any more questions?

--------------------------------------------------------------------------------

Operator [63]

--------------------------------------------------------------------------------

There are no further questions at this time. Please continue.

--------------------------------------------------------------------------------

Lars Torstensson, Modern Times Group Mtg AB - Executive VP and Head of Communications & IR [64]

--------------------------------------------------------------------------------

Okay. Thank you very much. That concludes the presentation for MTG's Q1 2020 interim report. We look forward to staying in touch until we release the next quarterly report. With that said, Q2 2020, mark your diaries now, will be presented the 23rd of July.

Also, a reminder that our Capital Markets Day is now the 9th of October in New York City. So that's also equally important to notice.

Have a great day. Stay healthy, and continue to wash your hands. Take care. Bye-bye.