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Edited Transcript of MTGb.ST earnings conference call or presentation 4-Nov-20 2:00pm GMT

·41 min read

Q3 2020 Modern Times Group MTG AB Earnings Call Stockholm Nov 4, 2020 (Thomson StreetEvents) -- Edited Transcript of Modern Times Group MTG AB earnings conference call or presentation Wednesday, November 4, 2020 at 2:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Lars Torstensson Modern Times Group Mtg AB - CFO, Executive VP and Head of Communications & IR * Maria Redin Modern Times Group Mtg AB - President & CEO * Oliver Carrà ================================================================================ Conference Call Participants ================================================================================ * Erik Lindholm-Rojestal Nordea Markets, Research Division - Analyst * Erik Moberg ABG Sundal Collier Holding ASA, Research Division - Research Analyst * Fredrik Olsson Handelsbanken Capital Markets AB, Research Division - Analyst * Martin Arnell DNB Markets, Research Division - Analyst * Oscar Erixon Carnegie Investment Bank AB, Research Division - Financial Analyst * Thomas A Singlehurst Citigroup Inc., Research Division - MD & Head of European Media Research ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by, and welcome to the Modern Times Group Q3 2020 Results Conference Call. (Operator Instructions) Also I must advised that the call is being recorded today, Wednesday, the 4th of November 2020. And without any further delay, I would now like to hand over the call to your first speaker today, Mr. Oliver Carrà. Thank you. Please go ahead. -------------------------------------------------------------------------------- Oliver Carrà, [2] -------------------------------------------------------------------------------- Thank you, operator, and good afternoon, everyone, and welcome to MTG's interim report presentation for the third quarter of 2020. As stated, my name is Oliver Carrà, and I'm responsible for Media Relations at MTG, and I'll be moderating today's call and later on our Q&A on the financial results. MTG's President and CEO, Maria Redin; and CFO, Lars Torstensson, are with us on today's call to present the quarter and take your questions. As usual, we'll start with the presentation followed by the Q&A. Please keep in mind, as stated that the only dial-in participants can ask questions. That concludes the introduction. Over to you, Maria. -------------------------------------------------------------------------------- Maria Redin, Modern Times Group Mtg AB - President & CEO [3] -------------------------------------------------------------------------------- Thank you, Oliver, and welcome to everyone joining our conference call. I'm pleased to present a strong set of numbers in my first quarter as the new President and CEO of MTG. I look forward to taking your questions later. But first, let's dive into the presentation. First quarter saw a strong results and record high profits from the gaming vertical and our group. Our net sales in the quarter amounted to SEK 912 million, and an adjusted EBITDA of SEK 196 million, with a record adjusted EBITDA margin of 22%. InnoGames continue to impress with a strong performance, driven primarily by Forge of Empires and saw a strong growth in (inaudible) mobile and brought the sales in the quarter. Kongregate, on the other hand, did not deliver growth top line as we would like to see, this largely due to the discontinuation of 2 publisher title last year. Though we're very excited to have seen them launch Teenage Mutant Ninja Turtles: Mutant Madness game successfully in September. In September, we also announced a combination of ESL and DreamHack to create a combined entity, ESL Gaming. While we continue to operate both brands, we believe that this is an important step to take our esports vertical to the next level. We also continue to successfully seal significant media rights deals in the quarter, further expanding our reach with strong partners in important markets such as Brazil and China, and we continue to provide relevant entertainment to the esport community online despite the extraordinary circumstances from the pandemic affecting live audience events. Now let me elaborate on our esport vertical performance in a little bit more detail. To mitigate the risk and to give the best chances for a massive profit to host studio events with the team present, we decided to push several events from Q3 into Q4 and early 2021. Although the intention of reduced activity meant lower revenues in the quarter, we substantially offset this by tightening the cost structure. O&O in the quarter declined 35%, and we continue to see decline in sponsorship, but the new media rights deal signed early in the year drove growth in media rights and changed also the revenue mix in the quarter. ESL successfully hosted 2 multi-property events as online production, ESL One Cologne and ESL One Thailand. ESL One Cologne was moved to close studio environment and saw teams compete across the world in 4 regional tournaments. The events were successful and set new standards in terms of production and broadcast quality. And ECL One was completed also in an online format across 2 regions, the Americas and Asia. DreamHack and DreamHack Sport Games held no Master events in the quarter, but arranged a series of small challenge events for CS:GO, and they also gained (inaudible) in the latter part of the quarter from a strong lineup of ESS events. Fan engagement has successfully been maintained in the quarter with our watch significantly increasing for both our Master properties. Further, in October, ESL Pro League reported new viewership records across all the metrics, including a new all time high of more than 1 million peak concurrent viewers, making it the most watched online match of CS:GO in history. We see mobile esports as a key growth area going forward. In Q3, ESL Gaming announced the return of ESL Mobile open and extension of the format to include all the countries from MENA region to compete alongside Europe. The 2019 competition attracted more than 500,000 participants in total, a number that we hope to see be beaten by the new event. Also in the U.S., we had our ESL U.S. Mobile open running its season 6 with a final schedule now in November. ESLs declined by in total 57% in the quarter, largely as a result of partner either canceling, postponing or downscaling events and activations. With some partner with key stakeholders, such as PUBG Mobile, Fortnite, Rocket League, Clash of Clans and the Nordic League of Legends. We continue to secure several new media partners such as DouYu and Huya and Globo, Omelete, extending our reach for our (inaudible) content in more languages and see more markets worldwide. Halfway through Q4, we've seen strong execution of several events. We have the ESL Pro League and IAM New York, both successfully held in October. ESL One Germany finished now in November. And we now look forward to IAM Beijing, and IAM global challenge running off a very busy quarter. While we look forward to being able to hold live audience events again, we're proud of how our portfolio companies have adjusted to the new circumstances. It's fair to say there is still a lot of potential for improvement in how we produce and distribute our esport content when produced online, but we are actively innovating every day using the latest technology to create best possible digital remote experiences for our fans, and the work we've put in now will also benefit the way we produce and distribute digital esports content also when the pandemic is long gone. Last but not least, we also wanted to briefly touch upon the combination of ESL and DreamHack, which was announced in late September and is expected to be finalized in Q4. The new ESL Gaming entity brings the best people globally in esports together and could be more successful in accelerating products and events innovation, more efficient in operation and has the potential to further stand out in offering the widest product portfolio to its media partners, brand sponsors and game publishers. The combination is also important step to cement our leading position in esports and gaming lifestyle and an important milestone in our ownership in both brands. It's important to underline that we will continue to operate and develop both brands, but a combined entity is adjusted for scalability, while also creating new opportunities for synergies. So we then move over to our gaming vertical. The third quarter was particularly strong for our gaming vertical, where InnoGames performance stood out, mainly driven by Forge of Empires. While Kongregate had underlying growth, its results was naturally still heavily affected by the loss of the publishing deal with Hyper Hippo for AdCom and AdCap. While we have a study in the move to mobile for InnoGames, we've been happy to see a steady growth in the mobile platform. This quarter, we can also see that browser stand for a significant portion of growth, adding 25%. And InnoGames' most experienced title, Tribal Wars, made its return to the top 3 game charts, and this is a display of the company's talent to produce longevity in its successful titles. Turning to the gaming KPIs. We recorded just another quarter of high growth in our ARPDAU, which grew by 23% versus last year and also to continue this growth trajectory on a sequential basis. This is a testament to the popularity of our top games and shows the scalability and predictability of our core games assets. It's important to note that while overall MAU and DAU declined year-over-year, this was mainly driven by the loss of these 2 third-party titles in Kongregate. On the other hand, InnoGames grew its daily active users in the quarter while the monthly active declined somewhat and in line with our anticipation. The Q3 results we present today is built on the foundation of strong gains, and we can see the clear benefit of the increased user acquisition spend in Q2. Our play base today more active, more engaged and spend more on the games than before the pandemic impact. This gives us and the portfolio company that we work with the confidence to move ahead. If we then look at new games pipeline development, that is also progressing according to plan. InnoGames has 4 new games in development, 2 of which we have already shown very strong results in retention test, and we're optimistic about launching these -- to release games in H1 2021. We further anticipate this will drive both increased revenues but also an increase in marketing spend. The first title that's scheduled for launch is in Q1, and that is an exciting new IP in the City Builder segment. With that said, then I hand over to you, Lars, to walk you through the financials. -------------------------------------------------------------------------------- Lars Torstensson, Modern Times Group Mtg AB - CFO, Executive VP and Head of Communications & IR [4] -------------------------------------------------------------------------------- Thanks, Maria. As it's already been touched upon, we delivered a solid set of results and record profit in our gaming vertical in the quarter. Additionally, our esport vertical demonstrated good cost control and a more favorable revenue mix outperforming earlier provided guidance. With that said, let me go through the P&L in some detail. Since the esport vertical had a light event schedule with a few Master properties, the underlying net sales was down by 9%. However, the gaming vertical grew underlying net sales by a solid 12%, driven by high engagement among the gamers and successful in games events throughout the quarter. Adjusted EBITDA increased by more than 5x year-over-year, with improved performance in both verticals, combined with lower operational and central costs. This was partly thanks to higher sales and the more normalized marketing levels at InnoGames and partly due to the esport verticals, adjusted EBITDA improved significantly versus last year, thanks to more efficient operations on the back of online events. Looking further into the reduced losses in esports, we delivered slightly better on our savings target with approximately SEK 200 million in lower cost in the quarter, primarily through additional COG savings as we fine-tune the online format for our tournaments. We continue to improve our understanding for what good looks like and gazing into the future, we have a lot of learnings to bring with us into a more normalized environment. I would also like to reemphasize that we do expect the COG savings to continue as long as we run events online or in studio format. Additionally, through the merger of ESL and DreamHack, we will not just be creating the largest esport asset out there, but also the most efficient. Short-term fixed cost savings are conservatively calculated at approximately SEK 50 million for 2021. But we believe that there are more long-term efficiencies to aim for at the 2 organizations are further integrated and we return to live audience events. The financial performance in the quarter was further positively impacted by the growth of media rights, providing a more favorable revenue mix. The EBITDA adjustments in the quarter amounted to negative SEK 72 million to be compared to minus SEK 36 million last year. And some of you might have noticed that the cost for management incentive program again was elevated. Yet, again, this is following the very strong results we see in the gaming vertical in general and in InnoGames, in particular, strong engagement in the form of higher ARPDAU levels has led to new records and as a result, higher payments for incentive programs in the gaming vertical. Depreciation and amortization were in line with last year, reflecting higher depreciations within the gaming segment as we both launched and acquired new games, which we are depreciating on the backup, partly offset by lower depreciations in esports and the amortization on purchase price allocations, which was slightly down in the quarter. Net financial items were adverse in the quarter, predominantly driven by exchange rate changes and mostly unrealized. One should remember that we have our cash balance held in euros. And given the recent and slight strengthening of the Swedish krona, we do see a negative impact this quarter. Finally, the group's tax was minus SEK 59 million, predominantly reflecting the increased results in the gaming vertical and InnoGames. So let's move on to the cash flow statement. On the back of the strong financial performance, the group reported an improved net cash flow from operations of SEK 135 million, driven by InnoGames, but also thanks to maintain good cost control in the esport vertical. The working capital change for SEK 2 million in the third quarter was predominantly driven by the gaming vertical, which had a high outflow of payables. Additionally, payment patterns towards major platforms providers such as Apple and Google had a negative impact on working capital change. CapEx was lower in the quarter compared to last year, which was mainly driven by Kongregate's acquisition of 3 yet to be revealed IPs. In the quarter, Kongregate successfully launched Teenage Mutant Ninja Turtles. Hence, there are now 5 remaining games in development within both InnoGames and Kongregate. And we did also invest in studio buildup and B2C platforms development at ESL. All in all, the group did have a total net positive change in cash in the quarter, not a lot, but still positive. As a result, the group remains well funded with a net cash position of SEK 1.6 billion as of the third quarter 2020. Gaming continues to be a cash flow contributing entity and we are working hard with esport vertical to optimize the current cost structure, especially in the light of ESL and DreamHack merger to take strides towards a positive adjusted EBITDA contribution from the vertical. Let's move on to the updated and upgraded financial guidance. As we have concluded, the operational development has been stronger than we expected when we provided our early guidance for the second half of 2020. As a result, we have upgraded our new outlook to reflect that improvement. The important changes are the following: revenue in the esport vertical is expected to decline by approximately 27% to 32%, and we previously assumed minus 30% to minus 40% in the second half of 2020 compared to the second half of 2019. ESL and DreamHack will continue to reduce both cost of goods and services sold and fixed costs. These savings will be at least SEK 325 million, which is no change from our earlier guidance. Group adjusted EBITDA for the second half 2020 is expected to amount to between SEK 375 million and SEK 400 million. And that should be compared to our earlier guidance of SEK 250 million to SEK 300 million. And this is on the back of continued strong user engagement and successful in-game events in the gaming vertical. That concludes my financial review, and any questions you might have, I would be happy to answer as part of the Q&A. Back to you, Maria. -------------------------------------------------------------------------------- Maria Redin, Modern Times Group Mtg AB - President & CEO [5] -------------------------------------------------------------------------------- Thank you, Lars. To summarize on the third quarter, we're proud to be able to present the report with another record set result for the group and for our gaming vertical, one that is on the result of a very strong underlying momentum development build over time and a team effort. We're seeing growth not only on the mobile platform, but also on the browser. And our new game development pipeline is progressing according to plan, and we plan the launch of 2 new promising titles in the first half of 2021, of which, the first will be already in Q1. Our esports vertical has proven that we can produce and distribute word-class digital-only esports content that is lucrative of thousand viewers to consume as (inaudible) partner to invest in, and we are successfully able to continue to sell media rights to our products. We consciously rescheduled several Master property in Q4, which is, therefore, a very packed and busy quarter. We pushed our vertical strategy to further convert our 2 strong portfolio companies, combining them into 1 entity with 2 strong brands. All the while, we have held successful digital Master property events and continuously innovate and improve the way that we produce and distribute digital-only esports, ensuring that we keep the show live and our audience is engaged. We have completed our strategic review process with MTG intending to retain and further develop the value of both the esports and gaming verticals. We aim to do this both organically and through acquisitions. We will revisit the idea of splitting the company into 2 only after we creating the step value for both verticals. The esports events will be held digitally or online for the remainder of 2020, and what 2021 looks for remains to be seen. While we want to reintroduce live events again, we're confident that the show can go on regardless. The record-setting gaming vertical performance and the continued resilience of our esports vertical has allowed us to upgrade our guidance for the second half 2020 to reflect the stronger-than-anticipated performance from both verticals. Our established games continue to perform very well, driving engagement within our play base, and our new games pipeline is looking stronger than ever. I look forward to update you on the progress on what we will see will be a very intense fourth quarter. That concludes our formal presentation of our Q3 interim report. Over to you, Oliver. -------------------------------------------------------------------------------- Oliver Carrà, [6] -------------------------------------------------------------------------------- Thank you, Maria. We are now ready to take any questions that you might have on the interim report or the conference call presentation. Operator, can we please have the first question? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Our first question is from the line of Martin Arnell from DNB Markets. -------------------------------------------------------------------------------- Martin Arnell, DNB Markets, Research Division - Analyst [2] -------------------------------------------------------------------------------- So my first question is on esports. And what was the main reason for the raised outlook there for the second half? -------------------------------------------------------------------------------- Oliver Carrà, [3] -------------------------------------------------------------------------------- Thank you, Martin. We have a question from Martin at DNB on the main reasons for the raised expectation in the market for esports. -------------------------------------------------------------------------------- Maria Redin, Modern Times Group Mtg AB - President & CEO [4] -------------------------------------------------------------------------------- Yes. No. I think, Martin, by the way, the initial guidance was between 30% and 40% decline. And now we tightened and lowered it a little bit. So we're now seeing 27% to 32%. And it is that we are seeing -- and this is strong underlying revenue momentum that what we initially saw as we closed Q2. So we're very happy about that. But the underlying trend still remains when you see the brand partnership is declining, but we see a very strong media trend, both when it comes to reach, getting many more media partners on board, but also value. -------------------------------------------------------------------------------- Lars Torstensson, Modern Times Group Mtg AB - CFO, Executive VP and Head of Communications & IR [5] -------------------------------------------------------------------------------- And just building on that, Martin, as well, we -- as we mentioned in our presentation, we are getting a better and better understanding of running online and studio events as well, meaning that we can also packetize that product in a better way. That means that the entertainment that we are now providing is improving, and that is also reflected in guidance. -------------------------------------------------------------------------------- Martin Arnell, DNB Markets, Research Division - Analyst [6] -------------------------------------------------------------------------------- Okay. Great. And is -- so I guess it's a lot about you adopting to online in this problematic environment. That's fair to assume, right? -------------------------------------------------------------------------------- Maria Redin, Modern Times Group Mtg AB - President & CEO [7] -------------------------------------------------------------------------------- Yes. But it's a combination of that and also getting more clarity. I think that every day, we get embedded to large points. And also, we are getting better visibility, we can also have a better communication with our partners. So it's a combination of several things. But I think that where we stand today is a much stronger position, even though it's turbulent world around us compared to the 3 and 6 months ago. -------------------------------------------------------------------------------- Martin Arnell, DNB Markets, Research Division - Analyst [8] -------------------------------------------------------------------------------- Yes. And if we look into 2021 and given where we are now with the pandemic and, I guess, it's fair to assume that you will not be able to have physical events early next year? Or I mean it's -- how do you view the 2021 outlook, given what you know today? -------------------------------------------------------------------------------- Maria Redin, Modern Times Group Mtg AB - President & CEO [9] -------------------------------------------------------------------------------- I think based on what we know today, it's too early to assume anything. So I think that we are planning parallel worlds. If you may have seen, we have already announced the ESL Pro Tour Counter-Strike schedule. So you have the date set for next year. We would like to be able to hold live events on back of those events, but the fact is that none of us know. So we need to plan accordingly, which is the same thing that we've actually done now for the last 6 months. And I think that we are getting better and better also on having this parallel world where we're actually living in uncertainty when we can start to introduce both studio events at the first instance and then eventually live events. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- (Operator Instructions) So our next question is from the line of Oscar Erixon. -------------------------------------------------------------------------------- Oscar Erixon, Carnegie Investment Bank AB, Research Division - Financial Analyst [11] -------------------------------------------------------------------------------- Oscar here from Carnegie. A few questions from me. Starting in the gaming segment, on the margin side, I mean, fantastic margin now in Q3. What is -- what are the dynamics behind this very strong margin? I suspect much lower marketing. Also what is reasonable to expect now in Q4 and also 2021, given the new game launches that is expected next year? -------------------------------------------------------------------------------- Oliver Carrà, [12] -------------------------------------------------------------------------------- Thank you, Oscar of Carnegie. We had a question on the gaming side. What has been the dynamics behind the margin? And what our expectations are for the coming quarter and longer down the road in 2021? I think this is a question for Maria to answer. -------------------------------------------------------------------------------- Maria Redin, Modern Times Group Mtg AB - President & CEO [13] -------------------------------------------------------------------------------- Yes. No, it was an exceptionally strong margin that we saw in the quarter, which is we are, of course, extremely happy about, but we don't believe that, that is a sustainable run rate margin going forward. The dynamics was a twofold. I mean underlying, we -- as you recall, we had a very high user engagement in Q2 and had a very strong both uplift of new customers but also reengagement of all customers. We were anticipated that to normalize in Q3, which we have seen, but we've still seen it normalize at a much higher engagement levels than what we've seen pre the COVID-19 outbreak. And that is something that we've been enjoying throughout the quarter and that we did not anticipate in full before the quarter started. At the same time, we are also compared -- I mean we invested quite a lot in marketing in Q2. We reaped the benefit of that in Q3, and you should expect the benefit to continue also going forward, given the longevity of the cohorts within InnoGames. So of course, that also positively benefited the quarter, whilst the underlying marketing effect was more normalized year-over-year. And when I say that, it's important to remember also that we last year actually did invest quite a bit of marketing also on the new games that we subsequently went into phasing out mode of. So on back of our core games, we still continue to invest, but the total marketing is actually a year down year-over-year. And then your second question, sorry. Next year, yes, you should expect marketing to go up. We're very happy to see the games pipeline that we have. As I said, we had 2 games in retention test already with very strong results, and we have another 2 games going into retention test now in Q4. So we're confident that we're going to have 2 new games releases in next year H1. And that will, of course, come on back of increased marketing, but also then sales. -------------------------------------------------------------------------------- Lars Torstensson, Modern Times Group Mtg AB - CFO, Executive VP and Head of Communications & IR [14] -------------------------------------------------------------------------------- And just as a friendly reminder, Oscar, I know you're well aware of this one, but we are expecting these games to land in a good way after being launched. And there is a strong correlation, of course, between higher marketing spend and successful games, just to bring that on board as you think about 2021. -------------------------------------------------------------------------------- Maria Redin, Modern Times Group Mtg AB - President & CEO [15] -------------------------------------------------------------------------------- Yes. And to add one more comment as well so we can have it all there. The InnoGames games because there is the 2 InnoGames that we will launch in the first half, I mean, as we have stated, it's not profitable in year 1 when you do the marketing. It's a little bit different when you launch a casual game, but the mid-core game is not profitable until year 2 and back obviously, new game launches and marketing. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- It's from the line of Tom Singlehurst from Citi. -------------------------------------------------------------------------------- Thomas A Singlehurst, Citigroup Inc., Research Division - MD & Head of European Media Research [17] -------------------------------------------------------------------------------- It's Tom here from Citi in London. I was going to ask about esports. I mean, obviously, your attendee revenues, your sort of pure live events revenues are minus 100%. So that's clear. But just to try and make the numbers maybe a little bit clearer for the media part or the media-related revenue. So anything that you generate from other sort of right sales or advertising. I mean can you give us a sense of what the growth is in that revenue line year-on-year? Just so we have a rough idea of the progress you are making in sort of transitioning the -- or sort of developing the sort of the media revenue streams, if that's the right way of putting it. So that was the first question. The second quarter was actually on the sort of marketing spend at games. I suppose reading between the lines, the fact that you didn't carry on the same level of spend on marketing in the third quarter told us that you actually did expect the lockdown effectively temporary that's proven a little bit more permanent. So I suppose -- I just wanted to go back and sort of test that assumption. I mean do you think we are seeing a sort of one-off blip in terms of engagement, okay, it's an extended blip? But do you think, for example, next year, you'll be facing sort of reduced level of engagement, and that's something we need to factor into our thinking? -------------------------------------------------------------------------------- Oliver Carrà, [18] -------------------------------------------------------------------------------- Thank you, Thomas. So first, we have a question from Thomas Singlehurst at Citi on esports, SMB revenues going down, and if we could elaborate somewhat on the transitioning and how the media revenue streams can develop over time? We can start off with that one. And then afterwards, we have a follow-up questions on the marketing going down in the quarter. If we are seeing any -- if this is an isolated blip in engagement or not? -------------------------------------------------------------------------------- Maria Redin, Modern Times Group Mtg AB - President & CEO [19] -------------------------------------------------------------------------------- I'll start with your question on esports. And you're absolutely right on the ticketing and sales, which is down 100%. I mean one of the other big components that we see also in our own and operated is the brand sponsorship sales. And I think that we've been quite clear, both in Q2 and also in this report that we continue to see the decline in brand sponsorship sales. And I think that's a combination of 2 factors. I mean first of all, even though we are driving better sort of viewing numbers and reach on our content than ever before, we cannot do all the activations that we have planned in the fiscal arena and events. We're working on it at a large point, and we are refining and improving our both audience experience but also interaction in this broadcast to also provide the best outlet for our brand sponsors. But there's still a way to walk on that one to get that perfect. And the second part is, of course, I mean, as we were closing many of these negotiations and discussed it with many brand sponsors, the outbreak of corona happened, which meant that you had a long pipeline of potential partners, and that went down quite significantly because the first thing, although some of our partners had to do was to look through their cost base, which, of course, impacted our discussions with them. So we do unfortunately see a negative trend within the brand sponsorship sales. On the positive side, I mean we've seen more interest than ever before about having access to our content, which means that we've been signing many strategic and important media rights deals, giving us more reach when it comes to global international streams, but also local, regional fees and also value. So I think that's the way to look at the combination. You're seeing a growth in media rights revenues that you're seeing a bigger decline in brand sponsorship revenues. -------------------------------------------------------------------------------- Lars Torstensson, Modern Times Group Mtg AB - CFO, Executive VP and Head of Communications & IR [20] -------------------------------------------------------------------------------- And then also on the gaming side, Thomas. I think that when it comes to engagement, we saw a very strong engagement among our players or fans or especially at InnoGames. And to -- the way we look upon is that this is not necessarily correlated to the pandemic. We see it as more related to very successful in-game events that engages with the fans and they can play more. So hence, as a result, as long as we can continue to and one should really emphasize that InnoGames is very good when it comes to creating a longevity within their portfolio of games. We believe that the engagement is going to maintain independency of pandemic or not. So from that perspective, we feel confident that our relationship with the fan is going to be maintained also in a more in a normalized environment, and they're going to continue to enjoy playing our games from that perspective. So I hope that helps. -------------------------------------------------------------------------------- Thomas A Singlehurst, Citigroup Inc., Research Division - MD & Head of European Media Research [21] -------------------------------------------------------------------------------- That does. And one follow-up. I mean, obviously, it's great that you've settled on sort of completing the strategic review and keeping the business as is, it makes sense given just how strong InnoGames is. I suppose the question is, is there any appetite to close out at least some of the minority, given that sort of minority leakage is so significant within InnoGames and it's clearly doing so well? Or is there no mechanism for you to do that? -------------------------------------------------------------------------------- Maria Redin, Modern Times Group Mtg AB - President & CEO [22] -------------------------------------------------------------------------------- Tom, no, there is a clear mechanism to do that. And I think everything comes with opportunity cost. So as we're saying in the strategic review, we're also saying that we would like to now build value in the 2 verticals, organic and inorganic, both esports and gaming. And then it becomes the cost allocation on how do you want to do that in the most shareholder value-accretive ways and that is, of course, what we're looking at and focusing on. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- Our next question is from the line of Erik Moberg from ABG. -------------------------------------------------------------------------------- Erik Moberg, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [24] -------------------------------------------------------------------------------- So the first one, in terms of your strategy within the gaming division, 2 years ago, you had a better position than several of your peers. They all -- they have now surpassed you quite considerably, both in terms of sales and the market cap. Could you perhaps add some more flavor on how you plan to create value within this division and the general pipeline in terms of M&A? -------------------------------------------------------------------------------- Oliver Carrà, [25] -------------------------------------------------------------------------------- Thanks for that question, Erik Moberg of ABG. It was a question on looking back 2 years and whether or not our competitors, our peers have surpassed us? And I think this is a question from Maria to answer. -------------------------------------------------------------------------------- Maria Redin, Modern Times Group Mtg AB - President & CEO [26] -------------------------------------------------------------------------------- Erik, I'd like to look forward. So I think that's what we are focusing on right now to make sure we build value in the gaming vertical from where we stand right now. And I think that the foundation we're having with InnoGames and Kongregate is a very strong foundation. We're coming out of the quarter extremely strong. And yes, we would like to grow both organic and inorganic, which means that the inorganic path is, of course, adding further portfolios next to InnoGames and the mid-core sector and the Kongregate and the cash flow sector. So that's how we want to build value and over time, then give back value to shareholders. -------------------------------------------------------------------------------- Erik Moberg, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [27] -------------------------------------------------------------------------------- Got it. Could you perhaps just give some more flavor in terms of the M&A pipeline, just in general, in terms of competition when you're sort of looking at targets, et cetera? -------------------------------------------------------------------------------- Maria Redin, Modern Times Group Mtg AB - President & CEO [28] -------------------------------------------------------------------------------- No. I mean we would never speculate and comment on any pipeline in detail, but I think it's fair to say that, I mean, gaming has performed very strong post the pandemic, which, of course, means that it's an interesting sector for many players. I think that we have a strong portfolio. We believe we are a great home for entrepreneurs. So that's the path we want to pursue. -------------------------------------------------------------------------------- Erik Moberg, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [29] -------------------------------------------------------------------------------- Got it. Fair enough. And just a question here on Kongregate. Could you perhaps give us a more flavor on how this part of the business ended the quarter to compare it with the start of the quarter? -------------------------------------------------------------------------------- Lars Torstensson, Modern Times Group Mtg AB - CFO, Executive VP and Head of Communications & IR [30] -------------------------------------------------------------------------------- Yes. Erik, it's Lars here. I think, first of all, I mean, I know you know this, but I would like to just repeat it for clarity. Of course, Kongregate was -- had some difficult comps as we -- going into the year, we discontinued to third-party IPs, AdCap and AdCom, which was 2 strong games within the Kongregate portfolio. Then with that taking aside, looking at the performance, I mean at the end of -- or in the middle of September, Kongregate launched Teenage Mutant Ninja Turtles, which was very well received by the market. So looking at how the quarter ended, we came out on a positive tone as well thanks to that launch. And now we are looking to continue to monetizing that title to roll into the fourth quarter. So -- and we -- as you know, we don't provide specific data on Kongregate, but it should be emphasized for that we had a very -- or a very successful launch of this new title Teenage Mutant Ninja Turtle. I hope that helps. -------------------------------------------------------------------------------- Erik Moberg, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [31] -------------------------------------------------------------------------------- Fair enough. And just in terms of -- when is it fair to assume that this side of the business can return to growth year-over-year? -------------------------------------------------------------------------------- Lars Torstensson, Modern Times Group Mtg AB - CFO, Executive VP and Head of Communications & IR [32] -------------------------------------------------------------------------------- No. I mean it's going to be a result of us -- it's going to be easier comps as of beginning of next year as AdCom and AdCap is out of the comparative period, so to speak, and then Kongregate is going to definitely be back into growth. And I think that the management team of Kongregate has done a lot of work also to make the -- under the hood, so to speak, to make the Kongregate a much -- the turnaround has been impressive and that they -- that means that they also are ready to make use of the new titles that are going to be launched next year as well. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- It's from the line again of Oscar Erixon. -------------------------------------------------------------------------------- Oscar Erixon, Carnegie Investment Bank AB, Research Division - Financial Analyst [34] -------------------------------------------------------------------------------- Just a question on M&A to strengthen the equity stories. Would you expect M&A in both segments, i.e., including esports? And what would you say regarding the types of targets and the size of the target, how that might differ between the segments? -------------------------------------------------------------------------------- Maria Redin, Modern Times Group Mtg AB - President & CEO [35] -------------------------------------------------------------------------------- Yes. I think we touched on the gaming type of targets before, and I cannot go so much deeper in that. We are looking to -- trying to do, is it complements our existing assets in the cash and mid-core (inaudible) play mobile. And if you look at the esports, I think given that the market is -- its municipality quite a lot smaller than the gaming, it would probably nurture that the target would also be smaller than if you look at the gaming side, but it's about finding capabilities that would complement our existing capabilities. We have 2 amazing brands on back of ESL and DreamHack, and I think the way we turned around those 2 companies to operate also in this online environment is very strong and very promising. But it also -- when you look at it, there's also things where you could further strengthen our capabilities, and that's what we're looking at. -------------------------------------------------------------------------------- Oscar Erixon, Carnegie Investment Bank AB, Research Division - Financial Analyst [36] -------------------------------------------------------------------------------- Got it. And one more question regarding gaming then. I mean we're one month in now to Q4. Have you so far seen any sort of positive effects on engagement activity and spending from the renewed lockdowns across Europe and the U.S.? Or is it similar pattern to Q3? -------------------------------------------------------------------------------- Lars Torstensson, Modern Times Group Mtg AB - CFO, Executive VP and Head of Communications & IR [37] -------------------------------------------------------------------------------- Oscar, Lars here. And I think that maybe reporting back to the earlier question that we actually -- the engagement is not necessarily related to lockdown or not as we see it. We -- as we also proved in the third quarter even with more open societies, we saw engagement increasing as people were enjoying the content that we provided within the games. So I think that is the trend that we are looking forward to continuing. And then we see if there might be, as I think one of your colleagues referred to as an additional blip following a second wave now coming in. But I think the message from us is clear in the sense that through strong in-game events, we've been able to keep engagement high, independent on the pandemic or not, and we believe that, that's going to continue as well. -------------------------------------------------------------------------------- Operator [38] -------------------------------------------------------------------------------- It's from the line of Erik Lindholm from Nordea. -------------------------------------------------------------------------------- Erik Lindholm-Rojestal, Nordea Markets, Research Division - Analyst [39] -------------------------------------------------------------------------------- So a couple of questions from me. First off, what would you say is driving the strong growth in browser within gaming? And would you expect that this growth can continue if it's sustainable, so to speak? -------------------------------------------------------------------------------- Oliver Carrà, [40] -------------------------------------------------------------------------------- Thank you so much for the question, Erik. What is the driving factor beyond the browser growth? Maria, perhaps, you can answer that. -------------------------------------------------------------------------------- Maria Redin, Modern Times Group Mtg AB - President & CEO [41] -------------------------------------------------------------------------------- No, I think we said in Q2 that we actually saw a quite positive reactivation of all customers finding their way back to our old games such as Tribal Wars and so forth that doesn't actually exist on mobile. And on back of those positive trends, we also increased and start to make marketing again on back of these games, which we have not done for several years. So I think that is what is driving the positive effect of browser. We have seen, to some extent, on some of the more time-consuming games that customers have now churned out as the lockdown goes out and the world a little bit normalize. But on some of the games, such as Tribal Wars, we are seeing continuation on strong engagement levels, which is very positive. That is here to stay or not, time will tell, but I think that it is really great to see the strength and the longevity of the InnoGames title. I mean this is the first title Tribal Wars that they launched and also how good they are in live ops. And that is also promising when you look to the new titles. So then we will see rather how long and how much it will grow in the months to come. -------------------------------------------------------------------------------- Erik Lindholm-Rojestal, Nordea Markets, Research Division - Analyst [42] -------------------------------------------------------------------------------- All right. Could you also give some more color on the KPIs that you're seeing for the early tests of the games that you are launching in InnoGames in 2021? -------------------------------------------------------------------------------- Maria Redin, Modern Times Group Mtg AB - President & CEO [43] -------------------------------------------------------------------------------- Yes. On a high level, I don't want to go into the specifics. But I mean the first 2 tests, I mean, what we do is to look at the retention rates, which is the first part, and then you go in and look at monetization levels. But if you look at the retention, which is, of course, one of the key components, based on the benchmark that we set up and the outcome, it looked very promising and which gives us also comfort that we are on a very good trajection into the ability to launch a successful game. Still to come is monetization, and still to come is actually to see it live. So it's always a final determining outcome. But now we look forward to the first game, it's going to come live in Q1, and that's going to be City Builder, same on back of Forge of Empires and the learnings we have there. -------------------------------------------------------------------------------- Oliver Carrà, [44] -------------------------------------------------------------------------------- Thank you, Maria, thank you, Erik. Okay. Do you have a final question? -------------------------------------------------------------------------------- Erik Lindholm-Rojestal, Nordea Markets, Research Division - Analyst [45] -------------------------------------------------------------------------------- Yes. Just a final question. In terms of M&A, do you feel comfortable going to sort of net debt position as well to carry out M&A? Or if -- are you limited to the net cash that you have currently? Would you use equity, for example? -------------------------------------------------------------------------------- Maria Redin, Modern Times Group Mtg AB - President & CEO [46] -------------------------------------------------------------------------------- I think it goes without saying that you will look at the full range of capital structure means when you assess M&A targets. We do have a strong balance sheet, but I think that will always take us so far. -------------------------------------------------------------------------------- Operator [47] -------------------------------------------------------------------------------- (Operator Instructions) The next question is from the line of Henrik Olsson (sic) [Fredrik Olsson]. -------------------------------------------------------------------------------- Fredrik Olsson, Handelsbanken Capital Markets AB, Research Division - Analyst [48] -------------------------------------------------------------------------------- This is Fredrik Olsson from Handelsbanken. First, congratulations on the strong report, first one as a team together. I have a couple of questions. A lot of them have already been answered. So let me start off with the pipeline within InnoGames and Kongregate. And I'll follow up on Erik's question there regarding browser exposure. Are we set to see browser exposure come down from the new pipeline? Are there more mobile games, so to speak? -------------------------------------------------------------------------------- Maria Redin, Modern Times Group Mtg AB - President & CEO [49] -------------------------------------------------------------------------------- Yes. All our games, we have 4 in InnoGames and then one bigger. Then we have, of course, many casual games coming out eventually in (inaudible) but all on the mobile first. And what we will then explore is to whether -- depending on success rate, if we then convert them into browser or not. But they will always be mobile-first, which would then, over time, of course, change and shift the ratio between mobile versus process sales in our portfolio. -------------------------------------------------------------------------------- Fredrik Olsson, Handelsbanken Capital Markets AB, Research Division - Analyst [50] -------------------------------------------------------------------------------- All right. And then moving on to the esports. Are there any one-off costs related to the DreamHack and ESL combination? -------------------------------------------------------------------------------- Maria Redin, Modern Times Group Mtg AB - President & CEO [51] -------------------------------------------------------------------------------- Yes, there were some one-off costs, but nonsignificant. -------------------------------------------------------------------------------- Fredrik Olsson, Handelsbanken Capital Markets AB, Research Division - Analyst [52] -------------------------------------------------------------------------------- All Right. And just one final general question. What's your view on the esports -- your esports operation, if there are no live events to return in H1 2021? -------------------------------------------------------------------------------- Maria Redin, Modern Times Group Mtg AB - President & CEO [53] -------------------------------------------------------------------------------- The thing we have said is that we are extremely happy on how we have converted our events online in esports. I think the last challenge that we have not yet cracked is how you move festival and the festival experience online. We're hoping to be able to find a great solution for that as well. But I think the engagement and the reach, the entertainment level in our online broadcast is very good. And of course, we're working hard to make that even better, and that's what we continue to work on. And I think we are, of course, hoping to return to a normalized world and having our live events. But even when so, we're probably going to continue with these many learnings that we've done in the online word to have a hybrid environment going forward. So yes, we want to return to physical events and we're hoping to do so sooner than later, but we're very happy with the product that we managed in quite short time to actually build and set in place during a period of a quite big turmoil to be fair. So I think the team has done an amazing job in studying this in a good way. -------------------------------------------------------------------------------- Lars Torstensson, Modern Times Group Mtg AB - CFO, Executive VP and Head of Communications & IR [54] -------------------------------------------------------------------------------- Building on what Maria was saying is that, I mean we're getting better and better every day that passes by when it comes to how we can manage online. We have also evolved our concept when it comes to studio events. And that means that to be honest, I mean, depending on what the future holds, we have a product that is suited either for live environment or for an online studio environment. So from that perspective, we feel quite comfortable. -------------------------------------------------------------------------------- Operator [55] -------------------------------------------------------------------------------- It looks like there are no further questions. Please continue. -------------------------------------------------------------------------------- Oliver Carrà, [56] -------------------------------------------------------------------------------- Thank you, operator. So thank you very much, everyone. That concludes the conference call for MTG's third quarter of 2020. We appreciate you taking the time to join today's call, and we look forward to staying in touch until we release the next report, our Q4 due February 4, 2021. Thank you so much, and have a wonderful afternoon, stay safe and healthy. -------------------------------------------------------------------------------- Operator [57] -------------------------------------------------------------------------------- So that does conclude our conference for today. Thank you all for participating. You may all disconnect.