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Edited Transcript of NENTb.ST earnings conference call or presentation 24-Oct-19 7:00am GMT

Q3 2019 Nordic Entertainment Group AB Earnings Call

Oct 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Nordic Entertainment Group AB earnings conference call or presentation Thursday, October 24, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Anders Hede Jensen

Nordic Entertainment Group AB (publ) - President & CEO

* Gabriel Catrina

Nordic Entertainment Group AB (publ) - Executive VP, CFO and Head of Strategy & M&A

* Matthew Hooper

Nordic Entertainment Group AB (publ) - Executive VP & Chief Corporate Affairs Officer

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Conference Call Participants

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* Henrik Mawby

Nordea Markets, Research Division - Senior Analyst

* Johanna Ahlqvist

SEB, Research Division - Analyst

* Martin Arnell

DNB Markets, Research Division - Analyst

* Peter Testa

One Investments S.A.G.L. - Analyst

* Rasmus Engberg

Handelsbanken Capital Markets AB, Research Division - Head of Research

* Thomas A Singlehurst

Citigroup Inc, Research Division - Director and Head of European Media Research

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and thank you for holding. (Operator Instructions)

I will now hand over the call over to your host, Matthew Hooper, NENT Group Chief of Corporate Affairs Officer. Please go ahead.

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Matthew Hooper, Nordic Entertainment Group AB (publ) - Executive VP & Chief Corporate Affairs Officer [2]

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Thank you very much, operator. And welcome, everybody, to NENT Group's Q3 Results Conference Call. I'm joined here in Stockholm today by our President and CEO, Anders Jensen; our CFO, Gabriel Catrina; as well as Stefan Lycke and Emelie Alm from our Investor Relations team.

Anders will provide comments on the quarterly results, key strategic developments and the progress we are making as the leading streaming entertainment and content production company in the Nordics. After this, Gabriel will comment on the financial performance and position of the group, and then we will open up for a Q&A session. Slides to accompany our comments are available at NENTGroup.com/Investors.

I will now hand the call over to Anders.

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Anders Hede Jensen, Nordic Entertainment Group AB (publ) - President & CEO [3]

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Thank you very much, Matthew, and good morning, everyone, and a special thanks to all of you who are dialing in for the second day in a row. Q3 has been a very busy and historically important quarter for us. We have again delivered on our profitable growth commitment, while at the same time continuing to grow our Viaplay subscriber base and invest in more and more original content. This again demonstrates the importance of our early and aggressive investments into the streaming markets.

We have also changed our operating model from a traditional country setup to a functional model, where we create focused Centers of Excellence that will work across markets, platforms, products and brands. This will enable us to take decisions faster and ensure better strategic alignment across the business and create skills hubs where talented employees can develop and grow. The new structure will also result in cost savings which will be -- which will enable continued investments into our content portfolio and delivery technologies so that consumers can get an even richer and more varied experience. We're currently in the middle of this process, and we'll come back with more details on the savings and costs during the fourth quarter.

Another benefit would be that we can scale more flexibly. And we have recently announced that we will launch Viaplay in Iceland during the first half of next year. Iceland is the perfect market, given the appetite for Nordic language content and its position as one of the most highly connected societies in the world. We do have ambitions for further expansion in the future.

Yesterday, we announced the game-changing combination of our Viasat Consumer business with Telenor's Canal Digital. This joint venture will enable substantial cost synergies, create a scale and competitive operator and provide the opportunity to upsell Viaplay to the Canal Digital subscriber base. This deal will drive shareholder value and fits our strategy to focus even more on the substantial opportunity we see in the streaming markets. We covered this deal at length in yesterday's call, and you can listen to a replay on it at NENTGroup.com.

Now turning to the Q3 results. The sales were up 10% on an organic basis. Our total operating income before IACs increased to SEK 302 million but did include initial SEK 13 million of advisory fees for the Canal Digital merger. So the underlying performance continues to be healthy.

The most important operational performance indicator for our business is the Viaplay subscriber growth. Put simply, scaling Viaplay is by some margin, the best way to drive sustainable shareholder value. Viaplay added a net 37,000 paying subscribers in Q3 compared to a net loss of 11,000 in Q3 last year. So the momentum we have seen in recent quarters has continued and the Viaplay subscriber base has now grown by over 25% in the last 12 months. We believe that to be significantly ahead of the market.

Subscription sales accounted for 63% of group revenues in Q3 and Viaplay accounted for 61% of our total subscribers. Both are growing at very healthy levels. Advertising accounted for 22% of our sales. And that percentage will continue to fall, given the growth in the rest of our business. Our Studios business accounted for 15% of total sales and the exceptional growth levels seen in H1 continued into Q3.

Then moving to the Broadcasting & Streaming segment. First, sales were up 8% on an organic basis and EBIT was up 3%. This was our 12th consecutive quarter of profitable growth. Subscription & Other sales were up 11% on a reported basis and accounted for 74% of segment sales. The Viaplay subscriber base grew to over 1.45 million, and our total subscriber base reached 2.4 million. The continued growth of Viaplay was driven both by high gross intake and low churn levels. Our investments in the Viaplay platform and content offering are clearly working, both in terms of customer intake and retention.

Our Viasat direct-to-consumer base was stable as growth in our broadband TV offering offset the gradual decline in the satellite base. Our third-party subscriber base decreased by 14,000, and this primarily reflected the typical seasonal patterns.

Advertising sales were up 2% on a reported basis and accounted for 26% of the segment sales. Radio sales were up, as double-digit growth in the Swedish radio business was offset by some continued weakness in Norway. Viafree reported slightly higher sales and the number of registered users and downloaded apps continues to grow very nicely.

TV ad sales were down slightly as continued price inflation and higher audience shares in all 3 markets were offset by the overall lower viewing levels. All 3 TV advertising markets are estimated to have been down in the quarter, but our audience shares were up in all 3 markets and that bodes well as we enter the annual upfront advertising contract negotiations with the agencies. Demand for TV advertising remains high. So we do expect prices to rise again.

Betting & Gambling advertising sales represented approximately 21% of our advertising revenues during the quarter compared to 24% in Q3 last year and 22% in the second quarter. Despite this segment fall, our total ad revenues were stable. Profits for the segment were up 3% and included a U.S. transactional headwind of approximately SEK 20 million.

Now moving on to the Q3 content highlights. We premiered 3 Viaplay originals during the quarter, including Heder, which is our most successful original to date and also topped the charts as series with the most unique viewers during Q3. Another very successful premier was Fixi, the interactive kids production, which will have a virtual lead character to guide kids around Viaplay and encourage them to take an interest in both technology and physical exercise. We now have a total of 33 originals premiered and 28 more announced. This high quality, local and relevant content as well as our unrivaled live sports offering are the key differentiators for us.

We have also signed a number of new sports agreements recently, including the exclusive Nordic rights to the Ice Hockey World Championships from 2024 to '28. We already showed a tournament in Sweden until '23. We now expand the coverage to the entire Nordic region, and we have added exclusive coverage of the ISU speed and figure skating events for the next 4 seasons. These rights are ideal complements to our winter sports offering and are hugely popularized for Sweden, Finland and Norway, respectively.

We have also added the rights to the Premier League Women's Football in the U.K., Germany and France as well as selected home and international matches. Following the success of this summer's World Cup, this is absolutely the right time to be investing in the development of women's sport overall.

If we then move on NENT Studios, the strong momentum as seen in the first half of the year continued into Q3 with 32% organic sales growth. The pipeline of signed development deals continue to look very promising but the year-on-year comps start to get more difficult in the fourth quarter. Operating profits was up slightly, including some additional cost for establishing our Brain Academy, our production company in the U.S. The ambition is to gradually increase the number of productions being done in-house for our own channels and services. Internal sales already accounted for 10% of total sales in Q3, double the 5% in Q3 last year.

With that, I will now hand over the call to Gabriel for his comments on our financial performance and position. Gabriel?

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Gabriel Catrina, Nordic Entertainment Group AB (publ) - Executive VP, CFO and Head of Strategy & M&A [4]

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Thank you, Anders, and good morning, everyone. I would like to start by giving some financial comments on the proposed merger between Viasat Consumer and Canal Digital that we announced on Tuesday, which will bring significant value to our shareholders.

We estimate that the combination will yield annual cost synergies of at least SEK 650 million with full effect from 2022. The largest savings are expected to come from a reduction of transponders, IT and SG&A-related costs. There will also be material revenue synergies from the combination of the businesses, as churn will be reduced and the JV will be able to upsell Viaplay to the Canal Digital base. We expect that the integration cost related to achieving these synergies will be approximately SEK 900 million and be incurred during 2020 and 2021. This primarily reflects the cost of moving Viasat customers over to the Telenor satellite service.

The JV will be owned 50-50 by us and Telenor, which means that we will not consolidate the JV in our numbers but report it as an associated company after closing. The intention is that the JV will pay out 100% of its distributable earnings to its owners in the form of cash dividends. The deal is subject to European Commission regulatory approval, and we expect to close the transaction during the first half of 2020. This combination will generate significant synergies, prolong the life of both businesses and accelerate the development of our streaming business in the Nordics. It fits perfectly with our strategy to become the leading Nordic streaming provider and content producer with a global team. And it's important to add that we have made a separate agreement to provide the JV with content, tech support and, of course, our Viaplay streaming service.

Moving back to the Q3 performance and the P&L, sales were up 11% on a reported basis and were driven by 10% organic growth as well as 1% FX contribution. The combined operating profit for our business segments, that is before central operations and IAC was up 3% and included SEK 20 million of U.S. dollar FX headwind. The negative EBIT contribution from central operations was up from SEK 56 million to SEK 65 million. And our total EBIT before IAC was up, not only included the FX headwind but also the SEK 13 million of initial costs related to the announced merger with Canal Digital. The effective tax rate in the quarter was approximately 21%.

Moving on to the cash flow. Our cash flow from operations was slightly up compared to last year. Net operating cash flow was down due to an increase in working capital, which reflected the timing differences and the payments for new and prolonged sports rights as well as working capital buildup in the NENT Studios on the back of the exceptional growth seen in Q2 and in Q3.

It is important to understand that a large part of the working capital buildup arises from investments in content for the future, such as sports rights and Viaplay Originals, which are of strategic importance and will secure the continued growth of our business. Also important to remind you that the timing of sports payments shifts between the quarters and years, as we have indicated earlier.

The impact on the working capital is reflected in the net debt as well, which is roughly in line with what we expected for Q3. Our net debt ended the quarter at SEK 4.8 billion, which is 2.5x our trailing 12-month EBITDA before items affecting comparability, well within our targets. The financial net debt was SEK 4.2 billion.

Finally, let's look at the business outlook. We do expect to continue to generate positive organic growth, primarily due to the growth of Viaplay. We remain committed to delivering higher profits for our business segments in 2019. Do remember that we have higher extension costs versus last year. We maintain our guidance that the negative EBIT contribution from central operations will be approximately SEK 250 million for the full year and that is excluding costs related to the transaction with the Canal Digital. We will have ongoing costs for the merger process in Q4 and especially in Q1.

We expect the full year transactional headwind of approximately SEK 75 million from the appreciation of the U.S. dollar this year, which is lower than our previous guidance for approximately SEK 100 million. We will face, though, an incremental U.S. dollar transactional headwind of approximately SEK 180 million in 2020, but we remain confident in our profitable growth commitment.

We continue to expect that our normalized tax rate will be approximately 20% but that 2019 will be slightly higher than this. We do expect a material working capital release during the fourth quarter. And we now expect that the full year change in working capital will be approximately SEK 600 million to SEK 700 million compared to our previous guidance for approximately SEK 400 million. This increase is primarily a function of incremental content commitments, including a step-up in the number of originals we have launched and have under production, and payments for new sports rights and including the ice skating, alpine and cross-country skiing and the Ice Hockey World Championship. We will continue to tie our working capital and I expect the annual build up to return to the normalized historic levels in 2020. We are maintaining our full year CapEx guidance at 1% to 1.5% of sales.

And that's it for my comments. Anders, back to you.

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Anders Hede Jensen, Nordic Entertainment Group AB (publ) - President & CEO [5]

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Thank you very much, Gabriel. Q3 was indeed a groundbreaking quarter for us at NENT. We did -- we delivered our profitable growth commitment and Viaplay's growth momentum has clearly continued, which demonstrates that the investments that we're making in content and technology are yielding results.

We have announced a new operating model which has been implemented from the start of Q4. This will not only lead to faster decision-making, but it will allow us to also scale more flexibly, which is very and very important as we launch Viaplay in Iceland next year, but also to reduce costs significantly.

The game-changing joint venture with Telenor will bring substantial cost synergies and the opportunity to upsell Viaplay to the Canal Digital subscriber base. Our content offerings are stronger than ever before, and we do have appetite for more. And the addition of more originals to the skiing, skating and now the ice hockey, demonstrates our focus on scaling Viaplay, which is the most effective way to drive substantial and sustainable shareholder value.

That concludes our commentary on the results. Over to you now then, operator, to start the Q&A session, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from the line of Johanna Ahlqvist.

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Johanna Ahlqvist, SEB, Research Division - Analyst [2]

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Yes. My first question relates to working capital, actually. And you mentioned, Gabriel that you expect the high levels this year to come back to sort of normalized level over time. But I mean, what is your visibility here as you look? Because, I guess in next year we'll have 2 major sports rights up for renegotiation again. And I'm just wondering, what's the sort of level of confidence in that you will get back to the SEK 400 million level in 2020?

And then my second question relates to the Viaplay very strong intake also this quarter. And I'm just wondering, given the fact that you have increasingly focused on the B2B deals here, I'm just wondering how the revenue split looks like between you and the operators, for instance you see in Denmark, when you have such offers?

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Anders Hede Jensen, Nordic Entertainment Group AB (publ) - President & CEO [3]

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I will start with your last question first, and then I will let Gabriel take the working capital question.

On Viaplay, you're absolutely right. We continue to see a very strong momentum. There are no significant B2B deals in the third quarter numbers, they are driven by direct-to-consumer sales. Typically, when we do B2B deals, they are on a rev share basis, where you can think about sort of an 80-20 or 70-30 split. That is the normal way of doing it. It may vary for a little bit from case to case, but that's typically where we land to have a sort of a coherent approach to the market. And that is something that we will continue to do. And we do see a lot more B2B opportunities on the horizon going forward. But what is very encouraging to see that the direct-to-consumer pool continues to be very, very strong in the market.

And on the working capital, Gabriel will comment. You are right that there are rights up for renewal next year, specifically, one which is the Champions League, as we have said before. With that aside, we have very good visibility exactly on what we expect to invest in and what is available in the market. So I think Gabriel can be quite affirmative on this outlook.

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Gabriel Catrina, Nordic Entertainment Group AB (publ) - Executive VP, CFO and Head of Strategy & M&A [4]

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Yes. So looking at next year, we have pretty good visibility on everything as Anders mentioned, when it comes to the investments that we're making and some of the content investments that we plan to make. Obviously, there's some views on how and when that -- especially that right renewal will come. But we have the -- aside from that, we have a pretty good sight on where we will land next year, which is in line with what we saw last year and the guidance that we had at the beginning of the year.

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Operator [5]

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The next question comes from Martin Arnell.

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

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This is Martin Arnell with DNB. My first question is on the advertising outlook. I think you said you expect prices to rise again for next year. And I think that the Swedish incumbent is out with a price list. Where are you now thinking about pricing for next year in advertising contracts?

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Anders Hede Jensen, Nordic Entertainment Group AB (publ) - President & CEO [7]

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Martin, you're absolutely right. We have seen price lists out from the leading commercial player in Sweden, suggesting high single to low double-digit price increases across the various price schemes. And that is the kind of levels that we are targeting for next year and are expecting that is in line with sort of the balance between available inventory and the continued high demand in the market.

We have seen this now in the third quarter, that despite the decline in gambling and advertising, the demand continues to be high and complements for the decline in that particular segment. We expect Q4 to be flattish, which will, assuming it's completely flat, will lead us to a 0.9% increase on advertising sales for the full year of 2019. And you should expect that kind of outlook going forward as well.

Radio continues to be very strong. But there, we have surplus inventory, given that we're taking significant market share. So less room for price increases. And the more registered customers we get on Viafree, the better price premium we can get out of it. So net-net, you should look at a high single-digit number for the price increases next year.

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Martin Arnell, DNB Markets, Research Division - Analyst [8]

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And that means your, overall for the total advertising, you're actually looking at a slight increase here? Or is that what you're saying?

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Anders Hede Jensen, Nordic Entertainment Group AB (publ) - President & CEO [9]

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I will be -- I mean, we have to be ready for everything. And one tweet from somebody can change things very, very quickly these days. So the way we're looking at advertising sales is basically that what we've said before, we are cautiously optimistic, but we look to flattish to very moderate positive development for next year.

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Martin Arnell, DNB Markets, Research Division - Analyst [10]

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That's great. Very clear on this. And then on the -- on Viaplay, given your sort of ramp-up of originals, competitor changes and new entrants, strength of your sports rights package, where -- when do you expect sort of changes to Viaplay pricing?

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Anders Hede Jensen, Nordic Entertainment Group AB (publ) - President & CEO [11]

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Well, on Viaplay pricing, if you take sports first, then there is only one significant write-up in the coming couple of years. So we're quite firm on the sports side of things. We have increased prices in Denmark, and we did increase quite significantly in Sweden not so long ago. We have all the winter sports sort of coming in with full force from 2021 with the scheme. So you should expect us to have a look at our sports offering around that time frame, probably not before.

When it comes to TV series and movies packages, we remain sort of of the opinion that it's best to see what Netflix is doing before we increase any prices. We saw this week that HBO increased their prices in all markets in the Nordics but Denmark, with on average SEK 20. And I think that is a signal of the need to start to actually use the pricing power and the significant demand that we're seeing in the markets. We will increase prices. The question is whether we just wait for Netflix or we arrive at a conclusion, actually, where we think we have a significant premium to Netflix and then we will increase prices on the back of that. So within the coming 6 to 12 months, we will know more about pricing. But the underlying pricing power in SVOD is significant and is something that will drive value in the coming years, that I'm pretty sure.

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Martin Arnell, DNB Markets, Research Division - Analyst [12]

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Okay. And my final question is on the new organization that you announced a couple of, I think it was a month ago or something. You expect savings from that, right? And can you just talk a little bit about the rationale for the new organization? And perhaps indicate some numbers on what you expect in terms of savings.

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Anders Hede Jensen, Nordic Entertainment Group AB (publ) - President & CEO [13]

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Yes. I mean the rationale is that we are a different kind of business today than we were in 2015 when we did the big transformation in MTG at the time and went to this country-based organization. That has made a lot of sense to decentralize and to get the countries sort of in line with ambitions.

Now we are also on the back of the proposed merger between Viasat Consumer and Canal Digital. Now we are more and more a fast-growing streaming company with a number of supporting areas around that. And that just calls for a -- basically demands a different way of working, where we are working with brands, across markets, indifferent of which market it is, with functions supporting multi markets instead of building up functions per market. And that will yield savings, and they will be fairly significant.

I can't say much more than that, given the sensitivity of it. But if you remember what we did in 2015, we had savings on a yearly run rate of approximately SEK 600 million to SEK 700 million. It will not be on that level, but it will be significant. That's as much as I can say today. We will announce the savings and the cost to achieve the savings in -- during this fourth quarter.

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Operator [14]

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The next question comes from Rasmus Engberg.

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Rasmus Engberg, Handelsbanken Capital Markets AB, Research Division - Head of Research [15]

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I had -- just to coming back to, what do you mean when you say you're returning to normalized net working capital levels? Is that SEK 400 million negative a year or somewhere around that or is there something else?

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Anders Hede Jensen, Nordic Entertainment Group AB (publ) - President & CEO [16]

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No, that's the level that we had in '18 and that we guided at the beginning of the year before we started to increase our ambitions when it came to originals and some of the new sports rights that we decided to invest in.

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Rasmus Engberg, Handelsbanken Capital Markets AB, Research Division - Head of Research [17]

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Okay, good. And you talked a little bit about further costs for the proposed merger of Viasat and Canal Digital. Can you give us some sort of level where we should be in Q4? And then you said probably that it would be higher in the first quarter, right? And this is excluding the SEK 900 million, obviously, that are taken in that company, I assume?

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Anders Hede Jensen, Nordic Entertainment Group AB (publ) - President & CEO [18]

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Yes. I mean these costs are small, I would say low double digits, very similar, maybe higher to what we saw in this quarter. But it's mainly related to external advisers as we're in a carve-out of the business. And then obviously, you have legal fees and financial advisers, but not material.

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Rasmus Engberg, Handelsbanken Capital Markets AB, Research Division - Head of Research [19]

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And -- but you said in Q1, they might be bigger? Or was that something -- is that -- or did I misunderstand that?

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Anders Hede Jensen, Nordic Entertainment Group AB (publ) - President & CEO [20]

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No, it was more the timing.

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Rasmus Engberg, Handelsbanken Capital Markets AB, Research Division - Head of Research [21]

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Okay. So the total will be in that level, but most of it will be in Q1? Is that what we should be...

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Anders Hede Jensen, Nordic Entertainment Group AB (publ) - President & CEO [22]

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When we will have to pay most of them.

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Rasmus Engberg, Handelsbanken Capital Markets AB, Research Division - Head of Research [23]

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Okay. Great. Excellent. And right, was there anything else I wanted to ask you? I mean overall, the Studios business, how do you look at that? I mean it does -- it shows tremendous growth, but no operating leverage at all. Is that how it should be going forward as well? Or what's the scale and scope of having that business internally?

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Anders Hede Jensen, Nordic Entertainment Group AB (publ) - President & CEO [24]

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Well, it is something that we are reviewing and how we want to position it, Rasmus, going forward. It is a significant force in our ramp-up in Viaplay Originals. And what we are benefiting quite significantly from access to that, both on the creative side of things and the production strength that has. I agree with you that, that as a reporting segment, given the volatility in that part of the business, it is a bit tricky to explain sort of the rationale in a public situation and a public listed company as we are. So you will probably see us reviewing how we want to deal with it going forward. That doesn't mean that we don't think it's a valuable strategic asset. We do think it is, but we may place it a bit differently in how we are structured going forward.

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Rasmus Engberg, Handelsbanken Capital Markets AB, Research Division - Head of Research [25]

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And you talk about yourself as the streaming company. And now you have made a deal for one of your sort of declining legacy businesses, the satellite distribution operation. There is another kind of, over time, probably declining business on when it comes to advertising TV. Is that something that you might also consider to look at a partnership or something like that?

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Anders Hede Jensen, Nordic Entertainment Group AB (publ) - President & CEO [26]

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Well, when partnerships are sort of yielding benefits, we're always open for discussion. But there are differences between the 2 legacy businesses and the way they are impacted by decline. What we're doing now is we're combining 2 subscription businesses into 1 scale subscription business, and that gives us benefits and it's not so hit by cyclical impacts over time.

If you scale up on advertising sales, you could definitely gain some scale benefits from it. But you also get more exposed to a part of the market that is less -- sort of less controllable. So that sort of speaks against that. And then if it means we would spend money on sort of buying or investing in something that is not our future, we will probably think very hard before we think -- before we decide to do that kind of work. Our partnerships and opportunities to work together to sort of find benefits without structural deals, absolutely.

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Operator [27]

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The next question comes from Henrik Mawby.

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Henrik Mawby, Nordea Markets, Research Division - Senior Analyst [28]

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So looking at your costs in Broadcasting & Streaming, the trend of 9% higher year-on-year, SEK 240 million up. You mentioned SEK 20 million, I think, relates to currency in that number. Can you just give us some more flavor on what else is in that cost increase? And are there any items of a temporary nature?

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Anders Hede Jensen, Nordic Entertainment Group AB (publ) - President & CEO [29]

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Yes. Sorry, can you repeat the last part of the question. I lost it for a second.

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Henrik Mawby, Nordea Markets, Research Division - Senior Analyst [30]

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Yes, yes. So what are the other items in the cost increase year-on-year? And are there any items in there that are of a temporary nature?

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Anders Hede Jensen, Nordic Entertainment Group AB (publ) - President & CEO [31]

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No, I think -- well, you have the investments that we have made in content that are hitting the cost base. And also, you have the currency, as you mentioned, but also some of the effects of the costs that we have in other currencies as well hitting. Nothing of an extraordinary nature.

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Henrik Mawby, Nordea Markets, Research Division - Senior Analyst [32]

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Okay. Great. And also, thinking about the merger with Telenor now on the distribution side, it strikes me that you've not been able to agree on where to locate the head office. And the 2 companies have radically different incentives in this business. Telenor, I mean, they probably want to defend the satellite revenues as much as possible and limit the success of the broadband distribution because that is a direct competitor for Telenor, right? While you, on the other hand, you would probably want to drive carriage fees and Viaplay conversion. It looks very -- like a very good deal on paper. But running this business and then agreeing on how to run it efficiently, I could see complications. How do you intend to merge -- to mitigate and handle that potential issue in governing the company?

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Anders Hede Jensen, Nordic Entertainment Group AB (publ) - President & CEO [33]

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Well, we don't do deals that only look good on paper. We make sure we have sort of the -- everything in place to make sure that the governance is controlled. We make sure that the incentives for the respective owners are balanced and that there is sort of a long-term view on how we're going to run this.

First and foremost, the headquarter question is not an open question. This company is primarily headquartered in Stockholm with dual functions or sales -- separate function sitting in Oslo. That is, as you can imagine, clearly taken care of in our shareholder agreement. We have also written a very long-term sort of outlook for the satellite contract that takes care of all the incentives for that part, for our partner. Equally, we have carried out long-term contracts on everything that is related to carriage fees and everything related to our core business on the content side of things. So that is taken care of.

And the shareholder agreements also clearly, clearly stipulates what the incentive for us doing this merger together is. And it is about yielding significant synergies and paying out every surplus single krona in cash through dividends to the shareholders. So -- and it's right, if you want to sort of going to play a little bit of a devil's advocate that you can look at different incentives and going into this, we knew this very, very well. And of course, there is a reason why this deal hasn't happened in the past. We have taken care of that. Then it's up to us and the management that we've put in place to execute on this.

But knowing both parties quite well, of course, NENT and having worked with Telenor in my previous life, I am very confident that this will be a fruitful partnership benefiting both parties.

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Henrik Mawby, Nordea Markets, Research Division - Senior Analyst [34]

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Sounds good. And just a follow-up on the satellite contract. I mean I'm not an expert on satellite distribution contracts. But to my understanding, it is a large component of the fixed cost in there. Is it the same dynamic in this contract? I understand you can't talk too much about the details in that specific contract, but is that the type of fixed cost dynamic we should expect from such an agreement?

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Anders Hede Jensen, Nordic Entertainment Group AB (publ) - President & CEO [35]

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Yes. Our satellite is a pretty sort of established business. So there will be no big sort of surprises in how this is operated. There is a significant synergy similar to mobile operators sharing networks, moving from 2 satellites to 1 satellite. And then the corresponding sort of transporter capacity being optimized over time. So it is actually very, very straightforward. But given that there is a third-party involved here, our current satellite service provider, I cannot comment anymore on the specifics on this one.

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Henrik Mawby, Nordea Markets, Research Division - Senior Analyst [36]

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Understand. And looking at your DTC business subscriber trend in the quarter, it looked -- continues to be very strong. I guess there is the mix effect underlying there with satellite dropping and broadband growing. Can you give us the mix on net adds in that segment, please?

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Anders Hede Jensen, Nordic Entertainment Group AB (publ) - President & CEO [37]

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Well, the mix is -- we have given you a number on the broadband subscribers. They're roughly 130,000 which is then the part that is joining this joint venture. So that's where the growth, as you correctly point out, in the broadband TV business it's compensating for the structural decline in satellite. But we also have sort of pretty good churn numbers and churn development on satellite exclusive of broadband, very much driven obviously by the content offering that we are having.

And the fact that satellite is, from a technical point of view, a very stable technology, which is why we and our partner-to-be in the joint venture believes that the long tail in satellite is actually quite long.

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Operator [38]

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Our next question comes from Tom Singlehurst.

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Thomas A Singlehurst, Citigroup Inc, Research Division - Director and Head of European Media Research [39]

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Tom Singlehurst from Citi. I missed the very beginning of the call, so I apologize if you did cover this. So I think previously, you had talked about 250,000 sort of net adds as a sort of target or aspiration for Viaplay for 2019. I was just wondering whether you've specified whether this should go up on the back of the stronger performance over the sort of middle half of the year, if that's the right way of putting it. That was the first question.

And then secondly, briefly on advertising. I know you have talked a little bit about sort of how you treat, sort of, gambling-related inventory separately. But I was just wondering whether there's any scope amid concerns about gambling to sort of self-regulate? I know in the U.K., we've seen some of the channel businesses choose to sort of limit the -- actively limit the level of inventory, the amount of gambling advertising on live sports, et cetera. Just whether there's anything that you can do yourself to defang that as a risk because it's still a relatively big overhang for investors?

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Anders Hede Jensen, Nordic Entertainment Group AB (publ) - President & CEO [40]

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Tom, on your Viaplay outlook question, we have added a little bit more than 200,000 subscribers now in the first 3 quarters of this year compared to 170,000 for the full year 2018. So I think it's fair to say that our outlook expectation of a minimum 250,000 net adds is something that is well in scope to be beaten.

We're not giving a new sort of upgrade number because we have to be mindful about the fact that we are growing ahead of the market. And at some point, you could argue that we are sort of preempting some of the growth that we have ahead of us for the full year. So we'll stick to the 250,000 but I feel fairly confident that we will beat that number for the full year.

We have grown a little bit more than 25% over the past 12 months, which puts us ahead of -- as much as we know about the total market growth, that puts us ahead of it, which then suggests that we are gaining meaningful market share. And that will be the case at the end of the year, that I feel fairly confident on.

On your second question on ad sales, we are not self-regulating in the sense that you suggest. We are not a regulator. And we think it would be very difficult to be sort of a good input giver into whatever regulation may come if we start to act in one way and some other players may act in a different way. When it comes to the live sports, as you mentioned, specifically we are regulating in the sense that we're mindful about giving a good viewer experience. So we don't want to sort of -- if you will, we don't want to poison our various sort of strong sports position by being sort of greedy on how we deal with gambling and betting during the sports shows. So that is a pure customer position that we're taking.

When it comes to the actual decline and the outlook, the gambling and advertising investments in the quarter or the sales reduced by some 14%, while advertising sales as a whole was up close to 2%. So the price increases and the fact that we don't have a sort of a demand problem for advertising sales, we have an inventory problem, meaning that the decline in TV viewing yields a smaller inventory. But there is still significant demand from also non-gambling and betting advertisers to go on TV. And when our outlook suggested that would be the case also for next year. So we are regulating in, if you will, from a customer viewing experience point of view, but that's it.

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Thomas A Singlehurst, Citigroup Inc, Research Division - Director and Head of European Media Research [41]

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And one follow-up, actually, if it's okay, on Viaplay pricing. I think obviously, I think you mentioned HBO Nordic has moved prices up. We obviously love to think about pricing in terms of the sticker price, there's sort of headline pricing. But I know that very often, pricing can also -- at least ARPU can be driven by sort of changes in approach to things like discounting. Are you seeing any significant sort of non-sticker-price-type changes to pricing amongst the competitive base? Are we seeing sort of Netflix or others being more aggressive on the level of discounting or policing password sharing or any of those other sort of under the covers-type sort of yield management?

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Anders Hede Jensen, Nordic Entertainment Group AB (publ) - President & CEO [42]

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Yes. No, that has a very good remark and a good question. Thankfully, people are fairly industrial in how they view SVOD and not giving away pricing power in a growing market, which we often see in adjacent industries. And we have seen some activities like that in the past. But there is very limited below-the-counter offering right now on the direct-to-consumer side. We do have reason to believe that there are some competitors out there that are giving away quite a lot in B2B deals. But obviously, that is only something that we believe and don't know. But we remain very firm on the value of our content. It has to speak for itself.

You cannot price yourself into the SVOD market if you don't have a content proposition that is strong enough because there is such a massive sort of pipeline of fantastic content coming from all parts of the scale. So we remain firm on not trying to price ourselves to a stronger market position. And we haven't seen, thankfully, that kind of behavior from anybody currently.

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Operator [43]

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Our last question is from Peter Testa.

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Peter Testa, One Investments S.A.G.L. - Analyst [44]

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I had a couple of more questions on the deal from yesterday, please. If you look at your partner, he's only put in a satellite business, and he has some agreement with C More, which you're obviously you're very used to competing against. I was wondering, which is comparing to yourselves, both IP and satellite into the business, which makes it also a cleaner proposition and how you handle customers. Can you just talk a bit about how the joint company can address this situation of split IP satellite and maybe the -- also, therefore, the relationship with C More, which would be different between IP and satellite potentially?

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Anders Hede Jensen, Nordic Entertainment Group AB (publ) - President & CEO [45]

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Well, we are actually working with C More on our sort of distribution side as well. And that is a difference from how it was some years ago. And we've done that quite successfully. So it's not that different today as it was not that long ago. So we have moved out into a rather value-creating way of driving these businesses for all parties. And we don't envisage any change in that way. We think that this new distribution company that we will go on with Telenor should be open for distribution of content from all sorts of partners, if it's something that our customers want.

You are right that we are bringing a few different elements to the table, including the IPTV base in Sweden, roughly 130,000 customers. And that is also reflected in the fact that if you look at an absolute customer base size number, we are bringing a smaller base to the table. And nonetheless, we're achieving a 50-50 split in the deal, which suggests the value of the assets that we're bringing to the table. So I think it's a fair balance between the 2 parties and what we are bringing to the table, the way we have reached a 50-50 agreement on this company. And going forward, it's about looking at the joint assets and how we can optimize those to yield as much as our customer benefits as possible, including working with both Viaplay and C More and others.

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Peter Testa, One Investments S.A.G.L. - Analyst [46]

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Okay. And with regards to having to work split IPTV versus satellite in Norway versus an integrated structure in Sweden, do you perceive any differences?

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Anders Hede Jensen, Nordic Entertainment Group AB (publ) - President & CEO [47]

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No, because our IPTV business is an asset-light one. It's based on wholesale fiber rather than us owning infrastructure. So there is no overlapping conflicting interest between, for example, the business that Telenor has in Sweden in the remain co, so to speak. So what will happen with that and how that's going to be developed in the future together with our wholesale partner or in any other way, that is for the JV management to work on and suggest to the Board and the 2 owners.

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Peter Testa, One Investments S.A.G.L. - Analyst [48]

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Okay. And then just on the carve-out P&L. I was wondering if you could give some sort of sense as to what income from Viasat or Viaplay is inside the venture and what is retained within NENT itself related to these customers.

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Anders Hede Jensen, Nordic Entertainment Group AB (publ) - President & CEO [49]

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Well, obviously, there is an internal intergroup agreement when it comes to distribution of content between the Viasat consumer and NENT, right? So that is including that in the P&L.

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Peter Testa, One Investments S.A.G.L. - Analyst [50]

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And they may have a distribution?

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Anders Hede Jensen, Nordic Entertainment Group AB (publ) - President & CEO [51]

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Yes, distribution share.

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Peter Testa, One Investments S.A.G.L. - Analyst [52]

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Okay.

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Anders Hede Jensen, Nordic Entertainment Group AB (publ) - President & CEO [53]

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Yes, exactly. So -- and then when the deal gets concluded, we will have a distribution contract with the JV, as we have with any other distributor that will hit the, you can call, the NENT remain co P&L.

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Peter Testa, One Investments S.A.G.L. - Analyst [54]

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Right. Okay. And the last question, please, is just on the content opportunity. Now that you have depth of content and some repeat seasons and so on, to what extent -- is there a point at which you think your third-party commercial ability to sell that content outside of your use is changing or increasing? If you can talk a bit about the pipeline developing there?

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Anders Hede Jensen, Nordic Entertainment Group AB (publ) - President & CEO [55]

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Well, if you talk about critical mass and how much more we can actually sort of develop, we're not there yet. There is still some ample opportunity to develop and to do more on that. If that is your question, if I'm not misunderstanding...

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Peter Testa, One Investments S.A.G.L. - Analyst [56]

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It's more of third-party opportunity, the extent to which, if you have multiple seasons and more stable, critical acclaim, what is the extent to which you can sell content third-party and gaming come that way, [different than your strategy now]...

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Anders Hede Jensen, Nordic Entertainment Group AB (publ) - President & CEO [57]

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Yes, you're right. We are still sort of building up on that. And as a sort of second windowing with a third-party partner for some of our key content is something that we're absolutely doing here in Sweden. We're doing it with SVT. We have a very, very successful series up now called Love Me, which has a second window on SVT, yielding some benefits for our production costs. And that will then sort of air before the second season hits Viaplay. So that's a good way of capitalizing.

Then, of course, outside our footprint in the Nordics, we have sold more than 50% of our Viaplay Originals abroad, which is a good indication on the demand for both sort of the Nordic content that we're doing and also what we could potentially do ourselves outside the Nordic, when we have critical mass on the content. So that's a way of, as you rightfully point out, a way of derisking our investments while keeping up a very high pace on adding new content to the platform.

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Operator [58]

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That concludes the question-and-answer session. I will now hand back the call to your host, Matthew Hooper.

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Matthew Hooper, Nordic Entertainment Group AB (publ) - Executive VP & Chief Corporate Affairs Officer [59]

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Thank you very much, operator. And thank you all for your time and questions today. We will now be road showing in Stockholm and London today and tomorrow. So we look forward to meeting as many of you as possible, face-to-face. And please, as ever, don't hesitate to contact Stefan or Emelie in the IR team if you have any questions or would like a meeting.

As you've heard on both of our calls this week, we have a unique story to tell, and we hope that you found it interesting.

That concludes today's conference call. Thank you for your participation.

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Operator [60]

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So that does conclude the conference for today. Thank you all for participating. You may all disconnect.