U.S. Markets open in 6 hrs 54 mins

Edited Transcript of NENTb.ST earnings conference call or presentation 18-Jul-19 7:00am GMT

Q2 2019 Nordic Entertainment Group AB Earnings Call

Jul 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Nordic Entertainment Group AB earnings conference call or presentation Thursday, July 18, 2019 at 7:00:00am GMT

TEXT version of Transcript

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

Corporate Participants

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

* Anders Hede Jensen

Nordic Entertainment Group AB (publ) - President & CEO

* Gabriel Catrina

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

* Matthew Hooper

Nordic Entertainment Group AB (publ) - EVP, Group Head of Corporate Affairs & CEO of Nent Group UK

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

Conference Call Participants

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

* Henrik Mawby

Nordea Markets, Research Division - Senior Analyst

* Julia Matoshchuk

Morgan Stanley, Research Division - Equity Analyst

* Martin Arnell

DNB Markets, Research Division - Analyst

* Mikael Laséen

Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst

* Rasmus Engberg

Handelsbanken Capital Markets AB, Research Division - Head of Research

* Sebastian Olsson

SEB, Research Division - Analyst

* Thomas A Singlehurst

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

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

Presentation

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

Operator [1]

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

Good morning, ladies and gentlemen, and thank you for holding. (Operator Instructions) I will now hand the call over to your host, Matthew Hooper, Head of NENT Group Corporate Affairs.

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

Matthew Hooper, Nordic Entertainment Group AB (publ) - EVP, Group Head of Corporate Affairs & CEO of Nent Group UK [2]

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

Thank you very much, operator, and welcome, everybody, to NENT Group's Q2 conference call. I'm joined here in Stockholm today by our President and CEO, Anders Jensen; our CFO, Gabriel Catrina; and our Head of Investor Relations, Stefan Lycke.

During today's earnings call, 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 Q&A session. Slides to accompany our comments are available at nentgroup.com/investors.

I will now hand the call over to Anders for his comments.

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

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

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

Thank you very much, Matthew, and good morning, everyone. Q2 was yet another quarter in which we have delivered on our key operating and financial objectives with 6% organic sales growth, 5% higher profits for our combined business segments, and very important, 20% growth in our Viaplay subscriber base in what is typically and seasonally a quiet quarter. These results again clearly demonstrate the benefits of our unique business model, the relevance of our strategy and the execution skills of our team. We're building a company that is well positioned to both drive and benefit from the shift to online and on-demand entertainment consumption.

Our reported operating income before IAC was down slightly as predicted. This was due to the higher central operation costs that we have now -- that we now have as a separately listed company from the end of the first quarter as well as the anticipated extraordinary one-off investment in the vital work of establishing our brand, culture and values. This is not the forward run rate, and we maintain our outlook for a central operation EBIT impact of approximately SEK 250 million for the full year. Given that we had no IACs this quarter, total operating income was up.

The most important operational performance indicator for our business is Viaplay's subscriber intake. Put simply, capturing the streaming opportunity is the key factor in driving long-term value for our shareholders. Viaplay added a net 65,000 paying subscribers in Q2 compared to a net loss of 25,000 in Q2 last year. So the strong performance seen in Q4 and Q1 has continued into Q2, and the Viaplay subscriber base have now grown by over 20% in the last 12 months. This has been possible because of the investments we have made into our Viaplay originals, new exclusive sports deals, additions to our acquired Hollywood portfolio of movies and series and further enhancements of the user experience as well as signing -- as the signing of new long-term B2B partnerships to make Viaplay as broadly available as possible.

Subscription sales account for 60% of group revenues, and Viaplay accounts for 60% of group subscriptions, both are growing at very healthy levels. Advertising only accounted for 26% of our sales in the quarter, and that percentage will continue to fall given the growth in the rest of our business. Our unique business model is all about agility and the ability to buy content for all windows and to monetize them flexibly. We have shown many times in the past that we are agile enough to both seize opportunities and deal with challenges while continuing to deliver profitable growth. Now is no different.

Turning to the Broadcasting & Streaming segment. Sales were up 4% on an organic basis, and EBIT was up 2%. This was taken in account our years as MTG, the 11th quarter of profitable growth and clearly demonstrates the positive effect of our early and proactive investments into taking a leadership position in the Nordic streaming markets.

Subscription & Other sales were up 8% on a reported basis and accounted for 70% of the segment sales. The Viaplay subscriber base grew to over 1.4 million and our total subscriber base to over 2.4 million. The continued growth of Viaplay was driven both by high gross intake and lower churn levels. Our investments in the Viaplay platform and the content offering are clearly working, both in terms of customer intake and, very importantly, retention of those customers. The originals are a key part of this. We now have a total of 29 originals premiered. We have 16 more announced. It is this high-quality local and very relevant content that, together with our unrivaled live sports offering, that is the key differentiator for us. It's not just about what we offer, but also how we offer Viaplay, so we have continued to add technical functionality to the platform, including the ability to create personal profiles and the introduction of Fixi, a virtual character that our tech team have created to guide kids through Viaplay and to encourage them to take an interest in both technology and physical exercise.

The combined Viasat direct-to-consumer and third-party subscriber base increased slightly to 956,000 as growth in our pan-Nordic third-party business and broadband TV offering in Sweden more than offsets the gradual decline in the satellite base.

Advertising sales were down 3% on a reported basis and accounted for 30% of the segment sales. The growth in Viafree and the Swedish Radio operations was offset by lower linear TV sales and lower Norwegian radio sales. Viafree reported double-digit growth levels, and the service now has over 2 million registered users and approximately 3.6 million downloaded apps across the region.

Our Swedish Radio business also delivered double-digit growth as we took further audience and market share. Our target audience share of 45% was up from 40% last year. Radio ad sales were down in Norway in fairly weak market conditions.

TV ad sales were down as continued price inflation was offset by overall lower viewing levels and the fact that we aired the Ice Hockey World Championship on our Swedish free-TV channels last year but not this year and the impact of the general elections in Denmark. The Swedish and Norwegian TV advertising markets are estimated to have been fairly stable in the second quarter while the Danish market is estimated to have been down.

We have continued to see comments about the potential regulation of betting and gambling advertising across the Nordic region. I addressed this at our Q1 results, and the markets where we operate are at very different stages of their investigations and considering different approaches. The Swedish government investigation will, for example, report back in October next year and could require changes in constitutional law if limitations are to be introduced. And the Norwegian government has conducted a consultation, and as far as we are aware, plans to send draft legislation to the parliament later this year for review in the spring next year, ahead of a potential implementation in 2021. The new government in Denmark will also look into this, but there is a lot less of this category of advertising in Denmark.

We at NENT Group will, of course, comply with the laws and regulations that apply to us in our markets, and we're following this -- following this important discussion carefully. But we are not a regulator, and we will not assume the responsibility of being one. And this discussion should, of course, apply equally to all media platforms including print, radio, TV and online media. Clear and sustainable regulations, road maps and time lines are always good for everyone, so we look forward to the conclusion of these investigations.

Now what I can tell you is that betting and gambling represented approximately 25% of our total TV and radio advertising revenues in 2018. Just under 24% in Q1 and just over 21% in Q2, with quite a variance between the countries. The main effect was the absence of the Ice Hockey World Championships on our Swedish channels, which attracted significant betting advertising last year. It is also fair to say that the betting and gambling companies' rush for market share in Sweden is subsiding now, while Norway continues to see a decline in the category spend. And as I also said in Q1, the issue that TV is facing today is not lack of demand from advertisers, but rather shortage of inventory supply. So I do not expect any changes in the future to have a major effect on our sold-out ratios or pricing power. We will naturally and gradually reduce the proportion of this category of advertising on our channels and services as the competitive heat in this sector calms down.

And just to be very, very clear, excluding the impact of the Ice Hockey in Sweden, our total ad sales would have been flat in Q2 this year compared to last year, and we do not expect any major movements up or down in our overall advertising revenues in H2 this year compared to last year. And we will, of course, then have the Ice Hockey back in Q2 next year.

Profits for the segment were up 2% and included a U.S. dollar FX transaction headwind of approximately SEK 20 million. Gabriel will comment later on the FX effects, but we do expect to continue to deliver profitable growth for the full year, not least that we have now announced price hikes for many of our traditional pay-TV products as well as for the Viaplay sports package in Denmark.

Now moving on to the Q2 content highlights. We premiered 5 new Viaplay Originals in the second quarter, including Wisting in Norway, which is our most successful original to date. It also topped the charts as the series with the most unique viewers during Q2. Second on the chart was another of our originals, Those Who Kill, in Denmark that we premiered in Q1. We also announced 6 new originals in Q2, including Home Invasion and Shadow Play with international high-profile casts. And we have yesterday announced our latest original and 6 documentary format, the Manson's Bloodlines.

We have announced several important content partnerships in Q2. We extended our partnership with the Danish Superliga football and the golf's iconic Open Championships. By the end of these deals, we will have had the 20 -- more than 25 years of partnerships with both the Danish Superliga and the Champions League, which is something quite unique in our industry. We have also secured new sports rights such as the 5-year exclusive pan-Nordic deal for all of the hugely popular Alpine and cross-country skiing championships from 2021. Just this morning, we announced the winning of the pan-Nordic rights to the international ice skating for 4 years starting this fall. This gives us a very strong position in winter sports, and both of these significant rights moved to us from public service TV for the first time.

Finally, we are also supporting the development of new events such as the W Series in women's motor racing. We have seen very good viewing across our extensive sports portfolio in general and football in particular, which was a major contributor to the very low churn levels for Viaplay as the Premier League run-in and the Champions League's later stages ran later than usual. We broke our viewing records for the Champions League twice during the knockout games between Ajax and Tottenham and then Barcelona versus Liverpool.

More broadly, these deals that we did in Q1 with NBCUniversal and MGM have strengthened both our linear and on-demand offerings, which is very important in the summer period. And we are building for the future by developing more and more of our own IP. After investing into FilmNation at the beginning of this year, we have now also taken a minority stake in PICTURESTART, a new U.S. studio founded by successful studio executive Erik Feig, which will create, co-finance and produce premium scripted content for young adult viewers around the world. Erik has produced and supervised films with a collective global box office taking of over $14 billion, including La La land, The Hurt Locker, Twilight and The Hunger Games. This focus on Nordic storytelling and content with a very global appeal not only makes our content more attractive to viewers on our platforms, but also to third-party networks, which is why we have signed new long-term and large-scale distribution partnership deals with the likes of Telia and Tele2 in Q2 after similar deals with Boxer and TDC in Q1.

If we then move to NENT Studios, it is great to see that the strong performance in Q1 has accelerated further in Q2 with organic sales of 35% up. As you will remember, we talked last year about the delay in a number of productions. We're now seeing those come through after sales started growing again in Q4 last year, and the main driver of this growth is the scripted category, where we have seen a significant increase. Splay One also continued to generate double-digit sales growth as the demand for branded content and influencer campaigns continues to be very healthy. The high sales growth also filtered through to operating profit, which almost tripled in the quarter. The forward pipeline of signed development deals and contracted productions looks very healthy and should fuel further growth in 2019. The ambition is to gradually increase the number of productions being done in-house for our own channels and for our own services. International sales already accounted for 18% of total sales in Q1 this year, up from 13% last year.

Now I will hand over the call to Gabriel for his comments on our financial performance and position. Over to you, Gabriel.

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

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

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

Thank you, Anders, and good morning, everyone. Starting with the P&L. Sales increased by 7% on a reported basis and was driven by 6% organic growth as well as 1% contribution from FX. NENT Studios accounted for 14% of sales, advertising sales of 26%, and the remaining 60% is from Subscription & Other related sales. The combined operating profit for our business segment, that is before central operations and items affecting comparability, was up 5%. The negative EBIT contribution from central operations was up from SEK 44 million to SEK 80 million as a result of us now being a stand-alone and separately listed company, but also including additional investments to establish the corporate brand, culture and values. As Anders mentioned, this is in line with what we stated in -- at the Q1 call and the guidance given at the CMD that the negative EBIT contribution from central operations will be approximately SEK 250 million for the full year.

The total EBIT before items affecting comparability was therefore down slightly from SEK 464 million to SEK 455 million, but does not really reflect the underlying strength of the operating business. With no IACs this year, our total EBIT was up 10% in Q2.

Net interest amounted to a negative SEK 14 million, and that included SEK 5 million related to the effect from IFRS 16. Interest costs will go up in Q3 as we gradually move away from short-term financing to a more balanced profile. This now includes the successful SEK 1.5 billion bond that we issued during May. The effective tax rate in the quarter was approximately 21%, and we do expect our normalized tax rate to be approximately 20%, but you would see quarterly and even yearly swings.

Moving on to the cash flow. Our net cash flow from operations was down slightly compared to last year, and this reflected the timing differences in the working capital driven by content and sports rights payments, which I talked about on the Q1 call.

Our CapEx amounted to SEK 45 million, and our operating free cash flow therefore totaled SEK 521 million versus SEK 571 million a year ago. Working capital will swing between the quarters, which is why I think it's more relevant to look at the operating free cash flow over the half year, which almost doubled compared to last year. We still expect the full year working capital movement to be roughly in line with last year following investments in originals as well as the increasing internal sourcing of content from our studios. We also maintain our full year CapEx guidance of 1% to 1.5% of sales.

As you know, we made a SEK 219 million dividend payment during the quarter. The second dividend installment of SEK 219 million will be paid out in October. Therefore, our net debt ended the quarter at SEK 4.2 billion, which is 2.3x our trailing 12-month EBITDA before items affecting comparability, and this is in line with our target level of being below 2.5x. The financial net debt was therefore SEK 3.6 billion (sic) [SEK 3.3 billion], and that includes the remaining part of the dividend payment but excludes the operational leases.

Finally, let's have a look at the business outlook. We do expect to continue to generate positive organic growth, and this is primarily due to the growth that we see in Viaplay. We remain committed to delivering higher profits for our business segments in 2019, but do remember that we will have higher central costs versus last year, which is why we have only committed to deliver total group EBIT growth from 2020 and going forward. We continue to expect a transactional headwind of approximately SEK 100 million from the appreciation of the U.S. dollar this year, of which roughly SEK 20 million impacted Q2 and will progressively increase during the rest of the year.

So to summarize, we keep our guidance to deliver profitable growth going forward while continuing to scale our streaming business.

That's it for my comments, and now back to you, Anders.

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

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

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

Thank you very much, Gabriel. Let me then end by reminding you of our equity story and the investment case for Nordic Entertainment Group. NENT is very well positioned to benefit from the shift to on-demand and online entertainment consumption following the aggressive investments that we have made and continue to make into streaming. We have the most relevant content mix of sports, acquired and original programming, and we are also investing to make sure we have the right talent and skill sets to be able to capitalize on the significant growth and value potential that we see ahead of us.

Finally, we have a very clear capital allocation strategy, we are committed and remain committed to profitable growth. We are at this point not focused on maximizing profits. The key long-term value driver will be to drive volume growth for Viaplay by investing in content, people and technology. We have also committed to paying a progressive dividend as we deleverage.

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

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

Questions and Answers

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

Operator [1]

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

(Operator Instructions) The first question comes from the line of Sebastian.

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

Sebastian Olsson, SEB, Research Division - Analyst [2]

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

Sebastian, SEB. I have a question about the ARPU. Do you see the same ARPU levels on the subscriber intake during the quarter as on the current subscriber base? And also, what countries drive the strong intake in the quarter?

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

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

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

Thank you for the questions. The ARPU is fairly stable as we see sort of both a lower churn in sports and a higher intake in TV series and movies. This basically sort of evens out the impact from a higher share of the lower package, the lower churn in sports. So it's fairly, fairly stable, which is very positive, of course. When it comes to the intake, we have seen a good ramp-up in Norway, Sweden and Denmark is doing continuously very well, and we think we're making good progress in Finland, but we haven't invested that much yet in Finnish original content. We do have some plans. So I would say Norway, Sweden and Denmark continues very strongly. Finland is lagging slightly behind but doing well.

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

Sebastian Olsson, SEB, Research Division - Analyst [4]

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

Okay. And on the same question during -- about only Viaplay. Is it the same answer on that?

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

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

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

Only about -- you were talking about ARPU in general? Or did I misunderstand you? Because I was answering both questions regarding Viaplay.

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

Sebastian Olsson, SEB, Research Division - Analyst [6]

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

Yes, that's great. Sorry. The ARPU development in Viaplay intake compared to the current base is the question.

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

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

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

Yes. So the ARPU is stable. So flattish development, and that is the consequence of lower churn in sports and higher sales in TM, which means that we are fairly stable on the mix.

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

Operator [8]

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

And your next question comes from the line of Mikael. (Operator Instructions)

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

Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [9]

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

I have a few questions also. First, on Viaplay. Can you comment a bit on more engagement figures, what you see in your subscriber base in terms of viewing time and thought streams and overall churn? So we get a feel for how the underlying development really is.

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

Anders Hede Jensen, Nordic Entertainment Group AB (publ) - President & CEO [10]

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

Yes. Well, what we see overall is that we see stable development. The engagement is increasing in the sense that the viewed hours are increasing, the sort of streams is a consequence of what content we have on the platform. But as I alluded to in the call, we have some significant success with some of the originals that is driving up the usage on those particular formats, and the sports, given the very, very interesting ending of Premier League and Champions League, is also up. So combined, I would argue that the engagement from our customers on our content is on an increasing level, very important to see that people are staying on longer on the content that they consume, which is sort of probably one of the reasons why we see sort of reduced churn. There is more to watch and people watch longer of it.

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

Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [11]

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

Okay. And when it comes to price expectations going forward, can you say something about that and what it does on the overall Viasat packages?

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

Anders Hede Jensen, Nordic Entertainment Group AB (publ) - President & CEO [12]

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

Yes, Viasat, we are on the traditional pay-TV platforms. We are now doing the adjustments that we had planned. So that is following our plan and is built into the outlook that we have provided. On Viaplay, we are now announcing price increases on sports in Denmark as a first step, and we are following the development of Netflix price increases that we now see sort of traveling through Europe. And if and when they come to the Nordics, we will increase at the same -- to the same levels. We think it's a bit premature to start to create our own price category. We don't want to sort of, in any way, offset the very healthy growth patterns that we see right now, but we believe that pricing power is one of the key tools going forward as the category gets more and more interesting and people are trading down on traditional TV packages. This is still cheap.

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

Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [13]

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

All right. And another question regarding subscriber revenue. Can you explain the licenses and royalties side, what is happening there? And the underlying subscriber revenue grew by about 4%, while subscriber growth was in total 12%. What is the difference between those 2, if you can clarify that, please?

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

Anders Hede Jensen, Nordic Entertainment Group AB (publ) - President & CEO [14]

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

Sorry, can you repeat it? Difference between...

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

Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [15]

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

Growth by subscriber revenue if you look at -- excluding licenses and royalty and production.

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

Gabriel Catrina, Nordic Entertainment Group AB (publ) - Executive VP, CFO, Chief Strategy Officer & Head of M&A [16]

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

Yes. As we guided in Q1, if you see effect of the content, it's roughly SEK 40 million for the quarter on the content licensing. And then you also have the revenues of TVOD going up as well in the quarter, which is also driven by all the investments that we got in content on Viaplay.

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

Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [17]

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

Okay. And how should we estimate licenses and royalties going forward? What's your own expectations? How should we think about that?

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

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

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

It will vary from the quarters depending on what kind of deals that we are doing. We have announced a sharing of Premier League with TDC in Denmark, which will impact this, where we do make some margin on these, what you will call, sort of content deals going forward. But you shouldn't expect above and beyond that any significant increases. It will just -- will be a bit higher on the back of that deal in Denmark in Q4, but it will be similar to what you see now in Q2.

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

Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [19]

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

Okay. And my final question is about your comments about gambling segment and betting. Can you repeat your exposure? You said 25% in 2018, 21% in Q2, and you mentioned another figure. I missed that.

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

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

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

Yes, let me take you through it. I appreciate there are many, many sort of variables on this. So if we take it from the top, in the second quarter, our total revenues coming from advertising sales was 26% of the total sales in the group. Of that part, 21% was related to gambling and betting revenues. The correlating number in Q1 was 24%. And last year, it was 25%. So there is a decrease. But if you just take the betting money that we got from the Ice Hockey World Championship last year and just put them on top what we have sold this year, our development would be flat. So the decline is for us, given that we are so forward-leaning on sports, is a lot less negative than you may see other media outlets talking about. And we are continuously sold out. So there is no lack of demand in the market, and the pricing power remains fairly strong. So we don't expect any significant either up or downturns in the second half of this year when it comes to advertising sales. And it is very important to remember that our growth in subscriptions more than offset whatever decline you may see. And we are, given that we are investing so heavily in Viaplay and all the content that we are putting to the market, we are market makers. We are driving down people's viewing on traditional linear TV, and that's a very conscious decision. We have a format and a model that we think has worked very well for us, and our continued investments in sports make us an attractive provider of advertising for the betting companies.

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

Operator [21]

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

And your next question comes from the line of Martin. (Operator Instructions)

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

Martin Arnell, DNB Markets, Research Division - Analyst [22]

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

This is Martin Arnell with DNB. My question -- first question, can you just elaborate a bit more on the Viaplay sub intake in Q2? Because I guess this is typically a slow period for the intake there.

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

Anders Hede Jensen, Nordic Entertainment Group AB (publ) - President & CEO [23]

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

Yes. Martin, yes, you're absolutely right. Historically, if you look at a couple of years back and the numbers that we disclosed, historical numbers for last year, Q2 was a slower, and in fact, actually negative development quarter given the seasonality in sports. This year, we have turned the tables. We have a 90,000 sort of swing positively between second quarter in 2018 and this year, and that is related to 3 main sort of categories: lower sports churn because of later leagues or finishes in Premier League, in Champions League. Added new sports content during the summer, like the Copa America, the Champions League qualifications in Sweden and Denmark, and the fact that people then only have 1 month to sort of churn and return and fewer customers are seeing the benefit of doing that given that we have good content. So lower sports churn.

Secondly, we have significant continued sort of pull in the market for our TV series and movies package. And that is, of course, on the back of the successful originals that we have put to the market and a significantly increased library, a new feature full of movies that we are getting from the deals with NBCU and MGM, meaning that we have more reason to stay once you've sort of -- once you're done binging the originals, you can go on to a U.S. series or movies. So that is doing very well for us. And that is a very conscious investment that we've done over the last year.

And the third is that we have 2 significant business-to-business deals kicking in this quarter. And without saying too much about the numbers of those deals, let me say that we would have been positive in terms of sales development also without those deals. So on a like-for-like basis, where we last year didn't have any B2B deals, we have turned a negative quarter into a positive strong quarter for us. And I'm fairly confident, even though we don't have all the numbers yet, but we are fairly confident that we are gaining market share in the second quarter.

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

Martin Arnell, DNB Markets, Research Division - Analyst [24]

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

Okay. That's a good answer. And on the full year outlook for net new subscribers, you said around 200,000 before, and now you're looking at 250,000. But I mean if this development continues, it sounds a bit cautious or...

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

Anders Hede Jensen, Nordic Entertainment Group AB (publ) - President & CEO [25]

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

Yes. We are sort of ambitious but cautious people, Martin. I think it's fair to assume that 250,000 is something that we, of course, can beat, but we have -- we do have some delays in the sports leagues and we have to consider Q3 to be a, if we look at the historic patterns, slower quarter, not negative, but slower quarter. We are working very hard to beat that, of course. So if we come back and beat that significantly, you will hear us upgrading on the next call from 250,000 to another number. But currently, we think it's prudent to make this upgrade. The underlying performance is very strong and very positive for us.

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

Martin Arnell, DNB Markets, Research Division - Analyst [26]

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

Okay. Great. And then on this advertising discussion, I think you said here that you don't expect your pricing power to change here in the second half. But based on what we know now, if you look into the negotiations for next year, can you tell us anything about sort of where you see this pricing story which you've enjoyed for quite a lot of years now? Where do you expect that to head going forward?

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

Anders Hede Jensen, Nordic Entertainment Group AB (publ) - President & CEO [27]

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

Well, I think we continue to believe in the pricing power, and we're not naïve. And I need to give you some facts, obviously, to substantiate that claim. The betting companies, the race for market share is slowing down, but you have some very strong forward-looking betting companies with Swedish licenses and with presence in the other markets that continue to invest, and they are absorbing some of the decline from the other ones that haven't gotten the market share or lost their licenses. Looking into next year, we again have the Ice Hockey World Championship. We are adding more sports rights. We announced today the skating starting to build a very strong winter sports position. So these larger betting companies that will take over more and more of the share of the smaller ones, they continuously invest and are very positive to the outlook that we are providing. So even if the category as such is slowing down, our pricing power is built on the product that we are providing. And you should not forget that indifferent of this, we are sold out across the portfolio. Both our own sort of channels and the sold inventory that we have from the likes of Viacom and Fox, we're sold out and that pricing power is not to be underestimated.

So while I fully recognize the concerns that we have seen around advertising sales and it impacts maybe different between us and other media outlets, we are quite confident that we see a stable, and which we also said at the Capital Markets Day, stable to slightly positive, and we still remain stable. Whether it's positive or not remains to be seen, but we see a stable advertising business going forward also into 2020.

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

Operator [28]

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

And your next question comes from the line of Julia. (Operator Instructions).

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

Julia Matoshchuk, Morgan Stanley, Research Division - Equity Analyst [29]

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

This is Julia from Morgan Stanley. I have 3 questions, and the first one is again regarding gambling advertising. So could you just -- for example, if you want to wake up in the world where gambling advertising is completely banned, what is your total share of revenues [and to beat] which is exposed? Just again the worst-case scenario that could possibly happen. So that's the first question.

And the second one, could we have a bit of indication of Viaplay subscribers between the premium package and basic package? And the third one, we already discussed it, but again a bit of color on the dynamics of subscriber net adds across the quarters.

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

Anders Hede Jensen, Nordic Entertainment Group AB (publ) - President & CEO [30]

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

Thanks, Julia, for those questions. If I start with the gambling and betting. I fully understand where you come from on that question, but it's very hypothetical because a ban on gambling advertising in the markets where we are present, that interferes with the Constitution and the freedom of speech and freedom of marketing. So while it could happen, it demands legislation changes that will take us well into 2021, probably into 2022. And it's impossible for me to give you any substantial sort of relevant numbers that you can use for anything. We see sort of what we can expect for the rest of this year. We also see positive traction into 2020. I do expect there will be some form of regulation. I don't think bans are likely to happen. Also remembering that the largest betting companies in the markets where we operate are still the government-owned ones and they need to market themselves. So I don't think a ban is realistic.

And remember also the total numbers. 26% of our total advertising sales on group level, 26% of the total advertising sales, which of 21% is gambling, down from 25% full year '18, 24% in the first quarter. And that sort of means that we were down below 5% of total group sales related to betting. So it is a small number for us. It impacts other outlets, media outlets differently. I hope that answers your question, but feel free to follow up.

On the other question, the mix on the Viaplay sub space, the larger share of that base, and we don't give that at this point, but the larger share is the TV series and movies, but sports is growing on a healthy level even though you expect lower growth rates in sports because people have already decided whether they want sports or not. What we do see in sports is significantly lower churn levels, which is very positive for the development. And then I'm going to have to ask you to repeat the third question.

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

Julia Matoshchuk, Morgan Stanley, Research Division - Equity Analyst [31]

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

Yes. I just wanted to hear how you think about Viaplay development throughout the quarters. You already mentioned that Q3 is usually a slower quarter but you're working hard to make it happen. And how do you think about Q4?

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

Anders Hede Jensen, Nordic Entertainment Group AB (publ) - President & CEO [32]

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

Q4, if you look at the development last year, which was a very strong fourth quarter, you should expect a strong fourth quarter also this year. Last year, Q3 was slightly negative. You should not expect that this year. You should go from flattish to slightly positive in our third quarter. So typically, Q1 and Q4 are the larger quarters and Q2 and Q3 are slower. And historically, Q2 because of the seasonality, Q2 and Q3 have been in sort of negative numbers and we are now saying that we do not expect that to happen going forward. So we have taken significant steps to get sort of a more stable growth throughout the year in our investments and continued investments into both original content, Hollywood and sports will sort of underline and underpin the relevance in what we're doing. So strong Q1, strong Q4. As we see now, very strong Q2 as well. And you should expect Q3 to be in positive territory, albeit maybe slightly lower than Q2.

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

Operator [33]

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

And your next question comes from the line of Tom. (Operator Instructions)

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

Thomas A Singlehurst, Citigroup Inc, Research Division - Director and Head of European Media Research [34]

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

It's Tom Singlehurst here from Citi. Apologies for the slightly crunchy voice. I've got a cold. A couple questions on pricing Viaplay. I appreciate what you're saying about being a sort of -- or not being a first mover in terms of pricing. But in light of the news overnight on Netflix, a couple questions. One is, to what extent do you reckon the price elasticity for Viaplay differs from price elasticity for Netflix? So if you do raise prices, can you give us some sort of sense of magnitude or sort of what the increase in churn might be? And then, of course, sort of linked to that, so what's the thought process around -- or is there a thought process around perhaps not following on price in order to settle down on volume gains? (inaudible) choose to move up, is there an opportunity for you to not move it and to accelerate market share gains and net ad growth?

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

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

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

Thanks a lot, Tom. If we start with sort of the elasticity on the pricing, let's first start by separating the Viaplay base into sports and TV series and movies, where Netflix is the analog for TV series and movies, while we control the pricing power for sports. Hence, the price increase we're doing in Denmark now on our sports package. We are, for the time being, to answer basically both of your question, following Netflix, for 2 reasons. We don't believe that not increasing prices will significantly increase our volumes because the market pull and push is there and the demand for our product and the continued investments that we're making will not have a negative effect if we do a price increase on the lines of levels that we expect Netflix to be doing. Over time, we are creating a category where we will have a higher degree of local high-quality content, a library that is comparative to the globals and a first feature window with the latest movies that is significantly stronger. That could argue that we have a price premium to the globals, but it's too early to say. And from my experience from previous life and also our thoughts now is that we should be mindful about the pricing in the market and make sure we don't price ourselves by not increasing but not over increasing to stand out negatively until we have developed a category that is strong enough. Is that answering your questions?

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

Thomas A Singlehurst, Citigroup Inc, Research Division - Director and Head of European Media Research [36]

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

No, that's perfect. Very clear.

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

Operator [37]

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

Your next question comes from the line of Rasmus. (Operator Instructions)

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

Rasmus Engberg, Handelsbanken Capital Markets AB, Research Division - Head of Research [38]

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

It's Rasmus with Handelsbanken. I have 2 questions remaining, which have not been answered, I think. Can you explain how this sublicensing work? Is it -- is that revenue recognized over the contract of the sublicensing deals? Or are they taken sort of all in 1 quarter?

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

Gabriel Catrina, Nordic Entertainment Group AB (publ) - Executive VP, CFO, Chief Strategy Officer & Head of M&A [39]

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

It's Gabriel here. No, those sublicensing deals are recognized for the period of the contract.

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

Rasmus Engberg, Handelsbanken Capital Markets AB, Research Division - Head of Research [40]

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

Okay. So we don't -- we're not looking at some sort of a...

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

Gabriel Catrina, Nordic Entertainment Group AB (publ) - Executive VP, CFO, Chief Strategy Officer & Head of M&A [41]

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

No, we're not looking at one-off.

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

Rasmus Engberg, Handelsbanken Capital Markets AB, Research Division - Head of Research [42]

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

Yes, yes. Okay. Very good. Clear. Secondly, there is -- in the cash flow in this quarter, it's also for you, Gabriel, I assume, there is something called cash flow from other operating activities, which is slightly more than SEK 804 million (sic) [SEK 104 million] negative in Q2. Can you explain what that is and how that would work going forward?

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

Gabriel Catrina, Nordic Entertainment Group AB (publ) - Executive VP, CFO, Chief Strategy Officer & Head of M&A [43]

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

Yes. Now there, we have a one-off effect of the investment that we got. You're referring to the other investing activities, the SEK 104 million. Yes, that is partly -- that is related to the investments that we've done in the U.S. studio PICTURESTART, which just gives the one effect, but you shouldn't see that number just stay at that level unless we do other investments. It's just not an M&A transaction, so otherwise, would have been on the acquisitions, but since it was a start-up, then you see it under that line.

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

Operator [44]

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

And your last question comes from the line of Henrik. (Operator Instructions)

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

Henrik Mawby, Nordea Markets, Research Division - Senior Analyst [45]

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

Henrik Mawby from Nordea. Coming back to the subject of gambling companies and advertising dropping -- or demand dropping from them, and I guess, the event with global gaming is a driver of that. I've heard anecdotal evidence that advertising prices in the secondhand market has been in sharp decline in the early summer, actually being below the prices we saw earlier this year. What have you recently seen on the spot pricing in the advertising market? And on that subject as well, if I have understood things correctly, you normally have a share of spot price advertising slots and then you have a share of upfront contracted slots, but I'm also hearing that you have recently basically been having no spot sales any longer. Can you elaborate a little bit about -- around that dynamic as well, please?

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

Anders Hede Jensen, Nordic Entertainment Group AB (publ) - President & CEO [46]

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

Of course. Well, on the gambling, we have seen fairly stable price development. And again, it's related probably to if you compare different pricing powers between what kind of outlets you were talking to, we are enjoying the benefit of having a lot of sports. So that is, especially the second quarter, with Champions League, Premier League. Related to that Champions League being on free-to-air channels, that gives us pricing power and a premium that we are enjoying. So fairly stable. So we don't recognize any sharp declines. We do recognize that there are fewer betting companies buying as much as they have in the past, that's clear. But the bigger ones are picking up that slack. So for us, it has been fairly stable and the decline, again from 24% in the first quarter, 25% in 2018, to 21% share in the second quarter is 100% related to the Ice Hockey World Championship last year, an event that we will have again then in the second quarter next year.

And to your second question, we do sort of have both what we call the upfront, the full year agreements and the ad hocs, and we have in the recent years reduced the percentage on the upfront on the full year to benefit from the demand in the market by having more available spots. We continue to do that, but we're sold out. So if you call the media agency and say I want to buy something on NENT and you're not part of our current customer base, it will be very difficult for us to provide something to you because we are over 100% sold out. Only [near] very high sold-out ratios on AVOD. And we do have some inventory on radio because of the significant market share gain that we see in Swedish Radio. I hope that sort of answers your questions. Happy to follow up if it's not clear.

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

Henrik Mawby, Nordea Markets, Research Division - Senior Analyst [47]

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

Absolutely. Good answers. Can I have a few more questions, please? Licenses and royalties, how should we think about that line item going forward? It's been stepping up now over the past 2 quarters, which is the only quarters we have available historical data for that, but it's been increasing year-on-year. Is that something structural we should factor in?

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

Gabriel Catrina, Nordic Entertainment Group AB (publ) - Executive VP, CFO, Chief Strategy Officer & Head of M&A [48]

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

Well, we are doing more and more of these deals as part of the distribution agreement that we do and the way that we monitor this portfolio. It is not going to be a significant part of the business, but it is how we optimize it. If you look at what we guided now for next quarter, it will be roughly around SEK 40 million next quarter and then below -- slightly higher in Q4, but you shouldn't see this item becoming a significant part of the business and stay at that level going forward.

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

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

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

Just to add some flavor to that, Henrik. I think to sort of understand why this is changing, it's a matter of us doing new kinds of deals, and let me take the agreement that we've made in Denmark with YouSee, the TDC outlets on TV where we will be on pay-TV sharing the Premier League rights and provide a full sort of service, it's a managed service where we provide the studios for their new TV channel, and they get half of the rights for Champions League for pay-TV. So that is something that you consider what we would normally call a sublicensing, but it's a content sale with a margin where we're providing a service. Well, what we don't give away 100% of the rights and we always retain everything on Viaplay. And that is a new way of working in a market where the demand for relevant content and standing out in new ways from the distributors is something that we want to capitalize on.

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

Henrik Mawby, Nordea Markets, Research Division - Senior Analyst [50]

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

And one last question. I think this was touched upon during the call, but I missed it. Currency headwinds going forward, I think you mentioned SEK 20 million in this quarter and you have previously been guiding for SEK 100 million for the full year, right?

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

Gabriel Catrina, Nordic Entertainment Group AB (publ) - Executive VP, CFO, Chief Strategy Officer & Head of M&A [51]

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

Yes. Yes, that's right. And we didn't have any effect on Q1, so you should see the remaining roughly SEK 80 million coming in, in Q3 and Q4, but we are absorbing that in our guidance to deliver on the profitable growth for the year. So we are absolutely...

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

Henrik Mawby, Nordea Markets, Research Division - Senior Analyst [52]

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

There's no change to that.

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

Gabriel Catrina, Nordic Entertainment Group AB (publ) - Executive VP, CFO, Chief Strategy Officer & Head of M&A [53]

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

No, there's no change. So if we didn't have that, then, yes, we will do a little bit better.

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

Operator [54]

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

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

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

Matthew Hooper, Nordic Entertainment Group AB (publ) - EVP, Group Head of Corporate Affairs & CEO of Nent Group UK [55]

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

Thank you, Anders and Gabriel, and thank you all for your time and questions today. We'll now be road showing in Stockholm and London today and tomorrow, and we'll then visit the U.S. in September. So we look forward to meeting as many one of you as possible face to face. And please do not hesitate to contact Stefan or Emily in the IR team if you have any questions or would like a meeting. As you've heard, we have a unique story to tell and we hope that you found it interesting. Goodbye for now. Best wishes for the summer. And that concludes today's conference call. Thank you for your participation.

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

Operator [56]

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

That concludes our conference call for today. You may all disconnect.