Modern Times Group MTG AB (publ)

Thank you very much, and good morning, and welcome to MTG's interim report presentation for the first quarter 2020. My name is Lars Torsensson. I'm responsible for communications and IR here at MTG. I'm joined today by Jörgen Madsen Lindemann, our group president and CEO, and Maria Rudin, our CFO of MTG. We will start with a formal presentation, as we always do, followed by a Q&A session. Please keep in mind, questions are only enabled for those participating through dialing. Our webcast is listen-only. So without any further delay, please, Jørgen, can you take us through the presentation of our quarter?

Jørgen Lundqvist Yeah. Thank you, Lars, and a warm welcome to our Q1 resource conference call. I hope everyone on and off this call stays safe and healthy. The global impact of this pandemic has been severe on societies and markets in which we, our portfolio companies and partners, operate in. What I am and continue to be very impressed with how our companies are navigating and mitigating during this uncertain and extraordinary situation. I would like to extend a huge thanks to our customers, to our people, to the esports teams and players, and all our partners for your support that has enabled to deliver on our strategy. If we then go to the next slide, as for basically any company worldwide, as I said, the coronavirus pandemic has also impacted the NTG Group's companies in the quarter. But the outcome has been different for our two verticals. While the interim regulations on international travel imposed quarantine regulations and restrictions on hosting events, audiences have had a negative impact on our esport business, the gaming vertical has continued to perform stable towards more positive results, indicating resilience to the current pandemic. In order to optimize our performance, we have set out three key policies to deal with the coronavirus pandemic business impact, focusing on our business continuity, racial efficiency, and last but not least, business opportunities. So in relation to business opportunities, our focus is to deliver our products to the fans and partners, either through moving events online or to reschedule to a later date in the year. The gaming vertical, we have continued to develop the existing and new gaming product pipeline games we have scheduled to launch or test in 2020. In terms of operational optimization, we are taking the measures needed to preserve the financial health of our companies, so we can navigate and mitigate the impact to make sure we remain competitive and also learn from the crisis to understand if our companies are set up the right way and that we continue to be fit for purpose. Looking at business opportunities, we see examples of how we can accelerate growth by investing more in advertising, which is the case for InnoGames. We also discussed new partnerships with relevant industry partners for esports. Throughout the history of MTG, we have improved in our capital structure, so we are also now ready to capitalize and invest in changes in the landscape and in changing consumer behaviors, which we see these days. In October 2019, we initiated a strategic review about gaming assets. MTG has since then received multiple expressions of interest in the business from both strategic and financial investors. The Board of Management continues to believe that a separation of the gaming and esports businesses, which would allow them to adapt their own financial structures and independent strategic objectives, is the best way to maximize shareholder value. This separation may be implemented either through a sale of the gaming business or through a listing of the gaming vertical at the last and foremost growth market. The coronavirus pandemic has caused some disruption to the review process and the decision on the best route to separation would be taken once markets have stabilized and we're able to present two strong equity stories in a similar fashion as we did when we listed NEN back in March 19. Go to the next slide, looking at the highlights for the quarter. Our gaming vertical has shown resilience and maintained stable performance, and we have seen an upswing in user activation towards the end of the quarter. We were just an inch from setting an all-time high in daily active users in March. Instead, we broke the record now in April. While the eSport vertical has been negatively impacted, we quickly adapted and changed to ensure business continuity and performance, and we continue to deliver on our strategic agenda. This has been done primarily by successfully converting live audience eSport events to be online only, ensuring the show goes on, in a way that is responsible towards the teams, partners, fans, and society. Operationally for esports, we have done slightly better than what we anticipated when we communicated the impact of the coronavirus pandemic in March, delivering an almost flat revenue development for the whole of NGG. In esports sales, it climbed by 11% or 50%. assumption of minus 25%, with owner and operator seeing a decrease by close to 20%. Esports services enjoys a growth of 14%, and we expect ESS to grow also in Q2. Owner and operator continues to be the biggest part of the revenue. However, our revenue pipeline is taking a hit due to many current and potential future partners are holding back on their spendings due to the impact of the pandemic has had on their business. And isolating the quarter, we saw a negative impact from moving events online and postponing one market property to Q2. Having to operate already committed events with no audience or move events fully online meant that there were limited possibilities to reduce the cost base in the quarter, leading to an adjusted EBITDA loss. The gaming vertical grew in revenue by 3%, supported by an accelerated performance in March by InnoGames, There is a coronavirus effect when it comes to the increase in overall time spent on mobile games, as well as downloads and use of browser games when looking at the weeks before and after the lockdown in various countries. Thanks to a very accommodating ad market, InnoGames increased its marketing investment in the quarter, and the adjusted EBITDA margin for gaming ended at 21%, with adjusted EBITDA contribution growing in absolute numbers. Kongregate has been negatively affected by the pandemic due to low ad spend in their games. Let's move on to esports more specifically. And as I said, we have kept on pushing our strategic agenda despite the circumstances. Esports being digital by design creates potential to offset some of the negative impact as we as fast-growing sport can continue to deliver great entertainment by moving pure online. to pure online competitions and thereby creating new products and business opportunities. Our work to further professionalize the commercial part of esports has continued in the quarter and we have been trying to walk you through the main events. If we look at the development of our properties, in the quarter we made sure that esports as an entertainment form continued despite the coronavirus pandemic. DreamHack was also able to follow through with their properties live, while EIN Katowice, ESL One Los Angeles, ESL Pro League Season 11 and its final in Denver were all successfully converted to existing and well-received online events. ESL One Los Angeles and Denver final were moved to Q2 and fully online. We've been equally active on the esports service end. For example, in February, the biggest Rainbow Six event took place in Montreal, delivered by ESL. Also, together with Supercell, we conducted a big online Brawl Stars event in the quarter to reimagine Riot Games that partnered around their league, their title league of legends, creating a Northern Europe championship and a UK circuit. Looking into the viewership, the fans' behavior, and speaking of fans, The impact of ESL in general and the Pro League season 11 in particular, we delivered very strong audiences and was topping the Twitch chart the first three weeks of the tournament. Also, it broke year-on-year records in viewership. Overall, during Q1 2020, the spotlight has been on esports, providing the industry some well-deserved attention as a compelling and convincing media product, and not to forget one of the only sports which continued to be live in these difficult times where many Other sports, unfortunately, have come to a pause. Looking at the publisher partnership, we managed during and following the end of the quarter to secure seven new publisher deals. On the owner-operated end, together with the Blitzer, we will create a pro tour circuit around the time of Starcraft 2 and Warcraft 3, showcasing scalability of our new format. For esports services, several key deals have been closed. We have set a super sale. She has newly built ESL Studio in Katowice and will produce tournaments around the popular mobile games Ball Start and Clash of Clans. ESL will, in partnership with Tencent and PUBG Mobile, create a World League tournament with qualifiers broadcasted globally. With Bethesda, ESL will create a Quake Pro League with four events taking place in Italy, two times in Poland, and the US. Many of the events have been affected by the ongoing pandemic, but the products are in either online or postponed to new days to accommodate live audiences. Also, ESL and DreamHack strengthened their partnership with the teams, as ESL and DreamHack signed a historical agreement with 13 global leading esport teams. We adopted the Louvre Agreement, a sudden nod to the Formula One circle, for whom the Concorde Agreement from 81 played a pivotal role in shaping the sport. Between then, the partners of the Google agreement have won 28 ESL and GreenHack master level competitions and two Intel Grand Slams in the last four years. The partners will present all of the top 10 ranked CSGO teams in the world. The agreement further established the ESL Pro Tour as the leading esports circuit former globally while also serving yet another example of ESL and GreenHack shared ambition to build and commercially professionalize the global business of esports. We onboarded several new media partners, such as MediaCast in Russia, TV2 Denmark, TV2 Norway, Colset, Telia, Mediaset, Sky, and so on. Today, we are also thrilled to announce Twitch as the most strategic media partner for GreenHack and ESL. This is a significant deal and a milestone for our eSport companies, and it shows the attractiveness of the media product that we have. Our collaboration with Twitch dates back to 2009, when it still was called Just Into TV. This new collective media partnership is reconfirming our long-standing operation and highlight the importance and relevance Twitch has to ESL and DreamHack communities, as well as the value the ESL and DreamHack eSport content brings to the global Twitch audience. Our sponsorship is sold during the quarter. Our eSport companies prolong important partnerships with brands such as TSL and TFT, Corsair and Pepsi, and onboarding new partnerships such as Sony Mobile, U.S. Pringles, and many more. Our revenue pipeline is taking a hit due to many current and potential future partners are holding back on their spending due to the impact of the pandemic has had on their business, an impact we should expect to continue in 2020. While ensuring acquisition of new partners remain a priority, we also ensure that our existing partners are pleased and can value the return and therefore continue to deepen their involvement in esports. Now let's look at our esport B2C services, also known as ESL Play, ESEA, and Batline. The B2C part of our business has seen an increasing amongst fans to play online and participate in smaller amateur competition. As a result, when looking at our B2C business, such as ESL Play and our Counter-Strike subscription services here, has seen a record-breaking engagement from users during the quarter. We've also seen more new and existing user participating driven in part by our partnership with Sony, where it still powers the competition, including titles like FIFA and NBA 2K. Even though the current turnover is relatively small, these are very interesting trends, and from a B2C product perspective, we will spend more time understanding them and opportunities within B2C Esports. And last but not least, build a relevant commercial product around these fan-relevant B2C products and results. We move on to the gaming. Take the next slide, please. As mentioned earlier, our gaming vertical has been more resilient towards the pandemic, primarily driven by continued positive development for InnoGames. Comm2Games, given its focus on more ad-based revenue model, has been negatively impacted during the pandemic. Also, compared to last year, the quarter was negatively impacted by the terminated published deal with HyperHippo. I'd like us to take a closer look at InnoGames and the uplift in user matrix that started in the month of March. The environment for making marketing investments has been very good, leading us to spend more on user acquisitions, this together with organic growth and higher user activation. We have seen good traction amongst players across several games, especially Force of Empires and the classics. As an anecdote, it is interesting to see that it's not only new players joining, but also fans from before enjoy new content that we have created. Elvanar is not yet seeing the same positive trends. However, we feel that the current work being done with the game on the mobile side should help it to perform better going forward. Because of more registrations and increased activations, our daily active users has increased for InnoGames in March, and we broke a new record for the KPI in April. The relationship is not one-to-one. but this trend should indicate that we are looking at a strong revenue trend for Q2 2020. And we are not just seeing increased DAO, the playing time has also increased quite significantly for in-game, close to 30%, and this shows that we see a higher engagement of the whole community. Even though there is not a perfect correlation between DAO and average revenue per 80 active users at DAO, we have slowly but surely also seen an improving trend for this matrix. I said more users that are engaging at a higher level with our games create an interesting platform for future positive revenue development. It needs to be mentioned as a caveat that these positive trends might or might not be temporary on the back of the pandemic. That needs to be seen, but for now we are happy to see a surge in users at the InnoGames side. If we then look to the next slide and look at our top priorities in Q2 and the full year for 2020 going forward, as I started out, we continue to push in our strategy, and we have an opportunity to move our positions forward in both our verticals. We have three clear priorities going forward, business continuity, operational efficiency, and sizing of new business opportunities. If we look at the business opportunity first, for the esports vertical, we will continue to build our pro tour format despite not being able to have live audiences. Consistency and relevance are key to maintain our growing relationship with all our stakeholders and make esports a commercially interesting and relevant sport for all stakeholders, fans, teams, sponsors, media buyers, and publishers. As a result of the current situation, DreamHack and ESL are moving a significant portion of their schedule online. Between ESL and DreamHack, We will cover more or less all days through multiple titles in Q2 2020, providing esport entertainment to fans. The gaming world, we are maintaining the schedule for the nine new game titles being either tested or introduced across 2020. We are also on the back of an accommodating market, investing in marketing to further grow our user base in the gaming world. For Kongregate, we would like to continue to secure publisher agreement and partnership with Nickelodeon, Kongregate will be developing a SpongeBob SquarePants idle game that will be launching in 2021. SpongeBob remains one of Nickelodeon's biggest franchises, beloved by millions of fans worldwide, and we are very pleased to see that Kongregate will be able to work with such a strong IP. Being nimble and efficient during the coronavirus pandemic is, of course, key. especially for our east border vertical, which, as mentioned, is severely impacted by the ongoing pandemic. It will also create the possibility to get out of this crisis much stronger than it went in with a setup that is more fit for purpose. For Q2-20, ESL and DreamHack are reducing both costs of so-called good soil and fixed costs. As we have indicated to you, these cost reductions will be at least 150 billion cents and will be predominantly in Q2. The lion's share of the savings come from us taking down variable costs as a result of our properties moving online. Examples of cost of this category is what we call venue-built operating travel. We're also making use of follow agreements with governments in our key markets. We are also looking at a more permanent fixed cost being taken out. This has more to do with the way we organize and work and would be independent of the pandemic. With what we know right now, we'd be comfortable reaching at least the $150 million in savings in Q2 2020, maybe even slightly more. With our strong position in the market, the current situation is also providing us with opportunities in both the esport and gaming world. With the esport first, as has already been shown in Q1 2020, we are building closer relationships with the publishers, together developing the esport format both online, mobile, and live. The focus is to continue making progress here during 2020. In an environment where live sports entertainment is scarce, we will, of course, continue to develop our online format and provide opportunities for both digital and traditional media buyers to engage in esports. Within the gaming vertical, we will continue to push our investments into marketing on the back of significantly improved return on ad spend levels. That's a window of opportunity to attract even more users and create a larger base for both indie games and common games to leverage upon. Then I also believe that the testing and trial market for our new games would be excellent, with so many gamers being available as a result of more people spending time at home. As a matter of fact, we will accelerate the launch of three common games to happen already in Q2. With all this in mind, we feel that our guidance for Q2 needs to be slightly adjusted, Earlier, we anticipated revenues in the esports vertical to decline 35% to 45% in the first half of 2020 in comparison to the same period for 2019. Now we feel this will be in the range of 25% to 35% instead. And as I've already alluded to, the savings in Q2, 20 would be at least 150 million SEK. With that said, over to you, Maria, to walk us through the financials.

Thank you, Juergen. And if you can all then move to the next slide. As Jørgen has presented, we ended the quarter with slightly higher sales than anticipated on the esports side, driving overall group sales to 924 million kronor in the quarter. That is a 2% decline year-over-year or a 6% decline including currency impact. As the Swedish kronor further weakened against both the euro and the US dollars, we continue to see a big impact on both reporting revenues and earnings and similar to balance sheet items. Gaming increased its proportionate revenue contribution in the quarter to account for two-thirds of the turnover, and I expect it to further increase in the second quarter. Adjusted EBITDA losses increased year over year, even though we had improved performance in both our gaming vertical and lower costs at our central operations, but this as esports losses increased. If we then look further into the increased losses in esports, this is a combination of revenue loss and fund costs. And with the risk of repeating, the main reason was because of us having to operate already committed events with no audience or to cancel events at a short notice, which means that there are limited possibilities to reduce the cost base in the quarter. This means that roughly 50% of the increased losses in the eSports segment in the quarter is due to sunk costs because of moved and canceled events, and the remaining 50% is a combination of us moving the ESL1 loose-and-loose event into Q2. not fully monetize the IEM Katowice, and the fact that the Katowice this year is not a major as it was last year. Rather, this year we will have the CSGO major in Rio, which is moved from Q2 to Q4. And then finally, that the underlying investments we have made into the ESL structure and the operation teams in ESL, DreamHack, and DreamHack Sport Games. Several of these cost items will be addressed in Q2 as a part of the $150 million savings that we have identified, and also in the quarter, this some costs will be limited. And as Jørgen also presented, we are working on identifying more permanent savings as we are reviewing our way of working at ESL and DreamHack, and we come back with more details on this as we have concluded the work. If you can turn the page, the EBITDA adjustments in the quarter amounted to negative 48 million SEK, to be compared to 79 million SEK last year. And as some of you might have noticed, the cost for the LTIP and MIT was elevated in the quarter, This was mainly due to the management incentive programs in the gaming vertical, and as a temporary effect in the quarter, I expect the run rate to go back to a more normal level going forward. And as we will not launch a new program at the headquarter in 2020, the new expected run rate will be approximately 20 million per quarter. If we then look at the depreciation and amortization, which increased slightly in the quarter, this reflects the higher amortization within the gaming segment as we both launch and acquire new games. which we're amortizing on backup. This quarter is also the first quarter with the IFRS 16 comparable numbers year over year. Finally, the net financial items were positive in the quarter, predominantly driven by the exchange rate movement. We should remember that we have our cash balance held in euros, and given the weakening of the Swedish krona, we do see positive impact here, partially realized and partially unrealized. And if I could then have you turn the slide again. We're moving to cash flow statements, and the group reported an improved net cash flow from operation of negative six or nine million. The positive contribution versus last year is following the effects in the working capital, where we see a positive improvement, and this is related to the timing of receipt and the service delivery within our esports verticals. And this, I believe this is a temporary change, and I do expect it to reverse throughout the year. CapEx was slightly up in the quarter. This is we're having nine games in development within both InnoGames and Kongigate, and this is key driver behind that. And we did also back on some of the new publishing agreements in ESL, invested some studio build-up, also driving CapEx in the esports vertical in the quarter. Within our VC fund, we did two follow-up investments within Bitscroft and PlayVenture, and we also realized our first exit with Phoenix Lab. Thus, the NIST investment in the VC fund amounted to $6.5 million in the quarter. The group remains well-funded with a net cash position of $1.8 billion as of Q1 2020. Gaming continues to be the cash flow contributing entity, and we are working focused with eSports to optimize the current cost structure to minimize the cash outflow. Post-quarter end, we did pay the annual dividend to the Indie Games minority. It was later than normal this year due to the strategic review. Does the cash balance post-quarter end was immediately impacted by SEC 190 million outflow? And that concludes my financial review, so back to you, Jørgen.