Modern Times Group MTG AB (publ)

Ladies and gentlemen, thank you for standing by, and welcome to the Modern Times Group Q3 2020 results conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. Also, I must advise that the call is being recorded today, Wednesday, the 4th of November, 2020. And without any further delay, I will now like to hand over the call to your first speaker today, Mr. Oliver Cara. Thank you. Please go ahead.

Thank you, operator, and good afternoon, everyone. And welcome to MTG's interim report presentation for the third quarter of 2020. As stated, my name is Oliver Cara, and I'm responsible for media relations at MTG, and I'll be moderating today's call and later on our Q&A on the financial results. MTG's President and CEO Maria Rudin and CFO Lars Thorstenson are with us on today's call to present the quarter and take your questions. As usual, we'll start with the presentation followed by the Q&A. Please keep in mind, as stated, that the only dial-in participants can ask questions. That concludes the introduction. Over to you, Maria.

Thank you, Oliver, and welcome to everyone joining our conference call. I'm pleased to present a strong set of numbers in my first quarter as the new president and CEO of MTG. I look forward to taking your questions later, but first, let's dive into the presentation. The first quarter saw a strong result and record high profits from the gaming vertical and our group. Our net sales in the quarter amounted to CEC 912 million and an adjusted EBITDA of CEC 196 million, with a record adjusted EBITDA margin of 22%. InnoGames continued to impress with a strong performance, driven primarily by Port of Empire, and saw a strong growth in both its mobile and browser sales in the quarter. Cognate, on the other hand, did not deliver growth top line as we would have liked to see, this largely due to the discontinuation of two publisher titles last year, though we're very excited to have seen them launch Teenage Mutant Ninja Turtles and Mutant Madness games successfully in September. In September, we also announced a combination of ESL and DreamHack to create a combined entity ESL Gaming. While we continue to operate both brands, we believe that this is an important step to take our esports vertical to the next level. We also continue to successfully steal significant media rights deals in the quarter, further expanding our reach with strong partners in important markets such as Brazil and China. and we continue to provide relevant entertainment to the esports community online despite the extraordinary circumstances from the pandemic affecting live audience events. Now, let me elaborate on our esports vertical performance in a little bit more detail. To mitigate the risk and to give the best chances for our master profits to host studio events with the team present, we decided to push several events from Q3 into Q4 in early 2021. Although the intention to reduce activity meant lower revenues in the quarter, We substantially offset this by tightening the cost structure. O&O in the quarter declined 35%, and we continued to see a decline in sponsorship, but the new media rights deal signed early in the year drove growth in media rights and changed also the revenue mix in the quarter. ESL successfully hosted two multi-property events as online productions, ESL One Cologne and ESL One Thailand. ESL One Cologne was moved to a closed studio environment and saw teams compete across the world in four regional tournaments The event was successful and set new standards in terms of production and broadcast quality, and ESL One was completed also in an online format across two regions, the Americas and Asia. DreamHack and DreamHack Sport Games held no master events in the quarter, but arranged a series of smaller challenge events per CSGO, and they also gained pains in the latter part of the quarter from a strong lineup of ESS events. Fan engagement has successfully been maintained in the quarter, with our watch significantly increasing for both our master properties. Further, in October, ESL proudly reported new viewership records across all the metrics, including a new all-time high of more than half a million peak concurrent viewers, making it the most watched online match of CSGO in history. We see mobile esports as a key growth area going forward. In Q3, ESL Gaming announced the return of ESL Mobile Open and the extension of the format to include all the countries from the MENA region to compete alongside Europe. The 2019 competition attracted more than 500,000 participants in total, a number that we hope to see be beaten by the new event. Also in the U.S., we had our ESL U.S. Mobile Open running its season six with a final schedule now in November. ESLs declined by in total 57% in the quarter, largely as a result of partner either canceling, postponing, or downscaling events and activations. With that partner, we have key stakeholders such as PUBG Mobile, Fortnite, Rocket League, Clash of Clans, and the Nordic League of Legends. We continue to secure several new media partners, such as and Global Omelette, extending our reach for our esports content in more languages and see more markets worldwide. Halfway through Q4, we've seen strong execution of several events. We have the ESL Pro League and IEM New York, both successfully held in October. ESL One Germany finished now in November. and we now look forward to IEM Beijing and IEM Global Challenge running off a very busy quarter. While we look forward to being able to host live audience events again, we're proud of how our portfolio companies have adapted to the new circumstances. It's fair to say there's still a lot of potential for improvement in how we produce and distribute our esports content when produced online, but we're actively innovating every day, using the latest technology to create the best possible digital remote experiences for our fans, And the work we put in now will also benefit the way we produce and distribute digital esports content also when the pandemic is long gone. Last but not least, we also wanted to briefly touch upon the combination of ESL and DreamHack, which was announced in late September and is expected to be finalized in Q4. The new ESL gaming entity brings the best people globally in esports together and can be more successful in accelerating products and events innovation, more efficient in operations, and has the potential to further stand out in offering the widest product portfolio to its media partners, brand sponsors, and games publishers. The combination is also an important step to cement our leading position in esports and gaming lifestyle, and an important milestone in our ownership in both brands. It's important to underline that we will continue to operate and develop both brands, but a combined entity is adapted for scalability, while also creating new opportunities for finages. So we then move over to our gaming vertical. The third quarter was particularly strong for our gaming vertical, where InnoGames' performance stood out, mainly driven by Forge of Empires. While Concrete had underlying growth, its results were naturally still heavily affected by the loss of the publishing deal with HyperHippo for AdCom and AdCap. While we have invested in the move to mobile for InnoGames and have been happy to see a steady growth in the mobile platform, this quarter we can also see that browsers stand for a significant portion of growth, adding 25%. And InGame's most experienced title, Tribe Awards, made its return to the top three game charts, and this is a display of the company's talent to boost longevity in its successful titles. Turning to the gaming KPIs, we recorded just another quarter of high growth in our ARPDAU, which grew by 23% versus last year, and also to continue this growth trajectory on a sequential basis. This is a testament to the popularity of our top games and shows the scalability and predictability of our core games' assets. It's important to note that while overall MAO and DAO decline year-over-year, this was mainly driven by the loss of its two third-party titles and congregates. On the other hand, inner-game grew its daily active users in the quarter, while the monthly active declined somewhat and in line with our anticipation. The Q3 results we present today is built on the foundation of strong games, and we can see the clear benefits on the increased user acquisition spending Q2. Our play base is today more active, more engaged, and spends more in the games than before the pandemic impact. This gives us and the portfolio companies that we work with the confidence to move ahead. If we then look at new games pipeline development, that is also progressing according to plan. InnoGames has four new games in development, two of which we have already shown very strong results in retention tests, and we are optimistic about launching at least two of these games in H1 2021. We further anticipate that this will drive both increased revenues, but also an increase in marketing spend. The first title that is scheduled for launch is in Q1, and that is an exciting new IP in the city builder segment. With that said, I'm going to hand over to you, Lars, to walk us through the financials.

Thanks, Maria. As we've been touched upon, we delivered a solid set of results and record profit in our gaming vertical in the quarter. Additionally, our eSports vertical demonstrated good cost control and a more favorable revenue mix, outperforming earlier provided guidance. With that said, let me go through the P&L in some detail. Since the eSports vertical had a light event schedule with few master properties, the underlying net sales were down by 9%. However, the gaming vertical grew underlying net sales by a solid 12%, driven by high engagement among gamers and successful in-games events throughout the quarter. Adjusted EBITDA increased by more than five times year-over-year, with improved performance in both verticals, combined with lower operational and central costs. This was partly thanks to higher sales and the more normalized marketing levels at InnoGames, and partly due to the esports verticals. Adjusted EBITDA improved significantly versus last year, thanks to more efficient operations on the back of online events. Looking further into the reduced losses in esports, we did a bit slightly better on our savings target with approximately 200 million Swedish krona in lower cost in the quarter, primarily through additional COG savings as we fine-tuned the online format for our tournaments. We continue to improve our understanding for what good looks like, and gazing into the future, we have a lot of learnings to bring with us into a more normalized environment. I would also like to re-emphasize that we do expect savings to continue as long as we run events online or in studio formats. Additionally, through the merger of ESL and DreamHack, we will not just be creating the largest e-sport asset out there, but also the most efficient. Short-term fixed cost savings are conservatively calculated at approximately 50 million Swedish krona for 2021, but we believe that there are more long-term efficiencies to aim for as the two organizations are further integrated and will return to live audience events. The financial performance in the quarter was further positively impacted by the growth of media rights, providing a more favorable revenue mix. The EBITDA adjustments in the quarter amounted to negative 72 million Swedish krona, to be compared to minus 36 million last year. And some of you might have noticed that the cost for management incentive program again was elevated. Yet again, this is following the very strong results we see in the gaming vertical in general and in games in particular. Strong engagement in the form of higher RPDAO levels has led to new records, and as a result, higher payments for incentive programs in the gaming vertical. Depreciation and amortization were in line with last year, reflecting higher depreciations within the gaming segment as we both launched and acquired new games. which we are depreciating on the back of, partly offset by lower depreciations in esports and the amortization on purchase price allocations, which was slightly down in the quarter. Net financial items were adverse in the quarter, predominantly driven by exchange rate changes and mostly unrealized. One should remember that we have our cash balance held in Euros, and given the recent and slight strengthening of the Swedish Corona, we do see a negative impact this quarter. Finally, the group tax was minus 59 million Swedish krona, predominantly reflecting the increased result in the gaming vertical and InnoGames. So let's move on to the cash flow statement. On the back of the strong financial performance, the group reported an improved net cash flow from operations of SEK 135 million, driven by InnoGames, but also thanks to maintain good cost control in the esports vertical. The working capital change of 42 million Swedish krona in the third quarter was predominantly driven by the gaming vertical, which had a high outflow of payables. Additionally, payment patterns towards major platforms, provided such as Apple and Google, had a negative impact on working capital change. CapEx was lower in the quarter compared to last year, which was mainly driven by congregates acquisition of three yet-to-be-revealed IPs. In the quarter, Kongregate successfully launched Teenage Mutant Ninja Turtles. Hence, there are now five remaining games in development within both InnoGames and Kongregate. And we did also invest in studio build-up and B2C platforms development at ESL. All in all, the group did have a total net positive change in cash in the quarter. Not a lot, but still positive. As a result, the group remains well-funded, with a net cash position of 1.6 billion Swedish kronor as of the third quarter of 2020. Gaming continues to be a cash flow contributing entity, and we are working hard with eSport Vertical to optimize the current cash structure, especially in the light of the ESL and DreamHack merger, to take strides towards a positive adjusted EBITDA contribution from the vertical. Let's move on to the updated and upgraded financial guidance. As we have concluded, the operation development has been stronger than we expected when we provided our early guidance for the second half of 2020. As a result, we have upgraded our new outlook to reflect that improvement. The important changes are the following. Revenue in the esport vertical is expected to decline by approximately 27 to 32 percent, and we previously assumed minus 30 to minus 40 percent in the second half of 2020 compared to the second half of 2019. ESL and DREAM Act will continue to reduce both cost of goods and services sold and fixed costs. These things will be at least 325 million Swedish krona, which is no change from our earlier guidance. Group adjusted EBITDA for the second half 2020 is expected to amount to between 375 and 400 million Swedish krona, and that should be compared to our earlier guidance of 250 million to 300 million Swedish krona. And this is on the back of continued strong user engagement and successful in-game events in the gaming vertical. That concludes my final financial review, and any questions you might have, I would be happy to answer as part of the Q&A. Back to you, Maria.

Thank you, Lars. To summarize on the third quarter, we're proud today to present a report with another record-set result for the group and for our gaming vertical, one that is on the result of a very strong underlying momentum development built over time and its team efforts. We're seeing growth not only on the mobile platform, but also on the browser. And our new game development pipeline is progressing according to plan, and we plan to launch two new promising titles in the first half of 2021, of which the first will be already in Q1. Our esports burger has proven that we can produce and distribute world-class digital-only esports content that is lucrative of thousands of viewers to consume, as it is for partners to invest in. And we have successfully also continued to sell media rights to our products. We consciously rescheduled several multi-property Q4, which is therefore a very packed and busy quarter. We pushed our vertical strategy to further converge our two strong portfolio companies, combining them into one entity with two strong brands. All the while, we have held successful digital multi-property events and continuously innovated and improved the way that we produce and distribute digital-only esports, ensuring that we keep the show alive and our audiences engaged. We have completed our strategic review process with MTG intending to retain and further develop the value of both the eSports and gaming verticals. We aim to do this both organically and through acquisition. We will revisit the idea of splitting the company into two only after we create the step value for both verticals. The eSports events will be held digitally or online for the remainder of 2020, and what 2021 looks for remains to be seen. While we want to reintroduce live events Again, we're confident that the show can go on regardless. The record-setting gaming vertical performance and the continued resilience of our esports vertical has allowed us to upgrade our guidance for the second half of 2020 to reflect the stronger-than-anticipated performance from both verticals. Our established games continue to perform very well, driving engagement within our play base, and our new games pipeline is looking stronger than ever. I look forward to updating you on the progress from what we will see will be a very intense fourth quarter. That concludes our format presentation of our Q3 interim report, so over to you, Oliver.

Thank you, Maria. We are now ready to take any questions that you might have on the interim report or the conference call presentation. Operator, can we please have the first question?

Yes, our first question is from the line of Martin Almau from DNB Markets. Thank you. Please ask your question.

Hello, everyone.

Hi, Martin.

So my first question is on esports and what was the main reason for the raised outlook there for the second half?

So thank you, Martin. We had a question from Martin at BNB on the main reasons for the raised expectation in the market for esports.

No, I think – hi, Martin, by the way. The initial guidance was between 30% and 40% decline, and now we tightened and lowered it a little bit, so we're now seeing 27% to 32%. And it is that we are seeing a strong underlying revenue momentum. That's what we initially saw as we closed Q2. So we're very happy about that. But the underlying trend still remains when you see the brand sponsorship is declining, but we see a very strong media trend. both when it comes to reach, getting many more media partners on board, but also value.

Just building on that, Martin, as well, as we mentioned in our presentation, we are getting a better and better understanding of running online and studio events as well, meaning that we can also packetize that product in a better way. That means that the entertainment that we are now providing is improving, and that is also reflected in guidance.

Okay, great, thanks. So I guess it's a lot about you adopting to online in this problematic environment. That's fair to assume, right?

Yeah, but it's a combination of having and also getting more clarity. I think that every day we're getting better at a large point, and also we are getting better visibility. We can also have a better communication with our partners. So it's a combination of several things. But I think that where we stand today, is a much stronger position, even though it's a turbulent world around us compared to about three and six months ago.

Yeah, and if we look into 2021, and given where we are now with the pandemic, and I guess it's fair to assume that you will not be able to have fiscal events early next year or, I mean, how do you view the 2021 outlook given what you know today?

I think based on what we know today, it's too early to assume anything. So I think that we are planning parallel worlds. If you may have seen, we have already announced the ESL Pro Tour Counter-Strike schedule. So you have the date set for next year. We would like to be able to hold live events on the back of those events, but the fact is that none of us know. So we need to plan accordingly, which is the same thing that we've actually done now for the last six months. And I think that we're getting better and better also at having this parallel world where we're actually living in uncertainty when we can start to introduce both studio events as the first instance and then eventually live events.

Thank you, Martin. I think we'll have to go to the next question.

Yes. But before that, I would just like to remind the participants who would like to ask questions, if you may just press star 1 and then wait for a name to be announced. So our next question is from the line of . Thank you. Please ask your question.

Thank you. here from Carnegie. A few questions for me, starting in the gaming segment. On the margin side, I mean, fantastic margin now in Q3. What are the dynamics behind this very strong margin? I mean, I suspect much of marketing. Also, what is reasonable to expect now in Q4 and also 2021, given the new game launches that is expected next year? Thank you.

Thank you, Oscar of Carnegie. We had a question on the gaming side and what has been the dynamics behind the margin and what our expectations are for the coming quarter and longer down the road in 2021. I think this is a question for Maria to answer.

Yeah. Hi, Oscar. No, it was an exceptionally strong margin that we saw in the quarter, which we are, of course, extremely happy about, but we don't believe that that is a sustainable run rate margin going forward. The dynamics was a twofold. I mean, underlying, as you recall, we had a very high user engagement in Q2 and had a very strong both uplift of new customers but also re-engagement of old customers. We were anticipated to normalize in Q3, which we have seen, but we've still seen it normalized at a much higher engagement level than what we've seen pre the COVID-19 outbreak. And that is something that we've been enjoying throughout the quarter and that we did not anticipate in full before the quarter started. At the same time, we are also, compared to, I mean, we invested quite a lot in marketing in Q2. We beat the benefits of that in Q3, and you should expect the benefits to continue over going forward, given the longevity of the cohorts within InnoGain. So, of course, that also positively benefited the quarter, whilst the underlying marketing effect was more normalized year over year. And When I say that, it's important to remember also that we last year actually did invest quite a bit of marketing also on the new games that we subsequently went into phasing out, mode off. So on back of our core games, we still continue to invest, but the total marketing is actually year down, year over year. Oh, and then your second question, sorry. Next year, yes, you should expect marketing to go up. We're very happy to see the games pipeline that we have. As I said, we had two games in retention tests already with very strong results, and we have another two games going into retention tests now in Q4. So we're confident that we're going to have two new games released in next year, H1, and that will, of course, come on back of increased marketing efforts, but also then sales.

And just as a friendly reminder, Oscar, I know you're well aware of this one, but we are expecting these games to land in a good way after being launched. And there is a strong correlation, of course, between higher market spend and successful games, just to bring that on board as you think about 2021. Yeah.

Can I add one more comment as well so we can have it all there? The InnoGames games, because there is two InnoGames that we will launch in the first half, I mean, As we already stated, it's not profitable in year one when you do the marketing. It's a little bit different when you launch a casual game, but the mid-core game is not profitable until year two, on back of new game launches and marketing.

Thank you, Marianne Lars, operator. I think we are ready for a follow-up. Next question.

Yes, sir. It's from the line of Tom Singletress from Citi. Thank you. Please answer your question.

Hey, Maria. Hey, Lars. Thank you for taking the question. It's Tom here from Citi in London. I was going to ask about esports. I mean, obviously your attendee revenues, your sort of pure live events revenues are minus 100%, so that's clear. But just to try and make the numbers maybe a little bit clearer for the media part or the media-related revenues, so, you know, anything that you generate from either sort of sort of right sales or advertising. I mean, can you give us a sense of what the growth is in that revenue line year on year? Just so we have a rough idea of the progress you are making in sort of transitioning or sort of developing the sort of the media revenue streams, if that's the right way of putting it. So that was the first question. The second was actually on... the sort of marketing spend at games. I suppose reading between the lines, the fact that you didn't carry on the same level of spend on marketing in the third quarter tells us that you actually did expect the lockdown effect to be temporary, but it's proven a little bit more permanent. So I suppose I just wanted to go back and sort of test that assumption. Do you think we are seeing a sort of one-off blip in terms of engagement? Okay, it's an extended blip, but do you think, for example, next year you'll be facing sort of reduced level of engagement? And that's something we need to factor into our thinking. Thank you.

Thank you, Thomas. So first we have a question from Thomas at Singularity City. on esports, S&D revenues going down, and if we could elaborate somewhat on the transitioning and how the media revenue streams can develop over time. We can start off with that one, and then afterwards we have follow-up questions on the marketing going down in the quarter, if we are seeing any, if this is an isolated blip in engagement or not.

Hi, Swan. I'll start with your question on esports. And you're absolutely right on the ticketing sales, which is down 100%. But I mean, one of the other big components that we see also in our own and operated is the brand sponsorship sales. And I think that we've been quite clear both in Q2 and also in this report that we continue to see the decline in brand sponsorship sales. And I think there's a combination of two factors. I mean, first of all, even though we are driving better sort of viewing numbers and reach on our content than ever before. We cannot do all the activations that we have planned in a physical arena and event. We're working on it at a large point, and we are refining and improving our both audience experience, but also interaction in the broadcast to also provide the best outfit for our grant sponsors. But there's still a way to walk on that one to get that perfect. And the second part is, of course, I mean, as we were closing many of these negotiations and discussing with many brand sponsors, the outbreak of corona happened, which meant that you had a long pipeline of potential partners, and that went down quite significantly because the first thing all those other partners had to do was to look through their call space, which, of course, impacted our discussions with them. So we do, unfortunately, see a negative trend within the brand sponsorship sales. On the positive side, I mean, we've seen more interest than ever before about having access to our content, which means that we've been signing many strategic and important media rights deals, giving us more reach when it comes to global, international streams, but also local, regional feeds, and also value. So I think that's a way to look at the combination. You're seeing a growth in media rights revenues, but you're seeing a bigger decline in brand sponsorship revenues.

And then also the gaming side, Thomas, I think that when it comes to engagement, we saw a very strong engagement among our players or fans, especially at in-game games. The way we look upon it is that this is not necessarily correlated to the pandemic. We see it as more related to very successful in-game events that engages with the fans and they can play more. So hence, as a result, as long as we can continue to, and one should really emphasize that in games is very good when it comes to creating a longevity within their portfolio of games. We believe that engagement is going to maintain independently of a pandemic or not. So from that perspective, we feel confident that our relationship with the fans is going to be maintained also in a more normalized environment and they're going to continue to enjoy playing our games and from that perspective. So I hope that helps.

That does. And one follow-up. I mean, obviously, it's great that you've settled on sort of completing the strategic review and keeping the business as is. It makes sense, given just how strong Inner Games is. I suppose the question is, is there any appetite to close out at least some of the minority, given that sort of minority leakage is so so significant within inner games, and it's clearly doing so well? Or is there no mechanism for you to do that?

Hi, Tom. No, there is a clear mechanism to do that, and I think everything comes with an opportunity cost. So as we're saying in the strategic review, we're also saying that we would like to now build value in the two verticals, organic and inorganic, both eSports and gaming, and then it becomes a cost allocation on how do you want to do that in the most shareholder value-increasing way, and that is, of course, what we're looking at and focusing on.

Thank you for those questions. Thank you. Operator, we can proceed to the next question.

Yes, our next question is from the line of Eric Mulberg from ABG. Thank you. Please ask your question.

Hi, guys, and thanks for taking my questions. So the first one, in terms of your strategy within the gaming division, two years ago you had a better position than several of your peers. They have now surpassed you quite considerably, both in terms of sales and the market cap. Could you perhaps add some more flavor on how you plan to create value within this division and the general pipeline in terms of M&A?

Thank you for that question, Eric Mulberg of ABG. It was a question on looking back two years and whether or not our competitors, our peers, have surpassed us. I think this is a question for Maria to answer.

Hi, Eric. I like to look forward, so I think that's what we are focusing on right now, to make sure we build value in the gaming vertical from where we stand right now, and I think that the foundation we're having with InnoGames and Congregate is a very strong foundation. We're coming out of the quarter extremely strong, and yes, we would like to grow both organic and inorganic, which means that the only inorganic path is, of course, adding further portfolios next to InnoGames in the mid-core sector and Congregate in the cashless sector. So that's how we want to build value and over time then give back value to shareholders.

Got it. Could you perhaps just give some more flavor in terms of the M&A pipeline, just in general in terms of competition when you're sort of looking at targets, etc.? ?

No, I mean, we would never speculate and comment on a pipeline in detail, but I think it's fair to say that, I mean, gaming has performed very strong post the pandemic, which of course means that it's an interesting sector for many players. I think that we have a strong portfolio. We believe we're a great home for entrepreneurs. So that's the path we want to pursue.

Got it. Fair enough. And just a question here on Congregate. Could you perhaps give us some more flavor on how this part of the business ended the quarter to compare it with the start of the quarter?

Hi, Eric. It's Lars here. I think, first of all, I mean, I know you know this, but I would like to just repeat it for clarity. Of course, Congregate had some difficult concepts. Going into the year, we We discontinued two third-party IPs, AdCap and AdCom, which was two strong games within the Congrate portfolio. Then with that taken aside, looking at the performance, I mean, at the end of or in the middle of September, Congrate launched Teenage Mutant Ninja Turtles, which was very well received by So looking at how the quarter ended, we came out on a positive tone as well, thanks to that launch. And now we are looking to continue to monetize in that title going into the fourth quarter. So as you know, we don't provide specific data on congregate, but it should be emphasized, of course, that we have a very successful launch of this new title, Teenage Mutant Ninja Turtle.

Fair enough. And just in terms of when is it fair to assume that this side of the business can return to growth year-over-year?

No, I mean, it's going to be a result of us. It's going to be an easier concept of beginning of next year as, you know, as common ad cap is out of the comparative period, so to speak. And then Cognate is going to definitely be back into growth. And I think that the management team of Cognate has done a lot of work also to – under the hood, so to speak, to make the turnaround has been impressive, and that means that they also are ready to make use of the new titles that are going to be launched next year as well.

All right, great. Thanks for that, and thanks for taking my question. That's all for me.

Thanks, Ericsson.

Operator, next question. It's from the line again of Oscar Ericsson. Thank you. He has a question.

Thank you, and thanks for the answer earlier as well. Just a question on M&A to strengthen the equity stories. Would you expect M&A in both segments, including esports? And what would you say regarding the types of targets and the size of the targets, how that might differ between the segments? Thank you.

Hi, Oscar. Yeah, I think we touched on the gaming type of targets before, and I cannot go so much deeper in that. We are looking to find students that complement our existing assets in the cash and mid-core genre of free-to-play mobile. And if you look at the esports, I think given that the market is in its totality quite a lot smaller than the gaming, it would probably be natural that the target would also be smaller than if you look at a gaming site. So it's about finding capabilities that would complement our existing capabilities. We have two amazing brands on the back of ESL and Dreamlike. And I think the way we turned around those two companies to operate in this online environment is very strong and very promising. But it also, when you look at it, there's also things where you could further strengthen our capabilities, and that's what we're looking at.

Got it. Thank you. And one more question regarding gaming, then. I mean, we're One month in and out to Q4. Have you so far seen any sort of positive effects on engagement, activity, and spending from the renewed lockdowns across Europe and the U.S.? Or is it a similar pattern to Q3?

Hi, Oscar. Lars here. Thanks for the question. I think that maybe referring back to the earlier question that we actually – The engagement is not necessarily related to lockdown or not, as we see it. We also proved in the third quarter, even with more open societies, we saw engagement increasing as people were enjoying the content that we provided within the games. So I think that is the trend that we are looking forward to continuing. And then we'll see if there might be, as I think one of your colleagues referred to as, an additional blip following a second wave now coming in. But I think the message from us is clear in the sense that through strong in-game events, we've been able to keep engagement high, independent on the pandemic or not, and we believe that that's going to continue as well.

Got it. Thank you very much.

Operator, next question. Yes, sir. It's from the line of Eric Lindholm from Rodea. Thank you. Please ask your question.

Yes. Hi, Maria. Hi, Lars.

Hello.

Hi. So, a couple of questions from me. First of all, what would you say is driving the strong growth in browser within gaming, and would you expect that this growth can continue if it's sustainable, so to speak.

Thank you so much for that question, Eric. What is the driving factor behind the browser growth? Maria, perhaps you can answer that.

No, but I think we said in Q2 that we actually saw a quite positive reactivation of old customers finding their way back to our old games, such as Tribe Awards and so forth, that doesn't actually exist on mobile. And on behalf of those positive trends, we also increased and started to make marketing again on behalf of these games, which we have not done for several years. So I think that is what is driving the positive effect on browsers. We have seen, to some extent, on some of the more time-consuming games that customers have now churned out as the lockdown goes out and the world is a little bit normalized. But on some of the games, such as Tribe Awards, we have seen continuation on strong engagement levels, which is very positive. If that is here to stay or not, time will tell, but I think that it is really great to see the strength and the longevity of the in-game title. I mean, this is the first title in Tribal Wars that they launched, and also how good they are in live ops, and that is also promising when you look through the new titles. So then we will see in browser how long and how much it will grow in the Monster Cup.

All right, thanks. Could you also give some more color on the KPIs that you're seeing for the early tests of the games that you are launching in InnoGames in 2021?

Yeah, I mean, I don't want to go into specifics, but I mean, the first two tests, I mean, what we do is to look at the retention rate, which is the first part, and then you go in and look at monetization levels. But if you look at the retention, which is, of course, one of the key components, based on the benchmark that we set up and the outcome, it looked very promising and which gives us all the comfort that we are on a very good projection into the ability to launch a successful game. Still to come is monetization, and still to come is actually to see it live. That is always the final determining outcome. But I will look forward to the first game. It's going to come live in Q1. And that's going to be a city builder theme on back on Forge of Empire and the learnings we have there.

Thank you, Maria. Okay, you have a final question?

Just a final question. In terms of M&A, do you feel comfortable going to a sort of net debt position as well to carry out M&A, or are you limited to the net cash that you have currently? Would you use equity, for example?

I think it goes without saying that you will look at the full range of capital structure means when you assess M&A targets. We do have a strong balance sheet, but I think that will only take us so far.

All right. Great. Thank you.

And again, for those participants who would like to ask questions over the phone, please press star and one. The next question is from the line of Hendrik Olsen. Thank you. Please ask your question.

Hi, this is Frederik Olsson from Anders Banken. Hi Lars and Maria. First, congratulations on the strong report, first one as a team together. I have a couple of questions, a lot of them have already been answered, so let me start off with the pipeline within Endgames and Kongregate, and I'll follow up on Erik's question there regarding browser exposure. Are we set to see browser exposure come down from the new pipeline, or are there more mobile games, so to speak?

Yeah, all our games. We have four in-game and then one bigger. Then we have, of course, many casual games coming out eventually. But all of them are mobile first. And what we will then explore is whether, depending on success rate, if we then convert them into browser or not. But they will always be mobile first, which will then, over time, of course, change and shift the ratio between mobile versus browser sales in our portfolio. Okay.

All right, thank you. And then moving on to the esports, are there any one-off costs related to the DreamHack and ESL combination?

Yeah, there were some one-off costs, but none significant.

All right. And, you know, just one final general question. What's your view on the esports, your esports operation, if there are no live events to return in H1 2021?

I think we have said it, that we are extremely happy on how we have converted our events online in esports. I think the last challenge that we have not yet cracked is how you move festivals and the festival experience online. We're hoping to be able to find a great solution for that as well. But I think the engagement and the reach, the entertainment level in our online broadcast is is very good. And of course, we're working hard to make that even better. And that's what we continue to work on. And I think we are, of course, hoping to return to a normalized world and having our live events. But even when so, we're probably going to continue with these many learners that we've done all day in the online world to have a hybrid environment going forward. So yes, we want to return to physical events. And we're hoping to do so sooner than later. But we're very happy with the product that we managed in quite short time to actually build and set in place during a period of a quite big terminal, to be fair. So I think the team has done an amazing job in setting this in a good way.

Building on Maria's saying is that, I mean, we're getting better and better for every day that passes by when it comes to how we can manage online. We have also evolved our concept when it comes to studio events. And that means that, to be honest, I mean, depending on what the future holds, we have a product that is suited either for live environment or for an online slash studio environment. So from that perspective, we feel quite comfortable.

Thank you very much.

Thank you. Thank you.

Looks like there are no further questions. Please continue.

Thank you, operator. So thank you very much, everyone. That concludes the conference call for MTG's third quarter of 2020. We appreciate you taking the time to join today's call, and we look forward to staying in touch until we release the next report, our Q4, due February 4th, 2021. Thank you so much, and have a wonderful afternoon, and stay safe and healthy.

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