Modern Times Group MTG AB (publ)

Ladies and gentlemen, thank you for holding, and welcome to the Modern Times Group Q4 2020 results conference call. At this time, all participants are in the listen-only mode. After the speakers' presentations, 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. I must advise you that this conference is being recorded today, and I would now like to hand the conference over to your first speaker, Lars Torstensen. Please go ahead, sir.

Thank you, operator, and good afternoon, everyone, and welcome to MTG's interim report presentation for the fourth quarter and for the year 2020. I am Lars Torstensson. I'm CFO at MTG. With me today, I have our group president and CEO, Maria Redin. We will begin presenting the quarter and then take your questions in a short Q&A session. Please keep in mind that only dialing participants can ask questions. With that said, I'm now handing over to you, Maria, to take us through the quarter.

Thank you, Lars, and welcome to everyone joining our conference call today. Before addressing the quarterly results for our fourth quarter and the full year 2020, I'd like to turn to our team members in the group. In mid-February last year, the new virus in South Asia rose to become a significant factor for societies all around the world and companies as a part of those. We were, as most companies, certainly rocked when the pandemic hit, and I'm certainly very proud of how quickly we managed to regain our footing thanks to the impressive and hard work from the whole group working as one team and how we ambitionally stayed on the course and delivered on our operations and our strategy for the rest of the year. It has truly been a dynamic year and a challenging one, but we're coming out of this stronger than we were one year ago. With that said, I would like to take you through our presentation, so you can turn page. If we start to look at the highlights from the quarter, On a group level, we continue to show good operational performance and high profitability as we report our final figures for the full year and Q4 2020. It has been a challenging but a transformative year for the company, and we're very happy to be able to conclude the year with a record high profit for the full year. On the esports side, due to postponements for the quarters earlier in the year, the fourth quarter was an intense with six multi-property events delivered by ESL Gaming, which together with good cost control resulted in a positive adjustment EBITDA. The gaming vertical delivered a robust quarter, rounding off a record year, and we made several strategic initiatives to both diversify and strengthen the portfolio, forming a new gaming investment holding company, an ownership increase in in-game, and the acquisition of Hutch and our most recent acquisition to the group. As we now progress into 2021, our strategy lies firm, and we are well-positioned to continue to deliver on our buy-and-build strategy. If we then move into the esports part, As we flagged already in Q3, we consciously chose to postpone a number of Master Properties events to our fourth quarter in order to mitigate the risk and give the best chance for our Master Properties to host studio events with the teams present. The quarter was indeed busy with a total of six Master Property events, which was delivered successfully as online productions. Among these were the ESL Pro League in October, IEM Beijing in November, and the Dreamlike Master Winter in December. Following our intense event schedule and the heavy weighting then of our events to the Q4, our organic net sales of owned and operated properties remain stable year over year, though with two more multi-properties compared to last year and two less open. The e-sports services net sales decreased in the quarter by 42% due to less e-sports initiatives than multi-publishers, a direct result from the ongoing pandemic. Still for us, the focus in ESL remains, and it is to establish more strategic publisher relationships, and we have executed some important events on behalf of publishers, such as Epic Games and Psyonix, to highlight a few in the quarter. To also bring up some of the strong performance in the quarter, ESL Prolegs stood out with a very strong engagement from our fans, resulting in several viewership records, amongst other the competitions at a new all-time peak of more than half a million concurrent viewers, and the number of watched hours rose to 89 million across both seasons, which is an increase of 129% compared to 2019. We're very happy to see the sustained strong support of the fans despite the pandemic circumstances and online broadcast. DreamXport games were on and off the air with the execution of the Superliga finals. We're also excited to see the continued interest from traditional sports leagues to complemented leagues with esports counterparts. Just yesterday, We announced a four-year e-sports cooperation between DreamHack and World Games and the NHL. And earlier today, we entered into an agreement to produce the Swedish e-Altbänske Football League. Travel and aviation restrictions in place to fight the coronavirus pandemic has meant that competition between teams based in Europe and Asia has been on hold for the vast majority of 2020. We're therefore very happy to be able to, in the Q4, reintroduce cross-Atlantic and multi-continent e-sports. although still in an online format, but it drives engagement. We also continue to see mobile esports as a key growth area. In the quarter, ESL Gaming expanded its very successful mobile open esports format to also cover the Middle Eastern and African region. The extended ESL Mobile Open 2020 concluded with a year-on-year growth of 24% compared to 2019, with well over 1.5 million players bailing out on titles such as Asphalt 9, Auto Chess, PUBG Mobile, and Clash of Clans. During the quarter, we've also seen a very strong growth in active players and play time for our B2C tournament platform, ESL Play, as well as our Minecraft client, BadLion. The ESL Play growth has primarily been driven by the PlayStation integration and the amateur tournaments in titles such as FIFA 21 and NBA 2K21, which were both released during the fall. Looking forward on the operation of our esports product going into 2021, visibility do remain decreased due to the pandemic circumstances that continue to have an impact. despite promising developments on the rollout of vaccine. As a result, we've taken the decision for 2021 to host the majority of ESL and DreamWorks tournaments as in-person competition, but from a controlled studio environment. ESL Gaming has announced a busy first schedule for 2021 with digital and studio production, and while uncertainty remains due to the pandemic circumstances, we are scheduled to host several live audience events again in the second half of the year, which we look forward to. Furthermore, we do expect that Modema continues to impact our e-sports operations in cooperation with established and new commercial partners, so we're very focused on driving close to 2021. While we continue to look forward to being able to host live events again, we're proud of how ESL Gaming has adapted to the new circumstances and continue to do so. As we speak, ESL Gaming is hosting the IEM Katowice as an all-online digital format in both CSGO, StarCraft II, and with Warcraft III competitions. It's held now and runs on the early March. So then moving on to the gaming vertical. Our gaming vertical showed good progress in the quarter with strong performance from in-game driven by Forge of Empires. We saw the commercial launch of Teenage Mutant Ninja Turtles by Kongigate, and equally important, our new games pipeline to be launched in 2021 progressed according to plan. In-game performance in the quarter showed solid underlying growth, primarily driven by Forge of Empires, on the back of several well-executed in-game events and campaigns around the holiday season. In the quarter, browser overtook the lead driving growth over mobile for InnoGames. We see this as a temporary consequence from the pandemic impact, mirroring the changed behavior in light of recommendations to work from home across many markets. That we're able to retain players despite changes in behaviors across platforms shows that InnoGames' types are great, both on mobile and played on browser. Cognizant showed stable progress in the quarter, during which new type of Teenage Mutant Ninja Turtles was launched. Underlying net sales were decreased, however, due to the discontinuation of two third-party publishing titles late in 2019. As for our gaming capabilities, ARKDA showed year-over-year growth of 11%, driven by continued high engagements among our fans, and thanks to already mentioned good in-game campaigns by InnoGames. While the sequential decline in ARKDA was more related to the number and the size of events held in Q4 versus Q3. The DAO and MAO decreased compared to the same period last year due to congregates. That was adverse impacted by the removal of two third-party games. This effect was partially offset by the launch of first-party titles. In-game, on the other hand, had decreased DAO, supported by continued strong use acquisition momentum. As we touched upon in the previous quarter, we're excited about our new gaming verticals pipeline for 2021. As of today, we have up to three new in-game titles planned for launch in different stages during 2021. with the first being soft-launched as we speak. Further, Kongigate and Hutch are respectively preparing launches of a new IP playing out in the popular SpongeBob SquarePants universe and a new exciting mobile racing title named Puzzle Heights, respectively. Following the acquisition of Hutch in December, we initiated the onboarding, and we expect to see the consolidated figures to be included in MCG's financial reporting starting January 21 and onwards. Moving on, the quarter saw execution of a number of strategically important initiatives. On December 7th, we announced that by utilizing our options in InnoGames, we increased our ownership by 17%, up to 68%, further developing our relationship with the company. As a part of the transaction, we also formed a new jointly owned holding company with InnoGames founders for current and future gaming investments. The cooperation between MTG and InnoGames has created considerable value for both parties over the years, And that's a good example of how we want to partner with founders of stellar gaming and esports companies. We join the vision for long-term perspective. Following the formation of the gaming cove, we acquired Hutch Games. And to finance the acquisition of Hutch, we also announced the rights issue, inviting all our shareholders to support our continuous M&A agenda. Looking forward, I can conclude that going into 2021, we have a more diversified portfolio of games, and a very strong new game-type language is progressing according to plan with several titles across different genres scheduled for thought and commercial launch later in the year. In the games and congregate with a range of established and proven IPs and titles ranging from city building and the ID category is now complemented by HUD portfolio with titles in the early growth trajectory. And through the acquisition integration of Hatch, we do not only add strong titles and IPs, but also considerably diversify our gaming portfolio with the addition of the mobile racing as a genre. We begin 2021 with a number of soft launches backed by increased marketing. These new games are expected to start positively impacting our gaming vertical in the second half of 2021 and more so in 2022 on back of successful launches. So with that said, I hand over to you, Lars, to walk us through the financials.

Thanks, Maria. And as you have concluded already, overall a good year from an operation perspective, despite the ongoing pandemic. As we have touched upon before, our verticals have experienced different realities. While gaming vertical has been operating from an elevated level, our esports vertical has been adapting to a situation where offline events no longer is possible. Independently of specific circumstances, both verticals have delivered above our own expectations in Q4 and full year 2020. With that said, let me go through the P&L in some detail. The export vertical had an intensive event schedule, driving a sequential recovery in the quarter. Compared to the same period last year, the underlying net sales was down by 13%, negatively impacted by mainly offline events moving online due to the pandemic. The gaming vertical grew underlying net sales by 4%, driven by in-game and a continued high engagement among the gamers. and successful in-game events throughout the quarter. Worth noting is that the amount of in-game events were slightly lower in Q4 compared to Q3, and that is a result of seasonal facing. This, in turn, had a temporary adverse impact on ARPDAU in the quarter. Adjusted EBITDA grew by 130% year-over-year, with an improved performance in both verticals, combined with lower central costs. This was partly thanks to high sales and more normalized marketing levels in the gaming vertical, and partly due to the esports vertical suggested EBITDA improved significantly versus last year thanks to more events held and more efficient operations on the back of online studio formats. In the wake of the ongoing pandemic, we continue to deliver on our savings target with more than 240 million in lowered cost in the quarter, primarily through additional COG savings related to online events rather than offline events for our tournaments. But the improvement in adjusted EBITDA is not only about COG savings, it's also about the amount of master properties held in a specific quarter. To be more nuanced, it should be noted that the intensity of the event schedule will also impact the performance of an individual quarter due to the fixed cost of the workflow. The second half of 2020 is a good example of that and the difference between a light event schedule quarter, CQ3, and an intensive schedule quarter, CQ4, and what that means for operational leverage in the esports vertical. With that said, the EBITDA adjustments in the quarter amounted to 33 million Swedish krona to be compared to minus 207 million last year. And some of you might have noticed that the cost long-term incentive plan slash management incentive program was reversed in the quarter. This was the result of an end-of-year adjustment following the conclusion of the full-year result in gaming vertical in general and in games in particular. Also, M&A costs was impacted by the acquisition of Hutch, including a stamp duty on the transactions. Depreciation and amortization in the fourth quarter amounted to minus 68 million and included amortization of PPA of 24 million. Amortization of PPA was lower compared to last year, mainly related to the congregate acquisition, which is almost fully written down. Excluding PPA, depreciation and amortization decreased by 9 million, mainly as an effect of larger write-down in the gaming vertical in fourth quarter 2019, resulting in a lower base. Net financial items amounted to 51 million, mainly gains from financial assets, revaluation of the VC fund, and unrealized exchange gains. Worth noting, once again, is that revaluation of the VC fund happens in conjunction with new financial rounds being completed or if existing shareholders sell to new shareholders, indicating a higher or lower valuation. Finally, the group tax was minus 77 million. predominantly reflected the increased result in the gaming vertical and Indie games. Let's move on to the cash flow statement. On the back of the strong financial performance of the group, we reported an improved net cash flow from operations of 54 million driven by Indie games, but also thanks to improved operational performance in the esports vertical on the back of the mentioned intensive event schedule. The relatively large delta in working capital between Q4 of 2020 and 2019 was mainly due to a large tax payment related to InnoGames in 4-4-2019. Additionally, InnoGames received an early payment by one of the distribution platform owners, having a positive impact on working capital in the quarter. In the quarter, we closed the Hatch transaction that was financed through a combination of rich facility amounting to $1.8 billion cash and shares. Even though not part of the quarter, the takeout of the bridge was conducted through a rights issue that I will come back to on the next slide. Additionally, we invested $70 million in the VC fund, and the capex amounted to $42 million in the quarter, mainly related to the gaming vertical, but also small investments into our B2C offering in the esports vertical. As a result, the net change in cash and cash equivalents from four continuing operations amounted to minus 390 million. That led to the group having a net cash position of 1.2 billion as of Q4 2020. Gaming continues to be the cash flow contributing entity. Let's move on briefly to summarize the concluded writing issue. As part of financing the HASH transaction and increased ownership in InnoGames, MTG conducted a rights issue as a takeout in the first quarter of 2021. Following EGM, publication of prospectus, trading updates, and the mandatory investor interaction as part of the process, we could conclude a successful and significantly oversubscribed rights issue providing MTG with proceeds of more than $2.5 million before deduction of transaction costs. As a result, we repaid on the 17th of February the bridge facility of 1.8 billion Swedish krona. We are of course very pleased to have received such strong support from our shareholders in both the rights issue and for our strategy. That concludes my financial review and any questions you might have, I would be happy to answer as part of the Q&A. Back to you, Maria, to conclude.

Thank you, Lars. To summarize on the fourth quarter, Despite the very challenging year that has been 2020, with the uncertainty and the volatility created by the pandemic, I'm pleased to be able to say that we are strong as a group today than going into the year. We delivered solid operational performance and high profitability, and we have a strong position to continue to deliver on the back of our strategy, developing what we have, and remaining on the outlook for the relevant and attractive MA targets for 2021. Despite the ongoing rollout of vaccines bringing hope of normalization for societies and industries, We expect that the pandemic will continue to impact our esports business also in 2021. The pandemic circumstances continue to mean low visibility and increased uncertainty. But with that said, we do look forward to reintroducing studio events in the first half of the year and hopefully also host live audience events in the second half of the year in 2021 once more. In the meantime, we've proven that our esports vertical can produce and distribute world-class digital-only events and create attractive audience and content for our fans and our commercial partners. The forming of our new gaming co. and the addition of Hutch also means our gaming vertical stands stronger, more diverse, and with a broader range of IPs and titles spanning more genres and growth stages. With the right issue we concluded, we are also enabled through the support of our shareholders to continue to deliver on our strategy and maintain the high focus on M&A activities from 2020. So with that, we close in 2020. Ahmad, thank you very much, and hand over to you, Lars.

Thank you, Maria. That concludes the formal presentation of our fourth quarter and fourth year report. We are now ready to take any questions that you might have on the report or the conference call presentation. So, operator, if you can help us to gather the first question, please.

Thank you very much, sir. Ladies and gentlemen, we will now begin the question and answer session. As a reminder, if you wish to ask a question, please press star 1 on your telephone keypad and wait for your name to be announced. You can cancel your request at any time with the hash key. And once again, it's star one to ask a question. Your first question comes from the line of Tom Singlehurst of Citi. Please go ahead. Your line is open.

Hey, Maria. Hey, Lars. Thank you for taking the question. Tom Singlehurst here from Citi. A couple, if it's okay. Maybe just starting with sort of broad outlook and the shape of the year. I mean, I'm conscious you haven't committed to any sort of firm targets in terms of growth or profitability. But I suppose just building on your comments about gaming, you mentioned you anticipate the contribution from launches in the second half and running into 2022. Obviously, on the esports side, you're also talking about physical events coming back in the second half. Should we anticipate the first half is still seeing revenue pressure across the whole group? So, yeah, if you can maybe sort of comment on aggregate outlook, if you can, and the phasing of growth 1H, 2H. That was the first question. Maybe we should start there, and I'll kick in with a follow-up, if that's okay. Okay.

Thanks, Tom, for the question. So as you concluded yourself, we don't provide any formal guidance, but I will hand over to Maria to elaborate on your question. So please, Maria, if you could answer Tom's question.

Hi, Tom, and thank you for your question. I think what we have said and what we don't want to do is provide guidance. But, of course, I mean, what we want to do, and when we look at the full year, 2021, our focus is drive growth. And we want to drive growth both organic and inorganic. And that's the strategy we set first. And if you look at on the organic side, I mean, we're very excited with the game launches that we're having coming up. I mean, five on the gaming side, three in Inno, one in Hutch, and one in Congregate. That will, to your point, drive marketing investments. we are starting with the first off launch as we speak, and then they will gradually roll out now predominantly in the first half. But that also means, of course, that the revenue buildup of these new titles will come in the second half of the year and predominantly in 2022. And then it is important to remember, we said that also in last year Q2, that, of course, we did see on the gaming side significant increased activity levels, and that was predominantly coming from New registration, back on the increased marketing activities that we can do, given the high raw levels that we enjoyed during Q2, and also reactivation for old customers, and that's something you should bear into mind when you look at the gaming quarters and the seasonality effects. And for the esports, visibility is unfortunately low. We would have hoped that the vaccine rollout would have gone faster, but we are where we are. On the good note, I think that with esports, ESL and DreamWorks, we've managed to entertain our fans in the community in a very strong way in online formats. We believe that we can reintroduce studio formats now in the first half of the year and then hopefully progressing into live audience events in the second half of the year. And one thing to bear in mind as well is that when you look at the year-over-year comms for Q1, last year we actually managed to execute most of our events. It was actually about this time last year. when we have to execute the Katowice event without an audience. So that is something to bear in mind. But our focus remains very clear on driving growth for the fall year 2021, both organic and then to add further acquisitions ideas.

Perfect. And a couple of follow-ups, one on esports and one on gaming. On esports, the question is around digital and hybrid. I mean, actually, the fourth quarter owned and operated performances, I mean, that stable year on year is absolutely fantastic. If we think about, you know, what, you know, the pandemic, I suppose the question is, when things do get back to normal, you know, is there more of a, is there more of a demand for studio based events and sort of digital only formats? Or is there a sort of hybrid model that, you know, net net will end up being additive? That's the question on the esports side. And then on the gaming side, I mean, obviously you talked about the organic launch, but it feels like M&A is going to be an ongoing part of the story. The question is, you've got obviously the sort of combined holding company in gaming, which is great. I'm just interested on whether the inner games minorities, you know, have a blocking stake when it comes to doing more deals and how, you know, from a mechanical perspective, how deal flow works with, as I say, the inner games minority in place.

Thank you. Thanks, Tom. So, as I understand the question, when it comes to esports also, if the online format is going to survive the return to normality, meaning that there would be a hybrid between online and offline events also when things are hopefully back to normal. And the second one was around gaming and the dynamics in the gaming holding company between us and our partners. in the inorganic minorities and how we discuss the L&D flows. But these are two questions for you, Maria.

Okay, let's start on the esports side. And I sincerely hope that the online and the studio formats will continue also in the world that normalizes. I think that we have learned a lot this last year. And we've also shown both to ourselves and to the market that we can actually entertain in a really good and relevant way through these formats. At the same time, there is both for the fans and for the players, but also for the brand partners, it's also important to go back to the physical events within stadium arenas. But I think that in the combination, we can do a whole lot more compared to what we've done before. So that brings back a little bit to the point when I said that we've done stronger today. I think that we learned a lot how we can improve our operating model, how we can scale it better. And I think also to add to that, which I think is extremely interesting to see, and that has actually accelerated also during the last sort of 12 months is to see the growth of interest in high mobile esports, which I think is super interesting, and what we can do more there, and also on the B2C side. So I believe there are many great opportunities to bring with us learnings and be better going forward, and that's what we focus on. And also to touch a little bit, because you also touched upon the Q4 as well, and that we actually had a profitable quarter, which is great, but also remember that the weighting of events was very much skewed to Q4, Given that we had six monster events and it is predominant back on the monster events that we monetize and hence also the proportion amount of revenues was also skewed in the same way to Q4. So that of course helped drive our gross margin and also the EBITDA level for these four. Then moving on to your question on the gaming side, I don't want to go into details with a specific agreement with InnoGames, but I think how I generally look at it is We have a strategy on the gaming vertical and what kind of companies we would like to buy. We are completely aligned with our board and our minority owners in the gaming vertical on what that is. And should it so be that seasoned gaming executives don't find companies being good, then they probably are not good. So I think that we are having a very constructive discussion with EHM on that respect, and I see no reason why that should not continue. And we are very focused on driving our M&A agenda and to look at potential targets both within esports and gaming.

And just for clarity there, Tom, EHM is the company that the minorities are represented by, so you follow the abbreviations.

Perfect. Thank you.

Thank you, Tom. So, Operator, we have the next question, please.

Of course. Your next question comes from the line of Eric Lindholm of Nordea. Please go ahead. Your line is open.

Yes. Hi, Maria. A couple of questions here from me. So starting off, can you talk a bit about what you are seeing here at the start of Q1, perhaps, for gaming? So some companies have witnessed a kind of challenging user acquisition environment in Q4 that improved in Q1. Is this something you have seen as well? I'll drop it.

Hi, Eric. Good question. It's always, you know, marketing is an important factor of the gaming industry, so I don't know how much we can share then, Maria, when it comes to how Q1 has been compared to Q4.

Are you referencing on the UA and the ability to spend on the UA side, Eric?

Yes, yes, exactly.

No, but for us, and I think it also becomes a bit company-specific because you're addressing a little bit of different targets. But if you lift the perspective on totality, I think that they are in line with our expectations when it comes to how much we want to spend on UA and the sort of return we're seeing on that UA level. So there's nothing that I want to flag specifically on that.

All right. Great. And looking at this continuation of the third-party publishing contract in gaming, which I guess is hyper-hippo, is it possible to give an estimate of how big the headwind was here in Q4 from this continuation?

Yeah, I mean, it has been said now for a few quarters, to be honest, but it has been phased out now to almost entirely, and And to be honest, it has impacted the top-line congregates, but it had very little impact on the bottom-line performance. So we have not gone out and said any specifics. But most importantly is that you see a good underlying trend in the company. The transformation has gone through. We are on the right projection, focusing on our first-party games. And we're now looking forward on building the Teenage Mutant Ninja Turtles games that we put the market in before. And then we are bringing the game on back of the SpongeBob universe. into the market in the first half of the year. So that's what we're focusing now going forward on.

All right. And the final one from you here. Can you talk a bit about the outlook for esports services here in 2021? So I noticed that you expanded the Blizzard contract to Hearthstone and signed some more contracts in DreamHack Sports Guests, for example.

Yeah, esports services, Ben, and how that is going to develop going into 2021, Maria.

No, I think that we are extremely excited about all those three deals that we have now announced. And I think even though our main focus lies in own and operate, because that we can drive a scalable operation, this strategic partnership on the ESS side is something we really want to continue to drive. And I'm hoping that we can bring more partners on board and together develop esports and build great esports stories around them. So I'm hoping that we will continue to do this, and it lies within our focus. And I think we're on to a very good start. And especially I would say and highlight the NHL and the e-sports, which we announced yesterday and today, because that also marks a new beginning that you have with the traditional sports franchises moving into e-sports. And I believe and I hope that that is something we continue to see more of.

And it's hot off the press, of course, if you didn't notice it yesterday, we did secure a four-year agreement with the NHL. As Maria is saying, it's also a very, very strong brand that can help propel the whole sport games franchise as well for DreamHack.

Did you have any more questions? No, that was it for me. Thank you so much.

Thank you, Eric.

Appreciate it.

Thank you.

I'm sorry, sir, no further question at this time, but once again, it is Star and want to ask a question. And we do not have any further questions, sir.

That is very much all right, as we did have a trading update, month ago or so. But thank you operator and for everyone joining today that concludes the conference call for MTC's fourth quarter and full year 2020 interim report. We appreciate you taking the time today to join the call and we look forward to stay in touch until we release the next quarterly report which will be the first quarter 2021 on April the 29th. So thank you very much. Take care and stay healthy.

Thank you, sir. Ladies and gentlemen, that does conclude your conference call for today. Thank you for participating, and you may now disconnect.