Viaplay Group AB (publ)

Good morning everyone and welcome to Viya Playgroup's Q1 results conference call. My name is Anna Hedenberg and joining me here on the call are our CEO Jörgen Madsen Lindeman and our CFO Johan Johansson. Before we start please note that today's call is being recorded. After the presentation we will open up for a Q&A. If you're listening on the web link Feel free to post your questions on the message board at any time, and I'll read them out during the Q&A. If you prefer to ask your questions live, you can do so by using your phone keypad, but more about that later. You can find all our results materials, including the presentation deck on the investor relations section on our website. We won't be following the slides directly, but they contain all the key information for reference. With that, I will hand over to you, Jørgen, to walk us through the Q1 highlights.

Thank you, Anna, and good morning, everyone. So, it has now been one year since we finalized the recapitalization of Viaplay Group. Since then, we have refocused our content strategy on commercial, locally relevant storytelling, prolonged key sports rights at market value, and sublicensed or sold selected titles to right size or cost base to stay competitive and relevant. We have worked closely with partners and suppliers to ensure that future agreements are sustainable and mutually beneficial. We have entered new and exited partnerships and focused on return investment across all areas. We have launched new fairly priced products and implemented account sharing measures across all core markets to protect the value of our content. We exited the UK and the Baltics, divested our studio operations and streamlined our organization to gain greater fit for purpose and cost control alongside with proper capital allocation. The exit of Poland, our last non-core market, is progressing according to plan and will be finalized in the summer of this year. Our Q1 results reflect the direction we are taking, but we are not yet where we want to be. The transformation is focused on performance improvements, monetization, value over volume, and cost control and building long-term sustainable business. We reiterate our 2025 targets of low to mid single-digit revenue growth and positive free cash flow for core operations. Our corporations revenue decreased by 5% organically, driven by lower year-on-year sales within sub-licensing and others. All other revenue streams grew year-on-year. Viaplay, which represents nearly half of our core revenue, saw organic sales growth of 1%, driven by price increases and improved product mix. D2C subscriber numbers and ARPU continue to grow year-on-year, supported by both Freeman Sport and Filman Series subscribers. Account sharing restrictions now fully implemented across core markets continue to support monetization and reduce the value leakage. We make clear choices about how we package and price our offering, focused on relevant, the right positioning, and improved monetization. These choices are deliberate and needed, and while the full impact will take time and may result in lower subscriber numbers and revenue in the short term, we are seeing positive signs in subscriber value and ARPU development. Linear challenge subscriptions grew 2% organically in the quarter that reflect the price adjustments and new distribution agreements, we increased our share viewing audience across all our core markets, underlying the continued relevance of our content. In advertising, the structural shift from linear to digital continues. Growth in digital and radio offset the linear decline, and the combined advertising business grew 1% organically. Digital ad inventory grew by 50%, largely due to the expansion of our HWORD products. Our HWORD offering is now also available in the Netherlands, which strengthen both our reach and our commercial flexibility in one of our core markets. We also continue to invest in anti-piracy measures and enforcement, working closely with partners to protect the value of our content and limit unauthorized access. Some licensing and others declined by 53% organically compared to the same period last year, which was expected. Q1 2024 included revenues from exceptionally scripted content deals which were not repeated this year. Instead, the focus now is on sports sub-licensing and creative partnership that maximizes reach and return on investment. The sport product continues to be a key audience driver. During the quarter, our RISE portfolio delivered strong engagement across all markets, with highlights including the Premier League, the FIS World Cup events, and the start of the new Formula One season. As we look ahead now into Q2, we expect continued momentum from the UEFA Finals, the ongoing Formula 1 season and the Ice Hockey World Championship. Our revised content strategy continues to resonate with the audience and the focus on commercial non-scripted formats is improving investment efficiency. Returning hits like Paradise Hotel in Denmark and Norway and new titles such as Better Sex and St. Jørgen's Street Cruise in Sweden now that relevant storytelling drives both engagement and return of investment. We remain disciplined in how we invest and equally disciplined in how we operate. Value over volume, cost control, ROI-based decisions, and simplification remain at the center of everything we do. Losses from no corporations were in line with expectations, and we remain focused on minimizing negative cash impact as we finalize the exit from Poland. We still have a lot to do and the transformation continues, but our strategy is clear. We are all focused building a wire play group that is more relevant and competitive in sync with consumer and partner demands, aligned with market trends, leaner, sharper, and with content that is more relevant to our audiences. Everything we do is focused on what our business needs to compete and create value over time. We'll continue making the necessary trade-offs to protect long-term value and ensure that our content, products, and partnerships reflect that ambition. That concludes my remarks, so Johan will take you through the financials. Over to you, Johan.

Thank you, Jorgen, and good morning, everyone. As we start the year, our focus remains on financial discipline, cost efficiency, balancing risks, and improving our cash flow. We continue to execute on the operational and structural changes initiated last year, and while we're making progress, these efforts take time. Our full year target remains unchanged, and delivery will require continued focus across all areas of the business, especially as comparables become more challenging in the second half of the year. Our Q1 reported sales were once again impacted by currency fluctuations. Organic growth was slightly better than reported with an FX headwind of approximately 50 million on core revenue and 60 million on cost. To note also that the organic growth for the first quarter was affected by lower contribution sales and excluding that effect, the organic growth was approximately 1%. Core EBIT, excluding IECs and associated company income, was negatively impacted by approximately 110 million FX in the quarter. This FX impact derives from that a portion of the content rights were paid in advance prior to the recent strengthening of the Swedish krona. At the same time, reported revenues in Norwegian krona, Euro and Danish krona were negatively affected by the transaction effects during the period. During the first quarter, we have locked in an FX rate for a part of the constant cost for Q2 to Q4 through payments in advance, as well as building up cash positions in euro and dollar however we are exposed to the fx effect on the revenues for q2 to q4 this means that our net exposure in dollar in dollar and euro has come down for the rest of the year and for our transactional ethics effects and hence based on where the fx effects are at the moment we expect a full year fx headwind on core ebit of approximately 100 to 150 million and that is excluding the potential FX effects reported as IECs. Operating expenses declined year-on-year in Q1, reflecting lower accelerated amortization from content sales and savings in non-sport content, as the previous scripted strategy has now been phased out. Content costs continue to represent approximately 80%, of our core operating expenses with the majority related sports. All new contracts are carefully evaluated based on return on investment. However, a number of legacy agreements have that were signed in a much more competitive environment. These come with the contract to step up that will increase our cost base. over the course of the year and are one of the reasons why comparables in the second half of the 25 will show tougher comps. SG&A was broadly flat compared to last year, which reflects our continued implementation of cost savings initiatives, which offsets the underlying cost effects, for example inflation. Core EBIT was negative 222 million in the quarter, an improvement of 48 million compared to the same period last year. And then remind again that we had 110 million negative FX effect compared to last year included in that. We expect the year on year improvement in core EBIT to be stronger in the first half than in the second half of the year. For the non-core operations, we made a loss of 5 million in the first quarter, and the wind-down of the Polish business is set to conclude by the summer. The items affecting comparability for the quarter amounted to positive 231 million, and primarily related to currency translation effects. Following the recrystallization, we have not been able to enter into new hedging arrangements covering these exposures, which has resulted in unhedged currency exposure. This has led to revelation effects on the acquired content and liabilities during the quarter due to FX rates movements, as well as currency revelation differences related to provisions made in 2023 for the honours contracts. This effect will continue to be reported as ISS until we have re-established a sustainable hedging. Our associated company income for the first quarter were 34 million, and we did not receive any dividend from Alente in the quarter. Turning now to cash flow, group free cash flow for the quarter was negative 671 million. with core operations negative contribution of 756 and non-core positive of 85 million. The positive free cash flow from our non-core operations was driven by working capital timing effects. We still expect the full year non-core cash drag to be approximately half a billion. um the quarter included um working capital build up of 320 328 million driven by seasonality in rights payment in combination with improvements and changes in payment terms and reduction in scripted content payments which we as i said before has now materially or unwound In addition to revenue and cost discipline, we will continue to focus on improving working capital efficiency, which remains an important priority to support free cash flow improvements. Our financial net debt excluding 302 million in net lease liabilities amounted to 1.583 at the end of the Q1 with cash and cash equivalents of 909 million. Total borrowings of 2.667 billion and 175 million in prepaid borrowing expenses. We had utilized 800 million of the 3.392 revolving credit facility at the end of the quarter. We are reiterating our full year guidance of low to mid single digit revenue growth and positive free cash flow for the corporations in 2025. And to summarize, this is supported by gradually improving the core EBIT over time, although quarterly fluctuations should be expected. And in the second half, as we absorb the contracted step of the rights cost. We also expect working capital to be positive for the year with other cash flow items such as finance, net, capex and tax and dividends remaining broadly stable. Execution will continue to be critical as we work through this transition. We remain focused on improving capital efficiency across all areas from content investments and partner agreements to working capital and cash flow management. While some effects will show up quarter on quarter, other may take longer time to materialize fully. There are both risks and opportunities ahead, and we are focusing on the right balance, making sure we protect value, unlock efficiencies, and remain disciplined in how we allocate resources. Thank you.

Thank you, Johan and Jörgen.

ready for your questions so operator please go ahead thank you to ask a question you will need to press star one and one on your telephone and wait for your name to be announced to withdraw your question please press star one and one again if you wish to ask a question via the webcast please type it into the box and click submit once again if you would like to ask a question via the telephone please press star one and one We currently have no phone questions. I will pass the call back to Anna. Thank you very much.

So we can start with a quite short question that is to you, Johan, and that is if you can explain the change from last year in Q1, where we had net income of 605 million for the quarter, whereas in Q1 this year, the same number is 125 negative.

Yeah, I can remind that last year compromised the one-off impact of 1.19 billion as a result of the debt write-down made in connection with rich stabilization in February 24. So that is the material difference.

Thank you. And now here's one for you, Jörgen. What concrete measures have you implemented to curb account sharing and how many account shares have been converted to subscribers as a result?

Yeah, so clearly what we have done is what made sure that people identify themselves and where they're using the accounts. You still can use your account outside your home, but you need to make sure that you verify that you are the account holder. So we have to make sure that we have limited the account accessibility to to fewer people, meaning that you can watch two simultaneous streams at home. And then clearly also, as I said, you can take your account with you when you go to summer house or whatever. Different though, in different markets as well. Some markets we have treated a bit different where we have had account sharing development earlier. It's quite an important measure clearly, and we see now the uptake. So a lot of the new sales that we can identify is actually people who we can see have used to be account sharer, meaning that they used to share an account with somebody. We can recognize them. So that is, of course, has a positive impact on our new sales, and we are very happy for that.

Thank you, Jørgen. And a short follow up on that one. Will you experiment with add-on accounts at a reduced price like others have done?

Yeah, no, clearly we are inspired by others, what they're doing. Also, our shareholders and influencers having different accounts, like student accounts and other things, which we are exploring how we can eventually get that implemented in our markets as well. So there's a range of opportunities, different packaging, different accounts, different needs, which we will be able to launch in our markets.

Thank you. So we have a question on the phone. So operator, please back to you.

Thank you. Just as a reminder, before I take the question, if you would like to ask a question via the telephone, please press star one and one on your telephone keypad. If you wish to ask a question via the webcast, please type it into the box and click submit. We'll now take the phone question. One moment, please. And your phone question comes from the line of Kyle Coker from Swedbank. Please go ahead.

Hi, thanks for taking the question. The sub-licensing revenue segment, a little bit difficult to predict from our side, and obviously down based off of the one-offs that were a year ago based on the sales of the scripted content. Would you say that this level is the kind of level that we can expect moving forward and, you know, I guess restricted now just to the sports sub-licensing?

Yeah, I think we have to divide it in two parts. So there's the sport licensing and then, of course, there is the bracket cleanup of all the script that shows that we have sub-licensed as well. But really what we are aiming for is, of course, that we would like to... to sub-license more sport, and that is what we have said all along, that we have too much in all fairness. So that is something where we would like to see an increase, but the normal content should be to some extent flat. Hopefully, going forward, you will see a higher sub-license on sport.

Okay, thank you. From our side of things, the levels and the amounts of the scripted content sub-licensing makes it sort of difficult, I guess, on a year-over-year level to kind of accurately model. So helpful to know that this is maybe stabilized a bit there. Another question with regard to, you know, there's some commentary around the step-ups in the costs in the second half of the year from the previous onerous contracts, etc., To what extent was that taken or not taken in the large IAC in 2023 that reduced what was classified as cost of sales and sort of the right sizing? Were those step-ups also not included in terms of those kind of right-sizing activities that were done in the income statement?

Yeah, if I may, I think when you're, So there's two different buckets, isn't it? Because one thing is the ordinary contract, and that is what we're talking about in the Nordics to a large extent, is, of course, that some of these contracts, they have inflation built in, yeah? And that is what we are witnessing. So that is one bucket. And then the other is the contract for international. That is a different bucket, as you know, where we sold that right to the rights owners. But what we focus on is, of course, the contract that we have, and that is legacy contract for, yeah, Basically, even some studios as well, which clearly we are in conversations with them about to write science as well, which some of them understand and have supported with, and some are living in their own bubble, have not understood it yet, to be fair. But that is the reason why we are talking about the increasing cost in the second half year, is because of these legacy contracts.

Yeah, I mean, I'm just thinking about it from the context of, you know, I guess there were also, it wasn't just the non-core, I guess, that saw IACs. I guess my understanding is, you know, there was right-sizing of the core portfolio as well to adjust for the onerous contracts. And I guess it's just, yeah, to an extent, I guess maybe that some of the inflation was not taken on the income statement as part of that 2023 exercise. And I guess it's just going to be continuing to funnel through and show up on the income statement in future years, it sounds like. Another question with regard to the RCF. I see that there was a draw on this during the quarter, now stands at $800 million. Can you explain a little bit around the need for that draw, given that I guess the second quarter is typically operating cash flow positive, what we've seen in the past. Is it just temporary fluctuations for payments, or how do we think about that?

Yeah, Johan, here, I think it's as you said, we used the RCF on the need for working capital swings, both within the quarter and between the quarters.

So would you describe it more of an intra-quarter? Because we're expecting typically a more positive working capital effect by the end of the second quarter.

Is that fair? But as I said before, I think for the full year, we are expecting to improve the working capital, but we will see working capital swings between the core quarters based on the seasonality we have in the payment terms and the way we also see the revenues that come in. So I think it's the natural pattern, and then on top of that, as I said, we're trying to work to improve the working capital efficiency throughout the year with a range of initiatives.

Okay. Thank you very much. That's it for now. Thanks.

Thank you. There are currently no further phone questions. I will hand back to Anna. Thank you.

So we will keep going with the questions here on the message board then. So Johan, this is a quite short question, but it's for you. When do you think you will be able to hedge again?

So we are working to improve our capabilities in this area, but we don't... We don't have any specific time plan that we can share on, but it is something that we will work throughout the year to implement.

Thank you, Johan. And here's one for you, Jörgen. It seems like there has been a recent growth in illegal actors in the market like IPTV in response to price increases in the industry. Could you maybe share your view on this? And one more here. Do you believe this has impacted your subscriber amount negatively this far?

Yeah, I think it is unfortunately recognized as a growing area, meaning that it is becoming bigger, the illegal viewing of the piracy. And that is, of course, as we have said as well, something that we are together with a range of stakeholders are working on and trying to prevent. And there are also now different legislations and different initiatives, latest CEOs in Sweden coming up now to make sure that we can be more active in this space together with partners and so forth. So it is unfortunately something we see, which is a problem for all, as you can argue. It's just like going to the cinema without paying for your tickets. And it's a little bit difficult to run a cinema, to be fair. And the same, of course, goes for us. So it is something that we are focused on to protect the value of our content and investing in this right now.

Thank you. So we will continue with a question for you, Van. And that is, could you please help us understand the building blocks to reach a positive free cash flow in 2025 for your core operations when you started the year with a negative of the 220 when H1 comps supposedly are easier than later this year?

As I said, we will gradually improve our EBIT throughout the year. I think the first half is a little bit easier comps-wise and the second half a little bit tougher. And then we will also gradually improve the working capital to reach a positive pre-cash for the core.

Thank you. And then we have one For you, perhaps, Jorgen. What has been the drivers for the large decrease in subscribers from Q4 to Q1? This was not the case from Q4 to Q1 last year. And if the management sees subscribers returning to old levels in the current quarter?

Yeah, but there's been different drivers, actually. And clearly, I would have loved to see that we would have kept many more of those customers. But some rights, we had some one-off events as well where we had rights which had very strong local participation. And then clearly we have not been good enough in keeping those customers long-term. That is something we need to understand why that didn't happen. So it's actually a mix of a range of things. I would also have loved to see clearly a bigger takeoff now. There's also some seasonality, of course, in it as well, which we're looking at. And also, we were impacted at some of the races in the Formula One started during nighttime as well, which was not the case last year. So different areas, to be fair. But clearly, we should have been much better in keeping the customers. And that is, of course, something we're focusing on.

Thank you. Jørgen? If there are no more questions on the phone, we will now conclude this Q&A. And thank you for your time and questions. We really appreciate the interest, and we're always happy to hear feedback on the format and content of these sessions. If you'd like to schedule a follow-up, don't hesitate to reach out to me at investors at biopaygroup.com. That's it for today, and thank you, and have a good day.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.