© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for holding, and welcome to the Modern Times Group Q4 2020 Results Conference Call. [Operator Instructions] 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 Torstensson. Please go ahead, sir.
Thank you, operator, and good afternoon, everyone, and welcome to MTG's interim report presentation for the fourth quarter and full 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 dial-in 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 to societies all around the world and companies as a part of those. We were, as most companies, certainly rocked when the pandemic hit, but I'm certainly very proud of how quickly we managed to regain our footings, thanks to the impressive and hard work from the whole group working as one team and how we ambitiously 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 1 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 the 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 esport side, due to postponement for the quarters earlier in the year, the fourth quarter was intense with 6 Master property events delivered by ESL Gaming, which together with good cost control, resulted in a positive adjusted EBITDA. The gaming vertical delivered a robust quarter, rounding off a record year, and we made several strategic initiatives to both diversify and strengthening the portfolio. The formula, have a new gaming investment holding company, an ownership increase in InnoGames 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 esport slide. As we said 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 6 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 DreamHack Masters Winter in December. Following our intense event schedule and heavy weighting then of our events into Q4, our organic net sales of own and operated properties remained stable year-over-year, though with 2 more Master properties compared to last year and 2 less Open. The Esport Services net sales decreased in the quarter by 42% due to less esport initiatives among the publishers, a direct result from the ongoing pandemic. Still, for us, the focus in ESS 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. It also bring us some of the strong performance in the quarter. ESL Pro League stood out with a very strong engagement from all fans, resulting in several viewership records, amongst others, the competition is at a new all-time peak of more than 0.5 million concurrent viewers, and the number of watched hours rose to 8 million -- 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 costs. DreamHack SportsGames rounded out the year with the execution of the Superliga finals. We're also excited to see the continued interest from traditional sports leagues to complement the leagues with esport counterparts. Just yesterday, we announced a 4-year esports cooperation between DreamHack SportsGames and the NHL. And earlier today, we entered into an agreement to produce the Swedish eAllsvenskan Football League. Travel and aviation restrictions in place to fight the coronavirus pandemic has meant that competition between teams based in U.S., Europe and Asia have 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 esports, 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 [doubling] 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 playtime for our B2C tournament platform, ESL Play, as well as our Minecraft client deadline. 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, our esports vertical 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 DreamHack tournaments as in-person competition but from a controlled studio environment. ESL Gaming has announced a busy full schedule for 2021 with digital and studio production. And while uncertainty remains due to the pandemic circumstances, we are scheduled to have several live audience events again in the second half of the year, which we look forward to. Furthermore, we do expect that the pandemic continues to impact our esports operations in cooperation with established a new commercial partners, so we're very focused on driving growth for 2021. While we continue to look forward to be able to host live events again, we're proud of how ESL Gaming has adjusted 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 CS:GO, StarCraft II and with Warcraft III competitions. It's held now and runs into early March. So then moving on to the gaming vertical. Our gaming vertical showed good progress in the quarter with strong performance from InnoGames driven by Forge of Empires. We saw the commercial launch of Teenage Mutant Ninja Turtles by Kongregate and equally important, our new games pipeline to be launched in 2021, progressed according to plan. InnoGames' 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 platform shows that InnoGames stats are great, both on mobile and played on browser. Kongregate 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 2 third-party publishing titles late in 2019. As for our gaming KPIs, ARPDAU showed a year-over-year growth of 11% driven by continued high engagements among our friends, and thanks to already mentioned good in-game campaigns by InnoGames. While the sequential decline in ARPDAU was more related to the number and the size of events held in Q3 versus -- so Q4 versus Q3. The DAU and MAU decreased compared to the same period last year due to Kongregate. That was adversely impacted by the removal of 2 third-party games. This effect was partially offset by the launch of first-party titles. InnoGames, on the other hand, had decreased DAU, supported by continued strong user 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 3 new InnoGames titles planned for launch in different stages during 2021, with the first is being soft launched as we speak. Further, Kongregate and Hutch show respectively preparing launches of a new IP playing out in the popular Spongebob Squarepants universe and the new exciting mobile racing title named Puzzle Heist, respectively. Following the acquisition of Hutch in December, we initiated the onboarding, and we expect to see the consolidated figures to be included in MTG's financial reporting starting January '21 and onwards. So moving on, the quarter saw us execute on a number of strategically important initiatives. On December 7, we announced that by utilizing our options in InnoGames, we increase 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 sets a good example on how we want to partner with founders of stellar gaming and esports companies with joint ambition for long-term perspective. Following the formation of the GamingCo, 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 games pipeline, which is progressing according to plan with several titles across different genres scheduled for soft and commercial launch later in the year. InnoGames and Kongregate with a range of established and proven IPs and titles ranging from city buildings and the idle category is now complemented by Hutch portfolio with titles in the early growth trajectory. And through the acquisition integration of Hutch, we do not only add strong titles and IPs but also considerably diversify our gaming portfolio with the addition of the mobile racing [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 operational 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 esport 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 esport 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 InnoGames 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 [win against] was slightly lower in Q4 compared to Q3 and is a result of seasonal phasing. This, in turn, had a temporary adverse sequential 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 higher sales and more normalized marketing levels in the gaming vertical and partly due to the esport vertical's adjusted 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 SEK 240 million in lowered costs in the quarter primarily through additional cost savings related to online events rather than offline events for our tournaments. But the improvement in the adjusted EBITDA is not only about cost savings, it's all about the -- 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 events schedule would also impact the performance of an individual quarter due to the fixed cost of the vertical. The second half of 2020 is a good example of that and the difference between a light event schedule quarter, see Q3, and an intensive schedule quarter, see Q4, and what that means for operational leverage in the esport vertical. With that said, the EBITDA adjustments in the quarter amounted to SEK 33 million to be compared to minus SEK 207 million last year. And some of you might have noticed that the cost for long-term incentive plan/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 InnoGames, in particular. Also, M&A cost was impacted by the acquisition of Hutch, included a stamp duty on the transaction. Depreciation and amortization in the fourth quarter amounted to minus SEK 68 million and included amortization of PPA of SEK 24 million. Amortization of PPA was lower compared to last year, mainly related to the Kongregate acquisition, which is almost fully written down. Excluding PPA, depreciation and amortization decreased by SEK 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 SEK 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 [have] 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 SEK 77 million, predominantly reflecting the increased result in the gaming vertical and InnoGames. 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 SEK 54 million driven by InnoGames, but also thanks to improved operational performance in the esport vertical on the back of the mentioned intensive event schedule. The relatively large delta in working capital between Q4 this -- 2020 and 2019 was mainly due to a large tax payment related to InnoGames in fourth quarter 2019. Additionally, InnoGames received an early payment from one of the distribution platform owners, having a positive impact on working capital in the quarter. In the quarter, we closed the Hutch transaction that was financed through a combination of bridge facility amounting to SEK 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 SEK 70 million in the VC fund, and CapEx amounted to SEK 42 million in the quarter, mainly related to the gaming vertical but also small investments into our B2C offering in the esport vertical. As a result, the net change in cash and cash equivalents from -- for continuing operations amounted to minus SEK 390 million. That led to the group having a net cash position of SEK 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 rights issue. As part of financing the Hutch transaction and increase ownership in InnoGames, MTG conducted a rights issue as a takeout in the first quarter of 2021. Following AGM obligation 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 SEK 2.5 million before deduction of transaction costs. As a result, we repaid on the 17th of February the bridge facility of SEK 1.8 billion. 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 a 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 stronger 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 M&A 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 GamingCo and the addition of Hutch also means that our gaming vertical is now stronger, more diverse and with a broader range of IPs and titles, [spanning] more genres and growth stages. With the rights issue we concluded, we're also enabled through the support of our shareholders to continue to deliver on our strategies and maintain the high focus on M&A activities from 2020. So with that, we close in 2020, and I thank you very much, and hand over to you, Lars.
Thank you, Maria. That concludes the formal presentation of our fourth quarter and full 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.
[Operator Instructions] Your first question comes from the line of Tom Singlehurst of Citi.
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 yes, if you can maybe sort of comment on aggregate outlook, if you can, and the phasing of growth 1H, 2H. That's the first question. Maybe we can start there, and I'll kick in with a follow-up, if that's 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 questions. So please, Maria, if you could answer Tom's question.
Yes. 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 to 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 have in coming up, I mean, 5 on the gaming side, 3 in Inno, 1 in Hutch and 1 in Kongregate. That will, to your point, drive marketing investments. We are starting with the first soft 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 into 2022. And let me -- it is important to remember and we said that also 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 rollout levels that we enjoyed during Q2 and also reactivation for all 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, yes, 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 ESL and DreamHack, we've managed to entertain our fans and 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 comps for Q1, last year, we actually managed to execute most of our events. It was actually about this time last year when we had 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 full year 2021, both organic and then to add further acquisitions [indiscernible].
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's stable year-on-year. It's absolutely fantastic if we think about what -- the pandemic. I suppose the question is when things do get back to normal, is there more of a demand for studio-based events and sort of digital-only formats? Or is that a sort of hybrid model that 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 InnoGames minorities have a blocking stake when it comes to doing more deals, and from a mechanical perspective, how deal flow works with, as I say, the InnoGames minority in place?
Thanks, Tom. So if I understand the question, it's -- when it comes to esport also, if the online format is going to survive and 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 InnoGames minorities and how we discussed the deal and deal flows. But these are 2 questions for you, Maria.
Yes. Okay. Let's start on the esports side. And I sincerely hope that the online 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, if you see the growth of interest in 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 -- 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 6 Master events, and it is predominantly back on the Master events that we monetize and, hence, also the proportionate 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 esports. Then moving on to your question on the gaming side. I don't want to go into details with the specific agreement with InnoGames. But I think how I generally look at it, 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 [indiscernible] and 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 that on EHM is the company that the minorities are represented by. So you follow the abbreviation.
Your next question comes from the line of Erik Lindholm of Nordea.
A couple of questions here for 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 the kind of challenging user acquisition environment in Q4 that improved in Q1. Is this something you have seen as well on front there?
Good question. It's always -- 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 or compared to Q4, please.
You referenced on the UA and our ability to spend on the UA side, Erik?
Yes. Yes. Exactly.
For us, and I think it is -- it also becomes a bit company-specific because you're addressing a little bit the different targets. But if you look at the perspective on totality, I think that they are totally 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 back of that UA level. So there is nothing that I want to flag specifically on that.
All right. Great. And looking at this discontinuation 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 discontinuation?
Yes. No, I mean, it has been said now for a few quarters, to be honest, but that has been phased out now to -- almost entirely. And to be honest, it has impacted the top line of Kongregate, 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, and we are on the right trajection, focusing on our first-party games, and we're now looking forward on building. The team is [meeting] in the 30 games that we put to market in Q4. 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.
Right. And the final one from me here. So can you talk a bit about the outlook for Esport Services here in 2021? So I noticed that you expanded the list of contracts to Hearthstone and signed some more contracts in DreamHack SportsGames, for example.
The Esport Services then and how that is going to develop going into '21, Maria.
No, I think that we are extremely excited about all those 3 deals that we have now announced. And I think we have -- even though our main focus lies in owned and operate because that's we can drive the scalable operations, these 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 eAllsvenskan that we announced yesterday and today [indiscernible] marks a new beginning that you have in the traditional sports franchises moving into esports. And I believe and I hope that that is something we continue to see more of.
And it's hot of the press, of course. If you didn't notice it yesterday, we did then secure a 4-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.
No further question at this time. [Operator Instructions] And we do not have any further questions, sir.
That is very much all right as we did have a trading update a month ago or so. But thank you, operator, and for everyone joining today. That concludes the conference call for MTG'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 staying in touch until we release the next quarterly report, which will be the first quarter 2021 on April 29. 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 all disconnect.