Modern Times Group MTG AB (MTGB) Earnings Call Transcript & Summary

Good morning, and welcome to MTG's presentation on our latest and very exciting acquisition of Ninja Kiwi. My name is Lars Torstensson, and I'm CFO and also responsible for Communications and Investor Relations at MTG. With me today, I have, of course, our group President and CEO, Maria Redin; and also our very own EVP for Gaming and Esports, Arnd Benninghoff. We will begin by presenting our M&A strategy on Ninja Kiwi and then take your questions in a short Q&A session at the end. [Operator Instructions] With that said, over to you, Maria.

Thank you, Lars, and good morning, all. We're obviously very excited to presenting Ninja Kiwi as our latest addition and also addition to our several games companies within the group. So before I do so, I will -- or actually let Arnd -- I just want to briefly highlight our strategy and why I believe that this transaction is an important milestone on our path to execute our buy-and-build strategy as we set forward. So looking at the next slide, MTG is focused within the gaming and esports segment. On the esports side, we are only the leading independent brand, arranging leagues, events, tournaments and engagement around the professional esports players to the fans and communities around the world through our ESL and DreamHack events and brands. On the gaming side, we are building a strong and diversified portfolio within the casual to mid-core free-to-play segment. We have acceptances with leading titles within the strategy and -- raising and the casual segment. We're also within this vertical building up capability functions on back of the existing center of excellences that we already have within the company and ensuring that we share the best practice between the group companies. Going forward and also the main reason for the Ninja Kiwi acquisition, we want to continue to drive value creation through combined organic and inorganic strategy or buy and build, as we call it. And I think the Ninja Kiwi transaction is a testament to our execution of the buy strategy. What we're looking for in the gaming space is companies with strong IP, great culture and proven management team. That foundation will always lie within the people and the product, and that is very important for us because we also want to drive organic growth post the acquisition. On the esports side, we are similarly looking for both organic and inorganic activities and initiatives. And here, we are rather looking for capabilities to further strengthen our position with the esports ecosystem and also our brands. If we move to the next slide. If you then look at what we believe comes down to -- and the reason for success in both acquiring and integrating companies, it all comes down to the capabilities and what we offer the company. We want to make sure that we are the best team of entrepreneurs. And the way that we can be that is by support services to help them accelerate their growth strategy, such as UA and [indiscernible] and make sure they remain an empowered management team. From our side, we will, of course, give them the management support and also financial support to accelerate their execution plan. As defined in the company, the more we also onboard new companies and great entrepreneurs, the broader our network becomes, which is one of the most important parts. Great entrepreneurs usually know great other entrepreneurs. And then, of course, access to funding, and also why we're very happy to be able to complete our rights issue yesterday. With that said, I would like to hand over to you, Arnd, and you can then talk about the specific on back of Ninja Kiwi.

Thank you, Maria. If you move to Slide 6, please. I'm happy to introduce Ninja Kiwi as a leader in the tower defense as a pioneer with their Bloons IP. They have built a franchise with no marketing investment and a very strong community backing. Ninja Kiwi is an Auckland based online and mobile games developer, offering cross-platform games, started in browser and then successfully also launched mobile games on the back of the Bloons IP. They have shown over the last years, company founded in 2006, a very stable and solid growth story with a high profit margin. Their games, Bloons TD 6 and TD 5 are up in the charts since more than 5 years under the top 20, Bloons 6 currently in each country of the world under the top 5 games, as premium games. Ninja Kiwi has started as a premium game publisher, but also has free-to-play games. Now they have a live portfolio of 7 games, 3 games in the pipeline, more than 140 million downloads, 6 million MAUs and a very strong base with more than 800,000 DAUs. If you go to the next slide, please, Slide 7. You can see it's a founder-led company. 2 brothers, Chris Harris and Stephen Harris with a long-lasting experience in game development, then joined later by Scottish studio, led by David Hamilton and Barry Petrie. Scott Walker joined them from EA, and built up the leadership team of Ninja Kiwi with 70 employees in Scotland and the New Zealand and more than 50 developers. Next slide, please. As you can see, a pretty similar history like InnoGames coming from the browser side, offering now leading mobile premium games with a high monetization through premium. The new games are going to launch like Bloons Battles, which is a PVP game with also esports potential will be a free-to-play game. If you go to the next slide, please. What we like about Ninja Kiwi is the strong IP with Bloons, which is a platform where they launch -- have launched now the sixth episode. They're adding more content, more features. They've seen a record high revenue in January. They're on a very solid growth trajectory. The other game, which is driving revenue is SAS 4, a zombie action shooter RPG, but focus is still clearly on the Bloons IP. If you go to the next slide, there, you can see how strong the community support is for Bloons. With outstanding -- a single dollar in marketing, they have generated more than 500 million views on YouTube. Very famous streamers are playing the Bloons game on a regular basis, and they have generated more than 3.5 billion lifetime play sessions. It's a true really evergreen IP, which still has so much growth potential. It's available on 10 different platforms and is constantly growing over the last years. If we go to the next slide, please. Just to summarize the investment highlights. So we see in Bloons a very stable and profitable platform, which we can grow over the next years. It's led by a very strong, experienced game team through the long-lasting relationship with Kongregate. We were also able to identify attractive upside potential. Now the transition with the new games to free-to-play, there's future growth potential. And when I just summarize on the next slide, please, the potential synergy areas, which spans from amortization where Kongregate will help Ninja Kiwi to really UA, which we're going to test for the new free-to-play games, where InnoGames can support. And then the idea is also to build up an audience network where we can cross promote the games between each different -- each portfolio company. If you go please to next slide, I just want to summarize the transaction. We pay SEK 1.2 billion upfront for 100% of the shares in the company, which translates into 7.3x EBITDA multiple on 2020 numbers. Out of the SEK 1.2 billion upfront consolidation, 56% are paid in cash and 44% in newly issued MTG AB shares. These shares are locked in 25% for 1 year, another 25% for 2 years and 50% over 3 years. Here now, this performance base tied to certain profitability targets. And based on our calculations, the earnout will approximately be around -- will end around SEK 406 million over 3 years. Given that the team is highly passionate about the games, and it's a great cultural fit with the other entrepreneurs and the portfolio, we firmly believe that it will stay for a long time. And if you go to the next slide, please. Here, you can see how our portfolio looks like today. Now with 45 live games, 10 games in the pipeline in development, we have now nicely diversified our games portfolio, have a strong player base with more than 20 million monthly active players. 2 strong companies now with Kongregate and Ninja Kiwi in the casual hub and Hutch and InnoGames in the mid-core hub. If you go to the next slide, 15, please. And this is a key slide where we always go back to show you how well balanced now our portfolio is with several games in production and now in introduction phase. [indiscernible] just launched this month, and the games from Kongregate. Growth phase also well balanced with 2 games from Hutch and [indiscernible] from Kongregate and the Bloons TD 6 game from Ninja Kiwi and still at the end of the growth phase, Forge of Empires is still nicely growing. So this is now, for us, a well balanced and the portfolio where we can build on and which we can grow over the next years.

Thank you, Arnd. Thank you very much. And that concludes our presentation on Ninja Kiwi, and we are now ready to take any questions that you might have on the transaction. So operator, if you can compile the first questions, please, and we are ready to answer that.

[Operator Instructions] Your first question comes from the line of Tom Singlehurst from Citi.

Tom here from Citi. So I have a handful of questions. I don't know whether you want me to ask them all upfront or give you time to think or go one at a time. But maybe the first one was just to -- actually, just to think about where this fits in. You mentioned at the end, you've got the sort of casual gaming, and then I think you called it the mid-core sort of segment. I'm just trying to work out when we think about the sort of the strategy behind the deal, what other gaps there are that we should be looking for you to fill over time? Is there a sort of premium sort of mobile gaming segment that we're missing? That was the first question.

Thank you, Tom. So if I understand correctly, you would like to just elaborate on how then Ninja Kiwi will complement the current portfolio and how we are looking also on future potential M&A to build on their portfolio strategy as well. Is that correct?

Exactly right. Yes. Just trying to understand the segment.

Yes. I will hand that over to Maria and Arnd can build on that as well.

No, it's a very good question. And I think that we always have like a portfolio mindset when we look at different targets and how it actually complements either the core or the mid-core segment? And also, is it purely like IP or is other capabilities that can then benefit the whole gaming company or per se. So I think what you see here is that, as you know, Hutch, which we acquired in the -- I mean, there was a great complement on the mid-core, and is also a very good synergy potential on back of the strong processes on back UA and [indiscernible] that InnoGames has built up. What we're now looking to make sure that we could find maybe not the same but similar games in the casual side to make sure that we bring really strong relevant IP and build a stronger casual segment as well. So I think that's why we are very excited about the Ninja Kiwi one. It fits perfectly with -- we feel that the relevance of evergreen IP, especially in the casual segment, which you can further grow. I think what is a little unique about the Bloons and Ninja Kiwi that even though it's a premium app, which is, of course, a little bit different to where we previously operated, it still has a high degree of in-app purchases. So it is hybrid. And I think that is, of course, where we also believe that capabilities we have within our games vertical can also accelerate their growth as they are also coming with new extensions on back of the Bloons IP. So I mean the capability we can help offering to Ninja Kiwi and of course survival and also UA and optimization. So that's why we believe it's a great fit.

Very clear. And then -- sorry.

No, sorry, Tom. I would just ask you to -- you can take your next question.

Yes. So I mean, turning to the deal itself. I mean, obviously, from a standing start, it looks like it's got a very attractive profile in terms of margins and growth. I'm interested in the earnout. Whether you can just give us some details on what the conditions are for the earnout? So whether there's some particular targets for either growth or EBITDA that it depends upon? And then a further follow-on question to that is, does the presence of the earnout prevent the integration in any way? Does it slow down the sort of achievement of synergies?

Thank you. Once again, Tom on that, it's regarding the earnout structure, growth profile and if the earnout structure in any way would hamper the possibility of extracting further synergies between different gaming companies. I mean once again over to Maria.

Yes. I don't want to go into detail of the earnout structure. But the way it build up. It's based on the financial performance of the company. And depending on the performance, it will then have different level payout of it. So I mean where they performed strong, they should also be providing them a better earnout structure. When it then comes to the synergies and integrations, as we always say, I mean, we want to make sure we keep empowering our local portfolio company. So I mean they will still continue to run their business. I mean we acquired them because we believe they have great IPs, great capabilities and a great management team. That's the way they should continue to operate within Ninja Kiwi. However, what we're also offering is, of course, access to our center of excellence as we call them, which can impact -- well should actually help them accelerate their performance, which in theory then would actually improve their chances to reach a high earnout, which would then create a win-win for both parties. So that's how we see it.

Should we take another question?

Yes, yes, yes. That makes sense. So the earnout doesn't get in the way of integration. That's the key thing I wanted to understand. And then final question. Just -- I mean, I suppose it's both specific on Ninja Kiwi, but it's also general. The mode of consideration, I mean, from our perspective, it's all equity isn't it because you've done the placement. But just in general, when you're doing these transactions, what's the ideal mix in terms of equity for the vendor? And specifically, in this case, how did you end up with the sort of essentially 50-50. Is that what we should think about as a sort of target level of equity issuance for companies looking to sell to you guys?

Yes. Thank you, Tom. I mean talking about the mix, I think there might be a little bit of misunderstanding exactly how the payment looked, but I will let Maria elaborate on that one. And I guess also every deal is unique to some extent. So it's hard to generalize. But please, Maria.

Yes. No. And I think that it's quite an important statement. I think every deal is unique, so you cannot say it's one size fits all. But I think that what unifies all the transactions where we want to do them is we want the long-term commitment from the founders. And that's why I like the share component because that shows that we are in this together to drive joint value creation, and we can then have a joint further upside. And that is what I truly like because we want to do this together with our companies that we acquire. It's a partnership. When it comes to Ninja Kiwi specifically, it's actually -- it's a 60-40 split over a period of time, it just skewed a little bit different on the upfront versus the earnout. And I think that was a discussion we had with them. They truly believe in the potential of what we want to create. They also very much believe in -- I mean some of the titles, even though they're early days, they have the competitive element. So they're also very keen to understand what can be done also more versus gaming versus esports and how they can work with our esports assets. So that gives them a further incentive on why they believe holding shares in MTG would be a great thing for them.

Your next question comes from the line of Erik Lindholm from Nordea.

So starting on some specifics on Ninja Kiwi here. So the monetization is quite low compared to some peers and Bloons has historically been a premium game here. But can you talk a bit about your plans to increase monetization? And is there any plans to make Bloons TD 7 completely free-to-play?

That's a lot of good questions there. But the -- of course, it will come to the monetization of Ninja Kiwi in general and then more specifically maybe when it comes to TD 6 versus the upcoming Battles 2. And then also, of course, when it comes to what sort of future payment mechanism that might be introduced when it comes to Ninja Kiwi games as it's coming from a place of more pay-to-play, and now it's moving into free-to-play. But Maria? Maybe Arnd, if you could maybe start with that, and then Maria can build it up. Is that okay, Arnd?

Yes, sure. I mean the Bloons TD 6 has a pretty unique combination of its premium, but already 40% of the revenue is free-to-play, is in-app purchase. And then they also have ad monetization, which can be further monetized. So I think, yes, they have upside potential, where we can help them work on the new games. The new Battles game with esports potential, PVP games, this will be purely free-to-play, where we start also scaling UA. So I think it's a healthy mix of different revenue models. And then as I just tried to explain it, we look at it as a platform. So there is no pressure to release the next Bloons 7. Instead, there's so much more content and features they can add. They just had a massive content release in December and have seen them, as a consequence, a record high revenue month in January, and they're still on the same trajectory. So that's why I believe there's so much more potential with the existing platform, existing game. But in the future, yes, focuses more on free-to-play and then they might consider also to launch the next iterations of Bloons as free-to-play games.

Thank you, Arnd. And Erik, would you like to follow up?

Yes, sure, sure. Great answer there. So Bloons, I mean, it's a really strong IP in tower defense, obviously, but I mean has there been any attempt to expand this IP into other genres, such as puzzle and so on? And do you think that could be viable as well?

If the Bloons can be expanded, Arnd that's definitely a question for you.

They closely listen to the community, and that's the basis of their success. So they will stay true to the tower defense genre. They have tested some IP licensing to leverage the game mechanics for more prominent IP. But in general, they will really focus on tower defense and rather further optimize, introduce competition instead of venturing out to other genres. They still have a cattle of business with also puzzle games. But here, they will -- they want to master the tower defense strategy genre.

Thank you, Arnd. Erik, any follow-ups?

Yes. I think maybe 2 more questions here. So I mean, from what I've understood, Ninja Kiwi has no people in marketing right now. So is it fair to assume that InnoGames will take over UA efforts completely here? I can start there perhaps.

Yes. Thank you, Erik. So we -- when it comes, Ninja Kiwi, of course, most of its stellar growth has been done organically and through a very strong community, but Arnd any thoughts that we can share on how you can increase marketing for Ninja Kiwi.

Yes. Since this is an exclusive deal. We have been talking to Ninja Kiwi since more than 3 years. They know Kongregate since more than 8, 10 years. And we have done various tests in the past, also ad monetization, how we can help them to improve the CPM and also we've tested UA. So our centers of excellence, led by InnoGames and UA, but also supported by Kongregate, they will help them to build up the competence and also we give them access to our systems and platforms on the UA side. So that will clearly be a benefit and was the key reason also for them to join the MTG family.

Thank you, Erik. Any more questions from your end?

Sorry, a final question here. Yes. So generally here, I mean, looking at the mobile gaming M&A market. After doing this deal, do you still see sort of plenty of opportunity out there? And are there any specific pockets of the market where you're looking more right now?

Thank you, Erik. I think it's around what the landscape looks like for further M&A. I think it's question to both Maria and Arnd. But Maria, maybe you could start on that one.

Yes. No, it's a very good question. And I think it's fair to say that it's an industry which attracts a lot of interest right now. But I think we have our strategy. We have a view on how we want to continue to build stronger games vertical and to be very straight, also stronger esports vertical. And I think that there's still a lot that we can do. We need to manage that as well and handle the integration to make sure that we also optimize the way we onboard companies and help them realize the value-add that we can also give to them. But we will continue to focus for further acquisitions. And I think that we have a pretty good view on what are the potential further add-ons that could be value-accretive for us.

Arnd, do you want to add...

Yes. And I think our -- one of a key principle guiding principle for investments is that we want to like to partner with studios, which focus on certain genres, really go for a leading position in a genre like [indiscernible] and simulation strategy games. And here, we have tower defense. And that's a bit our guiding principle instead of having a very two pronged portfolio of games. And there are really numerous opportunities out there in the market. And then we try to monitor them also through our existing companies, like here Ninja Kiwi was found through Kongregate. And that's how we track. And I think there is still a huge pool out there of these type of gaming studios.

Thank you, Arnd. Thank you, Maria. Erik, are you content with those questions?

Yes, I'm very content.

Thank you, Erik. I appreciate all the questions. And we could have the next question opertaor.

[Operator Instructions] Your next question comes from the line of Pascal Erixon.

I think Pascal is me. Oscar here. So a few questions from me. First of all, what is the reason Ninja Kiwi has not utilized fully used acquisition investment until now? And also what is the potential ahead? And should we expect higher growth and lower margins ahead?

Thank you, Oscar. It's always nice to have an alias, but it comes down to how come Ninja Kiwi has been able to come so far without any marketing and what would marketing mean for Ninja Kiwi going forward. Arnd, could you start and then Maria could be...

Sure. I mean there have been a pretty comfortable position here back to a very strong community, listening to community, and that was their main marketing channel without paying any streamers or influencers. And then it has also led to this very high profitability around the 45% to 50% profit margin. In the future now with more focus on free-to-play and supported through our UA competence, and there was one of the key points and also why they've chosen to go with MTG. Now we're going to definitely start getting UA. Given the ATV levels, they have enough room to acquire a user through various acquisition channels. So then over the time, the relative profit margin will go down a bit, but the absolute EBITDA will grow. So this is part of the future plan. But I think that's what we like here, and that was the USP why we bought Ninja Kiwi. I think in such a crowd and highly competitive mobile games market and now with the upcoming change where Ninja Kiwi won't be affected, I think it's a pretty solid base to have such a strong franchise, such a strong IP.

Thank you, Arnd. Oscar, do you have any follow-ups?

Yes. 2 more questions for me. Looking at the mix now, a more balanced mix, I would say, between genres and games in different growth stages. What are you looking at going forward in terms of genres? And also what type of assets in general you will be focusing on?

Thank you, Oscar. So we have then broadened our portfolio with Hutch and Ninja Kiwi, and the question now, what are we looking for next to complement the portfolio? Maybe, Maria to start and Arnd to complement.

Yes, it's a very good question, Oscar. And I think the way we look at it, and I think Arnd said it as well, we will remain focused on the casual to mid-core. We'll make sure that the companies that we look at, they do have a strong lead in whatever category that they are in. I don't want to go into the specifics of the categories that we're looking at, but it will be within casual to mid-core. Another thing what is also very interesting to see if we can also find companies, which have capabilities that can also benefit the whole group to make sure that we can altogether become better. I mean that we are usually say the 1 plus 1 plus 1 should be more than 3 because then that's when you drive value of the group on the next level. So I think that's what we're looking at, and I think that we're well underway. So that's what we continue to focus on.

Thank you, Maria. Oscar, would you like to follow up?

Excellent. That's very clear. Final question from me, which has to be asked. A quick comment on the M&A pipeline, if you could say something on how many companies you've been in discussion with? Also, could you say something about your pro forma net cash position after this transaction, please?

So I guess that is the golden question to some extent. So what -- how does the M&A pipeline look like? I guess we don't -- we can't provide that much insight into it. But I guess, Maria, if you would like to start and Arnd can continue as well.

Yes. I think it's fair to say that it's a very interesting pipeline, even though it's market that attracts a lot of attention. It is also when you do high-quality acquisitions, such as Hutch and Ninja Kiwi, I mean that rings the sort of the bell in the water. So I mean it's -- the rumors spread, and I think that also helps us to position us as a very attractive buyer. So I think there are interesting assets out there. At the same time, as I said, we want to make sure that we balance the number of investments we do with also being able to onboard them in a good way to becoming a part of our gaming family. So I think that's a balancing act, but we are -- continue to be very focused on both our organic and inorganic growth strategy.

Arnd, would you like to add anything to that comment?

Yes. Probably also, each of our respective portfolio companies are screening the market for potential smaller IP roll-ups just exactly in their genre. And then we have a network of partners, freelancers, who are monitoring the market, so -- and again, our key criteria is we want to stay selective. And we have a pretty high bar for game entrepreneurs and studios. So there has to be 100% fit with our portfolio.

And then when it comes to the cash position following the transaction, I'm going to -- just important to remember a couple of things. First is, of course, that we will be paying the note to InnoGames as end of the Q1 and also that the cash component of the transaction is then of the upfront is then 56%. The share component will then be issued following the AGM, and I think that would help you to land at the correct net cash position for the company.

And just a quick follow-up, if I may. Just if you could say something about sort of the key rationale or key competitive advantage that you have in a quite competitive market. Why do you think companies want to join MTG as opposed to competitors? Or what are your sort of key attractions, would you say?

So why should a successful entrepreneur choose MTG? I think it's a question to Maria, but also Arnd, of course, but Maria.

I think it's our culture, our people and the portfolio companies that we have, the entrepreneurs we have, success breeds success. We have great entrepreneurs. And that's one of the things that resonates very well when we speak to other companies. The fact that we -- the way we run our operating model, we want to make sure we keep the company we acquire empowered to continue to run the business, but still support them with their relevant services to accelerate their growth and having those key capabilities, and that's more on a pull effect rather than a push effect. And then it's -- I think that the Swedish culture resonates very well. I mean with of course the Swedish family model. It may sound funny, but it is actually very true. And we have -- we have a few people here at the headquarter. That means that we're trying to be efficient in everything we do and also the way we operate with our portfolio companies and give them support when they need it and then leave them to run their operations when they can. So I think that is it. Arnd, do you want to add to that?

No. That's exactly. I mean, the portfolio companies itself, like Ninja Kiwi and others when they do reference calls, that attracts them because they see there are other great entrepreneurs. And then there's centers of excellence, architecture where they run independently, they are still in charge, but they get the support and access to this toolbox and being part of family is a very important reason for them to join the MTG group. And also, more and more, we see on the mobile gaming side is that competitive gaming becomes small and small for developers like this Battles games. This Battles game is a PVP, where I can challenge others. Here, everyone sees the value of ESL offering them tournaments and bringing the esports know how to the games vertical.

Thank you, Arnd. Oscar, any more questions? Or are we okay?

That's it for me.

Thank you, Oscar. And operator, I believe we have 1 more question.

Correct. Your question comes from the line of Tom Singlehurst from Citi.

Sorry, guys, being slightly greedy, but actually a couple of really basic sort of almost modeling type questions, so I apologize to bring it down a level. But the first one was, just once again, so I understand the practicalities of this from a sort of -- from sort of an ownership perspective. Obviously, in the gaming vertical, you've got the minority held by the InnoGames sort of founders. I suppose the point is does that minority that gets sort of reduced pro rata as Ninja Kiwi comes in? I just wanted to just make sure I was understanding that correctly. And then the second question actually was on earnouts, and it might be that this is something you can give at a later date, maybe at the quarterly results or what have you. But I'm just wondering how we should think about the sort of cumulative earnouts across Hutch across this and whether we can sort of get a sense of the potential future share dilution or sort of cash cost of paying those earnouts cumulatively?

Thank you, Tom. Those are good questions. The first one is when it comes to how the minority ownership in MTG gaming will be impacted. And the second one was the impact from earnings. Regarding the second one, Tom, we could probably do a more detailed follow-up call on that one. But I think we have been quite clear in our releases what we assume is the -- or the most likely outcome of the earnout and also how the earnouts are structured. But let me follow-up directly with you on that one. But on Gaming AB, maybe Maria.

Yes. No, you're absolutely right. So we earned 77% in that gaming line company. And then our EHM against minority in the remaining part and in every transaction, I mean, they do have a right to also co-finance that, and they will most likely do partial co-finance from this, which means that they will be partially diluted, but given the relative size, it will not be significant. So they will -- they will partially finance this acquisition.

Thank you, Tom. Operator, do we have any more questions?

There are no further questions on the line, so if you'd like to continue.

Thank you, operator. So that concludes our presentation on the transaction of Ninja Kiwi, and we hope that, that has provided you with some additional insight and understanding for the strategic rationale and the reason why MTG is very excited about Ninja Kiwi joining the family. With that said, this ends our formal conference call, and you can always reach out us directly with any further questions and discussion topics. Well, with that said, thank you very much. Take care and stay safe. Bye-bye.

Thank you. That concludes today's conference call. Thank you for participating. You may all disconnect.