Modern Times Group MTG AB

STO:MTG B

Earnings Call Transcript 2019-Q2

[Operator]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Q2 2019 Results Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, Monday, the 22nd of July 2019. And I'd now like to hand the conference over to our speaker today, Lars Torstensson. Please go ahead, sir.

[Lars Torstensson, EVP, Head of Communications & Investor Relations]

Thank you, operator. And good morning, everyone, and welcome to MTG's Q2 2019 Interim Report Presentation. My name is Lars Torstensson and is responsible for communication and IR at MTG AB. Today, we will start with a formal presentation followed by a Q&A. Please remember that it is not possible to ask questions via our webcast and only through the telco. With me today, I have Jørgen Madsen Lindemann, our Group President and CEO; and Maria Redin, CFO of MTG AB. So without any further delay, please, Jørgen, can you take us through the formal presentation of our quarter?

[Jørgen Madsen Lindemann, President & CEO]

Yes. Thank you, Lars, and good morning, everyone, and welcome to our second quarter report. I would like to start by saying that we, at MTG, believe that esports and gaming is the future of entertainment, that is why we invest and partner with the best entrepreneurs, most promising publishers and leading brands in these industries. And there's a good reason for it, the number of gamers worldwide is expected to grow to 2.9 billion in 2022, up from 2.4 billion in 2018. And the global esport audience is also expected to grow to 645 million by 2022, up from 395 million in 2018, and that is defined as fans who watch esport games more than once a month. So games, whether played in the home, by the commuter on the go or in an esport arena by a professional esporter represent a major commercial opportunity. We have set ourselves up to deliver on this opportunity a strategic operating holdco executing a build -- a buy-and-build strategy, investing in companies with great potential and then operating them to add value and achieve that potential. In short, esports and gaming together, they are for the future of entertainment, and MTG is now uniquely positioned to capitalize on that exciting development. Let's move on to our quarterly results. And if I can ask you to go to Slide #2, then you'll see that MTG's second quarter of 2019 showed good progress on the strategy laid out across our verticals. We delivered record sales and record adjusted EBITDA for the quarter and continued to deliver on our operational and strategic direction with sales growth in our 2 verticals of 14%. Reported net sales was up 11% to SEK 1.1 billion for the group, adjusted EBITDA was SEK 71 million and the adjusted EBITDA margin was 6%. Sales on an organic basis were up 7% year-on-year. Within the esport vertical, our own and operated sales were up 15%. In total, revenue was up 8%, of which organic sales represented 4%. Now records in both -- a new record, sorry, in both our sponsorship revenue and ticket sales show that our esport vertical is starting to take over the natural role of traditional sports and evolving into the global arena. The gaming vertical showed exceptionally good results with organic sales up 14% and adjusted EBITDA margin at 29%. As I highlight, ARPDAU grew by 27% compared to the same period last year, showing that we are delivering when it comes to publishing and creating engaging mobile games.In the quarter, the MTG VC fund has completed several exciting seed and series A investments into gaming and esports start-up with a high risk but also the potential for high rewards. Our VC fund complements our strategy to buy and build companies in the esport and gaming vertical since it allows us to enter early into promising start-up and growth companies. And investments either remain financial investments or beginning of a longer relationship, which can also result in the company becoming part of the MTG group of companies in which we invest a majority stake. We have now also closed the sale of Nova, the last of our East European broadcast businesses. The sale of Nova allows us to go forward, focusing purely on the 2 vertical business segments, esport and gaming. It also provides us with around SEK 1.8 billion of cash to pursue acquisitions and implementing our strategy.Our operational focus during the quarter has been on creating a platform for future growth, both in esport and gaming, and we have brought ESL and DreamHack closer together to build the leading esport ecosystem and create the best products. This is both exciting and necessary, and I will return to this topic later in the presentation.A challenge that we have discussed with you before is the monetization of media rights in esport. This is taking time, and the lack of qualitative data from our properties is still hampering our efforts to sell and price media rights and compete effectively with traditional sports. So due to a slower development in this area, we have revised our 2019 revenue ambition for esport to better reflect this short-term reality.With that said, this is not changing our medium- to long-term view that there is a strong commercial product for esport media rights, and now -- and we are now making some necessary structural changes. MTG has all the assets to be able to take the lead in this area and to further commercialize -- commercially professionalize esport in the future. I'll also get back to that later. Overall, we believe that the second quarter was a solid quarter and showing that our sole focus on esport and gaming is yielding results. The split and the sale of -- the split of MTG and the sale of Nova are behind us. We have a clear growth strategy in place that includes acquisitions, and we see the performance improvement starting to come through in both esports and gaming. With that said, let's move on to what we are doing more specifically in the esport vertical. So if I can ask you to turn to Slide #3. In the second quarter, our strategic decision to focus on our own and operated properties have been more demanding with respect to esport services continue to yield positive results as the business vertical grew by 8%.Sales in own and operated properties increased by 15% in the quarter to SEK 318 million while the ESS revenue declined by 6% to SEK 127 million, representing 29% of total esport revenue.We have witnessed several positive indicators for the longer-term business case for esport being reached, first, the trend of improving operational metrics for our market properties continue. ESL One Birmingham and DreamHack Dallas were good example of this with more fans visiting and higher viewership compared to the same events last year.It will be a little bit more finer then ESL One Birmingham was our most-watched ESL Dota event ever with 24,000 fans over the course of the weekend in the arena at Birmingham, 9.8 million hours watched and the fastest-selling ESL Dota event ever. DreamHack Dallas was the largest successful DreamHack so far with higher ticket sales than anticipated and very strong reviews from visitors. The property produced 51 hours of forecast that resulted in 3.5 million hours watched, according to the ESC.Watch. We do experience and can begin to document that the eyeballs and brands value for esport are reality. So the market is there for the ones who can demonstrate some concrete commercial propositions around those eyeballs and document the effect.Second, as a result of the growing fan base and increased viewership, more sponsors got involved in both our Master and Challenger properties. In the quarter, our sponsorship revenue grew strongly compared to the same period last year and we landed several new and extended many existing partnership structures, Pepsi, Old Mountain Dew, AT&T, Vodafone, [ U1H ], Chipotle and more. And gaming brands are now being complemented by more general brands. Thirdly, DreamHack's newly launched e-FIFA league in Denmark and Sweden delivered strong incremental revenue and show promise for the prospect of a broader launch of e-leagues in traditional sports. These e-leagues run in parallel to the football leagues, and of course this means they will be seasonal. But they attract great viewership and in some cases, higher viewership than the actual football broadcast. These leagues demonstrate that esport can be delivered successfully as a mainstream media product.esport adjusted EBITDA loss of SEK 55 million was broadly flat year-on-year. The revenue growth meant that our margin improved somewhat in the quarter, top line growth remain our priority in esport, and own and operated is a scalable business. So as this revenue stream grows, we expect margins steadily to improve. With that said, we'll continue to expand and invest in our esport vertical both in the amount of properties and the revenue reach, which will hold back the pace of margin improvement. As an example in the quarter, we had our first ESL Master in India, and we introduced 10 more Challenger properties in countries such as Australia, New Zealand, Malaysia and Thailand. But as I said in my introduction, there is more to do to make this emerge as both become a more commercially attractive product. And our strategic efforts to commercially professionalize the sport even further, we all, that means the fans, the teams, the media partners, the sponsors, of course, ESL and DreamHack, have been asking for a schedule already now for 2020. And we will be able to deliver on the important objective for the sport by combining our ESL and DreamHack 2020 inventory of major tournaments and leagues to create a globally integrated product offering, which will make it easier for fans and relevant stakeholders around the world to follow the sport and professionalize commercial opportunities. And just as a cliff hanger, we'll reveal that full product after summer in August.Another key initiative going forward is to produce and demonstrate more qualitative data for the products in order for the sport to articulate the value proposition to the media partners and sponsors, just like all other entertainer products. We are, therefore, close to announce a global partnership with one of the leading research and consulting companies in order to establish a commercial currency for esport. So measures are being taken, but as stated earlier, this will be a key challenge to tackle going forward and one we will work with in the long-term perspective.If we then move on and turn to Slide #4, the gaming and the stellar -- which was a stellar performance in the quarter. Reported net sales in the second quarter increased by solid 19% to SEK 648 million and the organic growth was 14%. Mobile sales grew even stronger, 24% to SEK 330 million, which was 51% of the total net sales of the gaming vertical. InnoGames delivered another exceptionally strong performance in the quarter as Forge of Empires maintained its momentum and primarily driven by the successful in-game events in Q2 2019. The new game, God Kings, started to show early and promising results following soft launch in Q1, and we will increase our marketing efforts for it in the second half of 2019. And our work to make Warlords a future success is ongoing.Forge of Empires continued to impress, as I said, and in June, we saw the title breach the EUR 500 million lifetime value milestone. This shows that InnoGames has not just best-in-class ability to develop and launch the title to the market, but perhaps more importantly, the team has the ability to keep a successful title relevant and its player community thriving year after year.At Kongregate, the turnaround started to yield improvements in revenue and adjusted EBITDA, both of these reflecting Kongregate's focus on a smaller number of more successful games such as the newly acquired Bit Heroes. If we move on to Slide #5. The action that we have taken to turn around the performance of Kongregate by focusing the company resources on a smaller number of more compelling games as well as the continued strength of InnoGames main title paid off in the quarter and reflected in several of the main strategic KPIs. DAU remained stable and decreased marginally by 1% compared to the previous quarter. The quarter-on-quarter decrease in MAU was 5%, that was mainly due to the seasonality and the ongoing expected decline of browser users. Compared to the same quarter last year, DAU declined by 3% and MAU declined by 16%, and that was mainly driven by Kongregate that had more games featured in app stores and traffic generated from platforms it no longer uses.ARPDAU increases to SEK 2.8 from SEK 2.2 in Q2 2018, growing by 19% year-on-year at constant currencies. The positive development was driven by better game monetization on new and existing users in our top games as well as lower DAU in Kongregate.There was no material change in the proportion of gaming revenue generated by the top 3 title, which is Forge of Empires, Elvenar and Animation Throwdown, which was broadly flat at around 74%. Adjusted EBITDA in the gaming vertical was SEK 186 million and the margin was 29%. Looking forward into the third quarter, I would like to emphasize that marketing spend will increase as a result of especially InnoGames lowering both classic and new titles. Regarding our classic games, we feel confident that their lifetime value is higher than we historically have assumed and leading us to making more marketing investments today to realize that value tomorrow.If we then move on to see what we've been doing in our VC fund and turn to Slide #6. So let me just give you a brief recap of the premise of our VC fund. It complements our majority stake investments with seed and series A rounds investment in early-stage start-up in gaming and in esport. Granted that's often with venture capital, we're talking high-risk investment but with potential high returns for the right bets made. Over time, these will either remain financial investments or be a greater intro into companies that might become members of our growing esport and mobile gaming network. Our ambition is to make 10 deals in esport and gaming per year through lead or through co-investment with other top VCs. With that said, investment in first half amounted to a total of SEK 103 million, including capital commitments and span start-up and growth companies in the United States and Germany. Among the investments: Redwood City-based, Dorian; it's Austin-based game developer, Tonk Tonk Games; it is gamer platform, Playfull, from Los Angeles; it's German gaming studio, Sviper, which actually is founded by ex-InnoGamers; and San Diego-based, GoMeta. To date, we have made 20 investments in 16 companies totaling SEK 195 million thus far. And our largest holding in the fund are BITKRAFT funds, it's AppOnboard, it's Phoenix Labs and Play Ventures fund and Sviper.So that concludes my comments. So I'll now hand the call over to you, Maria, to take us through the numbers in more detail.

[Maria Redin, Chief Financial Officer]

Thank you, Jørgen, and good morning, everyone. If you then move to Slide 7. Let me start with the revenue and adjusted EBITDA. Net sales in the second quarter of SEK 1.1 billion were SEK 130 million higher than last year with 4% positive FX impact supporting the 7% organic sales growth.As Jørgen mentioned, esports and gaming both report higher revenues in Q2. Together, the 2 verticals achieved SEK 136 million higher sales than in second quarter last year, and this was partially offset by an adverse movement of negative SEK 50 million in our other operations, principally Zoomin, which reported sales down 40% to SEK 23 million. Our revenue recovery and cost-reduction initiative in Zoomin is continuing, and we're also exploring other strategic options. So you should not expect this level of losses to continue for the rest of the year.Adjusted EBITDA in the quarter was a record SEK 71 million, which was SEK 97 million higher than in the second quarter last year. This resulted in adjusted EBITDA margin of 6% to be compared with minus 3% for the same period last year. If we exclude the positive impact on IFRS 16, the adjusted EBITDA margin was 5%. The margin in the quarter was driven by the exceptionally strong performance mixed with relatively lower marketing cost in InnoGames. And as Jørgen mentioned, we will increase our marketing expense in our gaming vertical going forward, thus, you should expect the margin in the gaming vertical to go down in the second half of the year to more normalized levels, and margin improvements would rather be seen in the esports vertical. If I can then have you turn to Slide 8, we will look at the rest of the income statement in a bit more detail. Within the adjusted EBITDA, our central operation costs in the quarter were SEK 43 million, which is in line with the post-split run rate that we flagged at the Capital Markets Day. There were 3 adjustments to the EBITDA in the quarter. The first was a one-off cost related to the Zoomin restructuring of SEK 4 million, and that has been reported as an item affecting comparability. The second was a charge for the cost of the long-term incentive program, which was SEK 23 million. And the third was an M&A cost of SEK 4 million, primarily related to activities in our VC fund and the purchase of the Bit Heroes IP by Kongregate. In the quarter, there were no impairments of previously capitalized game development costs.So the total adjustment was SEK 32 million with EBITDA before adjustment of SEK 39 million. Depreciation and amortization were SEK 74 million and included a purchase price amortization of SEK 32 million. Depreciation and amortization excluding the PPA was SEK 30 million higher than in the first quarter last year -- or the second quarter. And almost all of this accounted for in the change in IFRS 16 that I already mentioned.Group EBIT was minus SEK 35 million, which was a SEK 90 million improvement versus second quarter last year. Net financial items were minus SEK 10 million, and this is predominantly due to exchange rate changes. Group tax cost was minus SEK 26 million. And the net loss for the period from continuing operation, therefore, amounted to minus SEK 71 million.As you have seen, we completed the sale of our 90% shareholding in Nova Broadcasting Group to Advance Media Group in April. As a result, we recognized a capital gain of SEK 1.4 billion. Nova has been reported as an asset held for sale since the first quarter of 2018. And from the first quarter of 2019, it was reported as a discontinued operation. And if I can then have you turn to Slide 9 and the cash flow and balance sheet. CapEx in the quarter was SEK 67 million higher than in the second quarter last year following the acquisition of the Bit Heroes IP. Above and beyond acquisition, was our CapEx still in the gaming vertical where we capitalized games development cost up until the game goes live. After which, all the cost are expensed and the pre-launch CapEx starts to get depreciated. We invested SEK 22 million in our VC fund, comprising 1 new investment and 2 follow-ons. And we have now invested over SEK 195 million in 16 companies into the VC fund out of the SEK 300 million target that we have indicated. All of the fund's investments are still carried at cost.Cash flow from continuing operations was an outflow of SEK 40 million. And in addition, we had SEK 29 million working capital outflow. Following the sale of Nova, we closed down a SEK 1 billion credit facility and we subsequently also repaid the SEK 130 million that was drawn. We ended the quarter with a net cash of SEK 2.1 billion. And that concludes my comments. So thank you, and I will now hand back to Jørgen.

[Jørgen Madsen Lindemann, President & CEO]

Yes. Thank you, Maria. So as I said at the start, we have delivered on the strategy with a strong Q2 2019 performance in both our core verticals. Esports is growing. The driver is our own and operated properties, and these are getting bigger and better and drawing in the eyeballs. And most important of all, these viewers are attracting sponsors and media as well as new publishers. Still a lot of work to be done in shaping the different revenue streams especially then, as mentioned, media rights. In gaming, we are happy with the development in Kongregate with player numbers and sales going the right direction again. InnoGames remains a really solid performer. Forge is going well. In mobile, which, today, is the most played and chosen platform for user base, and the classic browser games are still delivering sales. Work is ongoing with Warlords road map and the soft launch game, God Kings, shows early and promising development. So the gaming vertical is in good health.In the quarter, the MTG VC fund has completed several exciting seed and series A investment into gaming and esports start-ups and we closed the sale of Nova providing us with around SEK 1.8 billion of cash to pursue acquisitions and implementing our strategy. Lastly, we are taking important steps to commercialize -- commercially professionalize the industry through the combination of ESL and DreamHack 2020 inventory of major tournaments and leagues to create a global integrated product offer and through creating a standard for the esport industry when it comes to quantitative data around events in order for the sport to articulate the value proposition to media partners and sponsors. This is also an opportunity for DreamHack and ESL to work more closely together to realize the scale benefits that are there.So to conclude, MTG is set up to build the future of entertainment. We are a unique combination of a strong operator and investment company with an outspoken buy-and-build strategy

[Lars Torstensson, EVP, Head of Communications & Investor Relations]

Thank you, Jørgen, and thank you, Maria. That ends our formal presentation for the second quarter 2019. And we are now ready to take any questions that you might have. So operator, could we have the first question, please?

[Operator]

[Operator Instructions] Your first question comes from the line of Predrag Savinovic from Nordea.

[Predrag Savinovic, Analyst of Consumer Goods]

I'm trying to see what happened here with the guidance. What was the base of the guidance of 15% organic growth versus now? And what has changed since? It is almost as if you had anticipated an order which was part of the guidance and which didn't follow through. Is this the case?

[Lars Torstensson, EVP, Head of Communications & Investor Relations]

Thank you for the question. So it's around guidance and what are the drivers behind that change. So Jørgen, would you have a first stab and Maria to follow up?

[Jørgen Madsen Lindemann, President & CEO]

Yes. I think -- first of all, I think it's quite important what we have laid out here and discussed, which is always, of course, the ambitions for the revenue streams that we are having. And we see, as I said earlier, that sponsorship is doing well and continue to grow. That also reflect the 15% own and operated growth in Q2. And then the media rights as such, that is not one big order. It is in general, of course, that we are professionalizing that revenue stream as well. And the way to do that is, of course, to have a fixed schedule that people can relate to. So if you are selling this as a global product, which we are doing, there are different demands, there are different times zones, there are different areas that sponsors would like to participate in and media partners would like to see events in their area with local teams and so forth. So there's many, many components, which we now will be able to articulate for the 2020 by merging the DreamHack and the ESL schedule. So instead of like we have seen in the second quarter, we have events both for DreamHack and ESL in the second quarter. We will now make sure they spread out over the year and also articulated, so where we would have those events and what kind of events it is.So that is part of the way to professionalize the revenue stream around the media right. I think 2017, media right was forecast to stand for 14% of the revenue in esports. Sponsorship, of course, the vast majority. And sponsorship, we do see materialized, as I said, with a lot of prolongation for different sponsors. Also the case stories we have for media rights today with the, yes, companies in the Nordics to get stabilized widely and through Denmark and so forth forecasting these events, discovery forecasting the FIFA product is very strong. So the case stories are there. And those we, of course, need now to translate to become global currency so people understand the value of those media rights. Our Forge are there. Our Forge continue to grow. Also as I mentioned, for the events that we are having, so all the assumptions are there actually to create something meaningful but we need to put into more system, and that is what we are doing right now. So that is on a general base, so it was a long answer to your question, but that was on a general base and not that one deal would make it up for us. That is not going to be the case. It is a lot of deals globally with a lot of partners.

[Lars Torstensson, EVP, Head of Communications & Investor Relations]

Thanks, Jørgen. Do you want to follow up there, Predrag?

[Predrag Savinovic, Analyst of Consumer Goods]

Yes, yes. A couple more, if I may. If we try to bridge the growth going forward, where -- I mean where do you see the biggest growth here? Is it from adding new properties, from growing the existing ones or from adding media rights partners? Where is the growth going to come from going forward?

[Lars Torstensson, EVP, Head of Communications & Investor Relations]

Yes. Just to repeat that one for everyone's benefit, so when it comes to the growth targets that we have set out, what are the bridge there when it comes to driving forces there? So Jørgen, would you like to start with that one?

[Jørgen Madsen Lindemann, President & CEO]

Yes. But again that is -- the events that we're having, the big Master events that there we see very strong traction. We see, of course, many more data points, so we are much stronger in articulating the value. And Nielsen made a research around [ contribution ], which demonstrated very strong, big obligated number, euro number, million euro number in terms of media value. Unfortunately, we didn't reach all the way up there. So it is the existing event, Master events where you will see us grow. Of course, we are adding more Challenger events. Just this quarter, we added 10 more events. It was in Thailand, it was New Zealand, it was in Australia. So around the world. So that is -- then both the sponsorship part and of course, the media partners while ticketing is also increasing but of course, it's not the same scale as you have when it comes to sponsorship and the media rights. Do you want to add anything, Maria?

[Maria Redin, Chief Financial Officer]

And the results in adding more games to the events that we are doing. So it's a combination of the 3, I would say, that will drive the growth. It is to drive the monetization of existing events, add more events into new territories and also add more type of games into our events.

[Jørgen Madsen Lindemann, President & CEO]

We have quite interesting pipeline for the second half as well with potential -- and again potential new games coming in. Already now this quarter, we launched -- together with Riot, we launched the League of Legends tournaments with the colleges in U.S. We had the biggest global mobile esports events, and the final will take place in Gamescom with Vodafone. So to add to Maria's point, a lot of new products coming in as well. A lot of new publishers, hopefully, will come into us as well.

[Lars Torstensson, EVP, Head of Communications & Investor Relations]

But I guess you can say that we are creating a lot more logic and structure around it as well. So it's not just ad hoc events, but they are much more like a world league that is going to be presented.

[Jørgen Madsen Lindemann, President & CEO]

Yes. Also based on dialogue with sponsors and media partners also to discuss where our -- where do we see a need in what regions of the world and where do our partners want to expand. And then, of course, also we see a lot of interest around the 5G networks as well. So AT&T, Vodafone and so forth. And particularly, the mobile game event, as I said, was around also the concept of 5G.Then the new area, of course, is G-Sport as well, which we're looking at, and that is the FIFA events that we have talked about. In the Nordics, we have kick started, and there we see more -- hopefully, more events coming in as well. There's a lot of interested parties who have seen what we have delivered there, have seen the results, both in terms of sponsorship revenue and also the media impact where sometimes those events have had higher rating actually, than the actual football games, which, of course, we are happy about. So very interesting product, of course. It's also an opportunity for us to do more globally.

[Lars Torstensson, EVP, Head of Communications & Investor Relations]

Thank you, Maria and Jørgen. Predrag, do you have another follow-up?

[Predrag Savinovic, Analyst of Consumer Goods]

Yes, just one more follow-up. On your new guidance, how confident are you on delivering on these targets you've set out today?

[Jørgen Madsen Lindemann, President & CEO]

Yes. But first of all, it's important to say that we are giving out an ambition. It is a super young sport, particularly the esport part. And when we look at the pipeline, some of the things will materialize and some of the things we might not want to materialize because we don't get paid. But the ambition we are having around the 8% to 12% is something that we believe that we would be able to deliver. Again, it's more important for us to make long-term good deals than make a good deal, which will do good in a quarter. Still, we grew 15% on the own and operated in the quarter on the back of very strong sponsorship and ticket sales. So it is a long-term game, just to be clear. But the sport is growing, more audience is coming in. So there's no reason why we shouldn't grow the business. And we also do foresee to grow esport much faster in the second half than we did in the first half. You should not forget either that second half last year, I think we grew the esport part with 40% and the own and operated with 60%. So to grow, what did I say, Q2?

[Maria Redin, Chief Financial Officer]

Yes, that was Q2 Jørgen.

[Jørgen Madsen Lindemann, President & CEO]

Yes, sorry. So to grow 15% in own and operated is, of course, also quite strong on the back of tough comps from last year.

[Operator]

Your next question comes from the line of Martin Arnell from DNB Markets.

[Martin Arnell, Analyst]

So my question -- first question I have is on -- based on what you see in terms of viewership and usage, do you think this around 10% organic growth is a sustainable level looking a bit further out?

[Lars Torstensson, EVP, Head of Communications & Investor Relations]

So the question is around viewership and usage and the impact on longer-term growth prospects for esports, I would assume. Jørgen, it sounds like a question for you.

[Jørgen Madsen Lindemann, President & CEO]

Yes. I think when you look at it and also the growth rates that, as I said, we have seen and some of the revenue streams, obviously, it looks strong. And as I was also saying, the second half is going to be stronger than the first half. Looking forward, that is also why we want to establish a currency to make sure that the forecast of the industry is somewhat professionalized. But again, there is more people who have a say on that. So it is still a very young sport. And I think it fluctuates from everything from 20% to 23% CAGR the next couple of years from the different reports that you read. Now we want to make a strategic deal with one of the big analyst research companies also in order to, one, make sure that we have a say on that since we are very big in the industry. And therefore, we also want to make sure that we understand the growth rates and what we can express going forward. Looking at the eyeballs, the amount of eyeballs in the industry, there's no reason why this shouldn't be growing and continue to grow as long as we are able to articulate something meaningful around those eyeballs. More case stories is coming in, more prolongation, so that is, of course, what we see. And then it should -- the more data that you have, you should be able to price differently and price better. So we do see the sport continue to grow, and there are different views out there on how fast it will grow. And I think right now it range between 19% or 20% up to 23%, as I have seen the latest ones.

[Lars Torstensson, EVP, Head of Communications & Investor Relations]

So Martin, would you like to do a follow-up?

[Martin Arnell, Analyst]

Yes. And you talked a lot about these initiatives to improve monetization in esports. What of these would you say are the most important for you?

[Lars Torstensson, EVP, Head of Communications & Investor Relations]

Yes. Sorry about that. When it comes to monetization of esports then and what are the biggest factors to realize that, Jørgen?

[Jørgen Madsen Lindemann, President & CEO]

But that is, as I said earlier as well, particularly around the media rights where we see fantastic opportunities. And that is to professionalize the schedule, to make sure that people -- or partners understand what they get and when they get it and what areas, what time zones and so forth. So just like all other sports that you have, that you're more proactive on your scheduling. Today, the Champions League schedule is set. The Premier League schedule is set. The Formula One schedule is set for 2020 and so forth. And now the esports schedule will be set as well. And that means also you can have a different dialogue because obviously, your customers, your partners will have a different approach. You can hopefully make sure you fit into the schedule because you can demonstrate some interesting KPIs for the media part. And that is something which I think will yield great returns when we can do that. Everybody has been asking for this to happen. But again, it is a very young sport with a lot of opportunistic interest as well. But I'm very happy that we finally managed to get this nailed now and we'll be able to announce that in August.

[Martin Arnell, Analyst]

And Jørgen, do you expect a payoff from this next year?

[Jørgen Madsen Lindemann, President & CEO]

Yes. That should be the case, that you already now then can start to sell. So right now we will actually be able to start to sell an event in December of 2020. And that is the difference. I think in Swedish, it's called [Foreign Language], whatever it's called. So it is a different way of looking at it than we have done historically where you have said, oh, by the way, to the extreme, you might have understood in April, there is good opportunity for an event in November. Obviously, the big dollars, the sponsor dollars, whatever, will be allocated. It's not that you as a marketing director sit on a big pile of cash in the end of the year probably. And the same goes for the media investments as well. And that we know from our history, of course, is that hopefully you have a better view on what you would like to show than -- within 2 months' notice. So stuff like that, we believe, is going to professionalize the sport much more, commercialize the sport much more to the benefit of teams and the fans, of course, as well, and therefore, also sponsors and media partners.

[Lars Torstensson, EVP, Head of Communications & Investor Relations]

So I mean our view on media rights or the potential media rights had not changed. It's just a question of the need to commercially professionalize it. That's what we're talking about here. Martin, do you have a follow-up?

[Martin Arnell, Analyst]

Just a final one on gaming. And thanks for clarifying that on esports. On the gaming vertical, your EBITDA margin is quite high in the first half of the year. You talk about marketing spend increasing in the second half. Is all of this -- does that come together, that you will have a higher -- probably have a higher EBITDA margin for InnoGames this year than last year?

[Lars Torstensson, EVP, Head of Communications & Investor Relations]

So when it comes to the development, especially for InnoGames then and EBITDA margin, how this year's EBITDA margin will compare to last year, 2018? And I think, that's a question for you, Maria.

[Maria Redin, Chief Financial Officer]

Martin, you should expect that Q2 was exceptionally high though because you have the combination of very successful in-game events for our established events together with fortunately lower marketing in the second half. And as both Jørgen and I said, we will ramp up marketing both on the established games because we see the long lifetime value of our customers. And as well, we are rolling out then both God Kings and hopefully Warlords in the second half of the year. So you should see margins go down in the second half of the year, but it's still likely that you'll see a small margin improvement year-on-year.

[Operator]

Your next question comes from the line of Oscar Erixon from Carnegie.

[Oscar Erixon, Financial Analyst]

Just a quick follow-up here on the tying together of ESL and DreamHack. If you could elaborate a bit on what benefits you see. Is it cost synergies partly? Or is it mainly that their -- the sponsorship deals and media rights deals that is the long-term potential here?

[Lars Torstensson, EVP, Head of Communications & Investor Relations]

Thank you, Oscar. So when it comes to ESL and DreamHack then working closer together, what kind of results are we assuming there, Jørgen? Is it the scale benefits, commercial benefits? What can you elaborate on?

[Jørgen Madsen Lindemann, President & CEO]

Yes. And so obviously, it is both meaning that, first of all, we will combine 2 very strong and relevant esports companies and their schedule, yes? And also they complement each other fairly well, where we have the DreamHack company who is doing a lot of these festivals, which we call, in our structure, the open tournaments. And that is something where we will see that eventually take place also at the ESL events. So you can merge the 2 products. You can have -- you can presume and make sure that we don't have events the same weekend, that goes without saying. But you can articulate a much stronger customer journey and much stronger customer proposition by combining those 2 products. They are very complementary to each other. And yes, of course, by being more smart, obviously, we do believe that we also will be able to realize -- or to do things a bit smarter. That goes without saying. But it is -- to begin with, it is mainly focused on the products to create 2 very strong -- to make sure that those 2 very strong esports companies have 1 unit -- or unified schedule. I think that will render a lot of commercial opportunities in better sponsorship sales. Just imagine what we can offer the sponsors now. And data media rights, so you just imagine again what we can offer the media people -- media companies globally.

[Lars Torstensson, EVP, Head of Communications & Investor Relations]

Oscar, would you like to make a follow-up question?

[Oscar Erixon, Financial Analyst]

Yes, please. Yes, more of a sort of philosophical question, but I mean, long-term question on media rights and the potential there. I mean given how people watch esports today, your history with Facebook, et cetera, how do you consider this in terms of is this a viable, large revenue stream going forward?

[Jørgen Madsen Lindemann, President & CEO]

Yes. I think if you -- the way I look at it is I look at the eyeballs. And I look at that young demographic, which, of course, for many advertisers and media as such is difficult to get a hold of. And that is something we can supply then in the esports part. So that is, of course, commercially very interesting. And that, of course, should render or should yield great opportunities if we can demonstrate the returns, yes? So the investments that sponsors are making with us, like Mercedes and Pepsi or AT&T, DHL, whatever, is a significant amount. And of course, that means that they need to make a decision as well to go with us or to do something else which they have done in the past, which have been probably successful for them. So we do need to demonstrate that there is a better return with us. We have those case stories already. You can also find them online. DHL is one of them, which are talking about a great return on the dollar invested into esport. And that is what we can articulate now better and better, is that there is a good return so we can be at the heart of the media planning or the media campaign like everything else because we do have the audiences. And I think that is quite important to focus on is, of course, there are so many eyeballs in this industry. So obviously, if you are able to package those into interesting commercial opportunities, then you will be able to do better and to create a real sport out of it. And we are benefit, as I said, with the fact that we have so many young audiences as well, which are very scarce for many advertisers. But obviously, if you want the dollars that we want, you need to be more sophisticated in articulating the returns. And that is what we are working on also, as I said, with this research company, which we also would announce after summer. So it would become a complete normal entertainment product. It is just a very young and very opportunistic, and that is something you just have to bear in mind. But the audiences are there so I hope that we are smart enough to be able to present some interesting commercial opportunities around these eyeballs.

[Lars Torstensson, EVP, Head of Communications & Investor Relations]

Oscar, if you would like to make a follow-up?

[Oscar Erixon, Financial Analyst]

Yes. And one question for Maria as well perhaps. You mentioned regarding the profitability in the gaming segment will be lower, of course, from a very strong quarter now in Q2. Could you say something more perhaps about sort of the mix in margins here in the second half of the year given the quite high activity you will have in Q3, I suppose?

[Maria Redin, Chief Financial Officer]

Yes. And I mean and also we could [indiscernible]. It is quite expected as well. We had -- I mean the phasing of some of our events is a little bit different last year, so you'll come into this year having quite tough comps, Q1, Q3 and then Q4. And Q2 and Q4 were slightly easier comps due to the phasing of events last year. So you should expect there is, of course, a drop in margin in Q3 now to ramp up marketing and then a gradual improvement in Q4. So if you look holistically, second half versus first half, I mean, you should not expect a major difference in the margin if you look in the average in H1 versus H2. Hopefully, that helps a little bit.

[Operator]

The next question comes from the line of Rasmus Engberg from SEB (sic) [ Handelsbanken ].

[Rasmus Engberg, Head of Research]

Can I ask 2 questions about the esports in particular? Your losses are a little bit up in the first half of the year. Do you anticipate that the losses decrease in the second half? Or are they going to be roughly flattish? That's the first question.

[Lars Torstensson, EVP, Head of Communications & Investor Relations]

Yes. So when it comes to losses then for the quarter, slightly a positive look for the second half. Maria, that's definitely a question for you.

[Maria Redin, Chief Financial Officer]

Yes. No, and I think on this one, I said as well when I briefly talked a little bit about the outlook on the margin is you should not expect margin improvement in gaming. You should rather expect that into esports, which means, of course, on losses should gradually go down. And you will see that more skewed to Q4 than Q3.

[Rasmus Engberg, Head of Research]

Okay. And now that you guide for -- only for the 2 verticals, the gaming and esports, I presume that you believe that esports will grow faster than games for the year due to strong second half, right?

[Maria Redin, Chief Financial Officer]

Yes. That is a correct assumption.

[Operator]

Your last question comes from the line of Julia Matoshchuk from Morgan Stanley.

[Julia Matoshchuk, Equity Analyst]

I do apologize, I will repeat again a few things. But I'm a bit confused on precisely what should we expect in Q3 and in Q4. From what I understood, that we are looking at the improvement in margin in esports but worse margins in gaming. However, in Q4, there will be a worse again. Is it right or not? And second, when we look at the full year guidance, could we please have a bit more color what should we expect by verticals?

[Lars Torstensson, EVP, Head of Communications & Investor Relations]

Okay. So just to repeat, Julia, when it comes to margin development for the 2 verticals, what to assume when it comes to how gaming will look in Q3, Q4. And the same thing for esports, Q3, Q4, I mean, what kind of trajectory are we looking at? And then also how the sales guidance then is broken up between the 2 verticals as well. Did I understand you correctly there, Julia?

[Julia Matoshchuk, Equity Analyst]

Yes.

[Lars Torstensson, EVP, Head of Communications & Investor Relations]

Yes. Thank you. I think that is for you to start, Maria. And maybe add some color then if Jørgen needs to.

[Maria Redin, Chief Financial Officer]

Yes. So if we start with the margin improvements. What I really said was on -- if you look at in gaming, we will increase marketing, which should then ultimately directly will lead to lower margins because that's a payback over 2 years' time, which means that would benefit, predominant 2020, the marketing effect that we will do now in Q3 and Q4. So yes, margins will go down in Q3 in gaming. And then you will see it somewhat just starting in Q4. So that's the phasing on the gaming. And if you then look more specifically on esports, we'll see a small improvement in Q3, but a big ramp-up in improvement will be in Q4. So that's the weighting of scaling esports starting Q4 when it comes to the bottom line.And then if we look at the sales growth. I mean what we do is we guide for the 2 verticals, that is our core gaming and esports, and that stays in the range between 8% and 12%, which means that, of course, second half growth rates will be higher than the first half of growth rates, and esports should grow faster than gaming. I think that's basically what we've said.

[Lars Torstensson, EVP, Head of Communications & Investor Relations]

Julia, would you like to follow-up?

[Julia Matoshchuk, Equity Analyst]

Yes, please. I have a few follow-up questions. The first one is about Facebook deal. As I recall, you had a big Facebook deal from ESL. Was there any updates? Is this deal renewed? And I'm asking because again, that was predominantly media rights revenues. So that's the first question. And the second, again, it's a bit of a philosophical one. But we've already been through, I think, 3 or 4 guidance downgrades in esports. So could you please just give a bit more color on how do you see the nature of the revenues? How short-term they are? Do you have exposure to one big sponsorship deal that we should be aware of?

[Lars Torstensson, EVP, Head of Communications & Investor Relations]

Just to repeat then. It's around the commercial end of esports, then the Facebook deal, number one. And then if -- when it comes to esports development over -- historically, if we are exposed to any major sponsorship agreements, for example. But Jørgen, that's...

[Jørgen Madsen Lindemann, President & CEO]

Yes. So the Facebook deal, we are in a partnership with Facebook. And that is -- that partnership has changed from being an exclusive deal to a nonexclusive deal with them on a global scale. And obviously, deals like that and others, as I said earlier, is something we are negotiating, discussing, understanding what is the best media window for us, the media rights window globally.And then when it comes to the esports part and specifically commercial reliable customer or important customer, I think we do have significant sponsorships but many now. So in the old days, we had eventually 1 or 2, but now you have multiple sponsorships also depending on what products that we are having. And also if you combine DreamHack and ESL's customer base or sponsors, of course, you get even bigger. So that means also that you don't have one sponsor that you are fully reliable on. I think that is quite important. We are defining what categories we want to have at each of our events and now as well as global sponsors and regional sponsors and whatever and also for the different games that we are having. So you will see us add more different sponsors on as well. So we'll prolong hopefully the ones we have, and also you will see that more will come into the space.

[Lars Torstensson, EVP, Head of Communications & Investor Relations]

So for example, I mean, as you mentioned earlier, Jørgen, I mean, we'd go from maybe being dependent on typical endemic fans now to moving to more non-endemic so to speak?

[Jørgen Madsen Lindemann, President & CEO]

Yes. And that is a consequence, of course, of the non-endemic -- seeing the iPhones, as I said earlier, for them having difficulties on activities, but we have so many of those interesting eyeballs around our events. And that of course should be a task for us to make sure that we can articulate then an interesting commercial proposition around those eyeballs. And that is what we believe we do now with respect for 2020, where people can have a much longer horizon instead of having these eventually half year things you need to look at. Because it's also about activation of a sponsorship, it's not just to go in with a billboard or whatever. It is also how you activate it. And Mercedes is a good example of that, how professionally they have activated it. DHL, the same. And the same goes for the media partners as well. I know that from our past. To have a 6-month contract or whatever or to get something told 6 months in advance is difficult to market. So we do believe that it is a commercially even stronger product in 2020 now that we can combine the 2 schedules.

[Lars Torstensson, EVP, Head of Communications & Investor Relations]

Thanks. Julia, would you like to follow up?

[Julia Matoshchuk, Equity Analyst]

Yes. It's the last question, I promise. So again, I understand that you are doing this groundbreaking essentially job with establishing the industry. However, industry is expected to grow by just 22% per annum. It's not that much. So the question is, assuming that ESL will continue growing this in industry, will it be enough to turn the business profitable?

[Lars Torstensson, EVP, Head of Communications & Investor Relations]

So it's back to if the growth rate that we're currently seeing, both in the industry as well as with ESL then, is enough for us to reach the necessary scale to break even or to make money, so to speak? I believe that is for you, Maria, to elaborate on.

[Maria Redin, Chief Financial Officer]

Yes. No, but I think -- I mean, we have not changed our midterm outlook when it comes to our sales growth and our margin ambition, which means, of course, that means that you will drive esports into profitability. However, we will not do that sort of in the near-term future. And our ambition right now is to grow and set this industry and then start scaling and monetizing it. So yes, we still do believe that we will make esports profitable.

[Lars Torstensson, EVP, Head of Communications & Investor Relations]

Thank you, Julia.

[Operator]

We have another question from the line of Predrag Savinovic from Nordea.

[Predrag Savinovic, Analyst of Consumer Goods]

Just one follow-up. On the amount of activated properties you will have in Q3 and Q4, can you give a reminder of that?

[Lars Torstensson, EVP, Head of Communications & Investor Relations]

Yes. Jørgen, would you like to give a reminder on the properties we're going to have in Q3 and Q4?

[Jørgen Madsen Lindemann, President & CEO]

Yes. I think aggregated, you will see us having around 7 -- or not around, but 7 of the Master events in Q3, Q4 combined. You will see us having, whatever, around 23 Challenger events as it looks right now, plus/minus. And you will have -- you will see, whatever, 4, 5, 6 of these open events as well.So plus/minus 40 events is something that we would -- that we expect to have in Q3 and Q4. Then as I said earlier, there are some interesting opportunities which might come on top of that. So we are, of course, constantly negotiating with publishers. And we have had, of course, deals we've been working on for some time now which we would like to see materialize also now for the second half. So we hope that we would be able to announce them. So in all fairness, full speed ahead and that is also what we discussed, that the events that we have had historically for some time now, they're doing extremely well and doing good in terms of viewership and monetization. But we are doing more. And we are launching more new events as well. And new areas like India, we have the Master event. And like the 10 new Challenger tournaments we had this quarter. And unfortunately, not everybody was sold out of these events, to put it mildly. So it is investments always that we are doing, but we are interested in having those -- these Challenger events in order to fulfill our objective having this 0 to hero strategy where we are taking people in on a bottom level and in the end, they hopefully can play at the final in either New York or Katowice or wherever our big event.

[Lars Torstensson, EVP, Head of Communications & Investor Relations]

And also clarification on the DreamHack event and when that is taking place, Maria?

[Maria Redin, Chief Financial Officer]

Yes. I mean, basically, we'll move this quarter the DreamHack event. It was Q3 last year in Stockholm. This year, it will be in Malmö in Q4. So I think that is the difference. So you should just think about that on the phasing and that is revenue for DreamHack. That will be phased differently year-on-year.

[Lars Torstensson, EVP, Head of Communications & Investor Relations]

Does that answer your question, Predrag?

[Predrag Savinovic, Analyst of Consumer Goods]

Yes. Super.

[Lars Torstensson, EVP, Head of Communications & Investor Relations]

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

[Operator]

We have one further question from the line of Mathias Lundberg from SEB.

[Mathias Lundberg, Research Analyst]

My question relates to the esports segment and in particular if you could give us some more information about the revenue mix in esports. Because you've been speaking a lot about sponsorship agreements, broadcasting rights. Can you share with us how your revenue split is in the esports segment right now? Is it mainly sponsorship revenues or ticket sales? Stuff like that.

[Lars Torstensson, EVP, Head of Communications & Investor Relations]

Thanks, Mathias. So coming down to how we then break up revenue and the revenue mix. Would Maria like to start and then follow-up with Jørgen, if necessary?

[Maria Redin, Chief Financial Officer]

If you look at -- I mean, we have defined rather than look at the revenues, we looked at owned and operated properties and esports services, which is how we define how we then monetize our properties and that is roughly 70-30 split, you can argue. But then the actual revenue streams that goes into that, I mean, what you have is this sponsorship which also continues as the biggest bucket. You have media rights, you've got publisher fees, ticketing and merchandising. And that's, I mean, the same revenue bucket that we have. And of course, in owned and operated, the biggest proportion is then sponsorship of the media rights and that's also the scalable revenues and that's why we spend a lot of time discussing that. And what we now saw in this quarter and what we're seeing this year is very strong revenue growth on the sponsorship side, so we still need to do more work on the media side to make sure that it's catching up. And of course, the growth of these 2 revenue streams is what's going to make our business scalable. So that's where we're focusing a lot on those 2 items.

[Lars Torstensson, EVP, Head of Communications & Investor Relations]

Mathias, would you like to do a follow-up?

[Mathias Lundberg, Research Analyst]

Well, could we -- is it correct to assume that the incremental revenue growth then would come at a very high margin? Like if you succeed in growing your broadcasting rights, that comes to a high incremental margin?

[Maria Redin, Chief Financial Officer]

As I say, you're going to see 3 drivers of revenue growth. One, that's to monetize existing properties better. That should come with a high incremental margin because that is then driving revenue growth, particularly media rights on existing properties. Then you also grow adding new locations. So that is, as we have discussed before, that is not profitable the first time you do an event. So that will then not have a high incremental profit. And the third revenue growth is also adding more games. And depending on how that partnership looks like, that depends on also the gross margin. The longer sort of term of agreement that we have, and of course, the more investment we are willing to do on our side, the shorter-term agreement, of course, the less investments we're willing to put down. So it is a hybrid in the 3 different revenue stream buckets, you can argue.

[Lars Torstensson, EVP, Head of Communications & Investor Relations]

Mathias, would you like to do a follow-up?

[Mathias Lundberg, Research Analyst]

I can do one last one. Do you mainly push the split? When you sell new advertising spots, do you mainly push more ad spots? Or is it the price that increases?

[Lars Torstensson, EVP, Head of Communications & Investor Relations]

So maybe could you -- we're not certain if we got that question because you're saying when we are selling media rights, how that is broken up? Is that what you mean, Mathias? Or could you just rephrase it so we get it?

[Mathias Lundberg, Research Analyst]

Yes, I can rephrase it. In regards of sponsorship and advertisements, the increase in that sort of revenue, is that mainly stemming from increase in ad spots, number of advertisers, sponsors and so? Or is it driven by higher prices?

[Jørgen Madsen Lindemann, President & CEO]

Yes, it is both, as I said, actually when it comes to the sponsors. So you will see us on-boarding more sponsors. And then when you have a sponsor on board, you are able to articulate the outcome of that sponsorship. The sponsor is able to articulate the return on that sponsorship. Then, of course, that justifies better pricing. And that is what we have said several times, is the data that we are collecting right now. This is data that we in our old business have for 30 years or whatever, more or less, and that is what we are building up now to get those case stories that a telco operator or whatever is actually able to generate X, Y and Z with this activation. So that will help when we are selling in other areas of the world to have those documentation, those case stories. That is how you sell these sponsorships. So more will come and at better prices. That is the idea. But as I also said at our Challenger tournaments, we were not so loud for sure at these new launches. So there are a lot of sponsors who would like to see it. It is probably not marketed well enough. There is a lot of work to be done there as well. But the markets we are talking about are huge. So of course, over time, you would be able to have a very relevant tournament there with very relevant commercial streams around it as well, local media or local sponsors as well even and not necessarily global. So we are expanding our opportunities constantly also by having these Challenger tournaments.

[Lars Torstensson, EVP, Head of Communications & Investor Relations]

Okay, Mathias. Sorry, are you happy with that answer? Or would you like to do another follow-up?

[Mathias Lundberg, Research Analyst]

Great.

[Lars Torstensson, EVP, Head of Communications & Investor Relations]

Thank you, Mathias. Operator, could we have the last question, please?

[Operator]

There are no further questions at this time. Please continue.

[Lars Torstensson, EVP, Head of Communications & Investor Relations]

Thank you. Then I will hand over or back to Jørgen for some concluding remarks.

[Jørgen Madsen Lindemann, President & CEO]

Yes. So thank you very much all. That concludes the presentation for MTG's second quarter 2019 interim report. We look forward to staying in touch until we release the next quarter report. And with that said, Q3 2019 will be presented the 23rd of October. So have a great day, have a great summer and see you soon.

[Operator]

Thank you. That does conclude the call for today. You may now disconnect.