Modern Times Group MTG AB

STO:MTG B

Earnings Call Transcript 2021-Q1

[Operator]

Good day. Thank you for standing by. Welcome to today's Modern Times Group Q1 2021 Interim Results Conference Call. [Operator Instructions] Please be advised that today's call is being recorded Thursday, the 29th of April 2021. And I would now like to hand the conference over to your first speaker for today, Mr. Lars Torstensson. Please go ahead, sir.

[Lars Torstensson]

Thank you, operator, and good afternoon, and welcome to MTG's interim report presentation for the first quarter 2021. As said, my name is Lars Torstensson, and I am the CFO and also EVP of Communications and Investor Relations at MTG. With me today, I have our Group President and CEO, Maria Redin. We will begin by presenting the quarter and then take your questions in the Q&A session. Please keep in mind that only dialing participants can ask questions. With that said, I'm now handing over to you, Maria, to take us through the quarter.

[Maria Redin, Group President & CEO]

Thank you, Lars, and welcome to everyone joining our conference call. Our first quarter for 2021 has been intensive, both from an operational and an M&A perspective. And while we've seen solid progress in Australia during the quarter, both relating to our gaming vertical and our esports one, we have also continued to be impacted by the pandemic circumstances, such as restrictions to international travel and the continued limitation on hosting of events affecting our esports business. But it's not just about the business. I would like to take the opportunity to thank all our teams across esports and gaming for the efforts and great spirit. You have stayed focused and motivated despite very tough circumstances, and for that, I'm very grateful. So let me now take you through the presentation, and afterwards, I look forward to taking your questions. Our results for the first quarter were mixed because the pandemic continues to negatively impact our esports business. Our gaming vertical performed well, showing increased user engagement with our expanding portfolio of titles. Through the quarter, we've seen InnoGames soft launch their new city building title, Rise of Cultures, on the U.S. market, and later in April, also in the European market. The result of the new game has shown promising results across several important KPIs. And additionally, Hassel also released this new title, Hassel [indiscernible], at the end of the quarter. Overall, the new games pipeline has continued to progress according to plan, which I will come back to you later. Our esports vertical continued to be impacted by the postponed return of live audience events, and the short-term visibility remains low. As a consequence, we are experiencing longer decision-making processes from brand sponsors, and also [ the court] has delayed signing of a small number of anticipated larger sponsorship contracts. Most of these contracts have now been closed in Q2. Also, on back of emerging trends and learning from epidemic, we have accelerated strategic and operational investments in our esports product portfolio to strengthen our position, diversify our current offering, and broadening our addressable markets. I'm very excited about these new investments, as they will be setting us up for a position of strength as we continue to navigate towards a normalized operating environment, which we hope to see in the late 2021. Last but not least, we continue to keep high M&A momentum in Q1, during which we announced the agreement to acquire yet another impressive gaming company Ninja Kiwi, to our growing gaming vertical. The acquisition builds on our ambition to further diversify our gaming growth with more genres and stronger evergreen IPs. More to come on that. So if you'd like to move to the next slide, let's start off reviewing the gaming vertical performance in the first quarter. First of all, we are very excited about the gaming vertical that we are building, containing strong [indiscernible] such as InnoGames, Hutch, Kongregate, and now also Ninja Kiwi. Together, we will be able to leverage on each other's strengths and benefit from collaboration on UA, Liveops, and BI. Additionally, MTG now has a much more diversified games portfolio, stretching between different genres and life cycles, and with a solid pipeline of new game that can be introduced across 2021 and 2022. As a result of the clear benefits of being a joint gaming company, we've taken the first steps on knowledge sharing to ensure that we realize synergies between the different companies. It is still early days, but I'm very happy to see the pull effect we see and experience between the different management teams and the excitement that they have working together. I am certain that this, over time, will result in stronger vertical performance, better and more engaging games that resonate even stronger with our play bases, and that ultimately accelerates the value of the gaming co as a whole. But then, let's move now on to the results. We're pleased to see yet another good quarter delivered from our gaming vertical. In the quarter, net sales increased by 23% to SEK 767 million. Foreign exchange rates had a negative impact of 9% in the quarter, resulting at a growth at constant FX of 32%, of which organic growth was 8%. InnoGames delivered solid operational performance in the quarter, with sales increasing across existing games portfolio, driven by successful in-game events and marketing, yielding strong results for Forge of Empires, but also strong performance in the portfolio of the classic games. In the quarter, we've seen Hutch deliver solid growth compared to last year's quarter, driven by title Top Drives. The Formula One Manager game experienced a high level of seasonality, with players awaiting the launch of the actual 2021 Formula One World Championship. As this took place towards the end of the quarter, the [indiscernible] experienced a boost in downloads, and also users, in the beginning of Q2.Kongregate's performance in the quarter showed a stable process, despite the technical issues with the newly launched Teenage Mutant Ninja Turtles. That is now [indiscernible]. And with the technical snag behind us, we will now be able to scale the game going forward, which we look forward to. Also, as mentioned, in the quarter, we saw a number of important milestones on the new game front. In February, InnoGames soft launched in new title, Rise of Cultures, in the U.S. market, and with additional European markets being added now in April. The new [indiscernible] has shown promising results across several KPIs. And as an example, it is significantly outperforming Forge of Empires on its retention metrics, which is quite impressive. Additionally, the company has soft launched another title, [ Lost Dividers], now in April. InnoGames will continue to now build game playing across these 2 titles in soft launch, and we hope to look forward to full commercial release over the year, which then will also bring with it increased marketing investments in the quarters to come. In March, Hutch soft launched a new title, [indiscernible], and we're looking forward to seeing the continued development and the impact of UA scaling of that title as well. Adjusted EBITDA in the quarter improved to SEK 204 million, with a margin of 27%. The year-over-year improvement in margin was thanks to maintained high player [indiscernible] engagement across the portfolio. If you then move to the next slide, on March 24, we announced the acquisition on Ninja Kiwi, a New Zealand-based leading mobile games developer and publisher. Their evergreen IP, Bloons, is loved by millions of fans worldwide, and it's played a pivotal role in the development on the entire Tower Defense game genre. Their success today has been done so as to organic growth, which is impressive. And being now as part of our gaming vertical, we believe that there are more opportunities ahead through the collaboration of the other studios, but also with our esports vertical and mobile [indiscernible], but in particular, as the community around the Bloons title already today set on their own competition. Looking forward, the anticipated title, [ Battel II] will be launched this summer, something that we're very excited about and look forward to support through our gaming company. The next step, before Ninja Kiwi is a part of the MTG family, however, is the closing of the deal, and that we anticipate coming up now in Q2. If we can then move the page, taking a holistic view of our gaming vertical, I can conclude that our portfolio titles, through the acquisition of Hutch and Ninja Kiwi, has become much more diversified, both when it comes to genres, titles, and different parts of the gaming life cycle. Despite the difficulties brought about with the pandemic, not being able to work together at the office, co-creating and challenging each other, we've been able to progress according to plan. I'm impressed by how well our [indiscernible] gaming companies have been able to maintain productivity during these tough times. Hence, we have now an even more comprehensive new games pipeline, with over 10 games in different stages of production. Our gaming vertical continued to grow in new companies, genres, and strong IPS, more talented people and experiences [indiscernible]. This bodes very well for the remainder of the year, during which we will both launch additional new games, scale up marketing, and continue to pursue relevant M&A opportunities. So if you then move on to the esports vertical and turn page. Although esports continue to be affected by the ongoing pandemic in the first quarter, we maintained a strong online schedule, relevance amongst fans, and continued commitment from our partners. Net sales from esports vertical decreased 18% to SEK 244 million, negatively impacted by foreign exchange rate of 8%. Organic growth for the quarter was negative 11%. This year, we were not able to hold any physical events compared to last year, when that was still possible action in January and February. Further, publisher activations has been rescheduled to later part this year. As a result, we've seen lower monetization from both publishers and brand partners due to the pandemic. In the quarter, ESL Gaming successfully delivered and produced 3 [ monthly] properties, as scheduled, all being produced online. Due to the pandemic and maintain low visibility, we do not expect live events to return in significant volumes before the end of the year. As a result, some brand sponsors are hesitant to commit contractually and are waiting a return to normality. Hence, a small number of anticipated large sponsorship contracts did not materialize as expected in the quarter, and were instead signed now early in Q2. Post quarter end, we're pleased to see ESL Gaming announced the strategic prolongation of its cooperation with Intel starting in 2022, which is a strong thing of confidence from our largest partner. Added to that ESL Gaming recently announced extension of the sponsorship agreement with SAP, and also the media partnership with DouYu. Additionally, strategic partnership with publishers remain very active in the quarter. For example, we strengthened our relationship with Activision Blizzard as ESL Gaming was awarded the official Hearthstone Esports program for the next 2 years. Additionally, [indiscernible] ESL Gaming as the partner for the CIS and EU [indiscernible]. And post quarter end, we also announced extended agreements with Epic Games, which allowed DreamHack to operate 2 different tournament structures on back of the Fortnite for the remainder of the year. [ CSOV's] B2C businesses continue to experience sequential growth in the monthly active users on the back of the ongoing pandemic and improved product features. The long-term goal is to elevate the B2C business, enabling it to become a more meaningful contributor and to improve diversification of ESL Gaming's revenue streams by exploring new emerging trends within esports. What excites us is boarding of esports concept with emergence of competitive gaming outside AAA titles. This is, of course, mobile mid-core we're present with our mobile open but can also be the casual competitive gaming. This leads me to why we're now confident in investing for the future of esports. So if we then turn to next page, Q1 2021 has also been a quarter of important and accelerated investments in the esport vertical to better position MTG for the future. These investments include continued expansions of ESL Gaming B2C and mobile esports products. And it also involves the digitalization of traditional sports into esports products through the recently announced partnership with Bundesliga, NHL, and the International Olympic Committee. Additionally, investments were made in the quarter in preparation for expansion into new geographies and markets. Another key trend is the rise of casual competitive gaming platform, which enabled tournaments and competition for casual mobile gamers. With our recent VC investment in Joyride, a new innovative cash and competitive gaming platform, we secure access to a new B2C platform. Further, on back of our belief in mobile esports, we have also done a VC investment in Meta-Games, which offers a mobile esports manager game to drive further engagement within the product. While these businesses and product investments are in line with our strategy for esports, the costs associated with them has impacted adjusted EBITDA for the vertical by approximately SEK 25 million for the quarter. At the same time, these investments, we are preparing our esports vertical for a mixed model of live events, together with an enhanced online product proposition post the pandemic. We expect these emerging models to lead not just to faster growth and increase revenues, but also richer and more resilient commercial operation. Having said that, we still continue to carry on pursuing operational efficiencies in our core esports business, and also seek new commercial and sponsorship agreements to drive improvements. With that said, I will hand over to Lars now and walk you through the financials.

[Lars Torstensson]

Thanks. As Maria has already stated, it has been a very active quarter, both operationally and from an M&A perspective. And the pandemic continued to impact our operations, but in very different ways for our 2 verticals. The quarter was impacted by significant currency headwinds. The gaming vertical experienced 9%, while esport 8% in translational headwinds; in total 9% for the group. Net sales amounted to SEK 1.11 billion, growing by 9%, or 18% excluding exchange rates. Organic growth amounted to 2% for the group, supported by the gaming vertical, but held back by the esport vertical. The gaming vertical grew by 23% with the inclusion of Hutch, 32% excluding FX. The underlying net sales grew by 8%, driven by InnoGames and a continued high engagement among the gamers and successful in-game events throughout the quarter. As mentioned, our esport vertical had 3 master events in the first quarter, all online and without live audience. Compared to the same period last year, net sales were down by 18%, negatively impacted by mainly off-line events moving online, and lower monetization thereof, canceled festivals and delayed [indiscernible] activations due to the coronavirus pandemic. Excluding exchange rates, [ impact] sales was down 11%. Organic net sales growth was also down 11%, with our operated properties at positive 10%, and our esports services at minus 50%, due to delayed activation with publishers. EBITDA amounted to SEK 100 million, SEK 204 million from gaming, in building Hutch, and continued strong performance by InnoGames, and negative SEK 82 million from esport, supported by improved cost structure related to online events, but affected negatively by the ongoing pandemic and accelerated operational investments into new strategic initiatives. The gaming vertical had an adjusted EBITDA margin of 27%, supported by continued strong performance of InnoGames and high level of user engagement compared to last year. New game launches impacted the quarter to some extent. Let's take a closer look at the esport. As Maria mentioned, 2 factors have impacted the operational results in the quarter. Due to current circumstances with the ongoing pandemic and lack of clarity on when societies can return to normalcy, we are experiencing longer decision-making processes from the brand partners, and in the quarter, delayed signing of a small number of anticipated larger sponsorship contracts, which negatively impacted revenue and adjusted EBITDA for the quarter. Most of these contracts have now been closed and are therefore being booked in Q2 instead. Maria also talked about accelerated investments into several strategic initiatives in esport vertical following, as we start to see more positively on a return to live audience events again. Hence, we would like to make sure that we are at the forefront when it comes to services offered to fans and partners. These initiatives led to extraordinary costs of SEK 25 million impacting adjusted EBITDA. With that said, the EBITDA adjustments in the quarter amounted to SEK 46 million to be compared to SEK 48 million last year, so merely flat development. Management incentive programs amounted to SEK 19 million. Also, M&A costs amounted to SEK 27 million as a result of higher activity in predominantly the gaming vertical. Depreciation and amortization in the first quarter amounted to a negative SEK 97 million and included amortization of PPA of around SEK 54 million. Amortization of PPA was higher compared to last year, mainly related to the Hutch acquisition. Excluding PPA, depreciation and amortization was flat year-over-year at SEK 43 million. Net financial items amounted to a negative SEK 49 million, mainly due to unrealized exchange gain related to earn-out revaluations. Last but not least, the group's tax was SEK 31 million, predominantly reflecting the increased result in the gaming vertical and InnoGames. Let's move on to the cash flow statement. On the back of improved financial performance compared to last year, the group reported an improvement in net cash flow from operations at negative SEK 8 million, positively impacted by InnoGames, but adversely impacted by the operational performance in the esport vertical on the back of continued headwind from the pandemic and increased strategic investments. The relatively large delta in working capital between Q1 2021 and Q1 2020 was mainly because of the gaming vertical. As mentioned in the fourth quarter conference call, InnoGames received an early payment by one of the distribution platform owners that had a positive impact. As a consequence, this payment did not happen this quarter as it did in 2020. In February, we finalized the rights issue related to the Hutch transaction of SEK 2.526 billion. That was used to repay the bridge facility used in that transaction of SEK 1.8 billion, and the repayment of the vendor note to InnoGames of SEK 1.142 billion. Additionally, we also concluded an accelerated book bit related to the Ninja Kiwi transaction of approximately SEK 1.1 billion. Furthermore, we invested SEK 90 million net in the VC fund and the CapEx amounted to SEK 53 million in the quarter, as we continue to invest in our games pipeline and develop new esport platforms. As a result, the net change in cash and cash equivalents for continuing operations amounted to SEK 576 million. That means that the group had a net cash position of SEK 1.75 billion as of Q1 2020. Gaming continues to be the cash flow contributing entity. Looking into the second quarter, I would like to remind everyone that the upcoming comps will be tougher for gaming and easier for esports because of the way the pandemic affected the second quarter of 2020. That concludes the financial part of the presentation of the quarter. Now back to you Maria.

[Maria Redin, Group President & CEO]

Thank you, Lars. To summarize the first quarter, our game vertical continues to grow in new companies, genres, and strong IPs, more talented people and experienced mind. This bodes well for the remainder of the year, during which we will both launch additional new games and continue to pursue relevant M&A opportunities. For esports, we still expect the ongoing pandemic to continue to have an impact on our business with key stakeholders, such as brand sponsors and publishers. And while continuing to operate our events in digital formats for as long as deemed responsible and necessary during the remainder of pandemic, we are making investments to capitalize on the emerging trends we see within the extended esports ecosystem. Overall, we remain confident in our ability to handle the challenges we face, and we're excited about the opportunities ahead of us. We look forward to delivering our strategy, investing in and developing our gaming and esports verticals and creating further shareholder value. With that, it concludes my part of the presentation. So thank you.

[Lars Torstensson]

Thank you, Maria. That concludes the formal presentation of our first quarter interim financial results report. We are now ready to take any questions that you might have on the report or the conference call presentation. Operator, can we please have the first question.

[Operator]

[Operator Instructions] So your first question comes from the line of Oscar Erixon from Carnegie.

[Oscar Erixon, Financial Analyst]

So a couple of questions from me, starting with the esports segment. These growth investments of SEK 25 million, I believe it was, of sort of delayed sponsorships, which I assume is SEK 10 million to SEK 20 million. Is this -- should this be considered one-offs that will come back in Q2, both, if you can discuss both separately, please.

[Lars Torstensson]

So related back to the strategic investments in Q1 and delayed sponsorship contracts, should they be considered one-offs? Maria, if you would like to elaborate on that.

[Maria Redin, Group President & CEO]

No, I think we're very excited about the investments we're doing on the esports side. I mean, we've always said that we wanted to make sure that we continue to build both on organic and inorganic initiatives, and I think that's what we're now executing on back of. So the investments, I would not look at them as a one-off exercise. I mean, that is something we continue to pursue, but it would also gradually over the year, and more so in 2022, also deliver revenues on the top line, so I think that's what you should expect.And when it comes to the sponsorship, I think that, as I said and also Lars reiterated, I mean, we do have low visibility. We are working very hard to make sure that we optimize monetization for this year. We continue to do so, and we're already now out selling for 2022. So our ambition is that we will close more interesting and relevant sponsorship, and that is what we're working on, but it's too early to say exactly how the impact for the remainder of the year will look like.

[Oscar Erixon, Financial Analyst]

Okay, great. And then another question here. These investments, how should they be interpreted? I mean, is there a shift from sort of B2B to B2C? Could you explain the investments and your plans a little bit more in detail? And also, do you see a permanent shift away from large physical master events? Or just, yes, some help that would be good.

[Lars Torstensson]

Yes. Thanks, Oscar. So the first one is regarding the investments again, if there's a shift away from B2B more into investments into B2C, and if that should be read as an indication of a more permanent shift away from large arena events to more digitalized events as well. Maria?

[Maria Redin, Group President & CEO]

Yes. No, it's a very good question. And I think the way to look at it, and you may have heard us talking about [indiscernible] [ to hero] concept and our pyramids open to the market levels, and that's generally what we are now investing on back of. I think that we have -- and we are the leader in -- of the independent tournament and league operator with our ESL and DreamHack brands. And [indiscernible], we operated was looking at a media product on the top end of the pyramid. What we want to do with these investments is to make sure that we bring a much broader base to the bottom part of the pyramid with our open ecosystem, where you can have more of a platform and B2C value proposition.And I think also the exciting part that we are seeing is today, in our sort of master events and our ESL Pro Tour, we actually largely focus on the AAA hardcore professional players and [indiscernible]. But what you're seeing is an emergence about competitive gaming, both on the mobile mid-core side, where we're having the Mobile Open, which we're now rolling out on a more global basis. We used to be in North America, we expanded to Europe. This year, we're rolling out also in the [ EMEA] and African region and also Asia. And incremental to that, on back of the VC investments, we're also looking into the casual competitive side. And I think that's extremely exciting, because it all comes down to the same thing. It is competitive gaming, whether it's on AAA hardcore titles or if it's actually more of the mid- core titles, which we have on our mobile open side, or even [indiscernible] having much more casual side on their platform. So it's not to move away. We love our sort of to ESL Pro Tour events. It's more to complement and actually build on the sort of value proposition that we have always talked about, [indiscernible] online to off-line. And now we are taking a step forward there on back of the trends that we are seeing, and also the learnings that we've had in the last year. And I think also, last but not least, which I didn't talk about is also, what we see on the sports side is an extremely interesting trend. We have observed for quite some time. We launched [ Dream Export] games. And I think this year, we're actually seeing the real movement. So it's very exciting that we, this year, signed up the IOC, the NHL and also Bundesliga.

[Oscar Erixon, Financial Analyst]

That's very helpful. And just one final question on that topic before moving over the gaming quickly. In terms of margins for the esports, will this new sort of investment, will it impact the margins in 2021 further, or should it be seen more as in 2022?

[Lars Torstensson]

The question is around the esport operational margins and how they will be impacted by further investments, Maria?

[Maria Redin, Group President & CEO]

We don't want to give a forward-looking guidance or ambition. But what I can say is that we want to continue to pursue these investments. I think they are extremely strategic and extremely important, and that will put us in a much better position in 2022 when we also see that the markets will normalize, and we will look forward to bringing off-line events back to the market. But what we will also pursue very focused is to optimize the monetization in the existing core operations this year. Even though everything is run online, we will make sure that we push and drive monetization on back of our inventory, and also the efficiency on our cost base.

[Oscar Erixon, Financial Analyst]

Understood. And then gaming, just a couple of questions before [indiscernible] over. So first of all, gaming seems a little bit soft given the Hutch consolidation. Could you say something about how much Hutch contributed in Q1? And also, if you could, say whether you cut down on marketing, for example, Forge of Empires, to allocate more to the soft launches in the quarter.

[Lars Torstensson]

Just going to repeat the questions so we understood them correctly. So when you look at the results of the gaming vertical, then, is there any possibility to say anything about the Hutch contribution to the results? And if there's been a movement at InnoGames from established titles like Forge of Empires to the new games. It's once again, Maria.

[Maria Redin, Group President & CEO]

Yes. No. If we start with the Hutch contribution, I think we're very happy to see how they've been performing on the top drive. They had a very strong performance in the quarter. I think we were probably not expecting, nor did they, what [indiscernible] this year on the Formula One Manager gain. What we saw with a very strong comeback of the game when the formal season started towards the end of the quarter, and also now in Q2, the uplift both on downloads and then the revenue progression.I don't want to go into, and I don't want to break down the different companies' contributions. I will not do that on Hutch, either. So I can say that we're excited to work with them. And I think also, them coming a part of our gaming code, I think that will also help them to accelerate the areas they need to work on, because it's still a young company. They have young games. And as you know, as well, there's 2 parts to the successful games. One part is making the games, and I think they are fantastic and outstanding at it. And the other one is the monetization of games. That when it comes to the UA efficiencies and the Liveops. And I think that's where they can also do strong learnings from the different peer companies in the group. And I think that's where, even though it's early days, I think we're excited about the conversations that is going on. Then on to your second question, when it comes to InnoGames, we would never suboptimize any game. So Forge of Empires is performing fantastic. We've been doing great marketing on back of that. We're very happy to see the [indiscernible] levels so that we continue to execute on and to optimize that performance, whilst we also start to scale the new games. So we want to continue to optimize and drive growth in Forge, also, as we start to ramp up marketing this year on back of the new titles. So you should expect us, on an [ upside] number to increase marketing this year.

[Operator]

Next question comes from [indiscernible].

[Unknown Analyst]

Can you hear me?

[Lars Torstensson]

Yes, definitely hear, [ Erik ], so please go ahead.

[Unknown Analyst]

Yes. Can you hear me?

[Lars Torstensson]

We can hear you loud here.

[Unknown Analyst]

Perfect. Sorry about that. Yes. Starting off on the gaming here, can you perhaps talk a bit more about the promising KPIs that you're seeing for Rise of Cultures, and when do you expect sort of a more meaningful impact from this game in terms of revenues? And perhaps when do you expect the full launch of the game?

[Lars Torstensson]

So now doing a little bit more of a deep dive, then, on Rise of Culture, the latest title being launched by InnoGames. So if we could please elaborate a little bit on the early KPIs that we're seeing, especially maybe contrasting versus Forge. And then when will they have a meaningful impact, meaning when would we do a full commercial launch of that game, Maria?

[Maria Redin, Group President & CEO]

No. As always, we're a little bit restricted on giving our KPIs on title and software. But I think, as we also mentioned earlier in the presentation now is -- I mean you monetize it, it comes down to 3 metrics. Of course, the cost of acquiring customers, how much you monetize the customers, and how well you retain the customers. And I mean, if you look at a holistic combination of those, I mean, we're very happy to see how the game is progressing. And I think the one that stands out above and beyond our expectations is the retention. And I think I mentioned a reference versus Forge of Empire, and I think there's the reason why we do that. It's twofold because, right, the culture is actually built to some extent on back of the success of Forge [indiscernible] both city builder games, and also, Forge of Empires is our most successful game. And I can say that the retention metric, which is, of course, the starting foundation of any successful game, is significantly above the levels that we see in Forge, which gives us a good indication at least of the game. Still, many things need to come together before it's a full-fledged launch and a home run. But the starting points are very good.Then to your second question, I wish I could tell you an exact date, but a little bit depends as we now roll out more features into the game. That is a must in order to drive the monetization part. If everything is progressing towards plan, I'm hoping that we should see something sooner than later and that you see, in our Q2, Q3, Q4, a ramping up on the marketing each quarter. And to your point when you should see revenues then, again, assuming everything goes according to plan, I would say that any material contribution will probably come sort of in the last quarter of the year, and then a meaningful contribution in 2022. What we normally say for new games, especially within InnoGames, which has a little bit richer titles and put more marketing spend behind it, is that they are all loss-making year 1 and turn into profitability year 2. So that's how you should look at this game as well.

[Unknown Analyst]

Perfect. But is it possible to sort of quantify how big the UA impact from Rise of Cultures and [indiscernible] was in this quarter? And maybe do you expect the margin to decline here in Q2 as well?

[Lars Torstensson]

So regarding marketing investments, then, related to the new games in Q1 and how it will impact going forward as well.

[Maria Redin, Group President & CEO]

No. We did roll out marketing, but it wasn't fundamentally moving the needle for the gaming in Q1, but you should start to see the impact coming through in Q2 and Q3, and that is also going to negatively impact the margin to some extent.

[Unknown Analyst]

Perfect. And then, on the M&A opportunities here, you said that you're happy to see some more M&A going in later this year, but should we expect more deals already this year? And are you already now in any discussions worth mentioning?

[Lars Torstensson]

Thank you, Eric. So the M&A agenda. I mean we try to keep our cards quite close to our body here, Eric, but because it's, of course, always competitive situations out there. But I don't know, Maria, if you could share some insights into our thinking, both on gaming as well as esports?

[Maria Redin, Group President & CEO]

No. I think Lars has a very valid point. We -- as a general sort of remark, we never comment on any M&A until it's actually real and happen and signed. So I think what is interesting is, I mean, if you look at our position today and where we were just sort of 8 months ago, I think that the inbound interest that we are getting in becoming a part of our group have changed quite fundamentally, which is, of course, extremely exciting because it gives us a range of opportunity to explore, interesting discussions to be held, and then see what is the best fit to our portfolio, both on the gaming side and the esports side. For us, I mean, as we have stated, we want to drive value creation through organic growth and inorganic growth. And that we will continue to do, whilst also, of course, making sure that we keep a very close focus to make sure we can also integrate the companies and realizing the benefits of becoming a bigger group. And I think that's also why we're very excited to see the dialogue that's happening across the gaming portfolio right now. It's extremely exciting. And I think now we start to see the real benefit of actually having a gaming group and the great competence that we have within our portfolio companies.

[Operator]

It's the line of Martin Arnell from DNB.

[Martin Arnell, Analyst]

Maria and Lars. Can you hear me?

[Lars Torstensson]

Yes. Yes, we can hear you loud and clear.

[Martin Arnell, Analyst]

Excellent. So I just want to ask you sort of how you're trending so far in Q2 if we've seen some reopenings in Europe, if that has impacted the momentum in the gaming top line?

[Lars Torstensson]

Help me out, Martin. I'm not 100% sure that you're referring to the gaming vertical or the esport vertical when you talk about openings there.

[Martin Arnell, Analyst]

Gaming vertical and like in the U.K., for example, there's been reopening since mid-April, and I'm just curious to know if you've seen any impacts on the momentum.

[Lars Torstensson]

Yes. It's a good question, of course. I mean it's regarding if more open societies are impacting the gaming vertical in a meaningful way, Maria, if you would like to begin elaborating on that one.

[Maria Redin, Group President & CEO]

Yes. No, that's a very good question. And I think it's probably -- I mean, they have only been open so much and so long. But I think what we see is no change in any trends on our side. It's rather progressing in line with our expectations. So I think, of course, as more markets tend to open up, then time will see, but we see nothing currently in our cards.

[Lars Torstensson]

No. And then -- yes, we rather see, I mean, a quite also strong correlation if you take a company based in the U.K. as Hutch, for example, then it's -- their games has been more correlated, for example, F1 Manager, as Maria said, towards the season and, I mean, other events rather than the pandemic. So as the Formula One season gets going, then the interest around the games is also increasing as a result of that. So I think that we -- that is going to be a more important trend than maybe the societies open.

[Martin Arnell, Analyst]

And on that subject with Hutch and the Formula One seasonality, how big percentage of Hutch revenue is normally derived in the first quarter?

[Lars Torstensson]

Thanks, Martin, it's regarding how the revenues have been divided between the quarters. And I'm not going to hand it over to Maria because it's -- yes, you know, Martin, it's a relevant question, but we don't break down individual companies or gaming companies on a quarterly basis, as you know. So it's the same thing with Hutch. But of course, F1 being one of the largest titles, and that title then being dependent on the Formula One season, there will be seasonality related to that one, meaning that the Formula One season usually starts, then we're always starting the end of Q1 and then goes on for Q2 and Q3 and Q4. So that's what you should expect going forward when it comes to specifically Hutch and the Formula One.

[Martin Arnell, Analyst]

Okay. And on InnoGames, how should we view the margin this year? I guess there was a boost last year. Are you looking at something in between 2019 and 2020 for the full year?

[Lars Torstensson]

So when it comes to InnoGames and margin development, once again, we usually -- or we don't guide specifically on companies. But I mean, Maria, if you would like to elaborate to some extent on InnoGames.

[Maria Redin, Group President & CEO]

Yes. No, I think it's fair to say, as you commented that InnoGames did enjoy exceptionally high margins last year. The return on spend was on very elevated levels, especially in Q2. And also, we should remember that we didn't put any marketing behind any new games in 2020 for InnoGames. So coming back to how I answered the previous question, also how to think about scaling and marketing going forward and margin impact, you should expect us now to start scaling marketing. I mean, that is success for us, to be fair, because it means that our games in soft launch going into commercial launch are successful and performing. That will push down and put pressure a little bit on the margins this year, but will position us for strong growth then in 2022. So that's why we believe it's a good investment to be done and that will pay back over time.

[Lars Torstensson]

And as you say, Maria, I mean we look -- as you know, we are extremely data-driven when it comes to InnoGames, and we monitor the [indiscernible] levels very closely. And we see, as we've done historically, very good returns on the marketing spend that we're doing as well. So it is never done by chance, but rather based on data-driven decision-making processes and the marketing spend that we are doing are doing, both on Forge of Empires the classic games, and now the new games, are well balanced, and also with the right return profile as well.

[Martin Arnell, Analyst]

Okay. Great. And just a final question. On your marketing spending in the gaming vertical, are you seeing any key shifts or changes in the returns or pricing so far in March, April compared to January, February or late last year?

[Lars Torstensson]

So when it comes to pricing, when it comes to the different marketing channels, if I understood it correctly, Martin, if that has changed in any meaningful way when it comes to April or March, April. Maria?

[Maria Redin, Group President & CEO]

Yes. We actually continue to see very successful and strong marketing, and that is also what drove the performance in Q1. So now we will see going forward as well, with the IDFA coming into place now in May, that that is something that are we actively monitoring. And I think that we have done the preparations as we can and take it from there. But we continue to enjoy good marketing returns, and that's why we can continue to feel comfortable that we would do the spending levels we.

[Lars Torstensson]

Operator, can we have the next question, please?

[Operator]

No further question at this time, sir. Please continue.

[Lars Torstensson]

I think we have another one, Oscar.

[Operator]

I'm sorry. Apologies, sir. Oscar Erixon from Carnegie on the line, sir.

[Lars Torstensson]

Sorry, Oscar. I heard that you work for Carnegie, I guess, but...

[Oscar Erixon, Financial Analyst]

Exactly, that's right. So just to follow-up here on IDFA, which I think is clearly a very important topic right now. I mean, can you talk a little bit about what you have done to prepare for the impact, what you expect? Have you seen anything so far? Yes, deep discussion would be great there, because I presume it's already started a little bit now this week.

[Lars Torstensson]

As you say, highly relevant question with the introduction of is iOS 14.5 IDFA changes, something that we, of course, have been spending a lot of time on. Maria, could you elaborate on preparatory work and, I don't know, it's hard to say, but expectations also when it comes to IDFA?

[Maria Redin, Group President & CEO]

Yes. No, I think that what is fair to say is that we -- at least we got an extra sort of 5 months than what we initially thought to prepare in making sure that also across the different portfolio companies that we have, that we have an aligned view, and we have a shared best practice. But there's not one perfect source to how you prepare for this one, because you don't know exactly how it will play out, how many will opt in, opt out, what contract will you be able to have post this. But I think what we feel comfortable with is that the base foundation, especially the structure we have within InnoGames, is extremely data-driven, and we have a high predictability in that model. And that gives us comfort also to continue to do marketing, even though we may have slightly lower tracking levels on back of those customers.And I think what is important to remember as well is that we are not 100% mobile only. We actually have sort of like a 58%, 42% split for mobile versus browser. And that also, I mean, helps on the browser side, to be fair on the side diversity. And then I think we're going to learn as we go along. But I think that we are as prepared as we can be. And then it comes down to closely monitoring now every campaign, which we're already doing. So we feel as comfortable and prepared as we can. And then we will keep you updated as we proceed.

[Lars Torstensson]

And a small detail there, Oscar, and you might already be aware of that, just a reference to Ninja Kiwi, which could be interesting is that, of course, their success has always been based on organic growth only. And as such, our new member to the gaming company is not exposed in that sense to IDFA either. It could be good to know.

[Oscar Erixon, Financial Analyst]

Great. And it would be interesting to hear sort of if you break down your gaming exposure. I mean, I think it's fair to assume that InnoGames will be most hardly hit, given that it's high ARPU, it's targeted marketing. But could you break down sort of what percent of sales in gaming that you find directly exposed sort of to IDFA?

[Lars Torstensson]

So what we face directly exposed to IDFA, when it comes to our revenues. It's a very detailed question, Oscar. I don't know, Maria, if you would like to start, I could add maybe a couple of snippets there.

[Maria Redin, Group President & CEO]

Yes. I mean there is 2 ways of looking at. One thing is, of course, how precise you can do your advertising, which then you onboard customers and you then convert to paying customers, which then convert in a purchase, which is the vast majority of our revenues. I mean, over 90% of our revenue base is in a purchase versus advertising. And to some extent, one, some believe that the advertising style will be more hardhat than the in-app purchasing side. So on the revenue base, I think that this split more to in-app purchases will give us some sort of defensibility. And then, when you look at the sort of revenue shift where we have, as I said, we do have a high degree of browser in our revenue base, still. We continue to do marketing in the same way. And then if you look at the remaining part, that is, of course, split between Android and iOS. In particular, I don't want to go into that breakdown. But of course, it's the iOS part, first and foremost, that will be impacted. And then we see what Android will do over time.But as I said, we feel that we are as prepared as we can be, but this is on top of everyone in our sort of product marketing and games team in general, to make sure that we secure the best possible outcome for us as a group. And if there is anything, at least, what gives us comfort, coming back to where I started, is we do have extremely strong processes and system, which gives us high predictability models, which gives us comfort in our marketing machine.

[Lars Torstensson]

And one way of putting as well is, of course, that we are, through InnoGames, especially then, we are strong when it comes to our marketing and marketing apparatus, so to speak. And that relative strength will also be transferred into an IDFA environment, of course. So I think one should also consider that when looking at the new reality in a world where IDFA is a fact, that the relative strength can continue to be maintained also in that environment.Operator, can we have the last question, please?

[Operator]

That's the line from Rasmus.

[Rasmus Engberg, Head of Research]

This is Rasmus with Handelsbanken. I just wanted to ask you, with gaming becoming increasingly the completely dominant part of MTG, how do you think about the structure of the group going forward? Do you feel that esports belong here, and are you confident that it gets the attention and the investment that it might require?

[Lars Torstensson]

Rasmus, good to have you back here with the question as well. It was some time ago. But when it comes to the MTG and how it has evolved recently, with the lion's share of the revenue now being generated by the gaming vertical, how do we look upon structure? What do you say, Maria?

[Maria Redin, Group President & CEO]

Yes. No, of course, it's a fair question to ask. I think we put down the foot pretty firmly in the fall also, as I took on my new role, that we want to keep those verticals and build value creation in both verticals. With the pandemic, of course, short term, the esport has been hit on the top line side, and we have been able to execute very strongly on the strategy on the gaming side, which has built more sort of a stronger and more robust gaming vertical. But we remain very focused to make sure that we position ourselves at the forefront also on the esport side, and make sure that we maintain and build on our leadership position that we have. And I think that's why we're so excited about the initiatives that we now are accelerating in this quarter to make sure that, for us, esport is so much bigger than you can argue the media part that we're having. That's an amazing product that we do, and we are doing that in a really good shape and form, and we look forward to bringing back the off-line events and properly monetize them.But we also want to make sure that we build the relevant products and pillars next to it to make sure that we build a proper [indiscernible] universe and ecosystem, amateur to professional. I think that is a very exciting path forward for us. And I think that we are just in the starting base of that. So I don't see this sort of relative size today as any indication that these things do not fit together over time. Time will tell. But I mean, what we are focused on is to make sure we drive value creation in both verticals, both organic and inorganic in both verticals. And that's what we stay focused on.

[Rasmus Engberg, Head of Research]

And just a very brief follow-up on that. You said you don't expect any live events maybe until next year, but you haven't canceled DreamHack Winter, and there's also, as far as I can understand, IEM Winter schedule for December this year? Or am I wrong in that?

[Maria Redin, Group President & CEO]

No, you're absolutely right. On that, I wasn't clear. So that was my mistake. So until towards end of the year. So we do expect [indiscernible] towards the end of this year, but not until then. So that means we used to have, for example, the [ Colonia] event sort of in, I think, late July, August. That will no longer take place. So it's first sort of in mid Q4, we will go back to fiscal events, hopefully.

[Lars Torstensson]

I should just clarify that they will take place, but in an online format, so it's clear.

[Maria Redin, Group President & CEO]

But I think also, to add to that, I think what we do is, I wouldn't say call it like in the [indiscernible], but I mean, right now, based on what we see with the vaccine rolls out [indiscernible] everything in our planning is to go back to an off-line environment in 2022, and that we are very excited about. And to make sure we can also complement that off-line environment with a much broader and stronger online value proposition.

[Lars Torstensson]

So that concludes the conference call for MTG's first quarter interim report. We appreciate you taking the time to join today's call, and we look forward to stay in touch until we release the next quarterly report on July 20.Thank you very much. Take care, and stay safe.

[Operator]

This concludes this conference for today. Thank you all for participating. Stay safe, everyone. Thank you all.