Modern Times Group MTG AB

STO:MTG B

Earnings Call Transcript 2018-Q4

[Operator]

Good morning, ladies and gentlemen, and thank you for holding. Welcome to MTG's Q4 Earnings Call. [Operator Instructions] Presentation slides to accompany the call are available via the link on the homepage of mtg.com.I will now hand the call over to your host, MTG President and CEO, Jørgen Lindemann, who is joined on today's call by MTG's CFO, Maria Redin; and Anders Jensen, CEO of Nordic Entertainment Group. Please go ahead.

[Jørgen Madsen Lindemann, President & CEO]

Yes, thank you, operator, and good morning, everyone. As you can hear, I am unfortunately hit by heavy flu, with all the joy that, that brings, but I will obviously try to make sure that I will read out or discuss with you the results as clear as possible. But bear with me, my voice is not 100% today.But before we go into the numbers, let's just take a few minutes to update you on our operation to split MTG into 2 separate listed companies. We have now published the information brochure to provide the decision-making material for the shareholder meeting, which will take place the day after tomorrow, the 7th of February, in Stockholm. Assuming that the EGM approves the split, the prospectus will be published at the beginning of March, and separate Capital Market Days for both companies will be held on the 11th and 12th of March and the listing of NENT on Nasdaq Stockholm Exchange to take place at the end of March.The information brochure included the new financial targets for both companies, including the leverage ambition and dividend policies for NENT Group. And in this context and subject to the EGM's approval of the split that the NENT Group board will propose the payment of dividend of SEK 6.5 per share of the NENT Group, AGM to be held in May. MTG board is proposing that no dividend be paid to MTG shareholders in 2019. This is in line with both companies' stated dividend policies. We have, following consultation with our largest shareholders, decided to withdraw the capital raise authorization proposal. The consultation clearly suggested our major shareholders fully support the strategy and view, the opportunity of participating in any future fundraising as an important way of ensuring that they also participate in the benefits of that strategy. MTG will be, at the time of split, well capitalized to execute its stand-alone plan. And we have now also secured a SEK 1 billion credit facility, which will provide additional funding for MTG after the spin-off.If you turn to Slide #3, you can see that the strong momentum continued from '17 into '18 as sales, profit and margins were all up again. Full year sales grew by 4% on an organic basis, and operating income was up 24%. Nordic Entertainment delivered another outstanding performance with record sales and profit. And MTGx was profitable on a full year basis for the first time.We delivered our profitable growth objective, which shows that our products are more relevant, more available, more popular and more valued than ever before. Our strategy is clearly working, so we are doing this split from a position of strength as we want to further accelerate the development of these 2 great businesses.If you turn to Slide #4, you can see that the sales were up 1% on an organic basis, and operating profit before IAC were up 19% in Q4. Our Nordic Entertainment, International Entertainment and Studios segments all delivered organic sales growth and higher profit. MTGx sales were, as expected, down as we had less new games and content launches. And we have been scaling down the nonstrategic elements of our esports business in favor of high-quality and more sustainable revenue lines. The underlying growth in our esports and gaming business remains healthy, and the operating income improved, driven by -- primarily, by lower esports losses as planned.I will now hand the call over to Anders for his comments on the Nordic Entertainment and Studios business.

[Anders Hede Jensen, Executive Vice President]

Thank you, Jørgen, and a very good morning, everyone. Can I ask you to please turn to Slide #5. Nordic Entertainment broadcasting and streaming businesses, sales were up 3% on an organic basis in Q4, and profits were up 5% to a new all-time high in the fourth quarter. This was our ninth consecutive quarter of profitable growth and clearly demonstrates the positive effect of our early and aggressive investments into taking a leadership position in the Nordics streaming market. Free-TV and Radio sales were up 3% on a reported basis, fueled by continued double-digit growth in our Swedish Radio business on the back of the new radio licenses that we received in August last year and a very good operational performance. Our TV advertising sales were also up at higher prices and audience shares more than compensated for falling linear viewing levels. Viafree sales were slightly down in Q4. This was expected given the tough comparison from last year but also, more importantly, the strategic decision to shift some certain key content to Viaplay. And I think this is a perfect example of the benefits of our integrated structure, which enables us to maximize the value of both acquired and original content. Viafree sales were up double-digit percentage points for the full year, and we expect this growth to continue in 2019.Nordic pay-TV sales were up 7% as Viaplay generated further high subscriber intake and a record low churn rate. Our Viasat subscriber base was also up, both quarter-on-quarter and year-on-year, as growth in our broadband TV and third-party packages more than offset the decline in the satellite base. All of these clearly demonstrate the value of the investments that we have made in premium sports rights and local original dramas. We announced 4 new originals in Q4, including the Swedish drama, [ Hassel ], which was already -- which has already been picked up by VRT in Belgium while still shooting the format.Moving to Slide #6, please. The Studios sales and profits were both up on the back of rising scripted drama production volumes. Q4 represents a positive trend shift compared to the performance earlier in last year. And the forward pipeline of signed development deals and contracted productions is expected to enable further growth in 2019.Total segment sales and operating income for NENT Group as a whole were therefore up 7% and 5%, respectively. We are, in my view, perfectly positioned to benefit from the shift to on-demand viewing. We do expect to continue to deliver profitable organic sales growth and higher segmental profits. Our total operating profit for 2019 will, of course, be burdened by the higher central operation cost that we now take on as we are becoming a separate and listed company.That's it for my comments for now, so back to you, Jørgen.

[Jørgen Madsen Lindemann, President & CEO]

Thank you, Anders. And now if I can ask you to go to Slide #7. Sales from Nova Bulgaria, which is our only remaining operation in the International Entertainment segment, were up 7% on an organic basis. And profits were also up despite a SEK 10 million write-down related to the sale of 2 local e-commerce businesses. As announced, we are in the process of selling our Bulgarian assets, which are the last of our Central and Eastern European operations. We are now talking to new interested parties after the previous equity deal was turned down by the local competition authorities.If you go to Slide #8, we can see that MTGx sales were down 11% on an organic basis. This reflected the impact of our strategic shift in esports, where we're reducing our work-for-hire activities and focusing more on the owned and operated business. And we also saw a quarter of weaker growth in gaming. EBITDA came in at SEK 94 million, which is the sixth consecutive quarter of EBITDA profit. The operating profit or EBIT also increased to SEK 31 million and resulted in a first full year positive EBIT result for the segment. Our esports sales were down 13% on a reported basis as double-digit growth in DreamHack and ESL's owned and operated businesses was more than offset by lower work-for-hire revenues. Please also remember that sales were up 80% in Q4 '17, so we were facing a very tough comp. As discussed previously, we are scaling down the nonstrategic work-for-hire elements of our esports business in favor of higher-quality owned and operated events, where we see more sustainable and profitable revenue growth opportunities.ESL revenue from owned and operated business were almost up 50% for the full year on the same number of events and accounted for more than 60% of ESL's revenue in the year compared to around 44% in the previous years. We expect that proportion to increase further, and the outlook for '19 is promising. We have signed several important agreements since the beginning of Q4, including the extension of our global partnership with Intel until 2021 and announcing our first international Fortnite competition to take place over 2 regions at the IEM event in Katowice. We therefore expect esports sales growth to bounce back in Q1 and to build through the rest of the year as the momentum continues in our owned and operated events.The operating loss in esports was significantly reduced compared to Q3 and Q4 '17, again, reflecting the transformation of our revenue mix as well as the optimization program that we announced in April last year.Moving on to online gaming. The combined revenues for InnoGames and Kongregate were up slightly on a pro forma basis. InnoGames reported double-digit sales growth, although significantly lower than the exceptional growth we saw in Q3. The mainly reflected -- this mainly reflected the content update scheduling during 2018, which was due to Q1 and Q3 compared to Q2 and Q4 in 2017. We also saw a dip in the performance of our new game, Warlords, towards the end of the quarter when new content was not sufficient to maintain the strong start in sales that we have seen. We are now addressing this issue, adding more and better content to drive player retention and improve in-game monetization. Kongregate pro forma revenues were significantly down in the quarter, which we flagged for the Q3 conference calls and reflected the lower number of new game launches and the intensifying competition. Going forward, Kongregate will be focusing more resources on existing games with the best matrix and higher potential new games to drive sales growth.Combined EBITDA for our online gaming business was down, as expected, mainly due to the significant step-up in marketing of Warlords. However, we scaled down the marketing spend in mid-December when sales dipped. We'll increase the marketing spend again as the new content is developed.Zoomin revenue were down 21%, and the company continues to be loss-making. It is going through a major transformation under new management, and it will take time.So to sum up on MTGx, organic sales were, as expected, down due to exceptional comps, the effect of strategic refocusing and timing difference in content updates. However, we expect organic growth to return to healthy levels in Q1 and to build through the course of 2019. The segment was profitable for Q4 and for the full year, and we expect profitability to improve further this year.That concludes my comments, so I will now hand the call over to Maria for her comments.

[Maria Redin, Chief Financial Officer]

Thank you, Jørgen, and good morning, everyone. The positive trends seen over the many quarters continued into Q4 with high sales and profit. Nordic Entertainment delivered its ninth consecutive quarter of profitable growth, and MTGx reported its first full year positive EBIT result for the segment. Group central costs were lower than what we originally expected as the transaction costs in Q4 only amounted to SEK 6 million. We indicated in the information brochure that the total cost relates to the split and listing of NENT with the market, approximately SEK 195 million, of which SEK 99 million had been taken after the end of September. This split cost includes both the direct and indirect costs related to the split, such as financial, tax and legal advisory fees; listing fees; reorganization and rebranding costs; and personnel costs relating to the project. The remaining costs to be taken is approximately SEK 100 million, and that will be taken in Q1. That's the items affecting comparability, with MTG accounting for roughly 40%; and NENT, 60% of the costs. Our net interest in the quarter amounted to nil. There's a vast majority of our borrowings in the quarter was short, subsequently reducing the interest costs. Going forward, post-split, for NENT, we will aim to have a more balanced structure between short-term and long-term borrowings, and therefore, you should expect interest costs to increase accordingly.If I can then ask you to turn to Slide 10. Operating cash flow was up in the quarter, but the net cash flow from operations was down slightly, and this is following a timing difference in payment of receivables. Our net debt increased to SEK 2.6 billion, which corresponds to 1.3x trailing 12-month EBITDA before items affecting comparability. As Jørgen mentioned earlier, we have secured a SEK 1 billion facility, which will provide additional funding for MTG post the split.So that is it for my comments, and back to you, Jørgen.

[Jørgen Madsen Lindemann, President & CEO]

Thank you, Maria. And now to Slide #11, where you can see that our Nordic Entertainment business delivered its ninth consecutive quarter of profitable growth. Our Studios business also delivered higher sales and profits. MTGx reported lower sales but higher profits and is well set to grow faster with higher profits in 2019.We have released the information brochure regarding the split and the distribution of NENT Group. And we'll hold the EGM the day after tomorrow, the 7th of February. We expect to come back to you with more information in the form of a NENT prospectus and separate Capital Market Days in early March. The dates are set now for 11th of March for NENT and 12th of March for MTG.That concludes our commentary on the results. Over to you now then, operator, to start the Q&A session, please.

[Operator]

[Operator Instructions] Your first question comes from the line of Martin Arnell of DNB Markets.

[Martin Arnell, Analyst]

So my first question is to Anders and just to get some more color on NENT outlook for this year. Can you just elaborate a little bit more on the growth outlook for this year and also the incremental margin, how we should view your balancing revenue and OpEx growth, please?

[Anders Hede Jensen, Executive Vice President]

Martin, first, the outlook for this year, we have said and we will continue to say that profitable growth is our target and ambition and that holds true also for 2019. On an organic basis, you can expect from the around 5% mid-single-digit growth on the revenue line. Having said that, it's important, too, to say that profitability will be burdened, obviously, with the one-off costs and the new operational cost that we have to be a separately listed company, so the comparison will suffer a little bit from that. But underlying, we are well set to deliver profitable growth also in 2019. On the margin, it's not a number that we disclose. You can expect us to continue to invest as we have done this past year and these past years, so no significant shifts, but above and beyond that, no comments on the margin.

[Martin Arnell, Analyst]

Okay. And your -- you mentioned that the Viaplay sub intake was very healthy in this quarter. Was it an acceleration compared with the trends we saw in 2 -- in other quarters last year?

[Anders Hede Jensen, Executive Vice President]

Yes, it was significantly. And then the December -- the month of December is actually the all-time high ever for Viaplay, very, very positive. Obviously, we have activated all -- all systems go on our sales, but it's very sort of encouraging to see the -- so the full effect from the customers, very much driven by very strong originals in the fourth quarter. So a strong quarter, yes, and a trend shift upwards from previous quarters.

[Martin Arnell, Analyst]

Okay. And finally, on NENT, your third-party intake sub was very strong. What was the driver of that? And would -- is it fair for you to expect the intake in third party for the full year in '19?

[Anders Hede Jensen, Executive Vice President]

I think the results of the third-party sales in the fourth quarter and going forward is the result of good cooperation and sort of daily ongoing talks between our team and the teams of the distributors, so we find new ways of doing campaigns, new ways of providing value for both parties. And I think it's in that context you should view the distribution business going forward. Because in this changing landscape that we have, we and our partners alike will have to find new ways of cooperating, and we're putting a lot of effort into that. And we see good results from that in the fourth quarter. So the structural decline in DTH, in satellite TV is well compensated in the fourth quarter with an overall 22,000 more customers, which it's -- obviously, is very, very encouraging considering the pressure on traditional TV. But it is sort of groundwork every day from our team to make sure that we are the best partner we can be for the distributors.

[Martin Arnell, Analyst]

So do you expect a growing subscriber base, excluding Viaplay, this year?

[Anders Hede Jensen, Executive Vice President]

I would think it's too early to give you sort of a solid answer to that. We will grow our pay-TV business obviously, and that's including Viaplay. I'll come back to some more -- with some more granularity and some more news on how we want to work going forward on March 11 at the Capital Markets Day.

[Martin Arnell, Analyst]

Excellent. And just some questions to you, Jørgen. On your growth outlook in MTGx for 2019, this effect from phasing out the white label, is that coming to an end already in Q1? Or you mentioned that organic growth were going to bounce back already in Q1. Is it a gradual bounce back Q1, Q2? Or is it on a new level in Q1?

[Jørgen Madsen Lindemann, President & CEO]

Yes. It is a gradual bounce-back over the year, where we will see that particularly then the owned and operated, as you also saw in 2018, will do good for us. So we are getting more sponsors on board, and we are getting better paid and you get new media deals and so forth, so people -- or the companies have now understood, of course, the value of the [ iPolls ] that esports can deliver. That's very clear to see. Also, due to the fact that you have made an upgrade or prolongation of existing sponsorship deals so, of course, you can reach the return now as well, which is very important. So we are, of course, very happy with that development. And as I also mentioned, we had 50% higher revenue on the same amount of event in '18 than we had in '17. So of course, it goes in the right direction when it comes to the esports business, so very happy about that development. And then the same goes for games as well. We also expect the gaming companies to grow, and we do expect that InnoGames as well will have a fine year in 2019. And overall, of course, we do expect for MTG as such, that we will see profitable growth for 2019 as a whole.

[Operator]

And our next question comes from Victor Höglund of SEAB (sic) [ SEB ].

[Victor Höglund, Analyst]

This is Victor from SEB. Just had one more question here first on the leases you mentioned in the report. You mentioned the net debt impact but not anything around the EBITDA. Could you just comment as much as you can around that to help us figure that out? It will be great. And also how that will or would not affect the net cash that MTGx can get. Secondly, on NENT here, I was just wondering. So you are saying that the revenues from traditional to the advertising are increasing. Was that correct? Or is it radio that is increasing, and the rest is more or less flat? And then on MTGx, I just wanted to get your view not on esports but more on the InnoGames side of it because, last year, you had some one-offs in Q4 '17, which you did not have now on the EBIT line here. But on the revenue outlook and game launches and updates and new packages and so on, what's the schedule here for the gaming part of MTGx, so we can have a guess around what costs or revenue hikes would be acquainted with that. And then if you can just say how much of revenues in esports was owned and operated at the end of 2018, that would be very helpful.

[Maria Redin, Chief Financial Officer]

Victor, I can start then and talk on the leasing. So I mean, as we saw, we communicated, we have approximately SEK 1.1 billion in leasing that will be added then into the adjusted net debt calculation. And I think one important part to note, though, even though it's not going to change the calculation, it's roughly 20% of that is actually sublet. So it's not a full payment obligation on MTG. And then the EBITDA effect of that is approximately SEK 200 million so that you can do a backward calculation on what the adjusted EBITDA to net debt would be in Q4. And that would be if you do the backward, then 0.4 it would increase. So the 1.3 goes to 1.7 for the full year Q4 ending. And then, before I let Jørgen comment on the InnoGames part for next year, I can just comment as well, last year, what you saw in InnoGames is that we wrote down 2 games: 1 a little bit more advanced in the development and 1 quite early development phase. So it's approximately SEK 235 million for InnoGames that we took as a one-off charge. And this year, you only had a very small part that we wrote down, a partial part for the game this year. So of course, that distorts the year-on-year comparison that you see on the EBITDA line, where you actually see a small decline, but you're growing the EBIT for that segment.

[Jørgen Madsen Lindemann, President & CEO]

And when it comes to the InnoGames and new games launches and so forth, and obviously, that is what we do expect from our gaming companies, as we have discussed. And InnoGames will launch new games as well in 2019. We already now have a new game soft launch, which we will probably announce in a week or 14 days from now. And then on the Capital Market Day as well, the CEO, he will present more about the plans about new game launches and channels and so forth. For the gaming companies, the studios that we are having, they have to deliver new games on a constant basis. The owned and operated revenue in Q4 for esports was quite good actually, so we saw a double-digit growth in that area, as I mentioned as well. So the -- where we are -- where we saw a sharp decline was -- as we also discussed earlier, was in this work-for-hire business and this white label.

[Anders Hede Jensen, Executive Vice President]

And Victor, to your question on the revenues for TV and Radio, they're up 3%. It's driven by Radio, but the linear TV is also up. So we had a strong advertising quarter as a whole. Swedish Radio is doing very well. It's driven both by the product and the increased coverage. In TV, we see a very healthy price development and good share development in especially Norway and Sweden. So it's a combination.

[Victor Höglund, Analyst]

Okay. May I just add here, what I meant was that in 2014, 40% of sales was owned and operated. In 2017, the same number was 63%. I'm looking for that number in '18 or in -- '18 as a whole or Q4, if you can give -- any color on that would be great just so we understand how much of total sales in esports now is owned and operated.

[Jørgen Madsen Lindemann, President & CEO]

Yes, right. I think what we discussed was that -- I think we talked about the 50% of the revenues come from our owned and operated, yes? So that is what caused a big shift when we acquired the companies back with 30%, if that's what you mean. And now, when we look at the actual events in '18, we saw 50% increase on the actual event on owned and operated revenue than we did versus 2017 percentage. And on the event that we had then in Q4, we also saw good growth on the owned and operated. So yes, I hope that was what you're asking.

[Operator]

Your next question comes from Rasmus Engberg of SHB.

[Rasmus Engberg, Research Analyst]

I have some nitty-gritty to follow up with first. You say there's SEK 100 million left of one-off cost. I didn't quite get that. Is that SEK 100 million left for the next quarter? And then that's split 60-40, is that what you said?

[Maria Redin, Chief Financial Officer]

Yes, that's correct. So you should see in item affecting comparability for both MTG and NENT in Q1, of which that 40% of the SEK 100 million will be roughly MTG, and then 60% NENT.

[Rasmus Engberg, Research Analyst]

Yes, good. And for the combined entities, would you sort of be able to guess some sort of level for overhead costs, including or excluding, whichever you prefer, these one-off costs, roughly where should they be?

[Maria Redin, Chief Financial Officer]

I think what we had previously stated is that you'll see NENT around SEK 250 million, and you'll see MTG around SEK 200 million. And there is no change in outlook on that.

[Rasmus Engberg, Research Analyst]

And that is including or excluding?

[Maria Redin, Chief Financial Officer]

That's excluding this IAC. So these will below -- the incremental driven from the project.

[Rasmus Engberg, Research Analyst]

Very good. And secondly, what did you mean with interest cost? Can you give us a rough indication of how much of an impact we would see on that as you changed your loan structure?

[Maria Redin, Chief Financial Officer]

I think if you look at the first half of the year, you'll see more normalized levels because there you have -- I mean, the base should be with bonds and not commercial papers, which we have now because we are preparing for the split. So that's why we didn't launch existing bonds that we are rolling very short, which, of course, in this -- today's market gives you very low net interest cost.

[Rasmus Engberg, Research Analyst]

All right. Okay, cool. And then finally, you commented in the games, what -- where do we stand now in terms of Q1? You said you went all-in on marketing, but you saw some disappointment at the end of the quarter. Where do we stand now in Q1 in InnoGames?

[Jørgen Madsen Lindemann, President & CEO]

When you -- when it comes to the specific games, Rasmus, what you are doing is, is you are looking at -- as we said, at the retention components and so the content. We saw people there were very happy the first months and the second months, but then we saw higher churn, people spending less in there after 90 days. So that's something they are working on right now. I don't know if that's going to be ready in Q1. We will continue softly to market, of course. Warlords, there, we want to just keep the momentum for the gamers in already. So I don't think there's anything. Forge of Empires is doing good and the other games, that also -- luckily, there is more games, so they also should also perform fine and we expect InnoGames to grow.

[Rasmus Engberg, Research Analyst]

But do you continue -- because I seem to recall that in the last quarter, you said that you were going to step up marketing quite a lot.

[Jørgen Madsen Lindemann, President & CEO]

Yes.

[Rasmus Engberg, Research Analyst]

So what I'm just trying to get at is that -- is that still true for Q1 and Q2 this year or so at InnoGames?

[Jørgen Madsen Lindemann, President & CEO]

As soon as Warlords is back, of course. And also, with the new launch which we'll announce in 14 days, then you will start to spend more margin again so of course. And there's learnings as well about these content updates, where you -- instead of eventually having X amount of big ones during the year, as I just described during the quarters, there might have been more throughout the year, on a more regular basis. So that's something that they are looking at as well. But there's more games than just the ones here. And that is quite normal that you launch a game and you want to adjust it and so forth. So once the games are picked, we believe, and the content is updated and more interesting, then we will start marketing it.

[Operator]

Your next question comes from Henrik Mawby of Nordea.

[Henrik Mawby, Senior Analyst]

Okay, so coming back to NENT, Anders, and firstly, on subscriber growth. I noticed that, that satellite registered now the fourth consecutive decline in subscriber losses. Do you think that this is a trend we should extrapolate and expect to continue to see the decline of losses continue? Or is it too early to say that it's a trend?[Technical Difficulty] Anders, hello?

[Anders Hede Jensen, Executive Vice President]

Sorry, I was on mute. I'll start again. So on the DTH question, yes, we will continue to see a structural decline. I will be careful not to sort of give too much sort of forward-looking level expectations because we have been seeing that it's flattening out. And we do have hopes that the churn will reduce, and we're working quite intensively on it, and we see good results. A little bit too early to tell actually. I think the long tail of satellite is quite long, and there is good opportunities to work with it, but expect a continued structural decline. I think that's the way to look at it.

[Henrik Mawby, Senior Analyst]

And if we move on to Viaplay, I know with this, we tried to back that out with the data we're given here. But on the growth, you mentioned a record December. Can you confirm its absolute year-on-year growth accelerated in Q4 for Viaplay in revenue?

[Anders Hede Jensen, Executive Vice President]

Yes, I can confirm that. And I can confirm that it's accelerated quarter-on-quarter as well. So we see a very healthy sort of step-up towards the growth rates that we have seen previously, both last year and previous quarters. So the fourth quarter was a good quarter for the intake of paying customers, and the conversion of campaigns was very strong, so I have good hopes for Q1 as well. And it's very much driven by the fact that our content is attracting more and more viewers and more and more interest in general. And the originals is doing a good job in particular. So we're stepping up our ambitions.

[Henrik Mawby, Senior Analyst]

Okay. And Jørgen, one question for you. Yes, I know you've mentioned in previous quarters here that there's been a material seasonality in the launch of big updates in InnoGames. I think Q1 and Q3 was highlighted as quarters where you had big launches. Do you expect the same type of seasonality now for 2019? Or should we -- I mean, if that flattens out, then we should we expect a weak Q1 as well? How should we look at that?

[Jørgen Madsen Lindemann, President & CEO]

I think what we would like to do is to have more regular updates eventually, but that is the eventual learning that we would like to take on. So that is what we are looking at instead of having these big updates in one quarter, then try to have regular relevant updates. So that is what we are looking at. InnoGames, as I said earlier, the company -- and also, you saw the fourth quarter was solid where we had double-digit growth, continue to do good. And we expect to continue to do good also in Q1. So what -- the aim is, of course, now to get the new games to work, and then we are launching more, and we are working with them and to make sure that they become as relevant. The team, of course, had proven historically, if you look at the lifetime value of the different games that they have launched, that they know what they do. But there will always be adjustments, and we just thought it was fairly prudent to stop marketing and so forth, that we -- where we don't see the retention as we would like or this in-game purchase and so forth that we would like. So therefore, we -- there's nothing on InnoGames as such, and the content update will be coming on hopefully on a more regular basis and not in big, big -- what's called big updates in quarters.

[Henrik Mawby, Senior Analyst]

Okay. Can I -- just one follow-up on InnoGames and related to Warlords. To my understanding, you did dial back marketing a little bit towards the end of the quarter. And I suppose that it's related to the need maybe to fine-tune in-game monetization and things like that. How long can the fine-tuning process of a game go on before you start to realize that this is not going to be a success or that you make a more dramatic decision to not put your bet behind it, if you understand what I mean?

[Jørgen Madsen Lindemann, President & CEO]

Yes. No, I do understand, but I think that is something we have done already as well in the pretesting of the games that you see the underlying KPIs are good, to begin with, and then you start to work on the game, and then you will continue to develop the content. We did stop the marketing in December when we saw that -- as I said earlier, that the retention was not as we wanted it to be. So that is what they are working on right now, and we do expect it to come out here in Q1 and Q2 again sometime, probably Q2, I don't know. We'll see when they are ready, the guys, and then we will start to market it again. And then we'll also, as I said earlier, announce a new game coming in -- coming out in some 14 days.

[Operator]

[Operator Instructions] Our last question comes from the line of Mikael Laséen of Carnegie.

[Mikael Laséen]

Yes, I have a few questions. First one, regarding central operations costs, you've mentioned in total how you look at them. But how will they sort of develop on a quarterly basis? Will you reach SEK 200 million and SEK 250 million over time gradually in 2020 or from day 1 when you are separate entities?

[Maria Redin, Chief Financial Officer]

Yes, I think that it's going to be a little bit different between NENT and MTG. I would say that on the MTG side, I mean, you're basically starting on a run rate from Q1. On NENT, you will see a gradual ramp-up throughout the quarter.

[Mikael Laséen]

All right. And can you also help us with the cash conversion for NENT, approximately, how that is developing going forward and in terms of working capital requirements and CapEx in total, to understand the cash distribution possibilities then?

[Maria Redin, Chief Financial Officer]

Yes, I mean, I would say, I mean, if you look at for 2017 and '18, we have been building up quite a lot of working capital on back of prolonged sports rights, incremental new sports rights and then also the originals that Anders talked about. So I mean, that it has been on a higher level than, I would say, you should expect going forward. And also for CapEx this year, you had an extraordinary payment on the radio licenses, which extends for the next 8 years, so there has been some extraordinary high cash outflows that you should not see going forward. But I think then on the detailed cash conversion, I think again, we will come back to you at the Capital Markets Day to help you understand it even more granular. But that is initially the framework, that's how you should think about it.

[Mikael Laséen]

Okay. And when it comes to net debt for your entities, NENT and MTG, can you say something more about that?

[Maria Redin, Chief Financial Officer]

No, as you always said in the information brochure is that MTG will be in a net cash position, and then NENT will be in a net debt position. And we also set out the target debt level for NENT, which is then 2x net debt to EBITDA. So you have your starting point now that you have SEK 2.6 billion of debt, as MTG net debt, and then you need to split that accordingly. So MTG should end up in a net cash position post-split, and NENT will be at a net debt position, and that is 2x or 2.5x adjusted net debt-to-EBITDA target. And again, you will get more granular information at the CMD as well here.

[Mikael Laséen]

Okay, yes. And regarding the capital structure, can you explain this right, if you propose 20%, that you sort of could have directed it to a specific share -- to a shareholder in some way? Can you sort of explain that setup more in detail maybe for us?

[Jørgen Madsen Lindemann, President & CEO]

Yes. I think when it comes to the item we put on the agenda for the EGM around capital structure, I think after consulting the big shareholders, as I also mentioned in my speaking points here, is that there was great support for us to raise capital. And the shareholders suggested that any time we had ideas on more cash -- to use more cash, we came to them and came with the ideas, and then we would convene an EGM, and they would hopefully support. So that is what we will do. So we will not bring that forward to -- through the EGM, but rather, also as Maria said earlier, that the company right now is quite capitalized short term to the ideas that we have -- the stand-alone plan we have right now. This was asking for mandates to make sure that we could react superfast if there was something extraordinary came up and also looked at the opportunities to get international strategic partners on board. But it was very clear that the full support from our shareholders, meaning that when we want to raise capital, we should just call them and hopefully have then good ideas, which would then bring to an EGM, and they will support that.

[Mikael Laséen]

Yes, okay. I understand. But this strategic [indiscernible] or industrial play maybe, what can you say about that? A couple of years ago, I guess you talked about this possibility.

[Jørgen Madsen Lindemann, President & CEO]

Yes. No, but that -- and that comes in different shapes and forms: people, companies who can help us accelerate our business areas. And that is, of course, something we are very interested in. And of course, as we discussed earlier, particularly around the esports, that there might be companies there who could help us accelerate in Asia or other places where we might not have the same foothold we have in Western Europe or in U.S. And then, what we are talking about is several that could be interesting as well, who could bring different things to the company. So that could be an opportunity. I think it was very clear that whatever we wanted to do and wanted to raise capitalizing our existing investments, they were very supportive and want to be on board with that raise. And therefore, we will -- when things are -- opportunities are arising, we will then bring it to the EGM.

[Mikael Laséen]

Okay, very good. Interesting. And my final one, if I may, is about the esports side actually and the growth drivers for 2019. Can you maybe talk about the number of events that you're expecting to have; maybe the impact from the Chinese streaming agreements, in term agreement, price, money development and things like that? Can you grow esports in line with the market again?

[Jørgen Madsen Lindemann, President & CEO]

I think the growth drivers, which is also was set out by [ newsroom ] is going to come from sponsorship and from media rights. That is the 2 areas where it's going to take the biggest share of the pie, which -- then the pie will grow also in 2019. So that is, of course, the focus that we are having. And if you take Q1, where we will have 1 less event than we had last year in esports, in ESL, we had 3 events last year in ESL; this year, we will have 2, still, we do believe that we can grow the esports revenue in that quarter. And that is, of course, on the back of more sponsors and more media rights and so forth coming in. So that should work fine. As I said to you earlier as well, we see a lot of our sponsors now understand, and we have documentation as well that they can see the return of the dollar invested into esports is actually making a lot of sense. So that is something which is helping now; the prolongation of the distribution deals that we have seen right now; as you also mentioned, new partners coming in constantly, the Chinese partners was new. We will announce a big new partner in the Middle East now as well coming and so forth. So a lot of things are happening there. Luckily, we are born with the products or with the sports where the audience is already there, so now it is actually only for us to make sure that we capitalize on them. But -- and therefore, the focus also, as you also saw in Q4, on this high-quality revenue, which is important, instead of just being a production company. And then, of course, over time, we'll deliver as a stronger company.

[Mikael Laséen]

Okay. And maybe I missed that you commented then on the profitability. Was that for esports that we expect? Again, can you please repeat what's the status?

[Jørgen Madsen Lindemann, President & CEO]

Yes, I can. Yes, I'm sorry my voice is not -- I have to make time to be more clear. But yes, we do expect over the year now, 2019, that we will grow our revenue in esports, and we also will do better profitability-wise. And the same goes with the gaming vertical as well. We do expect that the gaming companies will deliver high revenue and also do better profitability-wise for 2019.

[Operator]

We have one more question, and it's from Victor Höglund of SEAB (sic) [ SEB ].

[Victor Höglund, Analyst]

Yes, I just had one follow-up on the group costs. So you said SEK 200 million and SEK 250 million. I was just wondering, in MTGx, you already have group costs. Is that included in the SEK 200 million? Or is it SEK 200 million more than what you already have in MTGx?

[Maria Redin, Chief Financial Officer]

No, it's not SEK 200 million more. What's that, SEK 400 million? No, it is -- that includes everything. So you're basically -- you will not have any MTGx headquarter, so you're basically having one overhead. That is purely an MTG office, and that is then SEK 200 million that we expect for the full year 2019.

[Victor Höglund, Analyst]

Okay. So the SEK 200 million includes what's already in MTG? So we -- depending on what you assume, that's already in MTGx, this will be less than SEK 200 million new so to say?

[Maria Redin, Chief Financial Officer]

Yes. I mean, you would say that the starting base excluding X is below SEK 200 million, and you add whatever is today in the MTGx central costs and then the combined is SEK 200 million for the new MTG.

[Operator]

[Operator Instructions] You have another question from Henrik Mawby of Nordea.

[Henrik Mawby, Senior Analyst]

One follow-up on the last question there. Can you give us any information on what the central costs within MTGx actually was during 2018?

[Maria Redin, Chief Financial Officer]

No, I don't think we've said something there. I mean, the biggest part, of course, comes from MTG. And as you combined these different entities, that's combined roughly SEK 200 million. So it's a smaller part that sits today in MTGx, and the bigger part sits in MTG. That together becomes SEK 200 million.

[Operator]

That concludes the question-and-answer session. I will now hand the call back to Jørgen Lindemann for his concluding.

[Jørgen Madsen Lindemann, President & CEO]

Thank you all for your time today and for your continued interest in MTG. We hope to see as many of you as possible to our EGM, the 7th of February; to the NENT Capital Market Day, the 11th of March; the MTG Capital Market Day, the 12th of March; then hopefully as well, the listing of NENT, end of March. So thank you very much, and sorry for my bad voice. Hope you got it, the message, anyway about the fourth quarter and full year. Have a great day. Thank you very much.

[Operator]

Thank you. That does conclude our conference for today. Thank you for your participation. You may all disconnect.