Description

Nordic Entertainment Group (NENT)

Date: 21/03/21

Investment summary 

Nordic Entertainment Group (NENT) presents a potential upside opportunity of 80%+ to current share price, underpinned by favourable industry dynamics and a strong track record.

NENT is a media and entertainment company, predominantly focused on providing a subscription streaming service in Europe. Currently 35% (~€0.4bn+) of its total revenue is related to Viaplay, its online streaming platform, the focus of this writeup. Additional business segments include traditional media & broadcasting assets: Other subscriptions (33%), Advertising (30%) and Studios (2%). The Other Subscription business provides linear channel content to pay TV distributors. Viaplay was started back in 2011, when management decided to use profits generated from legacy linear TV businesses to invest in an online subscription service across the Nordics.

A long position in NENT means buying into: (i) a broad shift of consumer habits related to content consumption and entertainment; (ii) SVOD European market penetration increasing due to significant headroom; (iii) differentiated positioning through content; (iv) execution ability around new market entry; (v) improved visibility in front of international and corporate investors of what is still a relatively unknown European streaming player.

In 2020, NENT kick-started its next phase of growth with plans to enter >10 new markets over the next 5 years, setting up plenty of optionality for the business and a unique position for a European streaming player. In 2021 the company continued to showcase a strong execution track record, increasing subscribers from 3m at the end of 2020 to 4m in 2021. NENT’s international plans have increased since then, which will require significant execution ability, content spending, culture and expectations management. The market will continue to closely monitor NENT’s Viaplay subscription numbers, which are a key catalyst. In some ways Viaplay can be compared with what Netflix was 8-10 years ago, in terms of relative growth opportunity, with more certainty around the consumer behaviour shift towards subscription video on demand (SVOD).

The company is increasingly becoming a strategic asset, with a clearly differentiated product, growing user base and market tailwinds, generating investor and corporate interest from some of the larger players that dominate this space.

Company story

Nordic Entertainment (NENT) is one of the few stories within the broadcasting & entertainment industry which involved bold management action that led to the company actively cannibalizing legacy businesses for the sake capturing the long-term growth opportunity which streaming presented in 2010s. Profits generated from the legacy linear TV businesses were used to start streaming services in 2007 and an online subscription service across the Nordics in 2011, Viaplay. At the time, NENT was still a traditional broadcaster and part of a media group, Modern Times Group (MTGB SS, demerged from Kinnevik in 1997) which contained several other broadcasting assets across Central and Eastern Europe, gaming companies, eSports and digital networks. NENT began to operate separately from MTG in 2018 and listed in 2019.

NENT is led by Anders Jensen (CEO) with a senior management team which has extensive prior experience in the broadcasting & telco space. Most of the management team are internal hires and have worked for the company >6 years each. In 2019 NENT announced organisational changes to streamline operations, moving away from a country-based operating model to functional leadership working across markets. In the process, it reduced group executive management from 15 to 8 people. The separation from MTG and org changes seem to have presented a challenging time for the company culturally, however, the changes appear to have been necessary to streamline operations and align teams to deliver on the ambitious growth plans.

Whilst NENT is still exposed to advertising and pay TV revenue, it is on a path to become one of the few European streaming champions, backed by a differentiated content library, a pipeline of original Nordic content, sport licenses, and a recent equity raise (~€430m), giving it the firepower to enter >15 new markets over the next 5 years.

Business model overview

NENT is focused on the streaming entertainment market where content is king. Currently 35% (~€0.4bn+) of its total revenue is related to Viaplay, its online streaming platform, the focus of this report. Additional business segments include: Other subscriptions (33%), Advertising (30%) and Studios (2%). The Other Subscription business provides linear channel content to pay TV distributors. In 2020 NENT created a JV, Allente, for its Viasat D2C service with Telenor’s Canal Digital. The JV will operate as a 3P distributor for NENT’s linear TV channels and is used as an upselling platform for Viaplay.

The overall revenue base is relatively recurring with ~70% of revenue being subscription driven (includes distribution agreements related to linear TV channels). Revenue is driven by the number of existing subscribers, how many of those churn in any given month, the amount of new subscribers that come in, and the average price paid per subscriber per month. Although NENT do not explicitly report churn, previous mgmt. commentary and market data suggest churn is low at <10% annualised. As with most Subscription Video on Demand (SVOD) providers, the primary costs relate to licensing existing TV & Movies, sport rights, developing original content, as well as sales & marketing. Content-related costs require a substantial cash outlay, resulting in a drag to FCF, as is the case with Netflix. Despite that, NENT has generated ~€45m pa of cash flow and ~12% EBITDA margin 2017-2020, with significant investment for international expansion occurring in 2021, lowering the margin to ~7%+.

Market

The European SVOD market has experienced extreme levels of growth in the last decade (40% CAGR 15-20). In 2020 the market reached ~140m subscribers, growing at ~40% p.a. and generating ~€9.7bn in revenue (Fig 1). The US-native platforms dominate the European market, with Netflix as the market leader with an estimated 54m subs, followed by Amazon at ~30m, Apple at 12m and Disney at 10m. In line with global trends, the main market drivers are changing consumer behaviour, increased quality and quantity of content libraries and relative value for money in the eyes of the consumer vs PayTV (Fig 2).

Fig 1

Source: European Audiovisual Observatory, Ampere Analysis. Note: figures might be updated with latest EAO data to be released 24 Mar 2022

Fig 2

TAM: The underlying market dynamics for SVOD are positive, but the TAM is also large – SVOD accounted for ~6% of total European Audiovisual revenue of €114.5bn in 2019 (Fig 3). PayTV revenue in 2020 was €34.2bn (-1% yoy) and Advertising TV ~€30bn in 2019, suggesting a total revenue pool of ~€65bn+ vs. €9.7bn revenue for SVOD currently. A 25% CAGR between 2020-25 (vs. ~40% growth p.a. 2017-20) will take the SVOD market to ~€30bn revenue.

Fig 3

Nordics: Looking closer to NENT’s home market in the Nordics, there are currently ~13m households in Nordics, ~63% penetration of SVOD (vs. ~85%+ in the US), implying ~5m households don’t have an SVOD sub. However, households that do purchase an SVOD service typically buy more than one (~1.8x subs per SVOD household in the Nordics vs. ~2.9x in the US), resulting in a total of 14.6m SVOD subscriptions in the Nordics. Under reasonable assumptions, which are more conservative than the current US stats (85% household penetration and ~2.5 SVOD subs per SVOD home), there appears potential for the market to add a further 10-15m of SVOD subs (Fig 4).

Fig 4

New markets: Poland, where NENT entered in Aug 2021, has plenty of headroom with ~14m households and only ~23-30% SVOD penetration. Assuming comparable stats to current Nordic penetration levels would suggest the number of SVOD subs can triple to ~14m from ~4.6m currently. A big win for its Poland entry is an exclusive ownership of the Bundesliga rights, as Poland has several players within the league. From Aug 21 fans who want to legally watch the tournament will have to tune in to Viaplay. There were an estimated ~2m subscribers who watch the Bundesliga on Eleven (a sport streamer). In Mar 21, NENT also secured exclusive UEFA Europa League rights in Poland. 

In Mar 2021 NENT entered the Baltics, representing a relatively small ~2.8m of households but potentially high association with Nordic Noir content. NENT is also looking to add additional European markets to its pipeline, with favourable underlying characteristics such as low current SVOD penetration but high growth and consumer demand. Outside of Europe, NENT completed a limited US entry in Q4 21 through a B2B partnership with Comcast, where the service is mostly positioned as a niche add-on, focusing on the Nordic Noir genre and targeting an audience that either has an existing Nordic heritage or is specifically interested in Nordic content. 

On 1 Mar 2022, Viaplay launched in the Netherlands, a market with ~8m households, having secured an exclusive content partnership with Dutch F1 world champion Max Verstappen, alongside other sports content (Premier League, Bundesliga) and B2B distribution agreements with KPN, VodafoneZiggo, T-Mobile and Delta Fiber. Some early data suggests that Viaplay is currently the most downloaded app in the Netherlands, higher than Google Maps, WhatsApp and Instagram. 

NENT is guiding for ~2.2 million international subscribers by the end of 2022 (up from 547k) and 6 million by 2025.

Going forward: Exploring the future of the SVOD industry more broadly, Jeff Bezos famously said that when thinking about the future it’s easier to focus on aspects of the market that won’t change vs. those that will. Applying the same thought process to SVOD, consumers will continue to: 

• demand great TV shows & movies as a form of entertainment – continual investment in differentiated content that is diverse and original will remain a necessity going forward

• be interested in live sport – providing an ability to watch live and recorded sport on any platform and anywhere will continue to be in demand

• demand affordable content with hassle free subscriptions – ensuring value for money with an option to cancel anytime will be a requirement to remain competitive

• consume content on demand, at their fingertips – anytime, anywhere or any device that’s suitable, so players have to continue to invest in a tech platform that can support this offering. The devices themselves might change (e.g. VR, glasses) but the ‘on demand’ component won’t

Focusing on the above factors will be crucial for continual success as an SVOD service. As post-COVID normality looks to be returning, there might be a relative slowdown in growth rates due to difficult comps, however, it is our view the underlying structural trends are unlikely to change, with large segments of the population relying mostly on SVOD as a source of entertainment vs Linear TV.

With the general direction of customer and market trends becoming clearer, consolidation in the industry will likely occur, especially with more traditional media companies realising their vulnerability. On an investor call, the NENT CEO said he was surprised by the lack of organic SVOD investment by traditional European media companies, that there has been significant investor interest in NENT, but that NENT are focused on executing their own strategy.

“You have a whole generation under 35 who has never normally been watching traditional broadcast or even cable television… So I think there's no way that just if we're allowed to leave our houses again, that they will suddenly stop streaming. That is for them where their entertainment comes from…I think linear television has a really dangerous future. I do think that's going to fall off significantly and people will stay with streaming services” ex VP Original Content, Netflix

Customer View

Looking at the customer dynamics in the market, an obvious factor that determines usage of SVOD is age. Other factors include the nature of the household (Family, Single person, Couple, Students) and personal preferences. NENT segment their customers into four buckets: Family, Family no kids, Movie Night Crowd and Series Junkie, each displaying slightly different behaviour. The customer characteristics have an impact on the type of content that’s mostly watched, willingness to pay and likelihood of churn (e.g. Family segment least likely to leave). 

Churn: One of the main customer satisfaction metrics, with the pandemic resulting in extremely low churn levels at NENT who said that churn Jan–Sep 20 vs Jan–Sep 19 was -0.4% (<5% annualised). More recently NENT have said they’re expecting stable churn rates. A US BCG survey conducted during the pandemic suggested that post-pandemic churn is likely to hit niche providers more than core ones. As NENT has a #2 position across its core Nordic market (Fig 6), it can be said to be one of the core services that is less likely to suffer – especially given that sport is coming back as well as the amount of local content. An Apr 2021 survey showed 90% of respondents think they are using the same number of streaming services they would have in the absence of coronavirus, suggesting less churn than perhaps was expected initially*. Prior to the pandemic (Dec 19) the BCG survey suggests churn rate of ~11% (or <1% per month), a 2018 Accenture survey of 25k consumers suggested ~14% globally have switched online entertainment service providers in the past year.

Source: BCG

KPCs: The main key purchasing criteria for customers are: 1) content; 2) price; 3) user experience – i.e. tech platform stability and ‘feel’. As mentioned earlier, content is king and acts as the primary pull and retention factor for customers. Entry pricing must be reasonable (~€12+ pm for Nordics) and value based.

In terms of user experience, factors such as buffering, recommendations, ability to stream live content, and the interface of the platform are constantly monitored. Netflix is once again said to be far ahead of the competition in terms of feature design (e.g. auto playing content when a user hovers their mouse over content) and recommendation algorithms but Viaplay stacks well in terms of image quality and tech capabilities required to watch live content (which Netflix doesn’t currently have).

“More interestingly what makes Netflix sophisticated is they automatically or manually change the title graphics, so you could be scrolling past a show and then, since you just scrolled past it, they will change the cover photo of that series for the next time when you look at it. Then you might say, "Oh, this is something new," and then you tap it. There are details like that that makes Netflix highly sophisticated compared to everyone else where it's all static” ex VP Digital, NENT

“In Viaplay's case the back end is good, so if you have a good connection, you will get a high image quality. Compared to Netflix it's as good or better with regards to seeing the quality of picture and the experience of viewing a program. When it comes to the user interaction design and buttons and all that, it's not as good as Netflix. The recommendation algorithm is not a sophisticated one. Netflix's recommendations is quite good” ex VP Digital, NENT

Path to purchase: A customer’s path to purchase tends to be split in two – Direct to Consumer and B2B2C. Most customers tend to sign up by going on an SVOD website but some gain access through their telecom or WiFi provider. Third party distributors can sign revenue sharing agreements with SVOD platforms which sometimes come as pre-installed on box sets (indicative rev share in the range of ~70% for SVOD platform and 30% for distributor). Recently NENT signed distribution agreements in the Baltics with major telecom providers (Elisa in Estonia, Tet in Latvia) and the Netherlands (KPN, T-Mobile, VodafoneZiggo) which allows SVOD platforms to gain subs faster.

Competitive landscape

Competition in SVOD is broad, due to the long tail of smaller providers (~460 catalogues operated by 200 SVOD services in Europe). However, the top 8 players account for ~90% of the subs in the market, with Netflix in the lead with ~40% share, followed by Amazon at ~30% (Fig 1).

Source: European Audiovisual Observatory, Ampere Analysis

The types of substitutes in the eyes of the customer broadly split into the following:

• Pure SVOD (e.g. Netflix, Amazon) including legacy broadcasters (Viaplay, TIMVision in Italy, IPLA in Poland)

• Ad sponsored VOD (e.g. Channel 4 in the UK, Viafree in Nordics)

• YouTube for selected content (e.g. Free documentaries, user generated content)

• Legacy linear FreeTV and PayTV

• Piracy – getting more cumbersome across Europe

Focusing on SVOD offerings, these can be split depending on their genre and geographic breadth and whether they have sport content (Fig 5). Some players tend to have a more limited selection of genres (e.g. Disney’s focus on Family or Discovery’s on Documentaries) whilst others such as Netflix are the “Walmart” of SVOD. Viaplay has a broad content library but is mostly known for its local and Nordic Noir focus. 

There is a popular view amongst investors that small, local SVOD services will find it hard to compete with the likes of Netflix, but the reality is that customers are willing to buy multiple subs and combine them to create the broadest content library that suits. Viaplay in the Nordics is seen as one of the key ‘add-ons’ to Netflix, given more local content and sport options, which is reflected in its market share at #2 behind Netflix in the Nordics and Iceland (Fig 6).

The key challenge for SVOD players is continuing to secure and produce high quality content that works well together (e.g. Family + Sport) and will keep the user engaged, as the option to cancel anytime is a double-edged sword.

Fig 5

Source: Our analysis, Company websites, GLG market expert interviews

Fig 6

Source: European Audiovisual Observatory, Ampere Analysis

Value chain: When analysing the competitive landscape, it is useful to keep in mind a basic overview of the industry value chain. SVOD players compete at all stages, from building relationships with high quality content creators (producers, storytellers) and choosing which projects to fund in order to support their original content pipeline, to winning licenses for exclusive content that is likely to draw new subscribers and grow the base of recurring revenue, allowing for further investment in content, which becomes a self-enforcing flywheel.

Following multiple original hits, Netflix is said to be far ahead of its other major US competitors in terms of building out relationships with European content creators. NENT appears to be well-positioned in terms of Nordic content specifically, becoming famous for the Nordic Noir genre and aiming to produce >40-50 originals p.a. vs 1-2 for NFLX in the Nordic market. The Netflix playbook of slowly increasing the share of original content within its own library eventually results in original content becoming its own draw factor for customers and has become standard practice within the SVOD industry.

Operations & Culture

NENT is well positioned in terms of offering differentiated, local content in combination with plenty of sport options, on a stable tech platform and with competitive pricing. The company grew subs at 33% in 2020 whilst maintaining low churn, entering new countries, releasing new originals and licensing sport content showing a strong execution track record over the last three years after separating from MTG in 2018. The company has also re-organised its operations to focus on functionality expertise rather than region.

“They've [Viaplay] always been a really strong service. They really have, very early on they had put together the four countries and started a streaming service across all the Nordics, which no one else is doing. So, years ago they've been quite strong, but their focus always has been Nordic content” ex VP Original Content, Netflix

“I would say Viaplay has been a really significant player for a long time in the Nordics. I always thought they'd go across Europe, I'd always hoped they'd become a European streaming player, because I think they could compete honestly more effectively than a Sky Now service” ex VP Original Content, Netflix

“I would bet on Viaplay, I think they'll be really fun to watch. I think they might be more effective than some of the bigger behemoths who won't be able to turn as quickly and as flexibly. Viaplay's a little smaller, smarter, just simply a faster decision maker, able to pivot more quickly. So, it'll be interesting to watch. I hope they expand a little more quickly, because this is the moment to do it. In five years, I think the landscape will be pretty crowded by big streaming players, so I'd love to see them get in there now” ex VP Original Content, Netflix

Some evidence suggesting it was a stressful time to be an employee at NENT during the changes in 2018-19, amplified by a high-performance culture, with extreme focus on quarterly results. Two ex-employees highlighted a culture of performance, specifically around the time of the re-organisation in 2019 and stock market listing. Organisational change at this scale is often painful, especially for a growth company. The danger is it could potentially result in employee burnout and lack of productivity caused by uncertainty and frequent changes.

“…it was a very, very intense transition from this old operation model to the new one. I worked both in Stockholm and in Oslo so I know a lot of people... They were all on the brink of breaking in November '19. Up until that point, people, it was not a great culture I would say. It was an extreme performance culture” ex VP Digital, NENT

Another feature to note on culture is that NENT is predominantly led by an internally promoted team, with a lack of external hires from the likes of Netflix or Amazon Video. As the company scales, it could be beneficial to acquire more experienced talent from the industry. Current key decision makers at NENT include:

• Pernille Erenbjerg – Chair since May 2021, on BoD since May 2020

• Anders Jensen – CEO of NENT since 2015, spent 6 years at Telenor until 2011 ex CEO of Telenor Hungary and CMO Sweden 

• Asa Jansson – Acting CFO since Nov 2021, previously VP Group Business Control & Commercial Finance at NENT, joined MTG in 2002

• Kaj af Kleen – CTO of Viaplay since 2012, joined MTG as a trainee in 2007

• Filippa Wallestam – Chief Content Officer since 2019, joined MTG in 2014, ex BCG in London & New York

• Kim Poder – Chief Commercial Officer since 2019, joined company in 1999

Financials & Valuation

NENT generated about ~€1.2bn in revenue at ~7% EBITDA margin in 2021 and has been cash flow positive over the last 5 years (~12% EBITDA margin in 2019, now lower due to increased investment in international expansion). Over 70% of NENT’s revenue is subscription related. There are four segments, Viaplay (35% of revs), Other subscriptions (33%), Advertising (30%) and Studios (2%). The Other Subscription business provides linear channel content to pay TV distributors. In 2020 NENT created a JV, Allente, for its Viasat D2C service with Telenor’s Canal Digital. The JV will operate as a 3P distributor for NENT’s linear TV channels and will be used as an upselling platform for Viaplay.

In 2021 reported revenue increased by 5% (16.7% organic) driven primarily by Viaplay and a recovery in Advertising following a COVID-related slump. NENT ended 2021 with a strong net cash position of SEK 2,059m (vs. net debt of SEK 3,026m including discontinued operations end of 2020). Cash & cash equivalents were SEK 5,702m end of 2021 following the raise (vs SEK 2,036 in 2020).

Viaplay: The primary focus of investors has increasingly become the Viaplay subscriber numbers, which grew 33% pa in 2020 and 2021 going from 2.2 million in 2019 to 3 million in 2020 and 4 million in 2021, boosted by the pandemic and low churn (e.g. 0.4% pm or <5% on an annualised basis in 2020). Market research suggests a more reasonable historical approximation is ~12-14% annual churn, with large variances likely between different players. Assuming a slightly higher annual churn rate of 0.7% and applying that to NENT’s 2021 revenue profile highlights the importance new customers had on revenue growth of 21% on Fig 7.

Fig 7

Costs: As is standard with SVOD providers, the main cost line item is programming costs (~61% of rev in 2019). However, NENT has started to invest more in licensed content, so we’ve assumed >70% going forward. Other significant costs include selling and admin (~8% and ~13% of rev respectively).

Valuation: NENT currently trades on consensus EBITDA multiples of 20x and 11x for FY23 and FY24 respectively (vs NFLX at 19.6x and 16x). The 2023 EBITDA multiple appears relatively high due to NENT’s considerable investment in international expansion, compressing the EBITDA margin in 2023 to lower vs. average. Given a large part of the growth strategy should be complete by 2024, we think the 2024 multiples are more relevant. On revenue, NENT trades at 1.4x-1.2x vs 4.8x and 4.3x for NFLX FY23/24. Current market cap is ~SEK 29bn (~$3bn, FX: SEK 9.44 per $1) and EV is ~SEK 27bn (~$2.9bn). Management have proposed no dividend to be paid for 2021, instead using the funds for international expansion.

Our DCF case suggests ~85% upside to current share price (Fig 8), driven by Viaplay expanding internationally and reaching ~12-13m total subscribers by 2025 and ~20m by 2030, resulting in a business that generates ~18-23% EBITDA margins between 2025-30. By 2025 Viaplay accounts for ~65% of total NENT revenue and ~75% by 2030 (Fig 9). 

Triangulating with SOTP and EV/sub basis yields ~60%+ upside to current share price just through Viaplay alone. Assuming that Other Subscriptions and Advertising segments are valued at 1x revenue each (conservative vs. some European broadcasters) suggests that currently the market values each Viaplay sub at ~$484 EV/sub. Assuming a ~33% discount to NFLX’s $816 per customer results in ~$550 per customer for Viaplay, which applied to 2025 subs forecast results in EV of ~SEK 66bn and a share price of SEK 878, discounted back to today suggests ~SEK 615 per share just for Viaplay alone. The resulting 2025 EV/EBITDA and EV/Rev multiples of 13.6x and 2.5x appear reasonable. All three metrics of EV/sub, EV/EBITDA and EV/rev are lower than Netflix, with ~24x EV/EBITDA and ~5x EV/rev for 2022 consensus.

Fig 8

DCF Sensitivity table

Fig 9

Risks

• Execution around international markets: extent to which Nordic content is seen as attractive in Poland for the long run is unclear, but counterbalanced by securing strong sporting rights (Bundesliga and UEFA)

• Renewing sporting rights (e.g. Bundesliga rights in Poland are secured from 2021-24): Losing sporting rights in the future could result in higher churn in selected, however, by that point the subs base should have grown significantly which would increase brand awareness. Substitute sport rights can also be secured in combination with continual original local programming and new content

• Culture burnout: Aggressive growth plans can be stressful to execute, which could put a strain on teams. Support from external SVOD talent and expertise would be helpful as currently mostly internal people lead the org 

• Sports content rights posing a drag to future profitability by 2025, due to significantly increased competitive intensity

Catalyst

• Viaplay number of subs (especially international for 2022)

• Post-COVID environment and KPIs around churn and minutes spent streaming in 2022

• Read across from NFLX and other streamers

• Further advertising revenue recovery in 2022

• M&A – potential future interest from third parties such as larger European broadcasters - CEO specifically said NENT has generated interest but they’re focused on executing their own strategy

Notes: *https://www.bcg.com/publications/2021/priority-considerations-for-video-streaming-companies