SGHC Limited

NYSE:SGHC

Earnings Call Analysis

Record Q2 Performance and Strategic U.S. Market Exit

Super Group had its strongest quarter ever in Q2 2024, with total revenue ex-U.S. reaching a record EUR 408 million, up 9% year-on-year. Adjusted EBITDA ex-U.S. also hit a high at EUR 98 million, reflecting a 24% margin. The company plans to exit the U.S. sports betting market, projecting no more than EUR 45 million in shutdown costs. Despite this, Super Group will retain its iGaming operations in New Jersey and Pennsylvania. The company raised its 2024 adjusted EBITDA guidance to more than EUR 300 million, driven by enhancements in operational efficiencies and localized market offerings.

Strong Quarterly Performance and Record Growth

Super Group reported its second quarter results for 2024, revealing exceptional total revenue of EUR 408 million outside the U.S., marking a 9% year-on-year growth. This is significant for investors as it reflects the company's continued strength in international markets, primarily within the iGaming sector, which constitutes 80% of its revenues. Additionally, the adjusted EBITDA reached a record EUR 98 million, growing 11% year-on-year with a robust margin of 24%. This success indicates a strong operational performance and highlights the company's effective cost management strategies.

Strategic Focus on Operational Efficiency

Super Group has prioritized operational efficiencies, including the integration of the Apricot sportsbook. The Q2 redundancy costs were EUR 3.3 million, which impacted the overall margin slightly. If adjusted for these expenses, the margin could have reached 26%. The leadership stated they are well on their way to maintaining consistent EBITDA margins above 20%, showcasing a strong commitment to improving profitability and operational effectiveness in their global operations.

Exit from the U.S. Sports Betting Market

In a strategic shift, Super Group announced they are exiting the U.S. sports betting market after extensive reviews. Although maintaining a presence in iGaming for New Jersey and Pennsylvania, the company expects to incur shutdown costs that will not exceed EUR 45 million. This decision aligns with their overall business strategy of investing only in markets with clear paths to profitability. The market has reported a loss of EUR 39 million in adjusted EBITDA for their U.S. operations so far this year, and they anticipate an additional EUR 20 million loss solely from gaming operations, reflecting a significant pivot in strategy.

Marketing for Sustainable Growth

Super Group has committed a substantial 23% of its net revenue to marketing, which is higher than the industry average. They believe this investment is critical for long-term growth and will yield beyond forecasted returns. Recently, they have secured notable brand partnerships, such as with Manchester City as their global betting partner. Their focus remains on ensuring that their marketing spend effectively drives customer acquisition and retention, which is essential for maintaining their competitive edge.

A Strong Cash Position and Dividends

Ending the quarter with EUR 307 million in unrestricted cash and no debt, Super Group maintains a solid financial position, allowing strategic flexibility. They have initiated their first cash dividend of $0.10 per share, a move aimed at returning value to shareholders. The company expressed intentions to sustain this dividend while considering further increases if business conditions permit, thus exemplifying a shareholder-friendly approach amidst an active growth strategy.

Revised Guidance and Future Outlook

Super Group has raised its adjusted EBITDA guidance for 2023 and 2024 to over EUR 300 million, which suggests a sustained focus on non-U.S. markets and represents a margin of over 9%. Confident in their operational strategies and performance metrics, the company anticipates making 2024 a strong year. This optimism showcases their effective management and strategic pivots, positioning them favorably for future growth.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and welcome to the Super Group Second Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Brett Milotte, ICR. Please go ahead.

[Unknown Executive]

Good morning, everyone, and thank you for joining us today to discuss Super Group's results for the second quarter of 2024. During this call, Super Group may make comments of a forward-looking nature that are subject to risks, uncertainties and other factors discussed further in its SEC filings that could cause its actual results to differ materially from historical results or from the company's forecast. Super Group assumes no responsibility to update forward-looking statements have been required by law.

On today's call, Super Group may refer to certain non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for measures of financial performance prepared in accordance with GAAP. Super Group has provided a reconciliation of the non-GAAP financial measures to the most comparable GAAP measures in the press release issued earlier today and available on the Investor Relations page of Super Group's website. In addition, Super Group will speak to its financial results and metrics in 2 parts: highlighting Super Group's profitable and cash-generative global business separately from its investments in the U.S.

This aligns with the annual guidance that Super Group has provided for 2024 and is consistent with both how Super Group us its business internally and how Super Group report going forward. So we recommend that investors refer to it sequential presentation posted to the website.

On this call, I am joined by Neal Menashe, Chief Executive Officer. And during the Q&A session, we'll be joined by Alinda Van Wyk, Chief Financial Officer; and Richard Hasson, President and Chief Commercial Officer.

I will now turn the call over to Neal.

[Neal Menashe, executive]

Thank you. Good morning, everyone, and welcome to Super Group's Second Quarter 2024 Earnings Call. Q2 was exceptional, our strongest quarter ever and one in which we set some new records. Total revenue ex the U.S. hit a quarterly record of EUR 408 million, reflecting 9% year-on-year growth. Adjusted EBITDA ex the U.S. also set a record of EUR 98 million, representing growth of 11% year-on-year and a very strong margin of 24%.

This year, we have been prioritizing operational efficiencies, including the successful integration of the Apricot sportsbook. During quarter 2, we incurred redundancy costs of EUR 3.3 million. Adjusting for these costs and the associated salaries, our margin would have been 26%. Our strategy of being nimble and decisive is paying off and we are well on our way to consistent EBITDA margins of over 20%. We continually assess and optimize our footprint, ensuring that capital is deployed into markets that generate the highest returns, and this is leading to further investments into core markets across the globe.

We obsessively tailor our offerings to each local market, which includes a continued rollout of our leading casino brand, Jackpot City into new and existing markets. In markets where we don't see a path forward, we pivot. We were happy with the status quo in the U.S. And after an extensive review we announced last month that we plan to exit the U.S. sports betting market. We are, however, totally divesting from the U.S. We are maintaining our high gaming presence in New Journey and Pennsylvania, where we plan to operate 2 brands, including Jackpot City from our spin portfolio. Our focus on high gaming aligns with our non-U.S. business in which about 80% of our revenue is from high gaming.

Like any other parts of the world, we are open to expanding our U.S. footprint for the right opportunities. In terms of costs, we estimate that the cash costs of shutting down our U.S. sportsbook business will not exceed EUR 45 million, the bulk of which comprises existing contract obligations and redundancy costs. This figure is easily manageable within our existing financial resources. We are just beginning the exit process, and we'll provide an updated figure of the shutdown costs in Q3. Two days in 2024, the U.S. business has incurred an adjusted EBITDA loss of EUR 39 million across both sports and iGaming.

And looking ahead to the rest of the year, we expect to incur an adjusted EBITDA loss of EUR 20 million by our gaming only operations. We have recently announced 2 new and exciting brand marketing deals I'd like to highlight. Betway becoming the official pace sponsor for South Africa's Premier Soccer League, which is now known as the Betway [ premnership ] [indiscernible] teaming up with the current Champions Manchester City to become their official global betting partner. Adding this [indiscernible] team to our brand portfolio further solidifies Betway's global recognition across the world's most popular sport. Branding is only one part of our multichannel marketing strategy a key driver of growth across the business.

This quarter, we spent 23% of our net revenue on marketing, a figure which is higher than industry average and reflects our long-term approach to the business. However, we are also focused on this number to ensure that we are extracting the appropriate returns from every year respect.

Moving on to the balance sheet. Our financial position remains strong. We ended the quarter with unrestricted cash of EUR 307 million and no debt. In June, we announced our first cash dividend of $0.10 per share paid in July. We intend to maintain this dividend and will consider paying a larger dividend if business conditions allow. Finally, given our strong performance for the first part of the year, we are raising our 2023, 2024 ex U.S. adjusted EBITDA guidance to greater than EUR 300 million. representing a margin of over 9%. We feel confident about the remainder of the year and look forward to making 2024 a super year for Super Group.

I'll now turn the call over to the operator to open the call up for questions. Operator?

[Operator]

[Operator Instructions] The first question comes from Jed Kelly from Oppenheimer.

[Jed Kelly, analyst]

Couple of things. Can you just talk about where you are globally with sports betting and just interpreting some of the results. I know you exited India. How is that trending ex India and then just with your sport results? And then there is some chatter about Alberta potentially legalizing sports betting. Can you just talk about how we should be thinking about if that market goes legal and just given your experience in Ontario.

[Neal Menashe, executive]

It's Neal, yes. Yes. So listen, sports betting is going well across the globe. Obviously, our casino part within our business is still consistent at 80% of our business is iGaming. But we think sports results have been fair to us. So it's really good there. In Canada, obviously, there is regulation coming in Alberta. We are super ready for it. We -- everything we did in Ontario, we've learned, we've learned how to do it even better. So the teams are ready and waiting when Alberta regulates. And across the board in all these markets, we are optimizing everywhere. So Canada, Alberta would be no different same as Ontario, same business in Africa. So listen, from this quarter, we super happy of our results and how our cost efficiencies are dropping down to the bottom line.

[Jed Kelly, analyst]

Okay. And then just as a follow-up, you're obviously record EBITDA ex U.S. you're generating a decent amount of cash flow implementing the dividend. Can you just think broadly how we should be thinking about just your capital allocation policies? Do you want to do more acquisitions like Jumpman target international markets. Just can you give us just an overall update on your capital allocation strategy?

[Richard Hasson, executive]

Richard here. So like we said previously, we are constantly looking for potential opportunities for acquisitions, and we keep doing that across potentially new markets and also within existing markets. On the broader capital allocation, as you would have seen, the dividend that was announced and paid, we mentioned there that it would be our intention to maintain at least a dividend going forward. And that's all part of it. As we generate cash, we'll look for the best uses of that cash. If there is nothing more advantageous, we'll continue to look at ways of returning that to shareholders. .

[Jed Kelly, analyst]

Okay. And then just my final question. Just as we think about the back half, anything we should be thinking about in terms of comps in terms of some markets opening, some markets closing, and I think in October last year, maybe it was September you had favorable outcomes in European football. So just anything you can talk about there and how we should be thinking about the whole comps.

[Neal Menashe, executive]

Okay. So I think for the second half, obviously, we had, as I mentioned, quite a bit of redundancy costs in quarter 2 and some in quarter 1. So obviously, those are one-offs. So we should get good optimization in the second half again, the second half just depends on sometimes in some of the months that you had last year, you can have a bad sports margin. But we're hoping with a bigger customer base, we should be able to even that out.

But I think from our point of view, is even into July, July continued the momentum of April, May and June. And best and the very important part that I said is we have got a large marketing budget of EUR 400 million, we are optimizing that. We are looking at that. We are turning over every campaign there to make sure that we can make that as effective as possible. And with that, with all the rest optimization we hope to even bring more to the bottom line, hence why we increased our EBITDA focus.

[Alinda Van Wyk, executive]

Alinda here. Just to add to that on the question on new markets, we continuously assessing the market and investing always back into markets, which has higher margins on the long run. There is a few movements extra markets in Africa. But we've also looked at 1 or 2 small markets and have no profitability for us that was eliminated. But this is a continuous assessment of marketing spend like [indiscernible] and where we will have the highest return on our investments.

[Operator]

The next question comes from Michael Graham from Canaccord Genuity.

[Michael Graham, analyst]

A couple of questions, if I could. The first is on -- just talk about the decision that you made to keep your iGaming presence in the U.S. and maybe just frame it out, if you could, in terms of the unit economics, how your cost of acquisition is different for iGaming compared to some of the other markets you operate in? And related to that, do you think we could see your iGaming footprint expand to more states over time if what you have currently goes well.

[Richard Hasson, executive]

Michael, Richard here. As Neal mentioned, we completed a very extensive review of the full footprint and ended with the view of remaining with iGaming in New Jersey and Pennsylvania. Like we said before, and we apply to all markets, we need to obviously see appropriate returns being generated in those markets. And so far, July running according to what we were expecting in the budget in the forecast. But of course, we'll track that on a continuous basis going forward. So no different, but it's just a focus on iGaming. And that's also very much aligned with the rest of the business where about 80% of the revenue is generated in iGaming.

In terms of the footprint across the rest of the country, for sure, if we see appropriate opportunities to expand the footprint within iGaming within the U.S., then we will look at those as and when other states are regulated.

[Michael Graham, analyst]

Okay. That sounds good. And then can I just ask for a comment on the competitive environment over the recent quarters, we've seen some of your mature markets, some regulatory changes like U.K., Canada and the Netherlands, just wondering if you can comment on generally how the competitive environment is evolving in some of those markets.

[Neal Menashe, executive]

So I think the competitive environment is always there, and we have to keep -- and that's where it becomes in your marketing and your product, right? And we keep on honing in on it. I think probably in the past, we had too many countries that we were honed in and so we closed a few of them, and that allows us then to focus on the other ones. And that was the same process we took in the U.S. Sportsbook. If we do not see a path to profitability, we'll rather than go in other markets where we are seeing returns.

Again, in these markets, the regulations make a big part. And in the U.K., they seem to be easing up a little bit, where obviously, the Netherlands was far worse. So the Netherlands, we decided not to go for, right? It's just not going to build your product. I mean the one that's probably been the worst and our results would even be better if it hadn't been, it would be Germany. There, they've got this regime. We've done all the work, but it's literally so onerous that the black market is just the customer just goes to the black market. So we can't compete as we could in the past.

But I think over time, the regulator will get on to that, understand that they're using the customers to the black market and be more reasonable with the people who are regulated. And that's always going to be a battle. And that's going to be the -- and that's been the story of our industry for the last 25 years.

[Operator]

The next question comes from Mike Hickey from the Benchmark Company.

[Michael Hickey, analyst]

Great quarter, guys. First, just on the U.S. exit, Neal, it looks like just running 2 states on iGaming. You're saying you're expecting a EUR 20 million loss for the second half of '24. You compare that to last year with the Sportsbook, it looked like you lost EUR 28 million. So you an incremental maybe EUR 8 million here. Just, I guess, one, I thought the savings would be a bit more and two, with just the incremental EUR 8 million. Is it worth losing the optionality, I guess, on Sportsbook side.

[Neal Menashe, executive]

Okay. It's Neal here. So a couple of things. The [indiscernible] is only for this next 6 months, right? But that's for iGaming and including the marketing spend in there. But of course, as I said, is we have to be getting the targets in each month. So if we do not get our net win target, then we have to reassess that those 2 markets. As far as we're concerned, those 2 markets, New Jersey and Pennsylvania are larger than Ontario and we're going to go there and try and compete because we think the product can complete. We did say last year that overall it would be around EUR 80 million or EUR 90 million for the year.

So the investment is coming down. We just have the redundancy costs now for the sports book. And in the U.S., we've literally halved our workforce. So I think we've got the right number of people to give it a good shot in the next 6 months. But again, like every other country in which is each one, New Jersey and Pennsylvania by themselves as a country and is the path to profitability or not.

[Michael Hickey, analyst]

Just to clarify then, so should we think an annualized investment in the U.S. of EUR 40 million-ish here...

[Neal Menashe, executive]

For 2025, yes. Yes, Yes, for 2025, yes.

[Michael Hickey, analyst]

Still feels like a big number. I guess, can sort of dig in on the past.

[Neal Menashe, executive]

Well, you won't actually get to that number if you're not hitting your monthly targets. So we set monthly targets, monthly network, monthly EBITDA losses. And if it's not, then we would scale back. So 40 would do the maximum.

[Michael Hickey, analyst]

So after 2025, when the forecast is just less than EUR 40 million investment in 2016, it would be significantly less than that. So that would be the mass spend over the next 3 years and you said that in the U.S., you're going to continue to operate 2 brands on the gaming side. Can you talk us through the rationale. It seems like running 2 brands would be more expensive than just sort of focusing on one brand in just 2 states?

[Neal Menashe, executive]

Don't know we've listened and we've been the casino business, our game seems business for 25 years, you need more than one brand. So -- and also running the second one isn't really expensive because of the same team who we run them, it's just the look and feel are slightly different. And in our [indiscernible], we have Jackpot Cities, [indiscernible] and a few others and remember 3 or 4 of the brands make up the bulk of it. So it's the same strategy. So from our point of view, that's how we've always done it. And you always need 2 in the rate of effectively for to optimize your CPAs, et cetera.

But I think it's quite clear, if you look at this in the U.S. -- sorry, I'll just do one other point. You said that EUR 40 million would be the most we would invest next year. Just to put it in perspective, the month of June, we almost made that profit in our existing business. So we are optimizing, we are clever. We are looking at the ways to bring this business ability and if it cannot come to profitability, then we will have to pivot away, but we obviously are optimistic that we can work.

[Michael Hickey, analyst]

I guess last question on that topic, Pennsylvania and New Jersey, these are not new states here, right, Neal. I mean, they're fairly mature relative U.S. expansion, which obviously is pretty new. I mean given the maturity of these states? How do you expect to sort of take share in this environment?

[Unknown Executive]

So, Mike, I think a lot of the -- a lot of the revenue that we were seeing from those states while live was sports and gaming was come from gaming. So that's obviously informed our decision and was part of our full review. The other thing is a lot about internal forecast have assumed improvements in a number of KPIs from where we were at the beginning of this year. And we also are we're seeing those come through at the moment. So we're tracking in line with those forecasts, which are seeing improvements in KPIs and that's obviously from where we stand today from the previous operations and gaming now just focusing on the gaming part of that.

[Neal Menashe, executive]

And Neal here. As you know, we compete in all the markets. U.K., we're seeing growth in all these markets are not -- there's not really any market that's new for us, right? And if it's Canada or Ontario everywhere, we are completing everywhere. And member, we just have to take extra revenue from other operators, which we see. And then in most of the countries we operate, that extra revenue is bringing our operating leverage. And that's why you see such good results for April, May and June.

[Michael Hickey, analyst]

What is your market share in New Jersey, Pennsylvania and iGaming?

[Neal Menashe, executive]

No. I mean, time because we just started. So let me have a look at the market share. All our care is all we're not 80% of the market. So we just go for have to get to a few million of revenue in each market to start making sure that, that market is working. But if you're not going to get to a few million revenue 5, 6, 8, 10 eventually, your targets then be ever going to get to profitability. But in other markets, if you take Spain, et cetera, you can be in a few million months, and we are making good margins.

[Michael Hickey, analyst]

A follow-up on the cap allocation topic. Sorry if you said this, Richard, I think you have a buyback authorized. You're obviously driving cash flow. Your business is expanding your confidence on growth. Does it make sense here to be buying back stock given where you're trading today?

[Richard Hasson, executive]

So that is something that we considered as part of the return of capital to shareholders. We leaned away from it given the relatively low float that we have in the business and ended up proceeding with the dividend route.

[Michael Hickey, analyst]

Okay. That makes sense. The last question or topic, the -- you expanded the margin guide here to 19%. It sounds like, Neal, you've got some room here to move that higher. Can you give us a maybe more medium-term perspective on your growth opportunity and maybe your progression in margin over the next few years?

[Alinda Van Wyk, executive]

It's Alinda. What we've realized in the last couple of months was everything that you referred to about the operating leverage coming into full plan now is that we're really seeing that margin consistently being the EBITDA margin been consistently over 20% month-on-month and more than 20%, so larger then. So what we've realized is that even at [indiscernible], our target has been almost 20%, and we're reaching that much quicker. We just -- looking around the -- as you note, we also haven't -- we feel comfortable with the guidance for revenue. So we're just tracking that in the remainder of H2 as well.

[Unknown Executive]

And out of [indiscernible] and other point is, we've still got 25%, 26% marketing ratio of a marked into net win for the year. So -- and that's in there and ideas to make sure that that's efficient and stuff. Of course, if we had to drop that down, then the margin would go up, which is I know lots of our competitors do, they come in at 18%, 19% marketing budgets. So we are looking at that and just -- but we feel comfortable that the investments we're making in marketing is returning long term, and that's how you're seeing it the same investment from last year's marketing, you're now paying off this year. So we're just trying to balance those 2.

But Alinda said we're going to get and that's what we're pushing for. And I think that these cost efficiencies and more efficiencies come through in our business, that should be a target we can easily exceed.

[Operator]

The next question comes from Bernie McTernan from Needham.

[Stefanos Crist, analyst]

This is Stefanos Crist calling in for Bernie. So recently, we've seen some other players sell their OSB licenses in certain states. Are there any opportunities for that across the U.S. business?

[Richard Hasson, executive]

Richard here. So we are looking at the possibility of that, again, very much on a state-by-state basis depending on a number of access points, depending on who's active there, but it is something that we are considering. Part of the numbers that Neal mentioned was the sportsbook shutdown costs and that those are still in early days. And a, there's contract negotiations going on there; but b, the possibility of recouping some of that investments and we'll update on that when we report on the Q3 numbers.

[Stefanos Crist, analyst]

Got it. And then just wanted to ask on Latin America. Can you remind us what markets you participate in and maybe your expectations there?

[Richard Hasson, executive]

SP1 So we don't normally give country-by-country breakdown. I'll give -- Mexico is one example -- of course, Brazil is something which we're looking at, and we're going through the application process. But like any other parts of the world, if there's markets there that we think make commercial sense, we look to [indiscernible] for licenses and launch it. As part of the geographic -- the footprint optimization that we're going through at the moment, we're considering this a lot more carefully and making sure that wherever we do go live, there is a -- and sustainable path to profitability.

[Neal Menashe, executive]

No. So like a market like [indiscernible], this just wasn't a path to profitability and the rigs which just made and the onerous way that the software has to work only in the one city as opposed to the province, we decided that's not a market for us. So that's another side. So because all we're opening the regulators come in that are favorable to regulated players and so we're in that process. But if they can turn up that they're not or they want it.

[Operator]

This concludes our question -- this concludes our question-and-answer session, and the conference is now concluded. Thank you for attending today's presentation. You may now disconnect.