Acroud AB

STO:ACROUD

Earnings Call Transcript 2019-Q1

[Operator]

Ladies and gentlemen, welcome to the Net Gaming Europe Q1 report 2019. Today, I'm pleased to present CEO, Marcus Teilman. [Operator Instructions] Marcus, please begin.

[Marcus Teilman, President, CEO & Director]

Thank you very much, and good morning, everyone, to this presentation of the first quarter 2019. My name is Marcus Teilman, I'm the CEO of the company and with me today, as always, I have our CFO, Gustav Vadenbring.Let's look at the agenda for this presentation. I would start off with some highlights for the first quarter 2019. Then I will go through Net Gaming in brief. After that, I'll hand over to Gustav for the financials of the first quarter. Then I'll round off with the summary and outlook and then I'll hand over for a Q&A session.So let's move on to the highlights on Slide 4. The first quarter of 2019 has been a challenging quarter with negative impact from regulatory changes in Europe, primarily in the Netherlands and in Sweden, but we've also been impacted by other markets such as U.K. and Italy. We are operating in a business where regulatory changes will have an impact, short term-wise, but I would like to reiterate that on a long term, we are really positive at regulations going on, so we look at this only from a positive side.In addition to this, we have also phased out our traffic from paid media channel, which has also impacted top line. Our revenues would be flat excluding the phaseout of paid media. We have also achieved a more diverse revenue model in line with our strategy where rev share agreement has increased from 23% to 40% of our revenues. This has a direct impact on the top line, but over time, we expect that the revenue from rev share agreements will start to build up. On a positive note, we have seen continued growth in North America by 42%, now amounting to 26% of the group's total revenues. EBITDA amounted to EUR 2.5 million, which was a decline of 18%; however, in Q1 2018, we divested Battle of Malta, which contributed EUR 300,000 to the EBITDA last year. EBITDA margin declined by 2 percentage points when we exclude the divestment of Battle of Malta from last year's comparison figures. Our cash conversion is slightly stronger than normal in Q1 '19 impacted by a positive net working capital, which Gustav will go through later on in this presentation. Let's move on to Net Gaming in brief and to Slide 6. Net Gaming is operating in the affiliate industry. So we are an iGaming affiliate. But what is an affiliate? Well, it's just like the travel industry where we see booking.com, Expedia, Inc., hotels.com and TripAdvisor, for example, where we direct our customers or our users to the -- to our customers, which is actually the operators in the iGaming industry. Competitors to -- of ours are other large companies in the iGaming affiliate industry such as Catena Media and Better Collective. And our mission is to always help our users to make right decisions in a complex iGaming world. That means that we need to guide our users to make the right decisions when they are searching for a specific bonus, a specific casino game or a specific operator. And that's what we do.If we move on to Slide 7, we see Net Gaming's growth pillars. We have 3 growth pillars, which is our long-term growth plan. First one is European online casino affiliation. We see significant growth potential where we have approximately only 1% of the market share and we believe that we can continue to grow in selected countries. One of our focused markets is U.K., but we also invest a lot now in Germany and there are some other interesting European countries that we are -- that we will also continue to invest. Also second growth pillar is U.S. iGaming affiliation and I would say that we are well positioned for coming iGaming regulation with our core assets such as PokerListings, CasinoGuide and SportsBettingGuide. In addition to this, we have been building and we will continue to build up local websites and domains for state-specific purposes both in casino and also in sports betting. But we believe that U.S. iGaming affiliation is very interesting in the long run and we expect that the more and more states will continue to open up for regulation. And our third growth pillar is Sports Betting affiliation in Europe. Last year, we established and started to build up our Sports Betting assets in Europe. We are seeing some growth in the Sports Betting segment, however, from -- built from small numbers. But in the long run, we believe that Sports Betting is a great contribution and addition to our -- will be a great addition to our total revenues in the long run. So we believe that this is a strategic move that we're taking to also add Sports Betting to our revenue mix.With that, I'd like to hand over to our CFO, Gustav Vadenbring, who will go through the financials for the first quarter.

[Gustav Vadenbring, CFO & Secretary]

Thank you, Marcus. We would move to Page 9, please. Two areas, which I would like to highlight before going into the trading and the financials are one that we have changed reporting currency to align our reporting to operational currency, which is euro. Hence we avoid translation impacts in our operational trading, meaning revenues and operational costs which are denominated in euro. The second one is that we have finalized the streamlining of the affiliate business in Q4, meaning we only have affiliate revenues in our business from Q1 '19 and we report one segment in accordance [indiscernible]. We have consequently divested or wind down our operator business. Therefore, we disclosed the historicals as discontinued operations excluding the operator business onwards. So that's the financial information you see in our interim reports and also in our analyst presentations onwards.So on Page 9, we see that our revenues declined in Q1 by 6% year-on-year, and, like Marcus said, we are flat excluding paid media. This is driven by decline in NDCs, which we'll see on the coming pages and that's related to both the regulation on the European markets, but also the phaseout of paid media. It's also impacted by the shift from CPA revenue share, which is accelerating in Q1 '19, reaching 40%. Second one on this page we like to highlight is that we're still operating with one of the highest EBITDA margins in the industry amounting to 63% in Q1 '19 compared to 65% in Q2 '18 adjusted for the effect of Battle of Malta.Move to Page 10. Our underlying revenue base still comprises 85% of casino revenues and poker being the second largest of 13%, but what we would like to highlight is the shift to North America from Europe. In Q1 -- at the end of Q1, we had almost 26% of our revenues comprising North American revenues and we grew 42%.Move to Page 11. NDC development is somewhat disappointing. At the same time, we decreased by 50% year-on-year and that's mainly driven by the European regulation, but also the phaseout of the paid media. We will move to Page 12. Positive for us is the -- this revenue split and the diversification of the revenues, now reaching 40% revenue share. This impacts our growth in Q1 negatively, but on the -- we see that it impacts us positively in the long run and this is a strategy we've been working after for almost a year.Move to Page 13, please. So our P&L for the group. I would like to highlight a few areas regarding the full P&L on this page. We continue to work closely following our cost base very closely and working with cost efficiency resulting in high margins. The operating costs you can see amounting to 1.5 -- 1,500 -- EUR 1.5 million are impacted in Q1 2018 by the capital gain of the divestment of Battle of Malta. Excluding that, in Q1 '18, our cost base is more or less flat even if we are continuously growing and improving our business. The financial net decreased in Q1 '19 impacted by translation effects related to reporting the bond loan in euro instead of translating that from SEK.Move to Page 14, please. For the strong EBITDA generation and a high cash conversion level the business model -- in the business model, we continued to deleverage in a relatively fast pace. We moved down to 2.1 now and we still have the target to be debt free in the end of 2020.Please move to Page 15 to show our cash flow of the business. As you can see on the cash flow, we continuously produce a lot of cash, reaching a cash position of almost EUR 12 million at the end of Q1 '19. We have a very high cash conversion of around 102% in Q1 compared to our general level, which is around 85% to 90%. This is mainly impacted, like Marcus said earlier in presentation, by positive net working capital changes. These changes are in turn related to that our debt collection has improved in Q1, resulting in a positive net working capital change.Move to Page 16. We continue to operate with a relatively light balance sheet without any large movements in Q1 '19. We can highlight that our net working capital level is decreasing somewhat in Q1, and our equity ratio continues to improve reaching 38% at the end of the Q1.And by that, I leave over to Marcus.

[Marcus Teilman, President, CEO & Director]

Thank you very much, Gustav, and we will continue this presentation by moving into the summary and outlook part. So let's move on to Page 18 and our financial targets. As you've already noted, we are currently operating below our financial targets. We are operating in a business where political changes can impact us in the short term and currently seeing changes with regulatory updates in Europe that are affecting us now. And we will -- and it might continue to affect us for some quarters going forward. However, we have a long-term growth plan that I'm convinced that will make us execute on our financial targets in the long run. And these financial targets should also be seen in the long run and not isolated quarter-on-quarter so to speak. So I'm convinced that in the long run, we will execute on our financial targets.With that, let's move on to Page 19 and the summary of Q1 2019. To summarize the first quarter, it has been disappointing from a top line perspective where our revenues have been negatively impacted by both regulations across Europe, but also an accelerated shift in revenues due to high portion of rev share agreement. In addition to this, the phaseout of paid media also impacted our organic growth negatively. We're seeing growth of 42% in North America, now 26% of our total revenues. Our cash conversion remains strong and our capital structure and equity ratio have started to improve to 38%. Our M&A department has been strengthened and is increasing its focus on strategic acquisition in key markets.Let's move on to Page 20 and the future outlook. As I've already stated, regulatory changes will continue to affect the iGaming and the affiliate landscape in Europe for some quarters. We continue to diversify our revenues to ensure future growth and to reduce the dependency on casino in Europe. Consequently, we continue to invest a lot in our U.S. expansion. However, we now see an increase in competition in that market that could have a short-term impact on our revenues. But further to our long-term growth plan, we also work hard to expand our new betting vertical in the European market.In summary, our long-term growth plan rests on our 3 growth pillars: European online casino affiliation; U.S. iGaming affiliation; and Sports Betting affiliation in Europe. In addition to organic growth in these areas, our M&A department is now gearing up and getting ready to execute on some bolt-on and strategic acquisitions that fit well with our growth pillars.And with that, I'm now ready to hand over to the operator to the Q&A session.

[Operator]

[Operator Instructions] And as there are no questions, I'll hand back to the speakers.

[Marcus Teilman, President, CEO & Director]

Thank you very much. And it's been a disappointing quarter for Net Gaming, but I am committed to deliver growth in the long run. And I'm happy to be presenting the second quarter back in August. Thank you very much, and have a nice day.

[Operator]

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.