Acroud AB

STO:ACROUD

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, welcome to Net Gaming Europe Q1 Report for 2020. [Operator Instructions]I am now pleased to present CEO, Robert Andersson; and CFO, Gustav Vadenbring. Please go ahead.

[Robert Andersson, President & CEO]

Thank you very much, and welcome to our Q1 presentation for 2020. This is my first presentation for this company, so please bear with me, as I'm new to this as well. But let's move on to Slide 2, please. So looking at today's agenda, I'll go through a little bit of my early findings and thoughts and then we'll go through the highlights of the quarter. Then Gustav will go through the financials of the Q1, and then we'll talk a little bit about the summary and an outlook. After that, we will open up for questions and answers.But I thought it might be in place, since I'm new at this company, to introduce myself a little bit. My name is Robert Andersson. So I am the CEO of Net Gaming. I have, prior to this, been the CEO of Enlabs, which is an online operator and also media company focused in the Baltics. I have transitioned into the Board of that company, and my operational role is now here with Net Gaming. Before that, I was the CEO of Catena Media, who is a competitor of Net Gaming, basically. And Gustav, please?

[Gustav Vadenbring, Group CFO & Secretary]

Yes. Thank you. So my name is Gustav Vadenbring. I'm the CFO of Net Gaming. I've been in the company for almost 1.5 years now, and I have a background working with growth companies, also within online and gaming industry. I've been a CFO on the stock exchange. And also, I have a background of almost 30 years at Deloitte for M&A and transaction services.

[Robert Andersson, President & CEO]

Okay. Moving on to Slide 3 really quickly. So what we go through now is some reflections that I managed to compile over the last 3 months since I started. So jumping on to Slide 4. I have to say that, first of all, when I got into the company, it struck me that there is a [ damned up ] will in the company of wanting to perform and wanting to win. And I have to say that it really has a strong group of people behind it. What it didn't have was optimal workflows and kind of a culture to nurture that talent that is in there. So something that I say that we will have to develop and work a lot with going forward. We have started, and we can already see some effects of it. It has a strong portfolio of assets. I'd say the Pokerlistings would be our AAA asset. It's something that can really compete on a total brand level, not just as a domain and a website. It also has a strong technology, having been in the media segment for a while as well. The platform that has been developed will allow for benefits of scale. I've now seen it. I've gone through it. I know what it can do. And I think going forward, we will see the benefits of being able to transition all our assets onto this system. It's going to be an ongoing job. It's not something that's going to be done overnight. So we should be honest with that, but this is a big transition to move everything to this platform. But we are in process of doing it. So we are setting ourselves up for future success, as simple as that.And of course, the market position. Again, I think we need to be honest with the fact that the company has not performed as well as it should have over the last year. It has lost revenue. It's lost profitability, where it's seen shrinking revenue basically due to either lack of focus in certain areas and, of course, regulatory changes. However, Net Gaming is still a comparably large player in the market, and we will be able to see benefits of scale. And as we continue and will start growing, I think we are in a really good position to be -- again, claim that little underdog position where we feel that we are the challenger, where we really want to go for -- against, let's call it, the top dogs. And it's always really good to be able to unite against, let's call it, a common enemy. But we are really going to focus on reclaiming our glory, so to say.And moving to Slide #5. If we go a little bit more into detail, all what I'm saying is that there has been some structural changes that we were able to complete fairly quickly in terms of aligning procedures and processes in different areas where we needed to have better focus. We have cut off certain efforts that were really not just spreading the company way too thin and wasn't going to actually generate revenue. I'm not going to get into details, but we have now really focused efficiency on products where we see that we can build a good portfolio going forward. It has been a little bit of a case of wanting too much in too many places at the same time. I've seen this in other companies before. So what we need to do is narrow our focus, which is really, really going to benefit us. Especially if you look at North America, I know this company has talked a lot about North America over the last year, but to be fair and frank, I don't think enough attention has been put on it when I see it from the inside. So what we're building now is dedicated the team to take on in North America. We are in a good position. It's just that we need to focus more on it, especially if you look at Pokerlistings and the other brands, where you have an underutilization of the traffic that comes from North America, simply because we can't take care of it. We are lacking enough licenses. We have now extremely, over the last 6 weeks, streamlined and accelerated our license application processes, and this is now something where we are putting a lot more steel.And then of course, we have launched sports betting and casino as part of Pokerlistings. Pokerlistings has a lot of traffic. So it's really relevant to be able to cater to that as well, and it is a big brand. So I'm very happy about that. And Pokerlistings is also, of course, something that has a lot of U.S. traffic that we need to be able to cater to.If you look on the last point here, development of sports betting offering, I mean, if you look with us being in COVID-19 times now where all sports are shut down, it's half a small blessing and a bit of luck that Sports Betting is so small part of our overall revenue. However, Sports Betting will continue after this to be a really big part of this industry and probably the largest one. So this is something where we need to and really continue to grow as part of our revenue composition going forward. So -- but all in all, we have several initiatives, quick initiatives, but also long-term strategic initiatives. And my kind of starting point going in here was to try and find the low-hanging fruits, where you can get 80% done with 20% of effort, the quick wins. And we are still at that stage while we are working out the right long-term plan going forward. But all in all, I'm very happy with the first 3 months.Moving on to Slide 6 now. We will look at some highlights and numbers for the quarter. Revenues was almost EUR 3.2 million. If you compare that to Q4, it's just a slight change. My personal feeling now is that we are kind of flattening out where the bottom curve is. We did have an organic growth of a negative 22% compared to the same period last year. EBITDA at over EUR 1.7 million and a very solid 55% margin. The EPS, there, you will see that we have grown the EPS a lot. I think it's very important, and I want to point this out for the investors here listening. This is an FX effect that has no effect on cash. But it has to do with the fact that our bond is in SEK, and we operate in euros. And this quarter, it had a very positive effect for us, which is great, of course. However, we should be very open with the fact that it can have also the opposite negative effect depending on the fluctuations between the euro and the SEK. And especially in this uncertain times, financial uncertain times, we should be aware that this can go up and down. It's hard for us to predict how this will look in Q2, but just so that you understand that this is an FX effect between the SEK and euro, and it will continue to fluctuate. With that said, very strong cash conversion of 81%, so we continue to build our cash position.I'm now going to move on to Slide 8 and discuss a little bit about the COVID-19 impact and also our revenue composition for the quarter. So 72% casino. Poker has seen a revival during this as well where it's coming back strong. I would personally guess without having too much data that this is an effect of the lack of sports during the COVID-19 as well. All in all, we are remaining neutral to slightly positive due to the COVID-19 outbreak. But we are already also -- we are moving into a post-COVID-19 world where people are enjoying, some being able to leave the house, et cetera. So it's normalizing. So business just goes on and winning this is about having the best products that ranks well, that will actually convert traffic. So again, long-term win is to have the best products for our customers and partners. And that's definitely where we are going.So just falling back on talking about the team and what happened here when COVID hit. The announcement started to come, like, people should work from home, especially in Malta, it wasn't like in Sweden, where it was recommendations, but we had to switch operations overnight to work from home. And I'm extremely proud and happy over the team how it's been handled. We are working like there is -- basically, like nothing happened or even better, I'd say, in some parts. So I think what this all teaches us is that we might come out of this with a different model of working where we can increase operational efficiency and also allow for a better work balance situation for a lot of people. So all in all, I think this is also teaching us a lot of things for the future, which will be beneficial. So this COVID-19 impact, it's ongoing, but I would say that I'm very happy with how we have handled it.Now I'm moving on to Slide 9, some significant events. So I was appointed. Yes, I started basically end of February, early March. Then we repurchased bonds at a nominal value of SEK 55 million. That means that the company has now repurchased SEK 122 million of outstanding bond. And of course, we went out with a COVID-19 and trading update, and we launched Sports Betting section on Pokerlistings.com.Moving on to Slide 10, events after the quarter. Well, as you saw on Monday evening, we announced that we had secured refinancing until 2022, which feels great. It means that we can now focus where focus should be, which is growing the company and growing the company profitable. I already talked about the fact that we have started quite a lot of new initiatives in order to improve efficiency and focus on the right things that will give us growth and profitability. With that, also the accelerated focus on North America needs to happen. We have a very good position that's been underutilized. We will need to invest in it, as simple as that. But the position that we have can be claimed if we put enough focus on it and resources on it, but that has not really happened until now.We also had now in May, a couple of weeks ago, there came out a major Google update. I don't know how many investors or shareholders knows about this. But of course, a Google update can change how one side changes in rankings, and it can go up and down. And I think this update proves our strategy to a certain extent with having a fair few brands, not too many, but also not too few, with an underlying different SEO strategy. That means that while some sites go up, some sites might go down. And I have to say that we have handled this Google update neutral to slightly positive, which is great because we've always focused on quality content. And this is a way that Google is moving forward, and this is going to be our strategy forward as well to make sure that our products are top notch quality.And we have seen an uptake in visits and leads in online poker due to this, but temporary we will see. But again, winning is not about maybe having a good month due to the fact that people had to stay indoors, winning will be about having the best products in the long run with the best SEO strategy, and that's where we need to put our focus.And with that said, I'm popping to Slide 11 where Gustav will now be able to move on with his financials.

[Gustav Vadenbring, Group CFO & Secretary]

Thank you, Robert. So we switch to Page 12. So in the revenue graph to the left, we see that our revenues have stabilized quarter-by-quarter around EUR 3.2 million to EUR 3.5 million, forming a good platform to grow from. In the Q1 '19, the regulation effect in Europe impacted the industry. And in the beginning of last year, the strategic shift from the CPA to revshare also accelerated quarter-on-quarter from 40% to almost 59%, as illustrated in the graph to the bottom right. These 2 factors impacted the year-on-year comparison and explains why revenues was higher in Q1 '19 to Q1 '20. So that's good to bear in mind.Our EBITDA level has been stable last quarters as well, around EUR 1.7 million to EUR 1.9 million with a margin around 55% to 60% as a new foundation to grow from.We can switch to Page 13. Like Robert said previously, we see a continued diversification of our revenues by vertical, which is totally in line with our strategy, where the betting and poker verticals are increasing in importance. We're specifically pleased to see that the poker is picking up, reaching 18% of revenues in Q1 '20, which is driven by intensified focus on Pokerlistings.com, but also likely by the COVID situation, where the betting has decreased, and then we see there's an increase in poker instead.Revenues related to the Sports Betting vertical are mainly generated in Europe, while Europe as a region has increased in share of revenues. You can see that in the graph in the middle. And regarding net NDCs, we have decreased somewhat from the last quarter mainly driven by decreasing in the Sports Betting vertical.We can continue to Page 14. So our revenues and EBITDA have stabilized in the last quarters, as we mentioned. The year-on-year comparison, you need to keep in mind, especially when we look at the P&L, is still impacted by the strategic shift to revshare and regulation effects. But what we can see is that our level of revshare now is around 55%, 60%, where it's probably going to be -- continue to be around 50% to 60%.We continue to have strong cost control rendering in continued high EBITDA margin around 55% in Q1 '20 as well. And one thing we would like to highlight -- or I would like to highlight is our financial net in Q1 '20, which is impacted by translation effects related to the revaluation of the bond, that means between SEK to euro.So there's 2 items I would like to highlight within the financial net in Q1 and, consequently, which is impacting the EPS, and these are not cash impacting the translation effects. So the first impact is a positive impact of EUR 567,000 related to the repurchase of bonds in March. The other positive impact in financial net is related to the revaluation of the bond, and that's impacting EUR 1.3 billion.We'll switch to Page 15. So per May 18, the refinancing was secured in -- and came in place, which is a big milestone for the company, like Robert told you. So the senior secured bond was extended to September 2022. New amendments in the terms to the bond is that we have an amortization component. So that means that we'll amortize approximately EUR 600,000 quarterly from start in September 2020. And our interest is -- continue to unchanged to 7.25%.We also continue to have a strong cash conversion, and the business model enables them to generate cash rapidly. So the strong cash conversion during Q1 as well that has enabled us to buy back bonds of almost SEK 55 million in March, improving the capital structure.We'll go to Page 16, please, to the cash flow. We continue to deliver strong and stable operative cash flow, reaching almost EUR 1.6 million in Q1 '20. We continue also to operate with a limited need to tie capital in net working capital and limited CapEx. And that means that almost 81% of all our EBITDA is transformed to cash and enabling the cost deleveraging. The cash outflow from financing initiatives is related to the repurchase of the bond in March.We can continue to Page 17, with the balance sheet. So we operate with a balance sheet mainly comprising of intangible assets, equity and borrowings, as we have told in earlier quarters as well. The only thing I would like to mention here is that our equity ratio continues to strengthen, reaching 53% in Q1 '20. Now we flip to Page 18, please, showing our financial targets, which are -- remains the same, and they should be reflected over 2 to 3 years' time. We will come back to that onwards.Robert?

[Robert Andersson, President & CEO]

Yes. So if we go to Slide 19 and, actually, consequently, onward to Slide 20. So just the outlook. I mean you won't be surprised by this, but we'll repeat some of the stuff. So we have intensified our work with finding the right path forward in order to drive organic growth and profitability. We will intensify the focus on the U.S. as well as focus on Sports Betting. One thing that I'd like to mention already now is that we will be merging Net Gaming and Highlight Media under one joint brand going forward. That work has started. This means -- and this comes from -- I'll give you a bit of background here is that, basically, Net Gaming consists of one company, which is Highlight Media and -- in Malta, this company is called Highlight Media, and in Sweden, where it's listed, it's called Net Gaming. And this causes both confusion, but -- both with internal and external. So we will merge this under one joint brand going forward. And we will continue to operate with a high margin and strong cash generation. So I welcome you to join the ride, and we will open up for questions, on Slide 21.

[Operator]

[Operator Instructions] There appear to be no questions registered, so I hand back to the speakers for any closing remarks.

[Robert Andersson, President & CEO]

Then I would just like to thank you for listening into our presentation, and I am really looking forward to August to give you yet another update. I will have then been half a year in the company. So I'm really excited about the future, and I'm really happy I joined this company.

[Operator]

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