Acroud AB

STO:ACROUD

Earnings Call Transcript 2019-Q3

[Operator]

Ladies and gentlemen, welcome to the Net Gaming Europe Q3 reports 2019. Today, I'm pleased to present Marcus Teilman, CEO; and Gustav Vadenbring, CFO. [Operator Instructions] Speakers, please begin.

[Marcus Teilman, President, CEO & Director]

Thank you very much. Good morning, everyone. My name is Marcus Teilman, and I'm the Group CEO of Net Gaming. And with me today to present this report for the third quarter of 2019, I have our Group CFO, Gustav Vadenbring.Looking at the agenda, I will start off with Net Gaming in brief and highlights. Then I will hand over to Gustav and he will go through the financials for the third quarter. I will then go through the summary and outlook. And then I'll hand over to the operator for a Q&A session.So let's start with Net Gaming in brief. I'm looking at Slide #4, Net Gaming, we are a lead generation company. So we are in that lead generation industry, just like booking.com, hotels.com, Expedia, Inc. and TripAdvisor in the travel and hotel business. So what we are doing is that we are driving traffic to our partners, the iGaming operators, since we are primarily within the iGaming industry at the moment. Our role models are definitely booking.com and hotels.com, which we think have a fantastic product and that's what we try to achieve as well.Let's move on to the next slide on Slide #5. We're a global and scalable company and that was founded in 2003. So we have been operating in over 16 years. We're operating in over 30 countries, and we have almost 30 nationalities in our office.During these 16 years, we have built up a structured capital and know-how with focus on technology and data, which is kind of hard to copy. And through our newly launched technical platform, we have a scalable platform connected with business intelligence system, SEO competence, data-driven analysis and high-quality content. And all these together will generate high-value leads to our partners. So that means that it's increasing the gap to our smaller competitors. And that is also how we're going to operate the business going forward to increase the gap all the time to our competitors. We are definitely set for scale with this, and we will continue to develop our know-how and structured capital going forward as well.Let's move on to Slide #6. And our 3 growth pillars. First growth pillar is European online casino affiliation. This is our core market where we have an estimated market share of approximately 1.5%. We have been growing quite rapidly in our core markets for the past 3 years, and we believe that we have significant growth potential going forward, where we would like to or our ambition is to increase the market share even further, especially with our scalable platform, we think that will allow us to do so as well.Second growth pillar is the U.S. iGaming affiliation. We are definitely well positioned for the iGaming regulation with our core assets, such as Pokerlistings.com, CasinoGuide, and also now this morning launched CasinoGuideNJ.com. This is the first launch of a niche site targeting the niche base in the state of New Jersey, and this is only the first launch of many planned launches going forward.And our third growth pillar is Sports Betting affiliation in Europe. Sports Betting in general in globally within iGaming, it's the largest vertical and amounting to over 60% of the total revenues for the iGaming industry globally.For Net Gaming, 80% of our revenues is coming from Sports Betting. We made an acquisition now in Q3, which has developed better than planned. And our share of total revenues from betting is increasing constantly. We believe that we -- we feel that we have just scratched the surface here in this betting vertical and we see great potential to grow further, both in Europe and the U.S. within Sports Betting vertical. So we'll continue to execute on our 3 growth pillars going forward.Let's move on to Slide 7, which is our direction forward. And I've got some feedback and some questions as well from investors about our direction going forward. So I'd like to clarify our direction going forward. Last year, we launched our financial targets, where we said that we will have a strong focus on organic growth. That remains. However, this year, we have been impacted by regulation in some European markets, and we have also continued our strategic shift from CPA to revshare, now amounting to 60% of our total revenues compared to only 12% in Q2 2017. So it's quite a drastic shift that is impacting our -- both top line and EBITDA level. Therefore, this year, we have also made an acquisition within -- some acquisitions within Sports Betting, a 2-step quest to get a better, both geographical mix but also vertical mix, since we believe that we have a fantastic growth potential in the betting vertical.We will focus on less brands, but develop stronger products and concepts. And I think that we have a lot of fantastic improvements here to do from a product point of view. Like I said, our role models are hotels.com and booking.com. And we think that we can look at them and see how they work with user friendliness, how they add user values and so on. So we will do the same. We will also -- also when we improve our product enhancements and et cetera, we are confident that we will also improve our conversion rates that have dropped lately.By developing strong products and concepts, we have a good foundation to continue to make a geographical rollout and continue to build up strong brands.Our main focus is to grow on regulated markets though. We have stable revenues in low-risk environments. And our main focus, like I said, is to grow on regulated markets, but with revenue share as the main revenue model. And this quite drastic shift from 12% in Q2 2017 to 60% in revshare now in Q3 2019 is to some extent kind of completed this transformation. We are quite happy with the current levels of 60% could be that we will be somewhere around 60% to 70% in revshare going forward. But we're happy that we've come this far. Of course, it also impacts our top line and EBITDA levels.We have now seen in Q3 2019 a stabilization in both revenue and EBITDA level compared to previous quarter. And this is the level where we will -- which is set now for future growth. And we believe that this is the best way to build the company long-term sustainably to operate the company in regulated markets, but also on high share of our revenues coming from the revshare model.We are still a profit-generating company with strong cash generation, and we are month-by-month and also quarter-by-quarter, of course, increasing our cash position, which we will use to lower our debt. So our balance sheet is important, it has been, has always been important and will be important going forward as well.However, we are continuing to evaluate strategic partnerships and acquisitions, although it's not our main focus. And we continue to screen the market to see what is out there. And if there is a strategic fit and the structure is -- the structure for the deal is right, then we might do acquisitions, but it's not our main focus, and that's important to point out as well.Let's move on to highlights and Slide 9. So during the third quarter, we are, as expected, affected by indirect regulatory changes and continued shift to revshare. On a year-on-year basis, on a high-level assessment, the main -- the 2 main reasons for this year-on-year drop is, of course, the transition to revshare and increase the portion of revshare, but also from regulatory space and this will split more or less equally the year-on-year impact of switch. Q3 is in line with the previous quarter Q2. And normally, both Q2 and Q3 are the weakest quarters during the year. So we see a stabilization in both revenue and EBITDA levels to grow from. And keep in mind also that in Q2 and this year, so the previous quarter, we had 47% revshare, and now we have 60% revshare, but it has stabilized this level.We continue to accumulate cash every month, and thanks to the high operating margin and strong cash generation. So we have a strong financial position, which we will use to continue with our organic growth focus.Let's move on to the next slide, please, Slide 10, which is significant events. During the third quarter, we made an acquisition of MaxFreeBets for the U.K. Sports Betting market, which is a regulated market. We have -- the acquisition itself has developed better than planned. We're very happy with that acquisition so far. And we can also use this acquisition going forward for other growth initiatives as well. We have also migrated and upgraded some of our core brands, 2 of them being CasinoSpielen and CasinoGuide. We migrated them to our new technical platform, and we upgraded the -- these 2 products as well.After the quarter, we have now launched Pokerlistings, which is our highest traffic-generating brand. That was launched on our new technical platform, where we have added a casino section. So we can use this casino section to monetize more on casino traffic. And we plan to also launch a betting section on Pokerlistings later on.This morning, we also launched a niche casino website in New Jersey, which is CasinoGuideNJ.com, which is the resource of many planned launches for the U.S. market going forward.After the quarter, we also repurchased some of our bonds at a nominal amount of SEK 37 million. And so we use that in order to lower our interest and financial net going forward.With that, I'd like to hand over to our Group CFO, Mr. Gustav Vadenbring, who will go through the financials for the third quarter.

[Gustav Vadenbring, Group CFO & Secretary]

Thank you, Marcus. We move to Page 12, please. As you can see in -- on our revenue development, as Marcus said as well, we have stabilized revenue development in Q2 '19 and Q3 '19, around EUR 3.5 million quarterly. Q2, Q3 is usually also the low season quarters. So -- and we have had our shift of CPA to revshare up to around 60% between the quarters. So that means that the revenues have remained stable, even though we had a shift. So you could potentially say that, that should have increased between the quarters in case the revshare should have remained at the same level. Also see that our EBITDA margins remain strong, very strong, around 50% -- plus 50% in Q2 and Q3. So we are still operating with a very high margin.Please change to Page 13. During the last year, 12 months, we have been working continuously with revenue diversification. We see a big step in the Sports Betting vertical, where we increased to around 8% of the revenues. That's the left circle, which is pink to in -- on the sheet, which shows 10% for other revenues, but Sports Betting is included here and amounts to 8% of those 10%. As Marcus said as well, we see a quite significant shift during the last 3 years in revshare and CPA. So we increased from 70% -- 17% in Q3 '17, up to 60% in Q3 '19 between CPA and revshare. And that has impacted our revenues like Marcus said, around -- we would estimate on year-on-year basis, around 50%.We switch to Page 14. We also see that our NDC development has a sequential increase in Q3 '19 compared to Q2 '19, which is very positive for us. This could also to be translated to that. It could generate potential growth in the coming quarters as we also now have shifted to the 60% revshare.We move to Page 15. We continue to have a strong P&L. You see that our revenue levels have stabilized in Q2 and Q3. And we're operating around EUR 3.5 million in revenues. Our cost base has been stable between the quarters, and we also see the rest of the cost items are relatively stable. So we continue to operate with a strict cost control and -- which will also help us with the scalability for the future when revenues increase.Switch to Page 16. Through the business model, we are operating with a very strong cash conversion and also very high margins, it enables us to deleverage very fast. Thanks to this, we have had a very strong cash position in the last quarters and that has led to that we had decided to repurchase some of our bonds after the quarter. So that is not included in the Q3 figures, and that was handled in October after the closing of Q3. It will not impact our net final debt position in such as it's a repurchase of bonds.We'll move to Page 17. We yield our high cash conversion around 82% to 85% on a year-to-date basis for both '18 and '19. You can see we have a decrease in Q3 '19 to 73%, and that is mainly based on our trade debtors that increased somewhat, and it's only a timing effect. That could happen between quarters, but in average, our cash conversion is around 80% to 85%.We'll move to Page 18. As we mentioned earlier sessions as well, our balance sheet is strong. It's quite a light balance sheet. And in Q3, our equity ratio has reached 41% and still growing or improving. And we operate with our net working capital level around 8% to 10%. And this is what is enabling our strong cash conversion as well.Move to Page 19. We have financial targets that we worked after. As you can see, we have deviations this year, which is based on the explanations Marcus has been telling you about. What is important to take with you is that our financial targets should be reflected upon over 2 to 3 years' time. So these are the financial targets we work after that we're going to deliver in the coming year. And they will remain unchanged for the next year.

[Marcus Teilman, President, CEO & Director]

Thank you, Gustav. Let's move on to summary and outlook. Summary Q3 2019 on Slide 21, please. Like I said, on a year-on-year basis, we have been mainly impacted by regulatory changes in Europe, but also an accelerated revenue share diversification from 30% to 60% from revshare agreement. So these are the 2 main factors for the year-on-year drop that are on a high-level assessment is split equally. However, Q3 compared to previous quarter, Q2, is in line with our expectations, and we have seen a stabilization of both revenue and EBITDA levels for future growth.We have a new operational organization in place in order to improve our products and also our conversion rates to grow further. With the relaunches of our core brands on the new technical platform, we can scale our business and be more efficient. And we're coming back to that regarding Pokerlistings on the next slide. We have also seen a major step within betting, reaching 8% of our total revenues, which is a good step. And like I said, betting is 60% -- more than 60% of the iGaming revenues globally. And so we're confident that we can -- that we'll continue to grow within betting because it's a very strategic focus for us going forward as well.Let's move on to outlook on Slide 22. Like I said, we will continue to execute on our growth plans within betting, U.S. and casino in Europe. We will prioritize organic growth on existing markets and use the revenue share model as well, now amounting to 60%, and we are happy with the current levels, although it could fluctuate a little bit between 60% to 70% going forward.Our core market, casino affiliation in Europe, where we have 1.5% market share, has seen quite a rapid growth for the past 3 years, although now short-term wise, we have been impacted by regulatory changes, of course. But we're confident that we will grow in this core market as well going forward, especially now with increased focus on our strongest brands and product improvement, I think we can turn it around when it comes to our conversion rates and improve our conversion rates further and especially with the new launch of Pokerlistings on the new technical platform, where we've added a casino section. Keep in mind that Pokerlistings is a very strong domain name itself and a strong brand. It was launched in 2003, and so it has a lot of great SEO potential to drive traffic to the casino section. And later on, also, we will add a betting section. So this initiative, launching Pokerlistings.com on the new technical platform, I'm confident that we can get some casino numbers on Pokerlistings as well, even short term.CasinoGuideNJ.com is a more long-term initiative, which is the first of many planned niche websites for our rollout in the -- in our U.S. expansion plan. And going forward, we will continue to operate the company with high-margin and strong cash generation that we will use for these organic growth initiatives and to lower our debt.And with that, I'd like to hand over to the operator for the Q&A session.

[Operator]

[Operator Instructions] Our first question comes from the line of Jens Black, Strategic Investment.

[Jens Black, Chief Executive Officer]

Can you tell me how many clients or how many percentage of your clients are you sending to unregulated sites?

[Marcus Teilman, President, CEO & Director]

I don't really get your question. We don't divide our clients into unregulated markets in that aspect, but…

[Jens Black, Chief Executive Officer]

Are you sending clients…

[Marcus Teilman, President, CEO & Director]

I assume you understand that you're asking about the share of our revenues coming from regulated markets.

[Jens Black, Chief Executive Officer]

Correct.

[Marcus Teilman, President, CEO & Director]

I assume. Yes, we haven't disclosed that figure publicly, so I can't do that in this call either.

[Jens Black, Chief Executive Officer]

Okay. Because main focus should be on the regulated markets as I think, because otherwise, you won't be like complying with responsible gambling.

[Marcus Teilman, President, CEO & Director]

Yes. Like I said, in our direction going forward, our main focus is to grow on regulated markets. So that's correct.

[Jens Black, Chief Executive Officer]

Okay. Are you having a page on your home page, where it states how you are acting to responsible gambling and what kind of initiatives you're taking?

[Marcus Teilman, President, CEO & Director]

Yes. We have a responsible gaming focus on our products, and we are continuing -- continuously going through our responsible gaming sections on our brands. And we have an initiative now also to improve that responsible gaming section going forward as well with even more self assessment test that sets out to make sure that the users can test their patterns and so on, so that they won't be likely to come into gambling addiction. So it will be a focus going forward as well for a responsible gaming and we will improve that.

[Operator]

[Operator Instructions] Okay, there seems to be no further questions at this time. So I'll hand back to our speakers for the closing comments.

[Marcus Teilman, President, CEO & Director]

Thank you very much for that. And I'd like to thank everyone for listening in, both on the web and also on the phone. And see you in February, when we will present the year-end report for 2019. Thank you.

[Gustav Vadenbring, Group CFO & Secretary]

Thank you.