Acroud AB

STO:ACROUD

Earnings Call Transcript 2022-Q3

[Operator]

Welcome to the Acroud Q3 2022 presentation. [Operator Instructions] Today, I'm pleased to present CEO, Robert Andersson; and CFO, Roderick Attard. Please begin your meeting.

[Robert Andersson, executive]

Thank you, and welcome to today's presentation of our Q3 for 2022. So if we start off with introductions. My name is Robert Andersson. I'm the CEO of the company, has been sold now for close to 3 years. And with me today, I have Roderick Attard. He will be presenting the financials later on in this presentation. And if we then get going of today's presentation, we look at the key figures first. Revenue amounted to EUR 6.7 million as EBITDA amounted to pretty much EUR 1.5 million. Profit after tax was minus EUR 600,000. This is created by a big amount of one-offs. Rod will disclose those a bit later. New depositing customers amounted to 34,000 pretty much, and cash flow from operating expenses was EUR 1.1 million.

And we would also like to highlight, although this is after Q3, we would like to highlight the fact that October EBITDA amounted to roughly EUR 1.1 million. And that is just one month compared to the whole quarter EBITDA this time around, it was EUR 1.5 million. So this is due to that acquisition that we have made, and we will go through that in more detail a little bit later.

And if we move on, we have Q3, we had some seasonal volatility. This means July was pretty much a normal month as where we have had August was a lot -- well, August was a strange month for us where revenue really -- or I'd say profit really was on the decline due to certain facts, while September, everything bounced back and was one of the best months we've had. So that's why Q3 was a little bit weaker than normal.

And if we move on, affiliation revenue, EUR 3 million. And next step. Well, if we look at in affiliation, we are getting ready for the World Cup. Obviously, this is a big deal in our industry. And the gambling cabin is really ramping up for some exciting times while we have the next step, SaaS network subscription and models that we bought 2 years ago is really proven to have some hidden potentials.

And while we move on, I would like to address the fact that we have successfully executed a very good acquisition strategy where we see that all our acquisitions are performing better or on par with what we expected them to do. So I'd like to talk a little bit about the acquisitions that we did with just recently announced with the Acroud Media Ltd. It's an agile company that is driven by media buying and advertisement. This gives us the opportunity to go into markets where we have not been and act on keywords compared with SEO that everything takes a lot longer time, which you have to build up. Here, we can act immediately if something comes up. So it makes it a very agile business model. Also, it's diversified. It makes us less dependent on SEO and Google algorithm updates. And this company has had very solid growth through the last couple of years, which means that we expect us to keep growing, and this is based on revenue share predominantly. So that means that the accumulated revenue will keep growing. This is a very stable business and stable revenue.

So if we look at the full year target, we have gone out with financial targets saying we're going to deliver 20% EBITDA year-on-year. We're at 19% now. And with the last push coming in Q4, we will deliver on this. And we are on track to deliver EUR 8 million to EUR 9 million EBITDA.

Here, you can see the group revenue, which is where you can see our revenue has declined quarter-on-quarter. However, Q3 is always our weakest quarter, and we have been delivering higher growth than what we did in Q3 2021. And if we look at our offer, we are now with this acquisition, completing the picture where we did strengthen our PPC and media in-house. So we have our innovative SEO, we have our media advertising and advertisement -- we have our advertisement networks and media house partnerships, all based on our software and technology.

And looking at us, we are rather a house of brands than a branded house. That means that we are -- Acroud is a group of companies such as matching visions, the gambling cabin and, for example, now the newly acquired Acroud media, we focus on building this groups or rather we focus on building a group with companies that have a strong own identity, but also have incentives to work across the board. This helps us really focus on what they are best at, rather than having acquired them and push our branding into them, we are stimulating their own identity while utilizing synergies. And this has been proven really -- going really well for us, this acquisition strategy. Now over to Rod.

[Roderick Attard, executive]

Thank you, Robert, and good morning, everyone. We will now be looking at the financial details, starting off with revenues. Since Q1 or January 2021, Acroud has been conducting 2 businesses in Berlin, the iGaming Affiliation business represented by the dark colored stacks on the slide and the size business represented by the light color stacks on this slide. We will be covering the performance of each business of each segment in a few slides' time.

In Q3 revenue amounted to almost EUR 6.7 million, as Robert highlighted, and that represent a small year-on-year increase of 4%. Some figures behind that. The growth is driven by the affiliation business where year-on-year revenues have increased by 12%. That growth has been set off by a decline in SaaS revenues of 2% year-on-year.

On a quarter-to-quarter, revenues have decreased, and that's the effect of seasonality impacting both segments. Worth highlighting is this strong -- exceptionally strong performance of the dream.stream network in Q3 last year, which, in our way has hidden or reverse the seasonality effect in 2021.

In -- during Q3 2022, 45% of the group revenues came from the iGaming Affiliation business, whereas this has generated 65% of the revenues. Switching our focus to the right-hand side where we see NDCs. Acroud keeps delivering high number of NDCs, new depositing customers to our partners, by our different products. The decline of 15% year-on-year is again related to the exceptionally strong performance of the dream.stream network in Q3 last year. More importantly, it is the continuous growth in NDC generated by the iGaming Affiliation business, which now have exceeded 21,000.

In the previous slide, we have again seen that revenue year-on-year has increased by 4%. Here, we're breaking that growth down by the different products we have in our portfolio. The main growth drivers year-on-year have been poker and casino products within the iGaming Affiliation business and the subscription product within the SaaS business. Such growth has been partly set off against the decline in network model revenues.

Switching our focus on the cost side here comparing Q3 versus Q2. And we can see that quarter-on-quarter, our cost base have decreased. Two main drivers here. We have a decline coming in cost base coming from the network model payouts. This is a direct variable cost, meaning it moves up and down with revenue. following the decline quarter-on-quarter in network revenues. Consequently, the network model [indiscernible] has also decreased.

We also have had a decrease in personnel costs amounting to EUR 82,000, and such decreases have been partly set off by the increase in other net operating costs. This is mainly coming from lower CapEx quarter-on-quarter, and we have also had a margin increase in other external costs. This is driven by increased investments in growth initiatives particularly the iGaming Affiliation business, which we're going to cover in a few slides' time.

We will continue to focus on cost control in order to run our operations with a higher margin.

EBITDA at group level during Q3 amounted to EUR 1.5 million, representing a growth of 19%. Affiliation business during Q3 amounted -- operated at an EBITDA margin of 37%, whereas the SaaS business operated at an EBITDA margin of 15% thus resulting in a blended group EBITDA margin of 22%.

During the quarter, we didn't have any one-off operational income or operational costs impacting EBITDA. We did however have some one-off items impacting the group's profitability and those related to the refinancing process and tax. More information about those can be found in our interim report.

In the next few slides, we're going to focus now just on the Affiliation business, starting off with revenue. Revenue during Q3 amounted to just over EUR 3 million, representing a year-on-year growth of 12%. Such growth is coming from organic initiatives and growth investments in regulated markets, particularly in the United Kingdom. The drop of 5% quarter-on-quarter, that's coming from seasonality effects.

Two points which I would like to highlight or share with you. First is about the casino -- performance of our casino products. Historically for a number of quarters, our casino revenues have been declining quarter-on-quarter, but that trend has been stopped in Q4 last year. And since 2022, we now see our casinos increasing year-on-year. Q3 was not an exception where casino revenues year-on-year have increased by 12%.

The second highlight, which I would like to share with you is the revenue diversification within the affiliation business. If we compare, for example, Q3 2022 to Q1 2020, going back to Q1 2020, back then, 72% of the inflation revenues came from casino. Now casino revenues in Q3, it represented 51%. And clearly, from this chart, you can see that our affiliation revenues are more diversified so we're not too dependent on one product.

Another form, let's say, of diversification is traffic sources back in Q1 2020, even 2021. 100% of our affiliation revenues came from SEO products, our SEO websites compared to 87% now in Q3 2022. The remaining 13% is coming from social and community-based affiliation, which is a different way of doing calculation compared to a traditional SEO business.

Now with the acquisition of Acroud Media, we're going to add or introduce the third wave of doing Affiliation business, hence, keep diversifying our traffic sources and revenue.

More information about revenue diversification. 38% of Q3 revenues came from rough share deals compared to 31% coming from cost per acquisition or CPA. And another 31% coming from other.

Other revenues represent upsales, banner fixed fees and new marketing products we are offering to our partners.

In terms of geo split, Europe remains our strong strongest continent, the strongest region and the good news or the biggest advantage with European -- with Europe is that many European countries have now regulations in place meaning that the iGaming market is a regulated market thus guaranteeing more stable revenues and less political or legal risk in the future.

North American markets have decreased to 11% year-on-year -- decreased 11% compared to 21% last year and other or rest of the world have increased to 15%. And that's coming from growth we're seeing in emerging markets, for example, telecom region.

As we have highlighted previously, and disease within the affiliation business keeps growing quarter-on-quarter, reaching 21,375 in Q3. This is the highest figure achieved by this segment in the company's history.

EBITDA in Q3 amounted to EUR 1.1 million, representing a drop of 8%. So despite the 12% increase in revenues, EBITDA has gone down. And that's, of course, coming from the cost base, which leads me to the next slide.

Year-on-year, the affiliation cost base has increased by 9%. Personnel costs have decreased by 28% year-on-year. Debt has been set off by the increase in other external costs increasing year-on-year by 27%. The increase or the driver behind that is investments -- further investments or increasing investments in growth initiatives to keep fueling the top line growth.

Now we're going to switch our focus on our second business, the SaaS business. Revenue for Q3 2022 amounted to EUR 3.65 million and that represents a drop of 2% year-on-year. The drop is mainly driven by network model revenues, as we have seen in previous slide, which year-on-year represented a decline of 4%. This, however, has been partly set off by increase in subscription revenues, which year-on-year have increased by 36%.

EBITDA generated by the SaaS business is higher and keeps the level higher than EUR 0.5 million, which in Q3 amounted to EUR 539,000, representing a growth of 19% year-on-year.

RGUs or revenue-generating units, projectors in the number of entities serviced by this segment. which, as we can see from this slide, is stable at around 400 entities. In Q3, it amounted to -- marginally decreased to 395.

Going back to the group picture, now covering our financing and cash flow. Gross debt in Q3 amounted to almost EUR 21 million. Net debt-to-EBITDA ratio in Q3 amounted to 3.1. The increase from Q2 is driven by the increase in gross debt, partly set off by increasing EBITDA with the acquisition of Acroud Media, and we expect to have higher EBITDA thus decreasing the net debt-to-EBITDA ratio in the coming quarters.

Last finance slide about cash flow. Cash flow generated from operating activities amounted to just under EUR 1.1 million during Q3. Cash inflow has increased to 83% compared to 74% we have had in Q2. Our net working capital is still negative and that's a focus area we need to work on in Q4, and that's what we're doing.

Cash flow from investing activities represent the funds advanced in preparation of the acquisition of Acroud Media, which as Robert highlighted, was concluded in October 2022. Cash flow from financing activities is characterized, of course, by the refinancing process. We have had a cash inflow from the new financing amounting to EUR 12.1 million coming from new investors and our bonds. And these were used to pay 10.3 million to the old bond holders, which have decided not to roll forward the bond. And to pay issue cost, which amounted to around EUR 750,000. And with that, I conclude the finance section and hand over the word back to Robert.

[Robert Andersson, executive]

All right. So let's round this off. I would say that what we have done is closed, I would say, almost closed was the last time we presented, if you will, the old Acroud in the sense -- with this acquisition going forward, you will see that pretty much a lot of our KPIs will double as well. And we are really excited for what this new group will be able to generate with Acroud Media, and we see a lot of synergies as well.

So although Q3 didn't really live up to our own expectations due to seasonality and a few other things, we are still very excited about the future and what we can do now with Acroud Media in the house. So I do really look forward to presenting Q4 when that time comes. So I hope you will be listening in, in February when we present that. And with that said, we are opening up for questions now.

[Operator]

[Operator Instructions] you wish to ask a question, please Senate -- we will now have a brief pass Our first question comes from Oliver Eliassen from Pareto Securities. Oliver, please go ahead.

[Oliver Eliassen, analyst]

Oliver here from Pareto Securities. I would just like to hear your thoughts on whether you're seeing any effect of inflation on your business in the form of a weakening consumer demand putting pressures on revenues or any wage inflation putting margins at risk?

[Robert Andersson, executive]

I can answer that. And I can only refer to our Q1 results -- or sorry, our October results that we have gone out with, which are the strongest we've ever delivered. Obviously, this is together with the acquisition that we have made, but we are not seeing any effects so far, but maybe that's too close to call, but at the moment, we are seeing 0 effects that we can relate to inflation or a weaker economy.

[Oliver Eliassen, analyst]

Okay. Regarding the EUR 1.1 million figure for October, is this figure minority adjusted due to the 60% ownership.

[Robert Andersson, executive]

Rod, could you clarify this?

[Roderick Attard, executive]

From an accounting point of view, the EBITDA is showing the 100%. We're calibrating first the accounting treatment, but that's something we will disclose more information about in Q4, but that represents 100%.

[Oliver Eliassen, analyst]

Also, I have a question regarding the future planned earn-outs coming up as far as I know that 50% of those are due in cash. Could you help me understand the timing and amount of these earn-outs coming up?

[Robert Andersson, executive]

Well, at the moment, timings are during next year, it depends a little bit on when it is closing. And obviously, we have a payment schedule to keep. And we don't want to comment anything regarding the actual sums, et cetera, at this point. It's too early. So we'd like to not dig into that now because we still have work to do in order to get to those figures, and it would also disclose a little bit too much information on what we expect to happen in Q4.

[Oliver Eliassen, analyst]

Okay. Could you please just verify the amounts provisioned for in the Q3 report regarding the acquisitions.

[Robert Andersson, executive]

That you can do, Rod.

[Roderick Attard, executive]

Sorry. The question was?

[Oliver Eliassen, analyst]

I'm wondering what the provisioned amount for earn-outs, what the amount is on the balance sheet as of Q3?

[Roderick Attard, executive]

EUR 9.5 million.

[Oliver Eliassen, analyst]

Okay. Thank you. I don't know if there's time for a few more questions.

[Robert Andersson, executive]

Yes. I have time.

[Oliver Eliassen, analyst]

Okay. Great. So looking at the capitalized work as of Q3, I could see that they were at EUR 223,000. Would you say that this level is reasonable to expect going forward? And does this -- the intangible CapEx, do they mainly relate to growth initiatives? Or should I view them as maintenance?

[Roderick Attard, executive]

Shall I take that, Robert?

[Robert Andersson, executive]

Yes, please.

[Roderick Attard, executive]

So we -- during the past quarters, we have been investing a lot in our websites, particular. So particular the iGaming Affiliation business. And that's mainly renting our websites, but also introducing new onetime markets. So definitely -- and part of it is maintenance, but majorly is coming from growth initiatives. And quarter-on-quarter, so Q3 have decreased compared to Q2. So now we're getting closer, yes, to maintenance levels of CapEx rather than the high amounts we have had during the past quarters, where we have invested a lot in growth.

[Oliver Eliassen, analyst]

Okay. And if you could please help me understand a bit. You mentioned the new acquisition will allow you to diversify user acquisition. Could you please talk a bit more about the pros and cons of media buying as compared to your traditional SEO model?

[Robert Andersson, executive]

Yes. So if you look at SEO, what you need to do is there is a lot of hard work going into ranking a website and making sure it gets the visibility in Google in order for you to generate revenue from it, right? You need to build the product. That's good. You need to let Google do its work.

It usually takes a year to 2 years if you do it well and invest hard to get it to the front page, and that's when you start making money. And then you need to maintain it there and defend it. If you look at paid media, we could basically choose to go into a market and test out advertisement on different keywords in that market tomorrow pretty much. And if there is a sport event coming up, we could target specific keywords for that sport event et cetera. So it does give an adaptability that's much quicker compared to SEO. I would say that, that's one of the real strengths of paid media is how agile it is.

[Oliver Eliassen, analyst]

And related to this, you mentioned the World Cup event coming up. Could you describe more a bit about your expectations on the event affecting Acroud business?

[Robert Andersson, executive]

Well, we're not expecting major differences in our business. And this is actually due to the fact that normally, World Cup is running through summer, which is normally a low activity season for us. However, this time around, World Cup is actually cannibalizing on the normal football season. So Premier League, et cetera. So in that sense, we don't see an upside, nor a downside, but this is a very different type of World Cup since it's running basically in the middle of autumn/winter.

[Oliver Eliassen, analyst]

And looking at the new depositing customers figure it was down slightly in the quarter. Would you say that this is related to seasonality? Or is it lower marketing spend than usual or...

[Robert Andersson, executive]

No. This, I would say, is down to seasonality. And if you compare from last year, that is compared due to the dream.stream in Q3 in 2021, an extremely large intake. So I would say that it's -- this is a seasonality effect.

[Operator]

We seem to have no further questions from the phone conference. I'll give the word over to you speakers for the closing remarks.

[Robert Andersson, executive]

All right. So well, I think I rounded it off before, but thank you for listening, and thank you to Pareto and Oliver for a bunch of intelligent questions. And with that, we will be back with you next quarter. Thank you.