Acroud AB

STO:ACROUD

Earnings Call Transcript 2018-Q4

[Operator]

Ladies and gentlemen, welcome to the Net Gaming Europe Q4 report 2018. Today I'm pleased to present CEO, Marcus Teilman, and CFO, Gustav Vadenbring. [Operator Instructions] Speakers, please begin.

[Marcus Teilman, President, CEO & Director]

Thank you very much and good morning everyone and welcome to this presentation for the fourth quarter 2018 and full year report 2018 of Net Gaming Europe AB. My name is Marcus Teilman, I'm the CEO of Net Gaming. And today I have also CFO, Gustav Vadenbring, with me.I'm going to start off with some highlights both for the fourth quarter but also for the full year. Then I will speak a little bit about Net Gaming in brief. Then I'll handover to Gustav to -- who will go through the financials for both the fourth quarter and also the full year. Then I'll round off with a summary and outlook and we will also round off with a Q&A session.So let's start with the highlights and we move on to the fourth page. Fourth quarter 2018 saw an increase in revenues of 10%, which was an increase in organic growth by 14% -- organic growth of 14%. I'd like to highlight here which is that organic growth is below our own expectations and there are some reasons behind this, of course. We have during the full year and especially now in Q3 and Q4 we have been phasing out the paid media channel. So the traffic from paid media has been phased out and we are purely now focusing on SEO traffic which is a more sustainable traffic in my opinion.Also we have seen a shift from CPA to rev share. And in Q4 2018 we had share of revenues from rev share agreements with 22% and now in the fourth quarter 2018 it increased to 35%. Of course that has a short-term effect on the top line growth and on the organic growth.I'd also like to highlight the difference between the revenue growth in affiliate revenues of 10% to 14% organic growth. And that is also that we have divested Battle of Malta which is the live hockey tournament that we organized last year in Q4 2017 and that we sold in the first quarter 2018. That has an impact on the revenue growth. So all in all, I'm not happy. It's a little bit below our expectations from an organic point of view, organic revenue growth point of view. But I'm also happy to see that thanks to careful cost control we have seen an all-time high in EBITDA. So EBITDA came in at 33.9%, an increase of 13% compared to last year and an EBITDA margin of 70%.We've seen still high cash conversion of 88% or EBITDA. And I think this is an indication of our high cash conversion which I think will be in the region of between 85% to 90% of EBITDA going forward. And Gustav will speak a little bit more about this later on in the presentations.Let's move on to the next slide and the full year 2018 highlights. Our affiliate revenues grew 19% in total with an organic growth of 12%. I've already mentioned the change in revenue streams. So we have changed the revenue streams from revshare 22% last year in Q4 now 35%. I'm happy to see that and we will continue to now optimize our revenue model. Now it's time for us to make some analysis of our revshare agreement to see which operators that have the best lifetime values, and then we'll see how we will distinguish the different revenue model contract.Thanks to our scalable platform also we see -- we saw an increase in our EBITDA by 19% up to SEK 127.1 million with an EBITDA margin of 66%. Also for the full year we saw an EPS growth of 1100%. So earnings per share for the full year came in at SEK 1.08 per share.Let's move on to the next slide and summarize the full year. First of all, we are now a pure affiliate company. We closed off our operator's business in October 2018. So we're now a purely affiliate company. It's really good to see that we also sold Battle of Malta. So we are purely focusing on online affiliation within iGaming. And I think our focus, our latest focus is really important for the future.Two other things I like to highlight as well is that first of all we acquired Webwiser in the second quarter 2018 but we also paid the second and final earn out of the very successful acquisition of HLM, Highlight Media. That means that after that we have -- we can now organize the company as we want to. In Q3 last year we also -- we also set our growth plan for the future. I'm going to talk about our growth plan and our 3 growth pillars later on in the presentation. But I really have to have that growth plan set when it comes to investing and also for the U.S. growth and of course also our continued focus for casino in Europe.Like I said earlier also, revshare diversification from 22% to 35%, I think that was a good shift. Now we will continue to focus on analyzing our data in order to improve our top line figures more. We have seen an increase in organic growth in Q3 and Q4 compared to quite a slow start to the 2018 year in Q1 and Q2 with lower organic growth. I'm fully convinced that this growth will continue to help us improve our organic growth further.I'm also very happy to see that we have improved our capital structure a lot during 2018. And now we only have a bond loan outstanding as of course of a much lower interest rate. Convertible loan was earlier redeemed in Q3 2018. And also by the end of June 2018 we moved list to Nasdaq First North Premier.Let's move in -- move on in the presentation to -- and I'm going to speak a little bit about Net Gaming in brief. So let's move on to Page 8. First of all, Net Gaming, like I said, we are now a pure affiliate company. Like many other successful companies in let's say the travel and -- travel industry like Booking.com, Expedia and also Hotels.com but also TripAdvisor where we help our users to find the right operator because we are in the iGaming affiliate industry like Catena Media and Better Collective. So we helped the consumers, the end consumers to find the right operators because there are a lot of operators out there and we are active on more than 30 geographical markets. So that's our industry and that's where we are operating at the moment.Let's move on to the next slide. And I'm going to speak a little bit our mission. Our mission is to -- our mission is that we help and inspire people to make the right decisions in a complex iGaming world. And iGaming is a sector that has grown a lot for many years in the past and will continue to grow for many years ahead of us. Only 12% today of all gambling is online. And we need to help our users to really make the right decision by having really high quality content but also to improve our design and to severe the user income and also to have a really good user experience. And we have made some key recruitments also in Q4 2018 but also now in Q1 2019 in order to fulfill our mission even further then to have a even cleared focus on our mission.Next slide which is our new vision. And our vision is to be the world's #1 in iGaming affiliation. And I think that we have a great, some great assets that we can build upon and we can develop further, in line with our growth plan. But we also have a really great foundation with competence and knowledge to scale this business up.It requires discipline and patience in order to -- in order to come up to that vision. It's a long-term goal that we have set. And I think it's a really good focus that we have now with this new vision in place. And I think that time is our [ friend ]. But we have a really clear growth plan that we will continue to execute on.So let's move on to the next slide. And I'd like to speak a little bit more about our growth plan which is based on our 3 growth pillars. I mentioned it -- mentioned it already in the Q3 report 3 months ago. And it's based on 3 different growth pillars. One, that's the European online casino affiliation. We have -- we see some significant growth potential with where we at the moment have around 1% of the market share. We believe that we can continue to develop our assets in this region and in this vertical even more. And I'm pretty confident that we will continue to take more -- to gain more and more market share.U.S. is opening up. We are growing rapidly in the U.S. And we have some fantastic assets there that we will continue to develop and especially also now with new sports betting vertical.Sport betting is -- in Europe is our third growth pillar. Sport betting in general accounts for approximately 50% of all the revenues in the global iGaming market. So I believe we have some fantastic growth potential in sports betting also, not only in Europe, but also in U.S. of course.That's the summary our 3 growth pillars. And with that I would like to hand over to our CFO, Gustav Vadenbring, who will go through the financials.

[Gustav Vadenbring, Chief Financial Officer]

Thank you, Marcus, for that. And let's see how it is featured in the financials what Marcus has been talking about.So we'll start with Page 13. And like to say that the company had solid growth into 2019, but we're far from satisfied. A lot of our main KPIs are showing a positive year-on-year trend. And also our underlying business is increasing in Q3 and Q4.I would like to highlight 3 main takeaways for -- when you're reading the Net Gaming financial trends quarter by quarter. One, we had a somewhat low position prior to the purchase price consideration from the acquisition of HLM Malta was settled in May 2018. That meant that we couldn't really execute all our expansion plans and our 3 growth plans in the pillars. Also we couldn't employ our key employees which was our foundation for the future growth.Two, we don't see strong seasonal patterns in the top line development that we've seen previously. The last 2 years it changed somewhat in the industry and Q4 is not as strong as it was earlier. And Q3 is somewhat stronger. It can also have to do with markets. We know or we've seen also that U.S. has been stronger in Q3 [indiscernible] this year and also in the market. So it's not the only with Net Gaming.Three, there has also been a strategic shift for Net Gaming or focusing on core business and organic growth. That means that some of our noncore business areas have been divested and being phased out and we're fully focusing on affiliate revenues and what we are really, really good at and have more than 15 years experience. And that's what you see that we are taking off in Q3 and Q4 in the organic growth.So looking on the revenue trend quarter by quarter to the left bottom. We see the total revenues. And organic growth, we would like to highlight is that it's really taking off in Q3. In Q3 we're 21% respectively 14%. And that is from our point of view the most strong key you can see in our business operations.We also have a really strict definition of organic growth which from analytical perspective is clean. That means there is absolutely no acquisition included. And that's important to have in mind when comparing with competitors and with the market. So we have a strong focus organic growth in online business and what we're strong with the last 15 years.Needless to say, in the second graph, we have strong margins, increasing also in Q3 and Q4 related to our focus on our core business of scalable platform.Looking on the EPS development, it's important to have in mind, you see it's going down in Q3, Q4, but that's not the trend it's showing in the underlying business over time in 2017-'18.We have a very strong EPS development year-on-year, as Marcus showed earlier. We also see that Q3 and Q4 have been impacted by 2 things, one is that we had a dilution of the convertibles with our early redemption. And the second one is we had a provision for potential credit loss impact in Q4 which is in line with IFRS 9 adjustment.So moving to the next page, revenue mix. And we would like to highlight that we are still growing fast in U.S., now comprising 22% on the revenues, meaning that the diversification and geographical split is increasing. You will also see that onwards within the product split the sports betting will increase. The reason why it was higher, the product split in other earlier is because we have worked with our core business affiliation and divested for instance Battle of Malta.So we are working with our diversification products geography and developing quite fast on that and we will show you that the coming year as well.Turing to next page, Page 15, the NDC development. We continue to grow very fast in NDCs quarter-by-quarter and year-by-year. It's mainly the casino vertical driving the growth. And you can also see that we had a somewhat downtrend in Q4, which is what was seen in the industry, that several of our competitors and also operators have been showing this trend. And we've also seen that Q3 was a very strong quarter.Some of our, the operators we work with had a slight delay or troubles with the commercial, which has impacted us also. But we see that this is still on a good level.Go to page, next page with revenues, revenue share and CPAs. We can see that, like Marcus said, that we're still continuing to increase our revenue split. And also that is good for our diversification of the revenues. So we're up to 35% in Q4 '18, which is in line with our expectations.Turning to the next page, we'll see the P&L, the full P&L. It also talks for itself to quite some extent. So I will just highlight a few points. We had a solid and strong 2018. We're aiming higher. We're -- even if we had quite significant growth. We're taking off in the second half year, that means Q3 and Q4 in the growth, and that's related to HLM that we have settled -- HLM purchase price consideration.Within our operational costs we are stable and we even decreasing in some parts. We have a rigid cost control. And our underlying operations are developing really well. And that's also impacting our EBITDA margin. That's a very important sign for us, that we are keeping our margins even if we are growing. And we are adding resources to the business with key employees to build our future growth.What is somewhat distorting in the P&L in the comparable levels, 2017 and 2018, are the financial net. We had a financial restructuring or new loan -- loans setup in 2017, and that is causing the high financial cost in 2017. The financial structure has been improved significantly between '17 and '18. So our interest costs are down to around SEK 7 million by quarter now. And that's what it's going to be on quarterly basis onwards.Depreciations are in line with expectations, very low, as we are operating with a very asset-light balance sheet. And also the tax levels we also work with that we have come down to a very low effective tax rate, which also is indicative now in 2018 for the future. So all in all, strong 2018 and quite good Q4 '18 where the operationals are performing really well and we focused on the core business.Moving to Page 18, the balance sheet. We'll be very short. Three takeaways. We have a very light balance sheet. We're operating with a very low net working capital level mainly comprising trade receivables. We have intangible assets mainly related to the acquisition of HLM Malta in 2016. And we have a very strong equity position improving very fast up to 32%.Moving to the cash flow. We have a very strong business model where we have a cash conversion of around 85% to 90%. I would say that the levels in 2018 are indicative for the affiliate business going onwards on our -- and our basis without the operator business. So I will say 85% to 90%, that's indicative. And we also have a very strong operating cash flow in both quarters, Q4 '17 but specifically Q4 '18. The investments in Q4 have mainly been in domains in U.S. but also we have been operating our office in Malta to have place for at least 20 more employees in a quarter for our expansion plans.If we turn to the last page, with our net debt-to-EBITDA levels. We can see that we are delivering very fast. We have come down to 2.1 in ratio now. And we are delivering very fast with the cash conversion of 85% to 90% of course. And then we have also -- have very high EBITDA margin. So it's quite natural that it increased in Q2 '18. As you can see in the presentation it's totally related to that we accepted quite big amounts for the purchase price consideration for HLM Malta but also we made significant acquisition from our side. So that will continue the fast leveraging.I'll turn over to Marcus.

[Marcus Teilman, President, CEO & Director]

Thank you, Gustav. And we move on to the summary and outlook. So page 22. And I like to speak a little about our financial target. Our financial target is to have an EPS growth of at least 20% and the outcome in Q4 was minus 32%. We've already mentioned some one-off items there, that's the reasons behind it. But for the full year we are in line with our financial targets where we had an EPS growth of 1100%.Organic revenue growth, it should be over time between 15% to 25%. In Q4 2018 it was 14% and for the full year 12%. I'm not happy with that but we see also a positive trend here in Q3 and Q4. So it's I believe -- really strongly believe that it will start to pick up again especially now also with our core focus on user [ incomes ] and also with our growth plan, that is very clear. Capital structure should be maximum 2.0. And we see a positive trend there. I'm not at all worried about that one. So we see a really good trend there.Let's move on to the next page and summary. Like I said, we are now a pure affiliate company. We have paid the final and -- second and final earn ups to -- for HLM acquisition, leading to us now employing some key employees for further expansion with very clear growth plan in 3 areas where we have launched a betting vertical during 2018 and we have planned -- laid a foundation for future growth in the U.S. We have also seen a revshare diversification with now 35% of our revenues coming from revshare agreement compared to 22% in Q4 2017. And like I said also, we have improved our capital structure over the year.Let's go on to the next side, which is the outlook. We have continued to develop new and strong digital brands. We have continued to execute on our growth plan in Betting, U.S. and Casino in Europe. Now in Q1 we have already released a new betting brand and two new casino brands. And we are soon also launching new U.S. [ plans ].Also like to highlight that regulatory changes will continue to affect the iGaming and the affiliate landscape short term. I've been working in this industry for now 15 years and short term of course regulatory changes like now in Sweden, for example, Sweden will comply with the new legislation [indiscernible] 1st of January this year, 2019. It of course can have short-term impact. But over the time and in the history it also shows that over time this is a growing industry and a growth sector. So I believe that we are well-positioned to execute on our growth plan in order to achieve our long-term mission. And with that I would like to hand over to the operator for Q&A session.

[Operator]

[Operator Instructions] And our first question comes from Markus Augustsson from Jarl Securities.

[Markus Augustsson, Head of Equity Research]

This is Markus from Jarl Securities. As you mentioned, you're moving away from paid media. How has that affected the cost side? You also mentioned increased cost controls. Can we see further downside in the costs from that going forward?

[Marcus Teilman, President, CEO & Director]

Yes, I think -- good morning, Marcus. I think that of course definitely it has impacted our cost side, other external costs. But we have seen a gradual phasing out of the paid media channel. So I think that the main impact on the cost levels, you have seen that in Q3, that must be the cost in Q2 of course. So I think now in this quarter it has affected the top line more than the cost side. In 2019 it will not have that much of an impact because this quarter we just had -- I don't know, but really low cost [indiscernible] which was first days of October.

[Markus Augustsson, Head of Equity Research]

And what about the cost control that has been tightened up.

[Marcus Teilman, President, CEO & Director]

Yes, we will continue to -- we will continue to have [indiscernible] cost control. Of course we are doing some key recruitments now. But we will continue to have good cost control and we will make -- in order to execute on our growth plans, we need to make some investments of course in order to grow our organic growth. But it's -- those are healthy cost [indiscernible] and this just really guide on any EBITDA margins and so on.

[Operator]

Our next question comes from Erik Cassel from ABG.

[Erik Cassel]

This is Erik. In terms of the underlying market growth for affiliates in Europe and in the Nordics, could you elaborate on what type of growth prospects you see ahead?

[Marcus Teilman, President, CEO & Director]

You mean our own growth what we are aiming for.

[Erik Cassel]

The underlying market growth.

[Marcus Teilman, President, CEO & Director]

Yes, the underlying market growth in generally in Europe and in the Nordic side it's been 7% to 9% total for iGaming if you look at both the H2 [indiscernible] for the iGaming industry. For ourselves we have seen many years now a growth in our Casino vertical of between 25% to even over 30% year-on-year growth for our casino vertical. And I strongly believe that we will continue to growth after that on the overall market. And that's why we have our financial targets of [indiscernible] revenue growth of between 15% to 25% over the time.

[Erik Cassel]

Could you please give us some flavor regarding your strategy in the U.S. and what type of role you want to play in that market?

[Marcus Teilman, President, CEO & Director]

Sure, I mean first of all we have some really strong global brand for the U.S. market. But we are also building up local presence in many of the states, both when it comes to betting, betting is a really interesting vertical for us which was launched in our company last year, mid last year. And we are building now up both sports betting and casino assets locally in each and every state. We have local domain names for these verticals in the states that we believe will open up for regulation for coming, let's say, 5 year. I think that we already have quite a strong position in the U.S. market. But of course we want to be an even stronger player in -- for the long run. And of course we're -- in line with our mission we want to be the #1 in -- the world's #1 in iGaming affiliation. So I think that's something where we want to be for the U.S. market as well.

[Erik Cassel]

All right. In regards to the timeline for the vertical expansion into sports betting when we can see it, when can we expect this to start to show up in the numbers?

[Marcus Teilman, President, CEO & Director]

It's hard to say exactly when we consider it. We see it as the sports betting vertical already now. It's growing quite well I would say, but of course from low number. It normally takes, yes, maybe up to a year to just to give you some kind of indication to it. But our goal is to definitely show some nice numbers from our new betting vertical already during this year. Exactly when, we don't really guide on it.

[Erik Cassel]

Okay. So to my last question. What's your thoughts on the current M&A landscape? Are there still quality affiliate assets available? And which regions do you find appealing?

[Marcus Teilman, President, CEO & Director]

Yes, I definitely think that there is room for more additional acquisitions. That's why we also hired Christian Käfling as our new Head of M&A who will start in end of the April this year. He will purely focus on finding the right acquisitions. I think that there are a lot of affiliates out there but with various quality and so on. And we have a set checklist with what we looked at, I mean, lower underlying and zero risk, perfect fit for the company but also depending on which verticals and also geographies. I think that thing is a very interesting vertical for us. If there are some targets for the U.S. market, that would be interesting, but also some other regulated market in Europe are of course of, yes, much of an interest. But of course this all depends on valuation and so on as well. So the manufacturers I think need to be taken into consideration. But we will for sure look into M&A as an additional growth driver. Our core focus will continue to be on organic growth. But if we can add qualitative acquisitions, I think that's very appealing to us.

[Operator]

[Operator Instruction] And we have a question from Simon Volkov, private investor. Please go ahead. Your line is now open.

[Simon Volkov]

I would like you to elaborate on the reservation made during the quarter for the potential credit loss, what is actually related to the -- to one-off.

[Gustav Vadenbring, Chief Financial Officer]

Hi, Simon. Gustav there. Thank you for your question. And I will try to answer as much as I can. And we have made a provision. And I will say that it's a potential credit loss [indiscernible] it's a provision made in form November, so it's not like a late or with adjustments and so on. And it is for potential credit loss related to our financial euro account and the financial institution. We can't go into detail about that. But it's -- I think from your question and for what is important to you is that it's -- this is a total one-off related provision that has nothing to do with underlying operating business and other words trading to do. It's totally financial related, that's why it's incorporated in the financial maps. And also you see in the balance sheet that it's put in financial -- and it would in the financials. So I hope that would be sufficient to give you comfort. It's very limited exposure so to say and the provisions we made. And we are comfortable that we will regain some of this provision. And it's fully in accordance with IFRS 9, this new accounting this year as well.

[Operator]

Okay. There appear to be no further questions. I'll return the conference to you.

[Marcus Teilman, President, CEO & Director]

Thank you very much. I'd like to thank everyone that have participated in the call both on the phone but also from the web. I'd like to round off with saying that we have a strong underlying performance in our operation still. And we look forward to continue to execute on our growth plan in order to achieve our long-term vision. With that I'd like to say thank you to everyone and see you in about 3 months time when we have our Q1 report. Thank you.

[Operator]

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