Evolution AB (publ)

STO:EVO

Earnings Call Transcript 2019-Q1

[Operator]

Ladies and gentlemen, welcome to the Evolution Gaming Group Q1 2019 Report. Today, I'm pleased to present CEO, Martin Carlesund. [Operator Instructions] Martin, please begin.

[Martin Carlesund, Group Chief Executive Officer]

Thank you, operator. Welcome, everyone, to the presentation of Evolution's first interim report 2019. My name is Martin Carlesund. I'm the CEO of Evolution. And with me today, I also have our CFO, Jacob Kaplan.I will start by giving some comments on the start of 2019. I will then hand over to Jacob for a closer look at financials as usual. And after that, I will round off with some comments on what we see ahead, followed by questions.Next slide, please. It's a pleasure to present a strong start of 2019. Last year, we worked extremely hard with expanding our operations to meet high market demand, and we can now see how this pays off both in terms of growth and profitability. We also worked very hard to increase throughput and to develop new fantastic games distancing us from competitors.You can see the numbers on this slide. Revenue growth of 54%, amounting to EUR 79.3 million compared to EUR 51.6 million Q1 2018. EBITDA increase of 64%, amounting to EUR 35.9 million compared to EUR 22 million Q1 2018. EBITDA margin of 45.3% compared to 42.6% same period last year. And finally, an EBIT increase of 69% compared to the same period last year.Live Casino really is the strong vertical of online gaming right now. And as the market leader, we continue to innovate to take the whole market forward. On top of that, we are expanding the market in itself with new never-before-seen products. As a result, we experienced -- as a result, we experienced operating synergies strongly strategic and competitive advantage of having Evolution Live seeing -- talking about what we have seen before. We have tried to capture the most out of that potential growth. When we presented the Q4 results I talked a lot about new games that we showcased on ICE. Now we've just started to roll out some of them, and first up was Live MONOPOLY. And we believe that we own something great based on the initial response from the players. I will talk more about this later in the presentation. However, it is important to note that the new games have not yet made any significant contribution to growth.In the quarter, we also went live with several new clients in several markets. Our clients in the Swedish market, Svenska Spel and ATG, have both been off to a great start in the new reregulated environment. Next slide, please.We showed the best possible indicator of the activity in the Evolution network. We had about 5.1 billion bet spots in the quarter, which is equivalent to an increase of 64% compared to last year. The reason for the growth being higher than the revenue is that our latest games attract smaller and more numerous bets. And that is the proof of that our strategy to expand to new play types, which I will talk more about soon. Next slide, please. We have a decent build of thousands of young Evolutioners, and we continue to recruit more talented people every day in order to keep up with the market demand. At the end of the first quarter, there were 4,671 FTEs, which is a bit over 6,400 employees, which now, of course, includes about 130 FTEs from Ezugi. I'm extremely proud of everyone working in the Evolution family and the hard work carried out each day. We all share the winning mindset and must improve constantly. A great culture is the key when growing at such pace that we are doing, and we always try to improve ourselves as an effective employers. Next slide, please. 2019 is a year of innovation. This year, we launch -- we will launch in total 10 new games, which is a record number and a key driver to continued sustainable growth. It's not only important for our growth, it's also a main driver for our customers to be able to continue to grow. Our core live games, such as Roulette and Blackjack is immensely important, and we are innovating, reinventing them with features like lightning, increasing quality, perfecting the user experience. But I've talked about that we have been aiming to go out in Live as a segment and attract new softer players, and we can see that's happening now. We are clearly getting traction in other targeted markets. Such players and players from other segments are now starting to play live to a much higher extent. We are not only reinventing the games. We have distancing us even further from our competitors. We're now also seeing how we can expand the total live segments with completely new games. Players love our games, and new player categories are beginning to see great amusement in live game show, like Guess. The traction and expansion is out of park in total online gaming. Well, this gives us growth opportunities and new market shares. With this much expansion, we see potential in further growth.Next slide, please. Our game shows are something new in the industry. With them, we have invented a new vertical, which is -- which at that pace, it gives us opportunity to attract much larger part of the market and softer players. Using the latest technology, we can mix Live RNG in the mix as well as human interaction and augmented reality. I would like to encourage everyone to watch a round of Live MONOPOLY. You can try it yourself with an operator or search for it on YouTube, and then you will really understand the many levels of entertainment. Not only will we be able to reach many more users with these games, we'll also distance Evolution even more from any existing competition. You won't find any games like any other Live Casino either, and the titles like Live MONOPOLY, Deal or No Deal that we are launching are exclusive to us. I'm very excited as you can hear. However, it will take time before the new games generate substantial income. Service operators might launch the games, but the players and the plays need to find them. Nevertheless, we are confident that our game shows as well as all our launches this year will underpin Evolution's status as the true innovator of the industry. At this point in this presentation, I would like to say that we are ever so paranoid. Innovation is key, and 2019 is the year of innovation. We're stressed about how we can do better and how we can constantly improve. We will fight every day to combat, and we simply need to make Evolution better every single day. This is the true core nature of Evolution.Next slide, please. Let's have a quick look at our markets. Rest of World has increased in share in this quarter, most of them driven by North America, with U.S.A. and Canada. That's -- part of that's mentioned, but all started from Asia, as well as the integration of Ezugi. We see good growth from all Nordics, and we've good performance also in Swedish market since the year start, together with the strong performance in Europe in general. We're also seeing small ramp-up of growth in the U.K. market, but it's yet too early to say it's turned the corner.I will now hand over to Jacob, who will guide you through the numbers. Next slide, please.

[Jacob Kaplan, Chief Financial Officer]

Thank you, Martin, and good morning to all of you listening in. We're now on slide titled Financial development.As Martin pointed out at the top of the call, 2019 is off to a strong start. Revenue amounted to EUR 79.3 million in the first quarter. That's 54% growth year-on-year. Should be noted that Q1 of last year, Q1 2018, was a weaker quarter, so the comparable numbers are somewhat weaker than normal, which reduced the percentage growth in this quarter. Second quarter of 2018, we had a quite strong quarter supported by the World Cup and so on, so more normal comparables in the quarters to come. That said, Q1 this year is very strong. The EUR 79 million includes EUR 2.5 million from our acquired Ezugi offering. So also adjusted for acquired revenue, growth is strong at 49%. Many of our customers have very good momentum in the Live Casino offerings right now, leveraging investments made during last year.We have added new tables and environments also during Q1 but at somewhat lower pace than during 2018. There is no event comparable to World Cup this year, but still we see a very good demand for tables for the rest of the year. Martin also mentioned our upcoming new game launches. They will be very interesting to follow, but they have not impacted Q1. So the current quarter shows there is still solid demand for the core table game offering.EBITDA amounted to EUR 35.9 million for a margin of just over 45%. Compared to Q4 2018, EBITDA is positively affected by IFRS 16, which moves about EUR 0.6 million from operating expenses to depreciation. So adjusted for IFRS 16, EBITDA margin would be 44.5%.However, the increase from IFRS 16 effect is more or less offset by the addition of Ezugi, which affected EBITDA negatively by about EUR 0.4 million compared to Q4. For the full year, we expect Ezugi to contribute to EBITDA slightly. However, it will not have the same margin as Evolution of 2018.On the topic of margin, we stated in the Q4 report that we expect EBITDA margins for full year 2019 in the range of 44% to 46%, meaning slightly up from the 2018 level. With a strong start of the year, we definitely see the possibility to end up in the upper end of that range for this year. Still, as always, when discussing the margins, we remind that they do fluctuate quarter-to-quarter. And again, we will continue to prioritize top line growth or revenue growth over margins when there is such a choice, but good outlook also for margins for the rest of the year.Operator, let's go to the next slide, please. Looking into more detail the P&L for the period, which, again, see revenues for the quarter at EUR 79.3 million. Moving down, personnel expenses totaled EUR 29 million in the quarter, up 39% compared to the same period last year. Increase in staff is mainly driven by increase in new tables. Depreciation is EUR 5.7 million in the quarter, including the EUR 0.6 million related to leasing contracts that are now booked to depreciation before IFRS 16, and EUR 0.1 million related to depreciation on the intangible assets acquired in the Ezugi acquisition. Altogether, an increase of 39% compared to previous year.Other expenses include, among other items, consumable equipment, communication costs, consultants and still some smaller leasing contracts that still remain here, although most of the larger contracts have been affected by the IFRS 16. The line is up by EUR 5.6 million compared to same period last year. So summing up, total operating expenses increased by 45% year-on-year in the first quarter, and that includes EUR 2.9 million related to Ezugi. So adjusted for acquired business, the increase is 37% year-on-year.Tax for the quarter is at EUR 1.6 million for a tax rate of 5.2%. All this sums up to a profit for the period of EUR 28.6 million, equal to an earnings per share of EUR 0.78 per share in the quarter. And for the rolling 12-month period, EUR 2.61 per share.Operator, let's go to the next slide, please. Cash flow and financial resources. To the left in the slide, we have a chart showing capital expenditure. This chart excludes M&A. So CapEx and tangible assets, that's mainly our new studios, amounted to just over EUR 4 million in the quarter. As we have stated earlier, main projects for 2019 are the new studio in Malta, further expansion in our Tbilisi studio, and later this year, also studio in Pennsylvania. Investments in intangible assets is mainly related to development of new games and features to the platform, fairly stable each quarter, as you can see in the slide, at around EUR 3 million for quarter. It's slightly lower than that in Q1, but for the year, we expect about the same level as 2018. But boosting the figure in Q4, as mentioned, is licenses for some of the newly launched games. So that's a one-off thing in Q4.As we stated earlier or at our last quarterly report, or year-end report, we expect total CapEx to roughly the same amount in 2019 as 2018 in terms of euro. That will, however, be a lower share of revenue than previous year, as we've also seen in Q1, where investments of share revenue rolling 12 months is slightly down.The middle of the slide showing -- shows cash flow. Operating cash flow around EUR 23 million, and cash conversion for the 12-month period is in a good trend, up to 74%. To the right in the slide, a look at the balance sheet. Continued strong financial position. The board is proposing the AGM took the sort of EUR 43 million of the cash as a dividend. That equals EUR 1.2 per share and is in line with our policy of 50% payout.That was the end of my prepared remarks. I'm going to give it back to you, Martin. And then we'll take questions after that.

[Martin Carlesund, Group Chief Executive Officer]

Thank you, Jacob. As already stated, we will have most of the new games to be launched ahead of us. We look forward to this and expect all titles to contribute to growth over time. It's clear the demand for Live Casino continues to be high. Consequently, we'll continue to invest to meet the demand. Investments will take place in all studios, but we will, as highlighted in the last report, also open a new studio in Malta, a new one this year. And as mentioned earlier by Jacob, we will start to build a new studio in Pennsylvania later this year.We're off to a good start of 2019, and also the second quarter has started well. We have previously guided for an EBITDA margin between 44% and 46% this year. And based on performance so far, we currently see good conditions to finish in the upper end of this range. By leveraging on our investments made in 2018 and with all the game launches, I'm certain that we, also this year, would be able to fulfill our mission to constantly increase the gap to competition.Thank you all for listening, and now let's move on to questions.

[Operator]

[Operator Instructions] Our first question comes from the line of James Goodman from Barclays.

[James Arthur Goodman, Research Analyst]

Perhaps I'll ask them one by one. It's probably easier. Extremely strong quarter. And notwithstanding the commentary around the Q1 comparative, it looks like a very unusual step-up from Q4 of last year, particularly given the new games aren't contributing yet. So really, my question was, is there anything seasonally we should think about as we go through the year because even running the current run rate into Q2 would be around 35% growth. So anything seasonally we should think about?

[Martin Carlesund, Group Chief Executive Officer]

I would comment it like we get leverage on the investments that were made in 2018, and there is nothing particularly seasonally affecting it. It's just normal.

[James Arthur Goodman, Research Analyst]

Okay. That's good to know. I was personally pretty struck by the new games when I saw them with my eyes, Deal or No Deal and MONOPOLY. They're extremely different to anything that we've seen before. I mean, you mentioned it in the prepared remarks, but these are relative, I think, very much to new players. And I'm just curious what you're seeing in terms of operator activity to actually target a wider audience for those games because clearly they have interests beyond the usual sort of slot or Live Casino players.

[Martin Carlesund, Group Chief Executive Officer]

We see high activity among the operators right now or our customers who actually launched games, MONOPOLY Live and the coming games. And we -- of course, they want to capture the full potential, so we see how it's spreading often at the talks, where they usually have questions and that's very good. I would like, however, to make a remark that even though they are aiming towards newer play group on certain places, we call them, they are fantastically popular also by the -- with the existing players because they have an opinion and they are new one, and they add something new to the whole live environment. So they are equally very popular with our existing players.

[James Arthur Goodman, Research Analyst]

Okay. That's clear. And then finally, I just wanted to ask about the -- one of your main competitors, which when they last spoke to us talked a little bit about relaxing some of their exclusivity. They've also signed a big content agreement with a customer, subsequent to that as well. Any thoughts you have -- not specifically on that competitor, but just around that sort of exclusivity issue and how that's developing?

[Martin Carlesund, Group Chief Executive Officer]

I believe in competition. And I think that the competition is good. It makes you be on your toes, and you want to do better every day. And we believe that we increased actually gaps to competition by far now with the launch that we do and what we did in 2018 and what we did in 2017 as well. So we are -- we're happy with that and continue to fight to be even better this year and next year and the year beyond that.

[Operator]

Our next question comes from the line of Lars-Ola Hellstrom from Pareto Securities.

[Lars-Ola Hellstrom]

I can start -- can you give us some flavor how much Ezugi eventually added to top line?

[Jacob Kaplan, Chief Financial Officer]

Yes. So in the quarter, Ezugi adds about EUR 2.5 million to top line and almost EUR 2.9 million to expenses. So negative EBITDA effect of about EUR 0.4 million. So that -- and I think, going forward, we -- with more and more integrators, I don't -- we won't be kind of reporting separately on Ezugi quarter-by-quarter, as I see it. But that's the starting point. And then we look to see that improve during the year. And as we've said earlier, for the full year, it will have a positive EBITDA.

[Lars-Ola Hellstrom]

Okay. All regions is growing sequentially and it's also accelerating growth. Starting with Sweden, have you noticed that operators is increasingly pushing the Live Casino product, and that you have not been affected by the lower player values seen in the market?

[Martin Carlesund, Group Chief Executive Officer]

Reregulation of Swedish market and regulation in particular has been good for us. We expect it over the years. And we see that Swedish market is developing well. We're adding customers and continue to feel that our games get good traction, yes.

[Lars-Ola Hellstrom]

Okay. Moving on to the Rest of Europe. I guess, a large part of it -- of the growth is Germany, as well as you have included Ezugi. But have you noticed any kind of slowdown in the Netherlands? And what to expect from Italy after the marketing ban? And yes, any comment on that?

[Jacob Kaplan, Chief Financial Officer]

As you know, we don't comment so much on the individual markets. But directionally, I would say yes, Netherlands maybe a little slower, and many of the other larger markets doing quite well. So that I think we can see as well in our business.

[Lars-Ola Hellstrom]

And the Rest of Europe or Rest of World then, is it mainly related to the successful launch in Québec?

[Martin Carlesund, Group Chief Executive Officer]

Most U.S. is growing well. And Ezugi's main market, the largest market, was also U.S. So that adds to that. Québec in Canada is growing well. Also Asia, as I mentioned, is growing well. So I would say traction is good all over there.

[Lars-Ola Hellstrom]

Okay. Also on new studios, the new Malta studio, how is it going? When will you start to migrate? And is there any risk for a potential hiccup in terms of efficiency, et cetera?

[Martin Carlesund, Group Chief Executive Officer]

It would be -- let's start with the last. There's always risks in any big project. I don't think that they would result in any hiccup. Then we'll simply stay a little bit longer at where we are right now. But the new studio is planned to start to be launched during Q2 or so, and then it's being -- coming into full production over the end of the -- in the end of the year.

[Lars-Ola Hellstrom]

Okay. A final one for me. I think it was a question already, but the content deal that Playtech has with GGC, how do you think it will play out? Do you think Playtech will be allowed to power their Live Casino products on the EVC brands and that you also will be let into the lobby for the Ladbrokes Coral brand?

[Martin Carlesund, Group Chief Executive Officer]

All competitors we have are good, and we like being in a competitive environment. I can't comment on the deals that Playtech is doing.

[Operator]

And the next question comes from the line of Stefan Knutsson from ABG.

[Stefan Knutsson, Research Analyst]

2 of my 3 questions was already answered, but the last one was looking at your split for the Rest of Europe, how much does various Bitcoin Casino contribute to this segment?

[Jacob Kaplan, Chief Financial Officer]

We haven't broken that out. It's not the segments we follow like that, so no comment there.

[Stefan Knutsson, Research Analyst]

Okay. I would also like to state that these questions are from Erik Moberg, who is unavailable for now.

[Operator]

And the next question comes from the line of Rikard Engberg from Penser Bank.

[Rikard Engberg, Research Analyst]

I have 2 questions. The first one is related to the growth in regulated markets. You increased from 30 percentage points to 34. Is this mainly due to reregulation of the Swedish market? Or is it due to growth in the U.S. and Canada?

[Jacob Kaplan, Chief Financial Officer]

No, mainly Sweden.

[Rikard Engberg, Research Analyst]

Okay. Good. That was my first question. And my second question is related to the U.S. Can you please elaborate a bit on the time frame of the Pennsylvania studio and the size of it will be approximately the size of the New Jersey or -- yes, what's your feel in that?

[Martin Carlesund, Group Chief Executive Officer]

Okay. Time frame of Pennsylvania -- it's a noticeable question, a little bit of adjustment for the possible time is from time to time. The best guess we have right now is that it will open up during 2019. It's been bearing from, let's say, Q2 to Q4 over some time now. And that's the range that I would say. So that's Pennsylvania, all that. What was your second question, sorry?

[Rikard Engberg, Research Analyst]

How you think the -- how will size of it be compared to New Jersey...

[Martin Carlesund, Group Chief Executive Officer]

Oh, yes. Sorry, sorry, I lost that. Yes, population value of -- the way the population is in Pennsylvania, so just it's somewhere maybe double the size or a little bit more than New Jersey.

[Operator]

[Operator Instructions] Our next question comes from the line of Oscar Erixon from Carnegie.

[Oscar Erixon, Financial Analyst]

Firstly on the Rest of the World region, which is back to very strong sequential growth again, obviously, driven by -- bit by Ezugi, the U.S. and so on. But can you just elaborate a bit on what drive these larger changes between quarters? For example, Q4 was comparatively weak given the growth rate in other quarters.

[Martin Carlesund, Group Chief Executive Officer]

The numbers in Rest of the World is slightly smaller. So the percentage variation of the quarters we look for still is higher. And now we add Ezugi. We have good traction in U.S. and also traction in Canada. That drives the figure up. And that was a strong -- is a stronger predict for that. The situation in Asia, which has been a question, varies also. We're not aggressively addressing that market. We are following our European operators. And simply, the figures from there varies.

[Oscar Erixon, Financial Analyst]

Okay. Got it. And then a few questions on the product. First of all, MONOPOLY Live seems to have been a huge success, which is good to see. Can you elaborate a bit on the types of customers and also what markets, if any, it has been the most successful and if there are any differences there?

[Martin Carlesund, Group Chief Executive Officer]

MONOPOLY Live, it's early days, of course. Good start. Great momentum. Fantastic. We don't think a lot on a specific market in that way. But of course, and we know that it's, for example, not regulated in Sweden, so we don't have it there. So it's not an option for all markets. And when it comes to the players, as I stated earlier on the call, it attracts also many of our older existing players that will like some laster game. But then it also attracts new types of players, more game show like, more entertainment, little bit softer players, which then essentially spans our markets live as a market I guess, but expanding. And with the new game, we're creating the demand as well as the product at the same time. And now we see how these players actually experience and walks into this new beautiful world, and that's very exciting.

[Oscar Erixon, Financial Analyst]

Excellent. And then finally for me, the upcoming game launches here, which I guess are included in the positive guidance for the margins. Would you say that these new products need to perform well in order to continue on this very strong growth trajectory in Q1 and also the margin guidance?

[Martin Carlesund, Group Chief Executive Officer]

We are cautious, and we know that it takes time for products to get real traction affecting the numbers. So I would say that we are cautious with the effects on the result in 2019.

[Operator]

As there are no further questions, I'll hand back to the speakers.

[Martin Carlesund, Group Chief Executive Officer]

Thank you very much. If that was all questions, I would like to conclude and finish this call. And thank you all for listening.

[Jacob Kaplan, Chief Financial Officer]

Thank you.

[Operator]

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

[Martin Carlesund, Group Chief Executive Officer]

Thank you.