Evolution AB (publ)

STO:EVO

Earnings Call Transcript 2018-Q4

[Operator]

Ladies and gentlemen, welcome to the Evolution Gaming Group Q4 2018 report. Today, I am pleased to present CEO, Martin Carlesund; and CFO, Jacob Kaplan. [Operator Instructions] Speakers, please begin your meeting.

[Martin Carlesund, Group Chief Executive Officer]

Thank you, operator. Welcome, everyone, to the presentation of Evolution's year-end report 2018. My name is Martin Carlesund. And I'm CEO of Evolution Gaming. And with me today, I also have CFO, Jacob Kaplan. As always, I will start by giving some comments of our performance for the quarter. I will then hand over to Jacob for a closer look at financials. And after that, I will round off with an outlook, this time, 2019 in focus, followed by questions. Next slide, please. I'm very happy to conclude a strong end of 2018 and an overall strong year for Evolution with many strategic achievements, such as building Georgia, launching Lightning Roulette, expanding in New Jersey, expanding in Canada, continue to increase the gap to our competitors and reaching the milestone of 550 tables, to mention a few. It seems to have been a fantastic year full of hard work. I want to take this opportunity to really highlight the thousands of young persons in Evolution, which is built off, who is together with management, making all of what you see in figures and product possible. Evolution's core is built on the huge desire to win and to constantly move the bar to the next level. Yes, I'm proud and ever so paranoid. Looking at the fourth quarter. We continue to work with expansion in our studios to meet market demand as well as our intense focus on product innovation. Our hard work is reflected in the Q4 numbers with a revenue growth of 38% and EBITDA increase of 40% and EBITDA margin of 45% and an EBIT increase of 42%. Last time we talked, we had 500 tables live. And now we have added yet 50 more. It's a significant leap in a single quarter. And we continue to see high demand going forward. The margin was slightly strengthened compared to the last quarter, supported by our ongoing work to optimize all tables that have been launched during the year. In the quarter, we carried out our first-ever acquisition. It is a strategic move that will further extend our presence in North America and provide more resources for continued growth. We are always interested in value-accretive acquisitions. And we will continue to look for new and right targets. However, organic growth through operational excellence and product innovation will continue to be the absolute main priority. During the quarter, we worked intensely with all preparations for this year's edition of ICE, which was held 2 weeks ago. You can see an image of our stand in the slide. I can't put words on how proud I am of the range of new games that will be launched during the year. I'll talk some more of them later in the presentation. After year-end, we have also signed a contract with Loto-Québec, which is our second customer in Canada but will be launched from our studio in Vancouver. Québec is the second-largest province in Canada. And we will initially serve its mostly French-speaking players with 6 dedicated tables. We also signed Draft Kings and went live with ATG and Svenska Spel in the beginning of the first quarter 2019. Overall, we have been off to a strong start in Q1. We'll get back to an outlook later in the presentation. I should also mention that the board proposes a dividend of EUR 1.20 per share, equivalent of 52% of the net profits 2018. Next slide, please. Bet spots is an indicator of activity in the Evolution network. And we saw healthy growth of 57% in Q4 compared to last year. The reason for the growth being higher than revenue growth is that our latest games, like Lightning Roulette, attracts smaller and softer players and more numerous bets. It's a proof that our strategy to expand to new player types is succeeding. Next slide, please. As we expand our operations, we need more talented people. And the recruitment pace remained on a high level in the quarter. As previously, we have seen the largest increase of people in our studio in Georgia, but we also continued to recruit in other markets. You can see in the slide that we have 4,319 FTEs at the year-end, which is equivalent to about 5,900 to 6,000 employees in total. However, with current pace, we have already passed the 6,000 mark in Q1. And it's a promising number actually. Next slide, please. Looking back at 2018, we have successfully launched 3 studios: our new central hub in Georgia, which is now our second-largest studio after Latvia; our studio in New Jersey, where we already have several operators live and are planning further expansion; and not to forget our studio in Canada, which went live in January last year and that now serves 2 province-run operators. With the studios, we can take them for further growth both in North America and Europe. However, as we indicated already in the last report, we have also identified the need to expand our presence in Malta, where all international leaders -- dealer teams are located. We have now decided to open a new larger studio there in 2019. In that context, you can imagine the Swedish regulation rejecting changing effect. And we now see a growing demand for Swedish-speaking tables. We now know by experience that the regulated markets drive the interest in live casinos, thanks to its local look and feel and the possibility for the operators to translate themselves in their native language. We believe this will continue to be the case as more markets regulate going forward. Next slide, please. Looking at our markets in the quarter, the Nordic showed particular strength with Rest of Europe. At the same time, U.K. continues to be a bit slow with the latest regulatory requirements. However, U.K. remains our largest market. And we do not only serve online operators but also have a growing portfolio of land-based casinos among our customers. Growth in Rest of World was somewhat lower in the quarter, mostly related to Asia. North America continues to grow at a good rate. Next slide, please. If I can single out the most exciting slide in this presentation, it's this one. I hope no one has missed our extensive lineup of new games that was revealed at ICE 2 weeks ago. [indiscernible] as this is not just new games, among hundreds of new games that are being [indiscernible] every year, I truly believe that we are on track to really define Live Casino as we know it. Both MONOPOLY and Deal or No Deal Live are great examples of this. We have created live game shows that are open to anyone to participate at any time. And our ambition is to deliver such level of entertainment that you actually want to watch the games even if you wouldn't participate yourself. We are also for the first time introducing dice games in our portfolio, which is long overdue and also a category which we believe has a global appeal. Already in the last report, we talked about the [ BFFF ] of Infinite Blackjack. And it's now live with several European licensed operators. The reception has been extremely positive. And we are proud to say that the table is already the most popular blackjack table in the world by player chance. With those 10 new games, we are now moving into softer segments of the market and by that expand it into slot segment. It has further increased our market in a very positive way. And of course, in order to be successful, it's important to underline that popularity of a game does not come by itself. Since many titles are yet to be launched, it's too early to say how large they can become. But we look upon them with confidence.Now I hand over to Jacob for some look at our financials. Next slide, please.

[Jacob Kaplan, Chief Financial Officer]

Thank you, Martin, and good morning to all of you listening in. And let's start around the slide, Financial Development. As Martin just mentioned, we had a very good finish to the year, which is reflected also in the financials. The blue bars in the chart show that revenue for Q4 totaled EUR 70.2 million. That's up from EUR 50.7 million the same quarter last year for a growth rate of 38% year-on-year. Both gaming volumes and demand for new tables have been strong. And we closed the year with 559 tables. Also as mentioned just a few minutes ago, we have a very strong pipeline of new games coming to market in 2019, mainly aiming to attract new players to the Live segment. But also as we've seen in the previous 2018, this continued, very good underlying growth in the core products. Moving on, EBITDA totaled EUR 31.6 million in the fourth quarter. That's an increase of 40% compared to Q4 2017. EBITDA margin is 45% in the quarter, maybe slightly better than my own expectation from 3 months ago. And we end the full year at just under 44% EBITDA margin, which is in line with the guidance we gave at the beginning of this year or at the beginning of 2018, I should say. For 2019, our expectation is to improve margin compared to 2018. We have stated a range of 44% to 46% in the year-end report as guideline for EBITDA margin for the full year 2019. This includes the positive effect from the move to IFRS 16, which means that roughly EUR 2.3 million of lease expenses. As 2018 resulted with operating expenses, we move to depreciation in 2019. So that will help EBITDA some while EBIT would be more or less unaffected. It also includes some pressure on group EBITDA margin from the addition of Ezugi in 2019, which will have a lower margin initially. A couple of moving parts but more or less offsetting each other as it looks right now. There will be many other changes as the year goes on. And we will still see significant variation quarter-to-quarter as is natural for our business and as we've seen in the past. In some ways, we think we can improve margins compared to 2018. We will, of course, share our view on the developments during the year and try to give continuous guidance over EBITDA margins in the short term. As we love to talk about margins, it is important. But as Martin has mentioned many times, we will prioritize top line growth over margins if there is such a tradeoff. And that's the valid statement also for 2019. Operator, let's move to next slide. Looking at a bit more detail P&L, we can see again revenues for the 3-month period of October to December totaled EUR 70 million. For the full year 2018, revenues amounted to EUR 245 million, that's an increase of 38% compared to 2017. During 2018, we have added EUR 67 million in the revenue compared to the previous year, which is more than we've ever done before. But as the base grows, the percentage does come down out a bit -- percentage growth does come down a bit in '18 compared to '17. Moving down in the P&L. Personnel expenses totaled EUR 27 million in the quarter. And that's up 35% compared to the same period last year. The increase in staff is mainly driven by increase in new tables. Also the full year increase is 35% in [indiscernible] status. Depreciation is EUR 4.8 million in the quarter, increasing 27% compared to previous year, slightly higher increase, 32% for the full year. Other expenses include, among other items, rent, consumable equipment, consultant. And it's up by almost EUR 4 million compared to the same period last year. And that's an increase of 45%. Summing up, total operating expenses increased by 36% year-on-year in the fourth quarter and 40% compared to full year 2018 to 2017. We have had a year with 3 larger studio build projects. And that drives cost. In large part, it's capital expenditure, but it also affects the P&L. Tax for the period includes some one-time effects at the end of the year. And it's low at EUR 1.2 million. But the indication going forward is a full year tax rate of about 7%. All this sums up to profit for the period of EUR 25.5 million equal to an earnings per share of EUR 0.70 per share and for the full year, EUR 2.29 per share. We'll go to the next slide, please, showing cash flow and financial resources. To the left in the slide, we have a chart showing capital expenditures. CapEx in tangible assets, that's mainly our new studios, amounts to just over EUR 3 million in the quarter. For the year, it's almost EUR 18 million. The main projects are the studio build in Vancouver, Tbilisi and New Jersey that we have talked about all through this year. Looking ahead to 2019. We see a similar level of investment in absolute numbers. However, the share of revenue will be lower. The main projects this year 2019 are the new studio in Malta that we've talked about, preparing for further expansion in Tbilisi and most likely also a studio in Pennsylvania during the year. Investments in intangible assets, it's mainly related to development of new games and features to the platform. Have been kind of stable to each quarter this year and the underlying number as it was in Q4 is roughly EUR 1 million. The boost in the figure in Q4 is a reclassification of fees paid earlier related to licenses for some of the newly launched games. And this was previously booked as financial assets but has now been moved to intangibles as the games are moving into production. There's no cash flow effect in the quarter, but it increased intangibles.In the middle of the slide, we show cash flow. Operating cash flow is EUR 22 million in quarter. Cash conversion for the full year is 66%, that's an improvement from 2017. And to the right in the slide, a look at the balance sheet. It shows a continued strong financial position. The board is proposing -- as Martin mentioned, the board is proposing to the AGM to pay -- it would be EUR 43.2 million of the cash as the dividend, equaling EUR 1.02 per share. The payout ratio of 52% on net profit, in line with our policy of over 50% payout. That would be my prepared comments. I'll hand it back to you, Martin, and we'll take questions after that.

[Martin Carlesund, Group Chief Executive Officer]

Thank you, Jacob. Let's close this up by looking into 2019. With half of the first quarter gone, we can say that we have seen a good start of the year. And we see continued good demand for tables and environments going forward. I'm happy with this. Also happy to announce the new major clients, such as Draft Kings, ATG and Svenska Spel all live during January. We will [indiscernible] that launched during the year, and we expect investment levels to be on par with 2018 in absolute numbers. Our key focus remains on strengthening our market leadership and drive the live casino industry forward. I think that we have managed to increase the gap to competition in 2018. And we are in a good position to continue on that mission this year, especially looking at the new 10 games that we just launched at ICE. In this context, I would like to thank all Evolution employees, customers and users and our shareholders for a fantastic year. And we look forward to what the future holds. Thank you all for listening. Now let's move to questions.

[Operator]

[Operator Instructions] And first question is from the line of Rasmus Engberg from Handelsbanken.

[Rasmus Engberg, Research Analyst]

Can I ask you 2 questions? Firstly, just trying to understand the buyback mandate. Why would you choose a buyback mandate rather than sort of a straightforward dividend? What are your thoughts around that? That's the first question.

[Jacob Kaplan, Chief Financial Officer]

Okay, we can handle that right away and go to the second question after that. The board is proposing to the AGM to get such mandate. We haven't had that in the past. There will be, of course, further detail in the notice to the AGM. But I would say it does give a little bit more flexibility both in M&A situation, both in shifting capital to owners. And we also have an outstanding incentive program, where we could issue new shares or there's a possibility to deal with that. So it does give a little bit more flexibility. But that's kind of the thinking.

[Rasmus Engberg, Research Analyst]

Okay. And then my second question was if you could sort of outline how your business in the U.K. is performing, how you see the market. Are we sort of leveling out in terms of the headwind from strict reinforcement? Or is there more to come in that? What's your take on that?

[Martin Carlesund, Group Chief Executive Officer]

It's, of course, very hard to look into the U.K. markets in 2019. We see a slight improvement in Q4. And we are hoping for better environment and a clearer picture of lead changing in 2019. So our hopes are that it would be coming back to a little bit more normal, with a little bit more healthy growth. But we don't have any clear view on that.

[Rasmus Engberg, Research Analyst]

Okay. Can I just have one question? I don't know if you feel answering it. But are you seeing growth in Sweden as we speak?

[Martin Carlesund, Group Chief Executive Officer]

We won't comment on the actual growth in Sweden. But we have started well. We were happy with the launch of our new operators. We went live like after 12 in the New Year's Eve. And we're very -- we're happy with the results so far.

[Operator]

And next question is from the line of Erik Moberg from ABG.

[Erik Moberg, Research Analyst]

First question. In regards to your EBITDA guidance, could you elaborate a bit more on this on how you will achieve it? I mean, will we continue to see expansion in North America? And I would assume that the likes of Svenska Spel would like to increase its amount of dedicated tables. On top of this, we also have the acquisition of Ezugi, which is appears to be a low-margin business.

[Martin Carlesund, Group Chief Executive Officer]

We see that we have had an expansion year during 2018. We've made heavy investments. And the major driver for our coming, as we believe, stronger margin will be that we will efficiently use these investments that we have done and get leverage on those.

[Erik Moberg, Research Analyst]

Okay, got you. And also in regards to other receivables, it appears to be up over 100% quarter-on-quarter. What is the main driver behind this?

[Jacob Kaplan, Chief Financial Officer]

There is an increase in accounts receivable in the quarter. I would say it's still kind of the normal fluctuations. We had higher levels earlier this year. As we've talked about in [indiscernible] we will kind of work continuously to push that down. So it's just trend with declining receivables, it's sort of broken in the quarter. But we're still in a good position on [indiscernible] than we were in the beginning of the year.

[Erik Moberg, Research Analyst]

Yes, absolutely. But I'm not talking about accounts receivable. I'm talking about other receivables, because I'd say it significantly spiked from Q3 to Q4. What's the main driver behind it?

[Jacob Kaplan, Chief Financial Officer]

Let me look into it and get back to you on that. Let me get back to you on that.

[Erik Moberg, Research Analyst]

Okay, perfect. I guess, it's about 100% quarter-on-quarter.

[Operator]

[Operator Instructions] Next question is from the line of Oscar [Audio Gap].

[Oscar Erixon, Financial Analyst]

A few questions for me. First of all, just regarding your margin guidance, you mentioned that you will optimize the expansion from last year and use that. Can you say something about the excess capacity in your current studios?

[Martin Carlesund, Group Chief Executive Officer]

We are constantly tuning that. And we are also expanding the capacity, as we speak, in Georgia. So that's continuously. We stated earlier that, for example, Georgia, which is the main delivery hub right now, will deliver capacity in 2 to 3 years, which of them, 2 years would be remaining. I would speak to that. So when it comes to the major deliveries, it's in that range. Other studios are in good shape and have the excess capacity that we see that we have the need for, and beyond that, of course, the possibility to expand further.

[Oscar Erixon, Financial Analyst]

Great. And you've talked a bit about North America and New Jersey, some very exciting clients there. What do you think about the outlook for North America and Live?

[Martin Carlesund, Group Chief Executive Officer]

I think the outlook for North America and Live in the long run is fantastic. I think that U.S. will become as big market as Europe or in that range. But it will take time. We already now see the Pennsylvania is pushing a little bit of timelines and other -- and it's very unclear when different other states would regulate. In the long run, it will be a fantastic market for Live, but it will take time.

[Oscar Erixon, Financial Analyst]

Got it. And I mean, very impressive showing at ICE, I think, a few games that looked very interesting. What games do you think will have the largest impact? I mean, based on your geographic exposure, which one do you think yourself will be the most important one in the next few years?

[Martin Carlesund, Group Chief Executive Officer]

It's a very good question, of course, but hard to answer. I mean, we will have our favorite. But the MONOPOLY game, which is a true new game with such fantastic, rich usage in space with 3D animations and multiple RNG elements. And together with Live, it's, of course, a fantastic game. For a number of players, it will be the game to play. Other games, like Deal or No Deal, more game show live, attracts different type of persons, fantastic games. The studio is one of the most complex that we had ever made. And that is thrilling in itself. But then you also have dice games, which is sort of amazing games for a large [ public ] of players that hasn't been available in Live. So honestly, it's up to you to pick one.

[Jacob Kaplan, Chief Financial Officer]

If you're asking us to pick a favorite child, but it's not going to [ happen ].

[Oscar Erixon, Financial Analyst]

Got it. Well, I have my own favorite, so we'll see. And final question for me and the one that has to be asked, I think. Rest of World has shown really, really strong momentum over the past quarters sequentially. And this year -- this quarter, it was quite flat. Could you mention -- could you talk a little bit about the dynamics there and if anything has changed in a certain market or where the flat development comes from?

[Martin Carlesund, Group Chief Executive Officer]

The other parts of the business is growing fast. That's also one layer of looking at it. So we are growing more or less everywhere. And we have the strategy or tactic that we are following the European licensed operators with Asia and we do so. And we continue doing that. And it will fluctuate a bit. And some quarters will be strong and others less so.

[Operator]

The next question is from the line of Rikard Engberg from Erik Penser Bank.

[Rikard Engberg, Research Analyst]

I have a question regarding the absolute number of new tables during 2019. Is it fair to assume that it will be same as during 2018? Or will it be more?

[Martin Carlesund, Group Chief Executive Officer]

We continue to see high demand from our customers of tables. Tables are continuously being phased and [indiscernible]. We're not guiding on an absolute numbers. But as the demand continues, we are on it to always deliver what our customer needs. So that's the answer for that.

[Operator]

And the next question is a follow-up from Erik Moberg from ABG.

[Erik Moberg, Research Analyst]

Just a quick follow-up question here. In regards of the statement that you're following licensed European operators into Asia, do you mean licensed European aggregators? Or do you mean actual operators?

[Martin Carlesund, Group Chief Executive Officer]

We have both platform aggregators as customers, which are licensed in Europe, as well as operators. And in that, we don't make that distinction that it's either-or.

[Erik Moberg, Research Analyst]

Okay, got you. But are you aware of all the operators that your aggregator integrate your games on?

[Martin Carlesund, Group Chief Executive Officer]

We rely on the regulator in Europe sees to that each operator and platform has performed accordingly. And in that sense that their operators are in turn regulated in the right way. We don't follow each and every brand name or operator that the platform or other has, no.

[Erik Moberg, Research Analyst]

Okay. But do you know who your 10 largest operators in Asia are as of right now?

[Martin Carlesund, Group Chief Executive Officer]

We don't go into details to disclose which are biggest in any of the markets.

[Operator]

And there are currently no further questions registered on the telephone line. So I'll hand the call back to the speakers. Please go ahead.

[Martin Carlesund, Group Chief Executive Officer]

Thank you very much for everyone listening and following us. With that, I would like to conclude this Q4 report from Evolution, which I think was good. Thank you very much.

[Operator]

And that concludes the conference call. Thank you all for attending. You may now disconnect your lines.