Evolution AB (publ)

STO:EVO

Earnings Call Transcript 2019-Q4

[Operator]

Hello, everyone, and welcome to the Evolution Gaming Group Q4 Report 2019. Today, I am pleased to present CEO, Martin Carlesund; and CFO, Jacob Kaplan. [Operator Instructions] Speakers, please begin.

[Martin Carlesund, Chief Executive Officer]

Thank you, operator. Welcome, everyone, to the presentation of Evolution year-end report for 2019. My name is Martin Carlesund, and I'm the CEO of Evolution Gaming. With me, I also have our CFO, Jacob Kaplan. I'll start off the presentation with the quarterly highlights and achievements and give some comments on our new fantastic titles that we announced on ICE. Jacob will then go through the financials, and I will then conclude by providing some thoughts on the future, followed by a Q&A session.Next slide, please. I'm very happy to be able to present yet another strong quarter, which sums up a very successful year for Evolution. The products we launched during the year including new titles in the game show category, in combination with continued strong market development and global demand, have contributed to a very high-growth rate. Furthermore, we also experienced strong results from these investments and increase in capacity we have made in the recent years. Those 2 factors, in combination with the constant pursuit of cost efficiency, have had a positive effect on our margins.I'm proud of what we have achieved in 2019. It has been an outstanding year from both financial as well as operational perspective. We now have more than 700 tables serving over 200 customers. I'm very impressed with what our employees achieve every day, and we are now approximately 8,000 employees working together towards our mission: to increase the gap to competition by offering market's best products. For the first time ever, we reached the revenue over EUR 100 million in a single quarter. Revenue growth in the quarter was 51%, amounted to EUR 106 million compared to EUR 70.2 million in Q4 2018. EBITDA increase of 77% amounting to EUR 55.8 million compared to EUR 31.6 million in Q4 2018. EBITDA margin of 52.7% compared to 45% same period last year. EBIT increase of 82% compared to the same period last year.I would like to sum this up as nothing but fantastic achievement by forward working at Evolution. The profitability is again the highest that we have ever reported in a single quarter, resulting in a record full year margins. Other highlights in the quarter include the agreement with Flutter Entertainment, and its brands Paddy Power and Betfair have also been focusing on our North American expansion, where agreements with new operators in Pennsylvania have been signed, and we are really looking forward to establishing our second studio in the U.S. during this year.Our Board of Directors proposed a dividend of EUR 0.42 per share, equaling a payout of 51% of net profit for the year, in line with our dividend policy of 50% payout.Last week, we are also pleased to announce the wide variety of innovative new Evolution titles at the ICE London Gaming Fair. We'll get back to that later in the presentation.Next slide, please. In this chart, you can see the activity in the network has continued to increase. The end of the year normally has a strong seasonality, but even with that in mind, you see the activity in the network takes a good step-up in the last quarter. We continue to see increased demand for Live Casino, partly as a result of the success of game launches earlier in 2019. Players show clear preference for Evolution games when put up against other products, and operators know they gain market share by using our products. You can also see how the audience for live games has expanded not only by existing players in online gaming, but also that our games reached completely new player groups attracted by our new game shows. This is clear -- it's a clear success of our strategy to widen live into softer players, which was initiated 3 years ago.In the fourth quarter, we passed 7 billion bet spots in the total of the network. Compared to last year, this represents an increase of 59%. Next slide, please. I'm happy that we have managed to recruit fantastic talent in our -- in all our markets. The success of 2019, which was a historic year, is all because of hardworking young talents with the right winning mindset. Evolution is built on thousands of young high potentials, and our success should be attributed to them. I already mentioned that we are about 8,000 employees. You can see it in the slide that we were about 5,500 full-time equivalent at year-end. We continue to grow with our clients and that also means high recruitment base. We want to attract the best talent and put a lot of resources in a being modern and agile employer, which is a mission I think that we are fulfilling.Next slide, please. This slide shows the breakdown of our revenue by geographic region. Nordics shows growth of 24% year-on-year. As we have commented earlier, during 2019, we had a strong start of the year, and growth has been moderate to flat in the Nordics from Q2 and onwards.Much has been said about the regulation in Sweden and its effect during the year. From our point of view, we think that the regulator has done a good job, and at least in live games, which we have a good understanding of, channelization is very high.U.K. showed 4% year-on-year growth. It's the most mature gaming market in Europe. Regulation has evolved over the last years. 4% is less than what we have had earlier this year. I see nothing significant here, and going forward, it is still a market where we have to grow.Rest of Europe continues to develop well and constitutes about 50% of revenues. Both Asia and North America is growing quickly with 172% and 106%, respectively. We see good potential in both these markets and expect continued high-growth rate in 2020. We're especially happy to see the recent regulatory movements in U.S.A., which increases the potential, and I will get back to that in coming slides.Other, including South Africa and Africa and remaining parts of the world, showed good growth of 38%. Revenues from regulated markets shows a growth of 34% and continuous -- constitutes 40% of revenue. As stated, the core Evolution strategy is to be the first Live Casino provider in regulated markets, and we expect this number to grow as more countries regulate the gaming markets.Next slide, please. For us, 2019 has been a year of products and innovation. We released 12 new groundbreaking games at ICE last week, making 2020 a new year of innovation. I'm very proud with it. Yet again, we increased the distance to our competitors. Our ambition is to pave the way for the entire industry by launching new groundbreaking products. Games like MONOPOLY and Deal or No Deal are definitely part of our success in 2019. Being back from ICE Show in London, I know we will continue to innovate the product area in 2020.Looking at our launch at [indiscernible] 2020, we are innovating around our classic core table games products, Roulette, Blackjack and Baccarat, as one that's continued to develop new type of games in the game show category and building our portfolio of First Person game, our line of RNG games. It's important to point out that continue to innovate and refine the playing experience in table games is our core. Games like Speed Blackjack, Instant Roulette, and scalable Power Blackjack were the latest addition to the Lightning franchise, Lightning Baccarat, are all examples of key additions to our portfolio of table games, a portfolio that no other provider can match.In the game show category, we launched new titles, Mega Ball, our take on lottery-style bouncing ball game. It's aimed at the new audience that might not have found live games before, a way for operators to cross-sell and introduce live games to wider audience.Another game in the game show category is Crazy Time. You simply have to see it. I don't think I can do justice by explaining, but it's built around the same concept as Dream Catcher and MONOPOLY with spectacular wheel and multiple bonus games and multipliers.These are just a couple of the 12 games we will roll out during this year. We've been hard at work for the last year creating what we -- what I think is our best game lineup ever. I'm excited to launch in 2020 and deliver value to our operators and a fantastic player experience to our players.Next slide, please. Evolution is a product-innovation company, as I said, we don't copy or steal. We lead the development, and we try to find new ways to always contribute to our customers' success. Therefore, I would like to take you a little bit deeper into our product and give some more insight into the game show category.In 2019, we revolutionized the Live Casino domain with successful launch of one of a kind in-house innovations such as MONOPOLY Live, Deal or No Deal and Lightning Dice and Side Bet City. These games as it sounds are landmark new releases for Evolution in partnership with powerhouse brands such as Hasbro, Inc., Endemol Shine Group as well as showcasing the incredibly specialty games that were developed in-house.Games in this category have achieved huge commercial success acting as powerful conversion tools to attract new players to Live Casino, specifically slots players, first time live players and those who do not traditionally play Live Casino. During this year's ICE, we'll present additional new games -- game shows that will strengthen our customer's Live Casino offering over the coming year. For example, Crazy Time and Mega Ball, our new game shows that yet again has the aim to widen Live and create new fantastic player experience for our end users. I really look forward to our coming launch dates. Next slide, please. In addition to the product development, we are continuing to invest to our future and forming new studios. During the fourth quarter, we are focused on further strengthening our North America footprint. We have expanded the capacity in New Jersey to meet the growing demand to be able to serve more customers with more games. We are also making great progress with the establishment of a studio in Pennsylvania, and I really look forward to see the studio go live in 2020.We're slightly more aggressive in -- we see a slightly more aggressive development in U.S. currently as we also see Michigan regulating. This is very positive, and we expect more U.S. states to allow online gaming in the upcoming year. We are well positioned to capitalize on the opportunity that will open up. It's also important in this context that New Jersey has outperformed our expectations, which show a very good total potential for the U.S. market.I will now hand over to Jacob, who will guide you through the financials. Next slide, please.

[Jacob Kaplan, Chief Financial Officer]

Thank you, Martin, and good morning to all of you listening. I'm on Slide #9, titled Financial Development. This slide shows our financial performance per quarter. As Martin mentioned earlier, the fourth quarter finished the year in a strong way, continuing the positive trends that we have seen all through 2019.Revenues in the fourth quarter totaled EUR 106 million, a 12% increase compared to the third quarter. We're still seeing a very broad growth profile. Growth continues across all our product types: classic table games, First Person RNG games and game shows as well as across different customer groups. Moving on to EBITDA, the gray bars in the chart. It amounts to EUR 55.8 million in the fourth quarter, equaling a margin of 52.7%. Investments made in additional studio capacity in several of our studios during the past 2 years are now giving good returns, and we have an efficient production setup with maintained high-quality, giving us economies of scale as we continue to grow. Saying it that way, production setup makes it sound as something mechanical, a machine. This is far from our reality. Our production setup is a very organic mix of people, building, software, video streaming technology, and all the thousands other things that together make up the same experience, all of it working together. We're always looking to improve our ways of working. But looking back to 2019, that production setup has worked incredibly well. We've added more tables and supported more games than ever before. All of it resulting in full year numbers of almost 50% top line growth with 50% margin. This exceeds also our own expectations from 1 year ago. If we look back on the past 3, 4 years, we have continuously been able to increase margins with our increased sales. 2016 full year margin was a bit under 40%. The EBITDA margin, that is. And during 2017, we took a step-up and margins improved a notch to 45%, a level that was more or less maintained during 2018. During the past year, as Martin mentioned, with the combination of scalable games and efficient operations, we managed to increase margins for the full year to 50%. IFRS 16 also helped during 2019 with about roughly 1 percentage point. Looking ahead to 2020, our margin guidance for the full year is to maintain or improve on the margin level of 2019. We will continue to invest in new studios, both in North America and also elsewhere. We will have a more uneven growth in tables as the Euro championships will affect rollout plans, but we will also benefit from new game releases and the growth of the Live Casino segment in general. Looking back a couple of years in the slide, you can also see that margins vary significantly quarter-to-quarter. We expect those variations also in the quarters to come, of course.All right. Operator, let's go to the next slide, please, for a closer look at the P&L. If you can look at the more detailed P&L for the period. We will start at the top. Revenues for the quarter, EUR 106 million, as mentioned. It has an increase of 51% compared to the same 3-month period 2018. Also for the full year, a similar increase, 49%.Moving down, personnel expenses totaled EUR 33.3 million in the quarter, and that's up 23% compared to the same quarter last year. It's slightly low in Q4, personnel expenses, I would say, the full year increase is higher at close to 30%.Depreciation is EUR 7.2 million in the quarter, up 48% compared to the same period last year. For the 12-month period, depreciation is up 40%. This includes the effects of IFRS 16.Other expenses include, among other items, consumable equipment, communication costs, consultant and royalty fees. The line amounts is EUR 16.9 million, with higher increase this quarter. It was relatively flat Q2 to Q3. Increase is 45% in the fourth quarter compared to last year and 41% for the full year 2019 compared to 2018.Summing up expenses, total operating expenses increased by 32% year-on-year in the fourth quarter and by 34% for the period January to December. Tax. Moving down, tax is at EUR 1.8 million in the quarter with a tax rate of just under 4% in the quarter. This includes some adjustments from previous periods. So the full year tax rate is almost 5%, which is a better indicator for 2020.All this sums up to profit for the 3-month period of EUR 46.8 million, equal to an earnings per share of EUR 0.26 per share. For the rolling 12-month period, EUR 0.82 per share on a fully diluted basis. All periods are showing EPS figures adjusted for the split 5:1, which took place during the second quarter of 2019.Operator, we can go to the next slide, please. Cash flow and our financial resources. Starting with the chart to the left in the slide, we show capital expenditure. Mentioned earlier, our investments in studios and product development have supported the strong results, 2019. We will continue to invest also 2020, and the gray part of the bar shows CapEx in tangible assets, meaning investments in our new studios. It amounts to almost EUR 7 million in the quarter. The main project are the expansion in Tbilisi and in New Jersey. Looking ahead to the coming quarter, development of our Pennsylvania studio will be a major project.The blue part of the bar represents investments in intangible assets and it's related to development of new games and features to the platform. It's just under EUR 3 million in the quarter.Altogether, CapEx is -- with more than EUR 30 million or -- EUR 30 million for 2019, similar level to 2018 in absolute terms. In relation to revenue, however, a lower level this year as you can also see in the slide on left -- in the chart to the left-hand side.In the middle of the slide, we show cash flow. Operating cash flow is EUR 44.8 million during the quarter. Cash conversion for the 12-month period has been fairly steady this year, little over 70%. It's 76% for the full year.And finally, to the right in the slide, a look at the balance sheet, it shows continued strong financial position. Cash assets have increased to EUR 182 million at the end of the period. The Board proposes a dividend of EUR 0.42 per share through the AGM. That's an increase of 75% compared to last year, which was EUR 0.24, and it equals the EUR 76.3 million or 51% of net profit this year. The proposal is in line with our communicated dividend policy of 50% payout ratio.That was the end of my prepared remarks. Hand back to you, Martin, and we'll take Q&A afterwards.

[Martin Carlesund, Chief Executive Officer]

Thank you, Jacob. A few words to conclude this report presentation. I'm proud of what we have achieved in 2019, which has been an outstanding year from both financial and operational perspective. Live Games continue to take market shares, and we will continue to support this with our new games. With titles like Crazy Time, Mega Ball in combination with new innovations of classic casino games, we continue pushing the boundaries and take the entire Live Casino industry to next level. Everything we do is about one thing: to extend the gap to competition and strengthen our market leadership. This perpetual mission in this -- is the common thread in all our studio expansion as well as in product development, operational excellence and recruitment. We continue to be a [ paramount ] company and always wondering what we can do better.Don't forget the Evolution is built on thousands and thousands of talents, together with the world-leading managers and management. Our success has been for what they create together. 2020 has started well, and I look forward to yet another exciting year.Thank you all for listening. Now let's move to the next slide and questions, and thank you.

[Operator]

[Operator Instructions] First question is from Erik Moberg from ABG Sundal Collier.

[Erik Moberg, Research Analyst]

Just in terms of your balance sheet, if you look at both accounts receivables and other receivables, sort of continues to increase quite a lot sequentially. Could you sort of give us some more flavor on that?

[Jacob Kaplan, Chief Financial Officer]

Yes, we could. I think we commented, for other receivables, that's almost entirely related to the tax -- current tax liability. So that -- those will move together. So it's more or less the structure of how the taxes are [indiscernible] once dividend is made.

[Erik Moberg, Research Analyst]

But just to follow up on that. On your other receivables, didn't that occur in Q3? And you sort of expect -- were expecting this to decrease on a Q-on-Q level, but now we still saw an increase sequentially.

[Jacob Kaplan, Chief Financial Officer]

Yes. It has to do with a little bit around the tax -- I think actually it's -- there was some adjustment after the year-end, so it probably will go down in Q1. But it's related to the fact that something else were there. That continues to increase as we grow. I would say in relation to revenue, we are maybe slightly higher level than in Q3, but still on a growth -- it's still looking entirely normal. Nothing special there.

[Erik Moberg, Research Analyst]

Okay. Fair enough. And then just looking at your accrued expenses and [ prepaid ] income under current liabilities, if we look at 2018, it was approximately EUR 7.1 million. Now it's increased to EUR 21.7 million. It's sort of like a substantial increase. Could you sort of just give us some flavor on that?

[Martin Carlesund, Chief Executive Officer]

It's related to investments we do on prepayment. Nothing outstanding. It's not impressive

[Erik Moberg, Research Analyst]

Okay. So I guess you will continue to increase into 2020. Should we expect this to continue to increase in the same sort of level? Or...

[Martin Carlesund, Chief Executive Officer]

I wouldn't expect that, no. We don't guide on that level, but I wouldn't expect for them to continue to increase, no.

[Operator]

[Operator Instructions] Next question is from Mikael Laseen from Carnegie.

[Mikael Laséen]

Can you say something more about the U.K. development and your performance in Asia, please?

[Martin Carlesund, Chief Executive Officer]

U.K., it's still -- it's the market under pressure, a little bit weaker quarter. We still see potential growth for U.K. in the coming year. There's not much more to add to that. It's quite hard. There's always a lot of discussions about the U.K. and regulation there, but we continue to see potentially the U.K. market going forward. Asia, we're still a fairly small act there. We see absolute chance of growing fine. We'll see traction of our products. The worldwide demand for our products, it's very, very clear.

[Mikael Laséen]

All right. And lastly on that new customer, how is that developing? And you have -- did you see any impact already in Q4?

[Martin Carlesund, Chief Executive Officer]

So we don't see any impact. Yes. No. Developing according to plan. We are not live yet. So there is no impact.

[Mikael Laséen]

Okay. Can you say something about the studios in Malta and also Pennsylvania? How Georgia is developing, to give some more color on those three?

[Martin Carlesund, Chief Executive Officer]

If we start with Malta, it's a brand new studio, went live with all -- we moved out of the old studio December completely. We had transition over the year. Fantastic new studio, great build, very happy with that. It's also very nice to be in one place now again where -- and operate from one place. Georgia, Tbilisi, doing very well, expanding according to plan. It's our largest setup right now. And we're very happy with the performance and quality after that studio, very good.I think you asked about Pennsylvania. But [ don't ] just fly-by, as you go to Pennsylvania through New Jersey, Atlantic City, we're expanding in Atlantic City, and investing and doubling the space and making a complete new office also there. Basically done in a couple of days depending on who you ask at the moment. And we're launching also a variety of new games like Dream Catcher in -- oh, have already launched Dream Catcher and a variety of new games in New Jersey. Pennsylvania, we are starting, so we expect to go live during 2020 with a really great studio, which is actually bigger than in New Jersey.

[Mikael Laséen]

Okay, interesting. And can you also talk a bit about the scalability, your fixed cost situation, the impact from game mix and studio mix, how that is affecting 2020, for example? And demand for different types of games, maybe how that could develop and impact the margin going forward? I mean where is the difference that's seen in different games, I guess, it has quite a large impact on your scale?

[Jacob Kaplan, Chief Financial Officer]

Yes. Let's see if I got your question right there. I think in terms of the games mix, I think, true. I mean, the game that's -- all the games are scalable, Blackjack of course being the exception. There are scalable versions of it. But as we grow the number of tables, a large part of that is of course Blackjack table. So that's part of the margin improvements that we're seeing during this year. But it's, of course, not the only part. So there's a lot of moving pieces in that. And our margin guidance for the full year, as we said, is that we think that we will maintain the level of 2019 and possibly even increase, depending on how our revenue develops, of course. I'm not sure I answered your question exactly there or it did give some more color to it.

[Mikael Laséen]

Yes. Maybe we can continue this discussion after the call maybe.

[Jacob Kaplan, Chief Financial Officer]

Of course.

[Operator]

Next question is from Christian Hellman from Nordea.

[Christian Hellman, Director of Small and Mid Cap]

Just a question on the geographical mix. Could you elaborate a bit on other markets or simply calling the Other in your table there, which you had revenues of EUR 10 million in Q4? What regions are we talking about in that segment?

[Jacob Kaplan, Chief Financial Officer]

We don't have a further breakdown. I mean, everything that's not including the Other. So South America, Africa, the others...

[Christian Hellman, Director of Small and Mid Cap]

South America -- sorry, South America, primarily or Africa or...

[Martin Carlesund, Chief Executive Officer]

Everything that is not split up above is included in Other.

[Christian Hellman, Director of Small and Mid Cap]

Yes, I get that. I'm just wondering if you could elaborate a bit more on it.

[Martin Carlesund, Chief Executive Officer]

We have not decided to split it like that. And it's not definite that we won't split it up further in the future, who knows. But at the moment, we don't split it up or give more flavor to Other right now. It's roughly EUR 12 million. That's the Other...

[Christian Hellman, Director of Small and Mid Cap]

Right. Yes. I am just trying to understand how do you get to that number? How do you actually -- is it on an operator basis? Or do you track the end players?

[Jacob Kaplan, Chief Financial Officer]

Yes, I can answer that. I mean, it's a combination of both. The part of revenue that's related to player volumes, that's divided -- that's split out to the country where the player resides. So that's the main part of our revenue. Then there are some revenues which are more fixed and not dependent on player volumes. They are allocated to the country where the operator resides. So...

[Operator]

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

[Erik Moberg, Research Analyst]

Yes. Just a follow-up question in regard to the Asian segment. Have you seen sort of any changes in the competitive landscape in Asia to compare now versus 1 year ago? And also, it's taken up an increasing share of your revenue. Do you perceive any risk for crackdown from the various government there?

[Martin Carlesund, Chief Executive Officer]

We can see that the interest from operators in Europe or Asia is very much higher now than recently. So there's more and more operators in Europe than actually in Asia. That's the difference, otherwise, it's about the same. Otherwise, no other comments really.

[Erik Moberg, Research Analyst]

So with operators, you need sort of like various aggregators, I assume, right?

[Martin Carlesund, Chief Executive Officer]

[Technical Difficulty] operators.

[Operator]

There are currently no further questions registered. So I'll hand the call back to the speakers. Please go ahead.

[Martin Carlesund, Chief Executive Officer]

Okay. If there are no further questions, thank you very much for attending. Nice to be here. And yes, thank you. That concludes the call.

[Operator]

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