Raketech Group Holding PLC

STO:RAKE

Earnings Call Transcript 2024-Q1

[Operator]

Welcome to the Raketech Q1 2024 Report Presentation. [Operator Instructions]

Now I will hand the conference over to the speakers acting CEO, Johan Svensson, and CFO, Måns Svalborn. Please go ahead.

[Johan Per Svensson, executive]

Good morning, and welcome. My name is Johan Svensson, and I'm the acting CEO of Raketech. Today, CFO, Måns Svalborn and I are here to present Raketech's Q1 report. We will start with our Q1 financials and our revised full year guidance. Raketech delivered EUR 19 million in revenues in Q1, representing an organic growth of 20%. Adjusted EBITDA of EUR 5.1 million and EBITDA of EUR 4.3 million after onetime costs due to restructuring.

Sub-affiliation continued to be the contributor to our organic growth, where decline within affiliation marketing impacted our EBITDA significant. As reported in the trading update 1st of May, we have revised our full year guidance from EUR 24 million to EUR 26 million in EBITDA to around EUR 20 million in adjusted EBITDA. Free cash flow before earn-out payment is estimated to come in just below adjusted EBITDA.

Now let's look at our different business areas, and we will start with affiliation marketing. Affiliation marketing, our in-house operated assets had a weak quarter with revenues of EUR 8.8 million, a decline with 18.5% compared to Q1 last year, mainly affected by strong comparison numbers in Sweden and negative impact of a Google Core update for our Casumba assets. The Google Core update started during the quarter and was completed in April.

The traffic situation for Casumba has stabilized but at a lower level compared to the start of quarter and last year. One of our assets was more affected than the others. We are working hard together with the founders on various initiatives to improve the situation and recover the lost traffic. Right now, it's still difficult to project when we can see a full recovery.

Our Nordic port assets had a strong quarter. The 3-year partnership starting April 1 was closed with Danske Spil, and we see a high demand for sport traffic and expect an additional boost during the second quarter with the upcoming UEFA Europe. Also, affiliation revenue from our U.S. tipster assets had its best quarter so far, still low levels but promising development.

Sub-affiliation. Sub-affiliation revenues amounted to EUR 9 million, an increase with 150% compared to Q1 last year, but the decline in top line compared to previous quarter. For the first time, we are now reporting gross profit, and we had a strong quarter with 23% gross profit margin. The foundation of sub-affiliation is that we help our affiliates and publishers with selling that traffic to operators and optimize that business.

Today, we have 2 different products, Raketech Network and AffiliationCloud. Raketech Network is a platform focusing on paid traffic, and AffiliationCloud focusing on affiliates with product generating organic traffic. The development of AffiliationCloud continues, both in terms of improved data quality and our features. The plan is to migrate the Raketech Network business into AffiliationCloud during the second half of this year and to have 1 product and platform for both paid and organic affiliates.

Moving on to betting tips and subscription. Our U.S. tipster sales delivered EUR 1.2 million in revenue during Q1, a 15% decline compared to Q1 last year. We are actively reviewing our strategy for this business area. On next slide, I will give you more details about the U.S. tipster business.

Going to the next slide, and our strategic initiatives for our different business areas. I will start with affiliation marketing, our in-house owned assets where we had our second consecutive quarter with negative organic growth. We have recently changed our operational model. We have tied down the number of product teams to secure the right competence and strategy for each product.

This restructuring has also resulted in cost savings. To be able to secure the right competence, we are open for new partnerships and work with entrepreneurs with a proven track record of our affiliation marketing. This is something Raketech has done successfully in the past.

As mentioned, our Casumba assets took a hit in the latest Google Core update. And the part of our strategy to turnaround affiliation marketing is to lower the SEO dependency. It means an extra focus on products with a higher portion of direct traffic. An example of this is our [indiscernible], where we saw a boost in traffic and sales during the quarter.

Another growth initiative is to increase our CRM activities. To continue to develop CRM will be important to increase the value of each lead and something we will continue to invest in. Customized partnerships with operators. Our ambition is to work closer in longer contract with our preferred partners, where we have opportunity to work long term with a constant strategy to increase the conversion and deliver value.

During the first quarter of the year, we closed 2 large -- 2 longer contracts with Danske Spil and be best in Denmark and an exclusive deal with a new Swedish casino operator.

Sub-affiliation. As mentioned in the Q4 presentation, focus is to expand to new markets and onboard new publishers. During the quarter, we launched [indiscernible] on AffiliationCloud with a promising start. The development of our AffiliationCloud platform is progressing with a target to migrate old sub-affiliation traffic and revenue to the platform during the second half of the year.

Betting tips and subscription. Our U.S. tipster business today consists of 2 models: advisory and multi-cap. Both of these models are fed with each from our website. Advisory is a manual process with dependency on the performance of our U.S.-based tipster sales team that work directly with the end users, our customers. The multi-cap model is online-based and integrated on our websites. Boost believes is generated, converted and managed online on our products.

Today, the majority of our betting tips and subscription revenue still comes from advisory, but we have seen a good organic growth on our multi-chapter platform. This is a result of our digitization efforts, which have been focused on increased traffic volumes, improved conversions on our product and dedicated marketing initiatives.

We are actively reviewing our U.S. betting tips and subscription strategy. We will continue to focus on accelerating the multi-chapter business as exchange much more efficient compared to the advisory business. The result of our efforts to digitize the tipster business has also led to increased affiliate revenue from the U.S. sports book operators. Q1 was a record quarter in terms of affiliate revenue from the multi-cap platforms.

Now over to CFO, Måns Svalborn.

[Måns Svalborn, executive]

Thank you, Johan. Total revenues increased with 20% from last year, driven by an increase for sub-affiliation, partly offset by a softer development for affiliation marketing. Sub-affiliation represents approximately 47% of total revenues in Q1, more or less in line with what we've seen in the last few quarters.

Although we see a sequential decrease for sub-affiliation from Q4 of last year, we see good appetite from new and existing publishers. Affiliation marketing decreased from last year, driven primarily by a weaker result from the Casumba assets and our Swedish assets, as Johan covered earlier. Our other larger assets in other markets show stable to positive performance.

On the right-hand side and a quick note on our revenue mix for revenue share, CPA and flat fees. In absolute terms, we are growing revenue share, which is good, and we see specifically an increase in rev share from our sub-affiliation area in Q1. The majority, however, of the revenues within sub-affiliation is CPA, which has driven the overall increase in CPA for the group over the last few quarters.

As for the regional split and starting with the Nordics, the shifts we have seen for the Nordics between the quarters is essentially an effect of the growth within sub-affiliation, and the decrease in Q1 versus Q4 relates also primarily to sub-affiliation with some effects of seasonality within affiliation marketing, which we normally see from Q4 to Q1.

Similar to previous quarters, the main drivers within Rest of World related to Casumba and again sub-affiliation. The vertical split on the right-hand side shows casino growing from last year, representing 82% of total revenues in Q4. The largest shifts we have seen within the verticals is driven by the growth in sub-affiliation and we will continue to see sub-affiliation contributing to both sports and casino throughout the quarters.

As Johan however, covered earlier, we are actively focusing on growing and monetizing on our high-traffic in-house sports assets, and we expect to see a positive development here going forward. And in the shorter time frame, we expect to see a positive result from the upcoming UEFA Euro.

EBITDA adjusted for costs relating to restructuring amounted to EUR 5.1 million. The nonrecurring costs we adjusted for relates to our review of our operating model that Johan mentioned as well as costs related to the change of CEO in early Q1.

As highlighted, EBITDA was primarily affected by a softer performance from our Casumba assets as well as tough comparisons for our Swedish assets. We did, however, see a strong contribution of a 23% gross profit within sub-affiliation. This is higher than previous quarters, driven by a positive development for rev share. And as we move along, we'll see the margin very depending on primarily rev share.

Worth mentioning, however, is that our primary focus is to ensure we grow this area from the perspective of increasing gross profit in absolute terms. On the right-hand side, we did see a strong free cash flow before earn-outs. I have mentioned during the last couple of quarters that we were expecting a catch-up from improved working capital, stemming primarily from trade receivables, which materialized during Q1.

Another point to make here is that we settled about EUR 13 million in earn-outs to Casumba during the quarter. And with regards to the upcoming earn-outs.

Moving on to the next slide. As I mentioned on the previous slide, we settled EUR 13 million of the Casumba earn-outs during the quarter, bringing the total outstanding consideration at the end of the quarter to EUR 34 million. For the next 12 months, we have upcoming earn-outs to settle of about EUR 14 million.

An important point to make here is that the remaining EUR 20 million can be settled at any point in time up until September 2026, meaning there is a lot of financial flexibility for us.

Another point to make is that our option to settle part of the earn-out in shares is also at our own for discretion, adding even more flexibility.

In conclusion, given our current cash flow estimate for the year, our free cash flow is well above upcoming estimated earn-out settlements.

Back to you, Johan.

[Johan Per Svensson, executive]

Thank you, Måns. To conclude here. Affiliation marketing, it is our full focus to turnaround our declining in-house assets, including the Casumba products, to deliver long-term organic growth. Here, we work in parallel with various initiatives. At the same time, we see a strong appetite for sports traffic in the Nordics, where we are investing in our products and in new contents to meet the demand from the operators.

Sub-affiliation, despite the drop in revenue compared to Q4, that we saw a stable performance during the quarter with an increased gross profit margin. U.S. tipster and subscription. The plan is to continue the digitization of the tipster business and increased revenue from affiliation marketing on the tipster assets. We are also reviewing our strategy and the advisory part of the business.

Outlook. Looking at April, the revenue came in at EUR 5.9 million, which is in line with April last year. However, higher share of revenue from our lower-margin sub-affiliation business.

Guidance for 2024. 1st of May, we revised our guidance for the full year to around EUR 20 million in adjusted EBITDA with free cash flow before earn-out just below the EBITDA.

With these words, we now open up for Q&A.

[Operator]

[Operator Instructions] The next question comes from Hjalmar Ahlberg from Red Eye.

[Hjalmar Ahlberg, analyst]

Yes, to start with a few questions on the Google update there. Can you explain a bit more about how it impacted? I mean, have you kind of identified it you see working on improving there. But could you give us some more flavor on what you're doing and what you think happen there for the assets that were most impacted, to say?

[Johan Per Svensson, executive]

Yes. I guess you -- Hjalmar, I guess you refer specifically to Casumba assets.

[Hjalmar Ahlberg, analyst]

Yes.

[Johan Per Svensson, executive]

Yes. We're working very hard together with the founders and the directors of the team. When this happened, first, you start with an analysis to try and find the reason behind the drop in ranking and traffic. Then we -- when you're done with that, we try to improve our content and product. It's both on page and off page SEO. Furthermore, we are working on different initiatives to boost our traffic besides recovering from the search traffic. One example for the Casumba asset is an increased focus on CRM activities.

[Hjalmar Ahlberg, analyst]

All right. And do you think that -- I mean, if you look at the competition, for example, for the Casumba assets? Have other -- have you lost market share? Or is it like a general negative impact for most in that market?

[Johan Per Svensson, executive]

We've lost traffic. We have, of course, lost some market share in terms of new traffic, yes. But we also see different type of assets ranking very well at the moment in specific markets.

[Hjalmar Ahlberg, analyst]

All right. And I mean, it seems like your other business doing well, sub-affiliation seems good. But do you see any impact, I guess, from your affiliate clients, so to say, from Google update or was it mainly this asset that you saw the impact on?

[Johan Per Svensson, executive]

Outside Casumba assets, we see a stable performance for other markets.

[Hjalmar Ahlberg, analyst]

Yes. And you mentioned that you want to kind of lower risk for similar going forward and working more with direct traffic, so to say. I mean, is this a big change that will take time to do? Or yes, how will this work out to do you think over the coming quarters? And how low -- how much can you lower the risk from this over the coming years?

[Johan Per Svensson, executive]

Yes, to lower SEO dependency, we will always work a lot with SEO activities. But I think the key is to drive traffic from -- in multiple channels here. So we are focusing on products. We have a higher portion of direct traffic. At the same time, we like to improve our CRM activity. So it's a mix, but it takes time to develop new traffic -- new channels of traffic.

[Hjalmar Ahlberg, analyst]

All right. And in terms of the trading update and the guidance, I mean, we know January revenue and then I guess if you just average of February and March and then comparing that to April, it looks like April is kind of bottoming out compared to March. Can you give some flavor on that? Is -- was March the kind of bottom and you're up in April versus March? Or is that difficult to say in the short term?

[Måns Svalborn, executive]

It's a bit difficult to say in the short term, but March and April were very similar in terms of revenue and also the split between affiliation marketing and sub-affiliation. And April, I can add as well, the share of sub-affiliation revenue was very comparable to what we saw in Q1 as well, even though we sort of matched the revenue compared to last year, as Johan pointed out, there is a hard -- larger share of sub-affiliation revenues.

But then bearing in mind the rest of the year as well, we obviously have the Euro coming up, which we expect positive effects and then Q2 normally is a slower quarter for us with an expectation for that to pick up in H2, at least based on historics that we've seen before.

[Hjalmar Ahlberg, analyst]

Right. Yes. That's good. And the guidance, I mean, you say you based upon current trading, I guess, so you don't really consider that -- and recovery from the Casumba assets with the guidance that you have now?

[Måns Svalborn, executive]

It's different aspects in that estimate. So there is some assumption of recovery. Timing is obviously a bit difficult to say on the recovery, there is some assumption in it. Then obviously, the initiatives Johan mentioned earlier as well, and initial as well, again, the euro during the H2 being normally a stronger season for us and the sports season in the U.S. opening up and stuff like that.

[Hjalmar Ahlberg, analyst]

Right. And a question on your optimization program. I mean, how should we see this going forward? Do you think we should see kind of absolute decline in OpEx? Or it's more like you can see more operating leverage if you grow top line and gross profit?

[Måns Svalborn, executive]

The main point is to achieve operating leverage. That's the main point. Then obviously, there is an element of cost savings as well. This has been factored in, in the full year guidance. And having said that, even though this was a onetime initiative, we did during the quarter, this is something we'll continue to look at primarily most from an OpEx perspective just to make sure this is something we do, obviously, continuously, but make sure we are as efficient as possible as we move along.

[Operator]

The next question comes from Rikard Engberg from Carnegie Investment Bank.

[Rikard Engberg, analyst]

So I have one question regarding the gross margin in the sub-affiliation segment. It came in at 23% this quarter. And is this number unusually high due to a high number of rev share? Or is it this level that we should look at sustaining going forward?

[Måns Svalborn, executive]

No, it is higher than what we've seen in previous quarter, and it is, as you're right to point out, I wouldn't say it's exclusively related to rev share because that's not to, but it's part of it. But we are actively looking to focus and we have been, but it will be a continued focus for us to make sure that we're growing in absolute terms in profitability. Revenue growth is obviously important for us, but we want to make sure we optimize profitability within that area.

[Rikard Engberg, analyst]

And also my last question. If you can shed some light on the development on AffiliationCloud and how it has developed and has been, I'd say, how is external clients view the product during the quarter?

[Johan Per Svensson, executive]

Yes. AffiliationCloud, developing well in the right direction definitely. Now we took the decision here to migrate Raketech Network into AffiliationCloud to have 1 platform where we got to give service to paid publishers affiliates and affiliates driving organic traffic. So yes, we will focus on development and improving the product, both in terms of data features, data and quality and other features.

[Rikard Engberg, analyst]

And one final question, this migration towards AffiliationCloud, will that affect your OpEx, so to say, we're lower it?

[Måns Svalborn, executive]

Sorry, the migration of Network into AffiliationCloud, if that will affect the [indiscernible]? Yes, to some extent, it's a marginal effect, but to some extent, effect will obviously be more streamlined in our organizational setup, I think, once we get this done. So that will have a marginal effect of us -- from us, but nothing super material.

[Operator]

There are no more phone questions at this time. So I hand the conference back to the speakers for any written questions and closing comments.

[Måns Svalborn, executive]

All right. So we have a few questions -- written questions coming in. The first one is potentially more of a board question, but I'll let you say something about it, Johan. So you pulled back the dividend. Are you considering buybacks at these price levels?

[Johan Per Svensson, executive]

Yes. It's up to the board and shareholders to decide.

[Måns Svalborn, executive]

Yes. Another one relates to the development on the Swedish market. Could you provide some color on the development in the Swedish market? Do you think the lower performance is related to asset-specific performance or a result of lower operator appetite for investment on the Swedish market?

[Johan Per Svensson, executive]

Yes. The Swedish market, we -- in Q1, we had -- '24 we had tough comparison compared to Q1 '23, we had a very strong start of last year in Sweden. It's a tough comparison this year in Sweden, but we see a stable performance compared to -- from Q2 last year compared to Q1. Sweden as market had a negative growth last year. We could see now in Q1 this year, Sweden total market at 2% growth. So it's good to see that Sweden is growing again as a total addressable market definitely. And we -- yes, that Sweden is an important market for us.

[Måns Svalborn, executive]

Another one. We've covered this briefly, but maybe I want to add something, Johan. So we -- a quote from the CEO comment, working closely with Casumba's committed funder, we have implemented zero recovery strategies and improved content quality. We also talk about lowering SEO dependency. Taken together, this suggests that the previous strategy was more SEO based and with insufficient quality. The kind of strategy that Google has long said it will publish. Would it be correct to say that the previous strategy maximize short-term traffic increases and pay out to Casumba former owners?

[Johan Per Svensson, executive]

Yes. We don't comment on a specific SEO strategy for any markets. But yes, it's correct. We've seen a decline in affiliation marketing. And the part of the turnaround here is to lower SEO dependency, and that's not normally before, just on assets not for all assets to add more type of traffic channels and revenue streams.

And the second question was about would it be great to say that -- there was something about earn-out as well.

[Måns Svalborn, executive]

Yes, there's a number of questions on the earn-out and the specific agreement. We can't go into the specifics on the agreement and so forth. There is one question around how the Casumba earn-out has been calculated and that we can cover. So the majority of the earn-out -- the final calculation of the majority of the earn-out was done end of Q4 2023, and the remaining one we have is a profit share up until July of this year. But that's in relative terms, a small part of the earn-outs.

And then another one on intangible assets. It looks like the databases are fully amortized at the end of Q2 meaning that the level of amortizations will decline as we move along. And this is true. So at least related to the Casumba assets, which we are amortizing quite heavily and have been amortizing quite heavily. They have peaked from an asset perspective. So that will decline as we move along in the -- they are amortized over 3 years. So those will be decreased with time as when we move along here.

And I think the last one we have, are you still optimistic about the Casumba assets long term? Do you expect a return to growth next year?

[Johan Per Svensson, executive]

We're confident in our strategy of turning around affiliation and marketing, and that includes Casumba assets, but we get. We can't -- right now, we don't know when we could predict a turnaround for Casumba assets specifically, but we're confident in our strategy.

[Måns Svalborn, executive]

I'm sorry, one came in just a few seconds ago. Your working capital did decrease in Q1. Is the end of Q1's level a new normal level to expect going forward if your revenue stays at the current levels?

So yes, they correlate. It's a little bit tricky to specifically forecast it because it depends on timing of payment to publishers and operators, which can shift a little bit between the quarters, but there is a correlation.

[Johan Per Svensson, executive]

Good. Thank you all for listening in, and thank you for all questions, and we speak again in August. Thank you. Have a good day.