Raketech Group Holding PLC

STO:RAKE

Earnings Call Transcript 2022-Q2

[Operator]

Welcome to the Raketech Audiocast Teleconference Q2 2022. [Operator Instructions] Today, I am pleased to present CEO, Oskar Mühlbach; and CFO, Måns Svalborn. Speakers, please begin.

[Oskar Mühlbach, executive]

Good morning to everyone, and welcome to Raketech's Q2 Report for the year of 2022. My name is Oskar Mühlbach, I'm the group CEO. And with me, as always, is also Måns Svalborn, our group CFO. Måns and I are going to take turns to go through the 4 bullets on the agenda, which you can see here on your left.

Once we're done talking, we will, as always, also give you the opportunity to ask questions during the Q&A session at the very end. Once again, warm welcome, everyone. Let's get started, and that is on Slide 3.

Starting with financial highlights for the quarter. Q2 came in at EUR 11.3 million, which is about 29% more than the same period last year. As expected, this is slightly lower than the first quarter, simply because Q2 is the weakest period of the year from a seasonality perspective and that most markets and operators have reported somewhat challenging market conditions.

Also this year, we met extraordinary comparison numbers considering last year had both the European championships in football as well as the COVID outbreak fueling digital industries, including the online gambling industry. To make the comparison even tougher, Finland is, as you might remember from our last presentation, lower this year due to new marketing restrictions, as well as Netherlands and Germany being out of reach for our network services. And finally, now that we have such a significant share of revenues coming from the U.S. We will have to get used to seeing lower numbers in Q2 compared to Q1, simply due to the U.S. sports calendar. Performance on our U.S. assets is solid, but activity is lower, correlating to -- but activity is lower, correlating to the major American leagues, which, to be clear, means that we are expecting revenues to pick up during the high season, which is from September to February.

With all this in mind, I'm happy about our delivery in Q2, things are going according to plan, and we continuously noticed product improvements having effect on rankings, commercial optimization having effect on monetization and new initiatives such as the affiliation cloud generating incremental revenue streams.

As we've said before, we are continuing to invest into the U.S. expansion and product development, which in combination with a reasonably fixed cost base, consequently lowered the margin for the quarter to 35%. I want to point out that I'm comfortable with this margin as the investments are directed towards growth, but also as our fixed cost base is stable, which means that we expect to see significant positive effects on our margins with increased revenue, specifically from our American assets, which, at this stage in time, is relatively resource-intense.

Cleared from network revenues and Rapidi, which is a small operator brand we use for data referencing, our organic growth year-over-year was 3.4%. Looking ahead, July started comfortably with EUR 3.9 million in revenues, thanks to strong organic performance across the board relating to positive effects from Google's latest core update in May and June. And keeping in mind that the high season hasn't really started yet. This number does look promising. And to spice it up a bit extra, the interest for Affiliation Cloud is continuing to be high.

Next slide. Slide 4, please. And now to some operational highlights and key numbers from the quarter compared to last year, our sports share of total increased with 163%. This is relating to last year's acquisitions. Naturally, however, the sports share was lower than in Q1, simply due to the U.S. sports seasonality, as I mentioned on the previous slide.

On the previous slide, I also highlighted that new regulations in Germany and the Netherlands affected our network revenues negatively. With this slide, I want to emphasize that we do not anticipate any more negative effects from these events going forward.

Besides it, of course, making the annual comparison a bit tougher also during Q3 and Q4 for the network specifically. U.S. revenues totaled 12% of group total, which considering the lack of major sport events is okay. We expect the U.S. sports season, which is between September and February to significantly increase this number in the remaining second half of the year.

Setting Finland and the network side, we experienced solid results across the board and saw healthy KPIs for most regions, initiatives and assets. Sweden stood out from a positive perspective with strong performance, which considering tough comparisons, is giving us confidence for H2.

Furthermore, I'm proud to announce that we have prolonged our RCF yet another year in terms -- on terms that in this industry should be considered as very healthy. And last, but absolutely not least, we have assigned resources into the operational handover of one of our oldest, dearest and largest assets, CasinoFeber, from the founders to the talented central operations team.

The handover is planned for February of next year. But as this is an important asset for us, we are, of course, already now working closely together with the original team to ensure a smooth transition. Not only is this exciting from a product development perspective, but of course, also from a cash flow perspective, we are expecting to see significant uplift in cash flow from -- in cash flow generation from this asset with around EUR 4 million or more per year as on February next year.

And let's move to the next slide, and that's Slide 5. So you now heard me talk about all the extraordinary factors that impacted the Q2 comparison such as the European Championships in football and the COVID boosting Q2 numbers of 2021 and the strong seasonality effects in the U.S. and the German, Dutch and Finnish regulations complicating things.

But to give you a bit more balanced view and to understand what things that we expect to affect us in the second half of the year, I've therefore created a slide of this topic specifically, which is this one.

And as you can see, I've listed 3 things. We expect to have an impact on our performance over the next 6 months. External factors such as inflation, potentially increased unemployment rates, recession or other macro factors, I've, of course, taken out of this equation.

If Q2 was a weak sports period than Q3, but potentially even more so Q4 should be the absolute contrast to this. We have the American football season starting in September, which typically is the most important sport for us in the U.S. Also with the FIFA World Cup being held in November this year, we expect to see increased activity on sports-related assets, most sports-related assets, I should say, but maybe more so outside of the U.S., where the football is around like a sphere.

The second factor, the box in the middle is relating to organic growth. And here, I want to take the opportunity to clarify how we define organic growth. Once an acquisition has been with us for 12 months, we start continue -- counting potential growth as organic. We have affiliate peers counting organic growth as growth even on acquired assets during their first 12 months as well.

And I've therefore received quite a few questions about this, which is why I want to clarify that we use the standard definition and nothing else. And on that note, as we did acquisitions in the second half of the year and that we are seeing growth in all of these acquisitions, I'm looking forward to including their future success into the organic growth calculations.

Furthermore, the positive effects from the latest Google core update positions us in a very -- positions us very well for the casino high season, which starts in September-October and continues throughout November and December.

The third box, to your very right, states increased EBITDA. And thanks to our stable cost base, higher revenues through in Q3 and Q4 should, therefore, also naturally lead to higher margins during this time.

With these 3 factors in mind, I want to reiterate our full year guidance of revenues within EUR 50 million to EUR 55 million and EBITDA margins between 40% and 44%. At this point, this is our best estimate, but I also want to flag that we're not going to hold back growth within lower-margin segments such as the Affiliation Cloud, if we see potential for that.

Before I hand over to Måns, I also want to talk just briefly about why I think that Raketech's current structure and business model is a bit extra resilient against the turbulence, but also a bit extra well positioned for long-term growth, and that is on Slide 6. So please go ahead.

So on this slide, you can see that I've included Raketech's current main business areas. For those of you who have followed us for a while, I want to clarify that the media category here is clustered together within affiliation marketing and that the network is clustered together with revenues from Affiliation Cloud in the middle bucket sub-affiliation.

These 3 different buckets represent 3 different dimensions of what together make up Raketech today. A few years back, we were an affiliation-only company, and the majority of our revenues were coming from the Nordics with Sweden and a handful of assets in particular.

Today, we're a modern affiliation in the performance marketing company offering a wide range of services and products to operators, other affiliates and end consumers. We still have a solid footprint in the Nordics, but more than half of our revenue are now stemming from multiple exciting growth markets around the world.

To mention a few, it's India, Japan, South America, Europe and, of course, also the so important U.S. market. And to be concrete, this means that we are more resilient to sudden macroeconomic changes and that we have more growth initiatives going than we've ever had before. And as you might recall, to get to this point has been a strategic focus for us over the past few years. I'm very happy to see that it is having the desired effects in terms of continued growth and stability in an otherwise volatile world.

With that said, there are also a few other aspects of this that are potentially more -- also important to bear in mind for you as an investor when looking at Raketech and our performance over time.

If we start with the box on your left, affiliation marketing, this is our bread and butter. In this bucket, we have comparison websites, forums, review sites, media assets. These assets are either acquired along the way and fine-tuned by Raketech or build from scratch in-house.

Nevertheless, every single asset requires either a few years' worth of investments and work to be successful or they need to be acquired along the way. Once they're past their initial growth phase, they're typically around at extremely high margins at up to 80%.

Over time, we aim to grow our assets within this bucket in line with or better than the digital gambling growth on the markets where they are present, and as the digital world of online gambling so far only represents 15% to 20% of the world's total gambling, we believe that there are many years of growth ahead of us within this segment.

In the middle bucket, we have sub-affiliation. This is, simply put, when we make use of, on the 1 hand, our advanced technical infrastructure and data analytics; and on the other hand, our since long-established commercial relationships with all of the global gaming operators.

We package this as a managed SaaS solution and allows modern affiliates access to unique tools and simple administration interfaces and operators access to widespread of quality short smaller affiliates, which is 1 click.

This segment includes our so-called network business as well as our recently launched Affiliation Cloud. with most operators active on multiple markets at the same time with a large -- with most operators active on multiple markets at the same time with a large number of affiliates, combined with an ever increasing legal complexity, the demand is large and it is increasing.

Margin within this segment is naturally lower than in the first one, but it does not require us to making any long-term investment into assets, and it allows us to quickly enter new markets without making acquisitions necessarily.

On the right-hand side, we have what we call betting tips and advice, which is a segment we only provide in the U.S. at the moment. We will, of course, eventually look at the opportunity to expand this outside of the U.S., but for now, the opportunity within the U.S. is simply too big for us to risk losing focus.

Consumers pay to get advice and tailored data insights about specific games or leagues and they pay via subscription and in some cases also through [indiscernible], which simply put is bonus being paid to us when our information and advice has led to successfully placed winning bet.

Activity within this segment is very much relating to the major leagues with September to February being the most important period. Operational costs are reasonably stable, consequently leading to very low margins during low season and very high margins during high season, which is what we saw during Q2.

With all these segments -- within all of these segments, we, of course, have much more granular services. But from an overall perspective, this is how our revenues are generated today and also the reason why we are so stable and resilient nowadays.

But also in my mind, a cornerstone in building a company that is long-term sustainable and wins not only today, but also tomorrow and the day after tomorrow. And with that said, over to Måns and the Q2 financials in details.

[Måns Svalborn, executive]

Thank you, Oskar. And let's start on Slide 8, please. As expected, we saw revenues decrease sequentially from Q1, which essentially is an effect of the U.S. sports season entering into the low season of the year, and additionally, somewhat lower activity within network sales.

Our U.S.-focused betting tips and subscription services accounted for 9% of total revenue in Q2 compared to 17% in Q1, which is more or less in line with our expectations, and as I mentioned, an expected seasonality effect. Performance from our network sales with somewhat lower activity, however, in line with the development of the markets they operate in, it presented 17% of total revenue in Q2 compared to 20% in Q1. Worth pointing out is that last year was exceptionally strong in this segment, as both the German and Dutch markets were still open for business ahead of reregulation within both of these markets.

Our revenues from affiliation marketing, which represents our largest revenue segment, are essentially in line with Q1 of this year, which is positive considering Q2 marks a slower season. We see strong performance in Sweden and Norway, positively affected by the recent Google update as well as continuously solid performance from Casumba and our recent acquisition Infinileads, targeting primarily to South of Europe.

So in summary, expected seasonality effects and solid performance from our core business of affiliation marketing. Next slide, please. This slide illustrates our revenue diversification, split on regions and verticals. As highlighted on the previous slide, Sweden and Norway are developing positively, both Q-versus-Q and year-over-year, which means that Nordic revenues are in line with comparatives despite the development of the Finnish market and the seasonality effects and despite tough comparisons from last year with the Rest of Europe 2020.

U.S., as I mentioned, is lower as an effect of seasonality Q-versus-Q. And as the last point in our region is that the decrease in Rest of Europe from Q2 of last year related, as I highlighted earlier, the shift of efforts within network sales from the German and Dutch market.

With regards to the sports vertical, we did expect a lower share of revenues, again, an effect of the U.S. sports season. We did, however, see as well as shift from casino revenues to sport revenues in network sales, which led to the share of sports revenues still above 30% of total revenues.

Network sales is, however, as we mentioned before, slightly more opportunistic in its approach, which could mean this could shift slightly back and forth between the verticals as we move along.

Next slide, please. And the key development was reasonably stable, looking both at Q-versus-Q and year-over-year. Affiliation marketing has contributed with a positive NDC account, but this was largely offset by the lower activity within network sales.

Next slide, please. And this slide illustrates our EBITDA and EBITDA margin in Q1 compared to Q2 of this year. The decrease, as you can see, in both EBITDA for absolute numbers and as a margin relates essentially to the expected seasonality effect of lower U.S. sports revenues, and this business line operates with a higher degree of fixed costs, which then naturally lowered the margin for the group during the off-season.

We do, however, as Oskar pointed out, expect to have -- this to have the opposite effect during H2 when the football -- the U.S. football season takes off. Network revenues has decreased as well, as we pointed out, with some effect on our EBITDA, but it has a smaller effect on our margin as it runs with a higher degree of variable direct costs, which is visible through the general lower direct costs.

Other costs, such as personnel expenses and other operating costs are essentially stable, and we expect these to remain stable during the following quarters. So to sum up, seasonality effects, primarily for the U.S.-focused sports revenues are affecting the EBITDA margin, which we expect to improve in H2.

Next slide, please. This slide is illustrating our EBITDA to net profit bridge. The largest items below EBITDA are depreciation and amortization on our intangible assets and other finance costs, which represents the discounted value of our outstanding earn-out liabilities.

Important to note is that these items are noncash affecting items, which is why cash conversion remains close to 100%, which we can see on the next slide.

Next slide, please. And my last slide is our cash flow bridge Q1 to Q2 of this year. As I mentioned on my previous slide, we continue to see high operational cash flow with high cash conversion of 98%. Earn-out payments amounted to EUR 2.8 million, of this EUR 0.9 million related to CasinoFeber, which is an earn-out that comes from end towards February of next year. And as from that point, we expect net cash to improve significantly.

And as a last point, we have capitalized some costs relating to the development of Affiliation Cloud of about EUR 0.2 million. This product will obviously need continuous development, but we're not expecting any major cost deviations from current levels.

Thank you. And back to Oskar, and Slide 14, please.

[Oskar Mühlbach, executive]

Thank you, Måns. That was the last slide for the day, but before we move on to Q&A, let me just wrap things up first. And let's start with the financials.

Q2 revenues totaled EUR 11.3 million, equivalent to an annual growth of 29%. Despite low season and tough comparison numbers, we saw a stable performance from core assets, however, due to changed regulations in Finland, Germany, and the Netherlands, we declined organically with 4% year-over-year.

Adjusted EBITDA came in at EUR 4 million, which equals a 16.6% growth year-over-year, corresponding to a margin of 35%. Other significant events and milestones worth highlighting is that our U.S. revenues came in at 12% of group total, and as Q2 is the slowest season of the year due to the U.S. sports calendar, it is expected for this year to significantly increase during the upcoming high season, which is September to February, Sports asset segment represented 31% of group total and non-Nordic revenues were 53%, slightly down from Q1 as a consequence of strong performance from our core assets in the Nordics.

Looking ahead, July revenues amounted to EUR 3.9 million, which is solid, considering the high season hasn't started yet. Looking at the rest of the second half of the year, we do expect the market characteristics to fundamentally change as the American focal season starts. Also worth mentioning is that this period is typically also where we see high level of activity within the casino segment.

And this year, we also expect increased general sports activity, thanks to the FIFA World Cup in November. In other words, an exciting half year ahead of us.

And that was it. Let's skip to the next slide, please. We have any questions?

[Operator]

[Operator Instructions] Our first question comes from the line of Marlon Varnik of Nordea Markets.

[Marlon Varnik, analyst]

Can you hear me well?

[Oskar Mühlbach, executive]

Loud and clear.

[Marlon Varnik, analyst]

Perfect. So just firstly, I mean, I understand that the month of July is lower activity month, especially for sports. But how should we view the July number here of EUR 3.9 million in relation to rest of the quarter, that what do you expect activity to pick up here throughout Q3?

[Oskar Mühlbach, executive]

All right, I can take that 1 month. It is a bit hard to give projections within the quarter specifically as we are half through. But generally, historically, Q3 has had an overweight of activity at the later part of the period if you look at it historically.

[Marlon Varnik, analyst]

All right. And just a question here on the CasinoFeber. I mean you are shifting operations from the original team to the central Raketech team, right? So -- and has this had any impact of the cost that's already here in Q2 or should we expect some impact in Q3 and Q4? If you can give some more flavor here on the effects of the cost base from the shift?

[Oskar Mühlbach, executive]

Yes, Måns, should I take that as well potentially? You can fill in if you have any more details, but I don't think you should -- we're already taking somewhat cost to that, but it's relating to staff costs, which I wouldn't say have any material impact.

Of course, it has a marginal impact on our margin going forward, but it's not significant. So it's not worth mentioning in that context. I think what we're preparing is that -- once we take the asset over in February, we'll, of course, host all of the costs and bear all of those internally.

So that would potentially then change how we operate going forward. But still we expect to significantly increase the cash flow from that asset being generated as of February. But up until then, I don't think you should expect any material extra costs even though we are taking some, but that's really been primarily to a few to the team working with it from our side.

[Marlon Varnik, analyst]

Yes. Right. And just lastly here on Finland. I mean, I assume that operators are cutting back on investments on the Finnish market given the regulatory headwinds we're seeing here in 2022. Should we expect the Finnish market to drop further here from Q2 levels due to this? Or what's the outlook from your point of view for the Finnish market here for the rest of 2022?

[Oskar Mühlbach, executive]

Yes, that's an interesting one, actually, because the reason why the major operators are careful now when the marketing legislation has been tightened is that they are, to some extent, afraid of being subject to payment blocks as of next year, which basically means that they still have an appetite for that market because they are working very carefully.

So I would say that the level where we are at, at the moment, is a stable one. We're actually seeing small positive signs of the larger ones returning to the Finnish market, somewhat more careful than before, of course. But I wouldn't say that there are any -- we don't see at this point at least any signs of any major disruptions on that market within the short term.

[Operator]

And we currently have 1 question in the queue. [Operator Instructions] And our next question comes from the line of Rikard Engberg of Erik Penser Bank.

[Rikard Engberg, analyst]

So my question is regarding the development of Affiliation Cloud, which you launched in the quarter. Are you satisfied with the launch? And what can we see going forward?

[Oskar Mühlbach, executive]

Yes, we are -- short answer, yes, we're very happy with the launch. We -- I think we still have to stick with what we said last time. I think it has potential of turning over EUR 10 million within 2 years. And it's quite an aggressive sort of ambition, but I think it's highly realistic looking at where the global market is trending.

So we've seen a lot of interest for it. But I want to point out that we're still in beta phase, so we still have some development until we can really push the button and market it on a global basis. But we're very -- we're positively surprised about how it's been received by the market so far.

[Rikard Engberg, analyst]

Good. And I have 1 more question, and that is regarding the EBITDA and the guidance that you've given for the full year. How do you see that the margin will increase? Is it too high gross margin or is it mainly due to driven by growth that you will see that margin will reach the guidance levels?

[Måns Svalborn, executive]

Yes. So I think I mentioned it in my slide, I think it's -- or we projected to have a similar sort of opposite effect that it has from Q1 to Q2. So the gross margin will likely be similar that we have in Q1 and Q2 and then on top of that, we'll probably add growth in revenues and primarily, as Oskar pointed out, U.S. sports activity picking up and the FIFA, the World Cup -- football cup coming up in November and December. So I think the gross margin will remain quite stable and added growth, driving [ EBITDA ].

[Operator]

We've had a follow-up come through from Marlon Varnik of Nordea Markets.

[Marlon Varnik, analyst]

Just a follow-up question here on the organic growth. I mean it was minus 4% here for Q2. I understand that the Finnish market dampened that number quite a bit. Can you quantify or give some more flavor on the effect of the Finnish market or what the organic growth would have been ex Finnish market, for example?

[Oskar Mühlbach, executive]

I don't know if I should take this, Måns? Should I go ahead? We haven't ever historically disclosed single markets in the Nordics. So I don't think it's wise to me to quantify it exactly. But if you discount the effects from network in the Netherlands and Germany being out of bounds for the outer reach for us this year in combination with Finland. We are seeing an organic growth of 3.4%. So not sure if that helps you do the math backwards, but that would potentially help you do that, yes.

[Måns Svalborn, executive]

And I think another way of putting it as well is we, looking at Nordic specifically, we do see positive development in Sweden, which is our largest market in the Nordic.

[Operator]

And as we currently have no further questions at this time, I'll hand the floor back to our speakers.

[Oskar Mühlbach, executive]

All right. Excellent. Thank you very much, and thank you, everyone, for joining the presentation today, and we look forward to talking to you again in connection with the Q3 report in November.