Ladies and gentlemen, welcome to the Net Gaming Europe Q4 report 2018. Today, I am pleased to present CEO Marcus Teilman and CFO Gustav Vadenbring. For the first part of this call, all participants will be in a listen-only mode, and afterwards, there will be a question-and-answer session. Speakers, please begin.
Thank you very much, and good morning everyone, and welcome to this presentation of the fourth quarter 2018 and the full year report 2018 of Net Gaming Europe AB. My name is Marcus Teilman. I'm the CEO of Net Gaming, and today I have also CFO Gustav Vadenbring with me. I'm going to start off with some highlights, both for the fourth quarter but also for the full year. Then I'll speak a little bit about Net Gaming in brief. Then I'll hand over to Gustav who will go through the financials for both the fourth quarter and also the full year. Then I'll round off with a summary and outlook, and we will also round off with a Q&A session. Let's start with the highlights, and we move on to the fourth page.
Fourth quarter 2018 saw an increase in revenues of 10%, which was an increase in organic growth by 14%. Organic growth was 14%. I'd like to highlight here that organic growth is below our own expectations, and there are some reasons behind it, of course. We have, during the full year, and especially now in Q3 and Q4, we have been phasing out the paid media channels, so the traffic from paid media has been phased out, and we are purely now focusing on SEO traffic, which is a more sustainable traffic in my opinion. Also, we have seen a shift from CPA to RevShare, and in Q4 2018, we had a share of revenues from RevShare agreements with 22%, and now in the fourth quarter 2018, it increased to 35%. Of course, that has a short-term effect on the top-line growth and on the organic growth.
I'd also like to highlight the difference between the revenue growth in affiliate revenues of 10%- 14% organic growth, and that is also that we have a divested Battle of Malta, which is a live poker tournament that we organized last year in Q4 2017, and that we sold in the first quarter 2018. That has an impact on the revenue growth. So all in all, I'm not happy. It's a little bit below our expectations from an organic point of view, organic revenue growth point of view, but I'm also happy to see that thanks to careful cost control, we've seen an all-time high in EBITDA. So EBITDA came in at 33.9%, an increase of 13% compared to last year, and an EBITDA margin of 70%.
We've seen still high cash conversion of 88% of EBITDA, and I think this is an indication of our high cash conversion, which I think will be in the region of between 85%-90% of EBITDA going forward. Gustav will speak a little bit more about this later on in the presentation. Let's move on to the next slide and the full year 2018 highlights. Our affiliate revenues grew 19% in total, with an organic growth of 12%. I've already mentioned the change in revenue streams, so we have changed the revenue streams from RevShare 22% last year in Q4, now 35%. I'm happy to see that, and we will continue to now optimize our revenue model.
Now it's time for us to make some analysis of our RevShare agreements to see which operators that have the best lifetime values, and then we'll see how we will distribute the different revenue model contracts. Thanks to our scalable platform, also we saw an increase in our EBITDA by 19% up to SEK 127.1 million , with an EBITDA margin of 66%. Also, for the full year, we saw an EPS growth of 1,100%, so earnings per share for the full year came in at SEK 1.08 per share. Let's move on to the next slide and summarize the full year. First of all, we are now a pure affiliate company. We closed off our operators' business in October 2018, so we're now a purely affiliate company. It's really good to see that.
We also sold Battle of Malta, so we are purely focusing on online affiliate within iGaming, and I think our focus, our latest focus, is really important for the future. Two other things I'd like to highlight as well is that, first of all, we acquired WebVisor in the second quarter 2018, but we also paid the second and final earnout of the very successful acquisition of HLM, Highlight Media. That means that after that, we can now organize the company as we want to, and in Q3 last year, we also set our growth plan for the future. I'm going to talk about our growth plan and our three growth pillars later on in the presentation, but I'm really happy to have that growth plan set when it comes to betting and also for the U.S. growth, and of course, also our continued focus for casino in Europe.
Like I said earlier also, RevShare diversification from 22% - 35%. I think that was a good shift. Now we will continue to focus on analyzing our data in order to improve our top-line figures more. We have seen an increase in organic growth in Q3 and Q4 compared to quite a slow start to the 2018 year in Q1 and Q2 with lower organic growth. I'm fully convinced that this growth plan will continue to help us improve our organic growth further. I'm also very happy to see that we've improved our capital structure a lot during 2018, and now we only have a bond loan outstanding, of course, also much lower interest rates. Convertible loan was redeemed early in Q3 2018, and also by the end of June 2018, we moved listing to Nasdaq First North Premier.
Let's move on in the presentation, and I'm going to speak a little bit about Net Gaming in brief. So let's move on to page eight. First of all, Net Gaming, like I said, we are now a pure affiliate company. Like many other successful companies in, let's say, the travel industry like Booking.com, Expedia, Inc, and also Hotels.com, but also TripAdvisor, where we help our users to find the right operators because we are in the iGaming affiliate industry like Catena Media and Better Collective. So we help the end consumers to find the right operators because there are a lot of operators out there, and we are active on more than 30 geographical markets. So that's our industry, and that's where we are operating at the moment. Let's move on to the next slide, and I'm going to speak a little bit about our mission.
Our mission is that we help and inspire people to make the right decision in a complex iGaming world. And iGaming is a sector that has grown a lot for many years in the past, but will continue to grow for many years ahead of us. Only 12% today of all gambling is online, and we need to help our users to really make the right decision by having really high-quality content, but also to improve our design and to serve the user intent, and also to have a really good user experience. And we have made some key recruitments both in Q4 2018 but also now in Q1 2019 in order to fulfill our mission even further and to have an even clearer focus on our mission. Next slide, which is our new vision, and our vision is to be the world's number one in iGaming affiliation.
And I think that we have some great assets that we can build upon and we can develop further in line with our growth plan, but we also have a really great foundation with competence and knowledge to scale this business up. It requires discipline and patience in order to come up to that vision. It's a long-term goal that we've set, and I think it's a really good focus that we have now with this new vision in place. And I think that time is our friend, but we have a really clear growth plan that we will continue to execute on. So let's move on to the next slide, and I'd like to speak a little bit more about our growth plan, which is based on our three growth pillars.
I mentioned it already in the Q3 report three months ago, and it's based on three different growth pillars. One, that's the European online casino affiliation. We see some significant growth potential where we at the moment have around 1% of the market share. We believe that we can continue to develop our assets in this region and in vertical even more, and I'm pretty confident that we will continue to gain more and more market share. U.S. is opening up. We are growing rapidly in the U.S., and we have some fantastic assets there that we will continue to develop, and especially also now with our new sports betting vertical. Sports betting in Europe is our third growth pillar. Sports betting in general stands for approximately 50% of all revenues in the global iGaming market.
So I believe we have some fantastic growth potential in sports betting also, not only in Europe but also in the U.S., of course. That's a summary of our three growth pillars, and with that, I'd like to hand over to our CFO, Gustav Vadenbring, who will go through the financials.
Thank you, Marcus, for that, and let's see how it's pictured in the financials what Marcus has been talking about. So we've started page 13, and I'd like to say that we're a company that had solid growth in 2018, but we're far from satisfied. A lot of our main KPIs are showing a positive year-on-year trend, and also our underlying business is increasing in Q3 and Q4. I would like to highlight three main takeaways when you're reading the Net Gaming financial trends quarter- by- quarter. One, we had a somewhat locked position prior to the purchase price consideration for the acquisition of HLM Malta was settled in May 2018. That meant that we couldn't really execute all our expansion plans and our three growth plans in the pillars. Also, we couldn't employ our key employees, which was our foundation for the future growth.
Two, we don't see as strong seasonal patterns in the top-line development as we've seen previously. The last two years, it changed somewhat in the industry, and in Q4, it's not as strong as it was earlier, and Q3 is somewhat stronger. It can also have to do with markets. We know or we've seen also that the U.S. has been stronger in Q3, for instance, this year, and also in the markets, so it's not only with Net Gaming. Three, there's also been a strategic shift for Net Gaming or focusing on core business and organic growth. That means that some of our non-core business areas have been divested and been phased out, and we're fully focusing on affiliate revenues and what we are really, really good at, and I have more than 15 years' experience there.
And that's what you see, that we are taking off in Q3 and Q4 in organic growth. So looking on the revenue trend quarter-by-quarter to the left bottom, we see the total revenues, and the organic growth we would like to highlight is that it's really taking off in Q3 and Q4 with 21%, respectively, 14%. And that is, from our point of view, the most strong key you can see in our business operations. We also have a really strict definition of organic growth, which from an analytical perspective is clean. That means there is absolutely no acquisition included, and that's important to have in mind when comparing with competitors and with the market. So we have a strong focus on organic growth and online business and what we're strong with the last 15 years.
Needless to say, in the second graph, we have strong margins increasing also in Q3 and Q4 related to our focus on our core business and scalable platform. Looking on the EPS development, it's important to have in mind you see it going down in Q3, Q4, but that's not the trend it's showing in the underlying business over time in 2017 and 2018. We have a very strong EPS development year-on-year, as Marcus showed earlier. You also see that Q3 and Q4 have been impacted by two things. One is that we had a dilution of the convertibles with our early redemption, and the second one is we had a provision for potential credit loss impacting Q4, which is in line with IFRS 9 adjustment.
So moving to the next page, revenue mix, we would like to highlight that we are still growing fast in the U.S. now, comprising 22% of the revenues, meaning that the diversification and geographical split is increasing. You also see that onwards within the product split, the sports betting will increase. The reason why it was higher, the product split in other earlier, is because we have worked with our core business affiliate and divested, for instance, Battle of Malta. So we are working with our diversification products and geography and developing quite fast with that, and we will show you that coming year as well. Turning to the next page, page 15, the NDC development, we continue to grow very fast in the NDCs quarter-by-quarter and year-by-year.
It's mainly the casino vertical driving the growth, and you can also see that we had a somewhat downtrend in Q4, which is what we've seen in the industry, that several of our competitors and also operators have been showing this trend, and we're also seeing that Q3 was a very strong quarter. Some of the operators we've been working with had a slight delay or problems with the conversion, which has impacted us also, but we see that this is still on a good level. We'll go to next page with the revenue share and the CPAs. We can see that, like Marcus said, that we're still continuing to increase our revenue split, and also that is good for our diversification of the revenues. So we're up to 35% in Q4 2018, which is aligned with our expectations.
Turning to the next page, we'll see the P&L, the full P&L. It also talks for itself to quite some extent, so I would just highlight a few points. We had a solid and strong 2018. We're aiming higher, even if we have quite significant growth. We're taking off in the second half year. That means Q3 and Q4 in the growth, and that's related to HLM that we have settled the HLM purchase price consideration. Within our operational costs, we are stable, and we're even decreasing in some parts. We have a rigid cost control, and our underlying operations are developing really well, and that's also impacting our EBITDA margin, and that's a very important sign for us that we are keeping our margins even if we're growing, and we're adding resources to the business with key employees to build our future growth.
What is somewhat distorting in the P&L in the comparable levels to 2017 and 2018 are the financial net. We had a financial restructuring or new loan set up in 2017, and that is causing the high financial costs in 2017. The financial structure has been improved significantly between 2017 and 2018, so our interest costs are down to around SEK 7 million per quarter now, and that's what it's going to be on a quarterly basis onwards. Depreciations are in line with expectations, very low as we're operating with a very asset-light balance sheet, and also the tax levels we also work with that we have come down to a very low effective tax rate, which also is indicative now in 2018 for the future.
So all in all, a strong 2018, quite good Q4 2018 where the operations are performing really well and we're focused on the core business. Moving to page 18, the balance sheet will be very short. Three takeaways. We have a very light balance sheet. We're operating with a very low net working capital level, mainly comprising trade receivables. We have intangible assets mainly related to the acquisition of HLM Malta in 2016, and we have a very strong equity position improving very fast up to 32%. Moving to the cash flow, we have a very strong business model where we have a cash conversion around 85%-90%. I would say that the levels in 2018 are indicative for the affiliate business going onwards on a basis without the operator business.
So I would say 85%- 90%, that's indicative, and we also have a very strong operating cash flow in both quarters, Q4 2017, but specifically Q4 2018. The investments in Q4 have mainly been in domains in the U.S., but also we've been upgrading our office in Malta to have a place for at least 20 more employees in accordance with our expansion plans. If we turn to the last page with our net debt to EBITDA levels, we can see that we're delivering very fast. We have gone down to 2.1 in ratio now, and we are delivering very fast with a cash conversion of 85%- 90%, of course, and then we also have a very high EBITDA margin. So it's quite natural that it's increased in Q2 2018, as you can see in the presentation.
It's totally related to that we settled quite big amounts for the purchase price consideration for HLM Malta, but also we made a significant acquisition from our side, so that will continue with the fast delivery. I'll turn over to Marcus.
Thank you, Gustav. And we move on to the summary and outlook. So page 22, and I'd like to speak a little bit about our financial target. Our financial target is to have an EPS growth of at least 20%, and the outcome in Q4 was - 32%. We've already mentioned some one-off items there that the reasons behind it. But for the full year, we are in line with our financial targets where we have an EPS growth of 1,100%. Organic revenue growth should be over time between 15%-25%. In Q4 2018, it was 14%, and for the full year, 12%. I'm not happy with that, but we see also a positive trend here in Q3 and Q4.
So I believe, really strongly believe that it will start to pick up again, especially now with our core focus on user intent and also with our growth plan that is very clear. Capital structure should be maximum 2.0, and we see a positive trend there. I'm not at all worried about that one, so we see a really good trend there. Let's move on to the next page and a summary. Like I said, we are now a pure affiliate company. We have paid the second and final earn-out for the HLM acquisition, leading to us now employing some key employees for further expansion. We have a very clear growth plan in three areas where we have launched the Betting Vertical during 2018, and we have made a foundation for future growth in the U.S.
We have also seen a RevShare diversification with now 35% of our revenues coming from RevShare agreements compared to 22% in Q4 2017. And like I said, also, we have improved our capital structure over the year. Let's turn to the next slide, which is the outlook. We have continued to develop new and strong digital brands. We have continued to execute on our growth plan in betting U.S. and casino in Europe. Now in Q1, we have already released a new betting brand and two new casino brands, and we are soon also launching new U.S. assets. Also, I'd like to highlight that regulatory changes will continue to affect the iGaming and the affiliate landscape short term.
I've been working in this industry for now 15 years, and short term, of course, regulatory changes like now in Sweden, for example, Sweden will apply with a new legislation in place on 1st of January this year, 2019. It, of course, can have a short-term impact, but over the time, and the history also shows that over time, this is a growing industry and a growing sector. So I believe that we are well positioned to execute on our growth plan in order to achieve our long-term vision. And with that, I'd like to hand over to the operator for a Q&A session.
Gentlemen, if you have a question, please press 01 on your telephone keypad and you'll enter a queue. After you're announced, please ask your question. Our first question comes from Markus Augustsson from Jarl Securities. Please go ahead. Your line is now open.
Hi, this is Markus from Jarl Securities. As you mentioned, you're moving away from paid media. How has that affected the cost side? You also mentioned increased cost controls. Can we see further downside in the costs from that going forward?
Yeah, good morning, Marcus. I think that, of course, definitely it has impacted our cost side, other external costs. But we have seen a gradual phasing out of the paid media channel. So I think that the main impact on the cost levels that you have seen that in Q3 definitely because in Q2, of course. So I think now in this quarter, it has affected the top line more than the cost side. In 2019, it will not have that much of an impact because this quarter we just had, I don't know, but really low cost for paid media, which was the first half of October.
What about the cost control that has been tightened up?
Yeah, we will continue to have careful cost control. Of course, we are doing some key recruitment now, but we will continue to have good cost control, and we will make, in order to execute on our growth plan, we need to make some investments, of course, in order to grow our organic growth. But those are healthy costs that we can really guide on any EBITDA margins and so on.
All right, thank you.
Thank you.
Thank you. Our next question comes from Erik Cassel from ABG. Please go ahead. Line is now open.
Thank you. Hi, this is Erik.
Good morning, Erik. The underlying market growth for affiliates in Europe and in the Nordics. Could you elaborate on what type of growth prospects you see ahead?
You mean our own growth, what we are aiming for?
The underlying market growth.
Yeah, the underlying market growth in general in Europe and in the Nordics, I'd say between 7%-9% in total for iGaming if you look at what the H2 Gambling Capital is, which is the analyst term for the iGaming industry. For ourselves, we have seen many years now a growth in our casino vertical of between 25% to even over 30% year-on-year growth for our casino vertical. And I strongly believe that we will continue to grow faster than the overall market. And that's why we have our financial targets also with the Nordic revenue growth of between 15%-25% over the time.
All right, thank you. Could you please give us a flavor regarding your strategy in the U.S. and what type of role you want to play in that market?
Sure. I mean, first of all, we have some really strong global brands for the U.S. market, but we are also building up local presence in many of the states, both when it comes to betting. Betting is a really interesting vertical for us, which was launched in our company last year, mid-last year. And we are building now up both sports betting and casino assets locally in each and every state. So we have local domain names for these verticals in the states that we believe will open up for re-regulation for the coming, let's say, five years. I think that we already have quite a strong position in the U.S. market, but of course, we want to be an even stronger player for the long run. And of course, in line with our vision, we want to be the number one, the world's number one in iGaming affiliation.
I think that's something about where we want to be for the U.S. market as well.
All right. In regards to the timeline for the vertical expansion into sports betting, when can we see it? When can we expect this to start to show up in the numbers?
It's hard to say exactly when we can see that. We see that the sports betting vertical already now is growing quite well, I would say, but of course, from low numbers. It normally takes, yeah, maybe up to a year to just give you some kind of indication to it. But our goal is to definitely show some nice numbers from our new betting vertical already during this year, exactly when we don't really guide on it.
Okay, thank you. So to my last question, what's your thoughts on the current M&A landscape? Are there still quality affiliate assets available, and which regions do you find appealing?
Yes, I definitely think that there is room for more additional acquisitions. That's why we also hired Christian Käthling as our new head of M&A, who starts in the end of April this year. He will purely focus on finding the right acquisitions. I think that there are a lot of affiliates out there, but with various quality and so on. And we have a set checklist with what we look at. I mean, low underlying SEO or risk, perfect fit for the company, but also depending on which verticals and also geographies. I think that betting is a very interesting vertical for us. If there are some targets for the U.S. market, it would be interesting, but also some other regulated markets in Europe are, of course, of much interest. But of course, this all depends on valuation and so on as well.
There are many factors that need to be taken into consideration, but we will for sure look into M&A as an additional growth driver. Our core focus will continue to be on organic growth, but if we can add qualitative acquisitions, I think that's very appealing to us.
Okay, thank you. Thank you for taking my questions.
Thank you, Erik.
Thank you. And as another reminder, if you do wish to ask a question, please press zero one on your telephone keypad now. And we have a question from Simon Volkov, who's a private investor. Please go ahead. Your line is now open.
Hi. I would like you to elaborate on the provision made during the quarter for the potential credit loss. What was it actually related to, and is it truly a one-off? Thanks.
Hi, Simon. Gustav here. Thank you for your question, and I will try to answer as much as I can. And we have made a provision, and I will say that it's a potential credit loss, first to say. It's a provision made from November, so it's not like a late audit adjustment and so on. And this is for our potential credit loss related to our financial euro account at the financial institution. We can't go into detail about that, but I think from your question and for what is important for you is that this is a total one-off related provision. It has nothing to do with the underlying operating business and the onwards trading to do. It's totally financial related. That's why it's incorporated in the financial nets. And also, you see in the balance sheet that it's put in within the financials.
So I hope that would be sufficient to give you comfort. It's very limited exposure, so to say, and the provisions have made, and we are comfortable that we'll regain some of this provision.
Okay, thank you. Perfect.
It's fully in accordance with our IFRS 9, this new accounting rules this year as well.
Okay, thank you so much.
Thank you.
Okay, as there appear to be no further questions, I'll return the conference to you.
Thank you very much. I'd like to thank everyone that has participated in the call, both on the phone but also from the web. I'd like to round off with saying that we have a strong underlying performance in our operation field, and we look forward to continue to execute on our growth plan in order to achieve our long-term vision. With that, I'd like to say thank you to everyone and see you in about three months' time when we have our Q1 report. Thank you.
Thank you. This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.