Earnings Call: Q4 2019

Feb 19, 2020

Thank you, and good morning. Welcome to Beta Collective's webcast presentation in connection with Q4 and full year report covering the period January 1 to December 3139, which we released today. My name is Jesper Serkel, CEO and Co Founder of the company, and with me today are CFO, Flemming Peterson and Head of IR, Kristina Thompson. I'm happy to share our Q4 report 2019 with you and in this presentation, we'll comment on the highlights from a very successful year. Please turn to Slide two, where we display our disclaimer regarding any forward looking statements in the presentation. I ask you to please pay attention to this. Please turn to Page three. The agenda of the presentation is structured so that we will start with the presentation of the highlights for the full year. We'll walk you through the financials for both the quarter and full year 2019, including a recap of the framework of our financial targets. Then we will continue with the business update. We will, as always, end the presentation with a Q and A session. Please turn to page four. In 2019, we have continued our focus on developing and maturing our branded websites with high quality content and user experience. We want to bring value to our users and enhance the entertainment of betting, which is a driving factor for our product development and our strategy in general. We signed new media partnerships, hosted our first Bookmaker award show and expanded our business in the newly opened U. S. Market. Through these initiatives, Beta Collective has in 2019 moved towards becoming a more broad based sports media group working on a variety of platforms. Let me give a snapshot overview of the business performance and highlights of 2019, starting with the financial highlights for the full year. Please turn to page five. For the full year, we landed well in line with our financial targets with an annual growth of 67%, of which 26% was organic growth, along with a high NDC growth of 66%. We even managed to absorb the newly acquired U. S. Businesses and still meet our earnings target of more than 40% EBITA margin. All this combined makes me very satisfied with this year's performance. Looking at the last three years' revenue development, Beta Collective has grown with an annual average of 60%. We have managed to deliver high growth and maintaining a similar growth in operational earnings, while still allowing room for investments in brands, products and new markets. Our business model allows for a high cash conversion with almost all of the operational earnings turning into cash. This was also the case in 2019. We added high value to our B2B customers by sending more than 431,000 new depositing customers, resulting in growth of 66%. Alongside sending new customers, Beta Collective provides attractive and entertaining products that we know continues to be of inspiration to Betters no matter when or where they have signed up with an online sportsbook, thereby creating long term value for our customers. Please turn to Page six. Other highlights from 2019 include our acquisitions in The U. S. And UK as well as our two media partnerships. We'll comment in more detail on The U. S. Business and media partnerships later in this presentation. On the product side, we upgraded our flagship brand product bettingexpert.com, and we made an investment in MindWay AI, who specializes in innovative and advanced software solutions for the identification of at risk gambling and problem gambling behavior. We also cofounded RAKE, responsible affiliates in gambling, in The UK, and we are happy to report that more affiliate companies have joined since, helping us promote social responsibility and a safer gambling environment for our users. In Q4 twenty nineteen, we completed a directed share issue of 4,000,000 new shares, raising cash proceeds to the company of €30,000,000 and restructured our bank financing. So all in all, a very satisfactory year where we took new big steps in building our business while at the same time delivering solid financial performance. Please turn to Page seven and the word over to Fleming for more details on the financial performance. Thanks, Jesper. Let's look at the financials for Q4 and the full year 2019. Please follow me to Page four. Growth in Q4 was strong compared to the same quarter last year, which was expected as Q4 is normally a strong season quarter. However, we experienced some headwind due to very low average sports win margins. Still, we delivered the highest revenue and operational earnings in the company's history. Revenue grew by 61%, of which 24% was organic. Operational earnings grew by 32% with a reported 36% EBITA margin and a cash flow increase of 39%. We continue to deliver high numbers of indices, adding to our bank of players and laying the foundation for continued growth. Q4 recently added hundred thousand ADCs to our partners. This is a new company record and a 55% year on year growth. Please turn to Page nine. Turning on Q4 revenue. Total revenue was €9,300,000 which was a 1% growth compared to the previous last year. And organic revenue growth was 24%. The full year net growth in the quarter was affected upwards by the acquisitions in The U. S. And Sweden earlier in the year. Q4 saw record high player activity in terms of gross wagering and value of deposits, I. E, on revenue share accounts, however, also with very low sports win margins, reducing revenue and thereby also earnings by estimated EUR 2,000,000,000 compared to our historic average margin. I'll come back with an overview of the sports wagering and the sports win margins in a few slides. Revenue share accounted for 60% of the revenue and 68% of player related revenue with 18% coming from CPA, 11% from subscription sales in The U. S. And 11% from other income. Revenue for the full year was €67,500,000 with an implied growth of 67%, of which 26% was organic growth. We have decided to provide a trading update for the first month following the reporting quarter. January 2020 revenue ended with a total revenue of €7,200,000 with a total growth of 48%, of which 30% was organic growth. The Sports win margin for the month was significantly above average. Please turn to page 10. Looking at the earnings, Q4 EBITA was €7,100,000 before special items, resulting in an EBITA margin of 36%, including an expected downwards impact of four percentage points from the newly acquired U. S. Businesses. Excluding the impact from The U. S, the EBITA margin before special items was 40%. For the full year, EBITA before special items was 27,200,000 a margin of 40%, equally with a downwards impact from the newly acquired U. S. Businesses. Excluding The U. S. Impact, the EBITA margin for the full year before special items was 43%. The cost base increased with the acquisitive growth and investments in new markets and technologies as well as new initiatives such as the new media partnerships. The effective tax rate for the full year is affected by certain costs not being tax deductible, and for Q4, the effective tax rate was 23.3%. Please turn to Page 11 and moving on to the cash flow and balance sheet. In Q4, operating cash flow before special items was €7,500,000 resulting in a cash conversion of ninety six percent and €26,600,000 for the full year with a conversion rate of 91%. Following several acquisitions since the IPO in 2018, the balance sheet was strengthened through a capital increase providing cash proceeds of €30,000,000 Cash and unused credit facilities stood at €90,000,000 by the end of the year. The strengthened balance sheet combined with the higher cash flow from operations provides significant room to further explore M and A opportunities. Please turn to Page 12. Coming back to revenue and growth, we again share some of our key internal key performance indicators, I. E. Sports wagering here, which is the growth in the underlying betting volume on our revenue share accounts, while we also have added historical figures from the acquired companies and indexed them all to Indexhundl starting in Q1 twenty thirteen. The numbers are derived from accounts that represents more than 50% of the group revenue. As can be seen from the graph, the underlying betting volume in these revenue share based accounts has increased significantly over time with a steep growth in recent quarters that we mainly attribute to the many indices that have been sent in 2018 and throughout 2019. Again, in Q4, we saw a continuation of the up going curve, which is very encouraging as this is a strong indicator for the increase of value in the player databases that have been built over the years. Please turn to Page 13. In addition to the betting volume, we are looking at the average sports win margin on revenue share counts, I. E, what percentage is paid out on the volume. We have used the same indexing as in the graph shown before. And what can be seen here that the margins fluctuate over the quarters and that Q4 twenty nineteen was significantly below average at index 79, whereas the historical index number in the quarter shown is 93. Throughout 2019, there has been a significant increase in sports betting volume, whereas sports win margins have been lower than average, especially in Q4 and Q1 and Q4. In January 2020, we saw sports win margins significantly above the average. In absolute terms, the revenue share income was negatively impacted by an estimated EUR2 million due to the lower Sportswind margins in Q4 twenty nineteen. And for the full year, the lower Sportswind margins has impacted revenue negatively by an estimated 3,000,000 and thereby also earnings. The volatility in Sportsman margin is something we view as being transient, but it can, of course, affect short term financial performance up or downwards. Please turn to Page 14 and the word back to Jesper. Thanks, Fleming. In connection with the IPO, the Board of Directors decided upon financial targets for the short medium term. As 2020 is the last year in the range of the financial targets, which are average targets over the three year period, we have provided additional information for 2020 in isolation. For 2020, we expect double digit organic growth and total growth of more than 30%. The operating margin EBITDA for 2020 is expected to be more than 40% and net interest bearing debt to EBITDA below 2.5%. Please turn to Page 15. The business update, we've decided to provide key focuses on some of the macro trends we're seeing in our industry and how we work with our business in this environment during 2019. Please turn to page 16. Let's start with a look at what trends are driving our growth. The ongoing digitalization means that users are moving from land based to online betting. We have benefited from this trend for several years. Still in Europe, which is leading in the digitalization, only a little above half of sports betting is performed online. We expect more users in Europe and the rest of the world to go online, continuing this trend for years to come. In line with increased digitalization and new products becoming available for betting, the use of mobile devices means that users can bet anytime and anywhere, and this also drives the in game betting, which is currently on the rise. More markets are being regulated, and we welcome regulation as it adds visibility and a level playing field. Adapting regulation that allows online betting also limits black economies, provide national tax revenue, and not least provide the best possible environment for sound betting behavior. In general, we also see increased sports events and sports verticals becoming interesting for betting, which facilitates higher betting turnover. Please turn to Page 17. Connecting the trends to our strategy and product portfolio, we are developing products with focus on content and user experience, as we see this as providing both short term value in search engine rankings and long term sustainability in terms of brand value. We've also increased our focus on more and specific big sports events and have seen strong results in 2019 within sports like horse racing, MMA, and boxing. To meet user demands and in order to match new product development done by by the online sports books, all our product development is done with mobile first as premise. On the regulatory side, we took advantage of the changing regulation in The US, where we now have established a strong foothold through the two acquisitions, namely the Rotor Grinders Network and the Vegas Insider and Torsten Ots site, respectively. We launched a new initiative to market our products through establishing partnerships with Classic Media, currently counting The Daily Telegraph, and the leading local sports media nga.com in New Jersey. This provides us with additional channels to market, operate and manage customer contacts to the betting and casino operators. I'm very proud of Better Blacksit being the chosen partner of such prominent media brands. The ambition is to enter more of this type of agreements going forward. While still in early stage, these partnerships may become an important part of our business in the future. However, we still need to establish proof of concept for this line of business. Please turn to page 18. During 2019, we acquired two businesses in The U. S. It has been a firm goal of ours to establish a strong foothold in The U. S. Market since the PASS Act was repealed in May 2018. As this move was the most significant for us in 2019, I would like to give an update on how we see the development so far. By the end of the year, our U. S. Operations increased in profitability after implementing new business models following the acquisitions. While we are still dependent on the state by state regulation, we believe we have strong brands and a solid platform for U. S. Expansion as the market grows. The new U. S. Business performed as expected with an increasing operating profit in the second full quarter. I'm happy to report quarter on quarter revenue growth of 45%, partly explained by Q4 being high season. We expect all U. S. Assets to be fully transformed in the second half of twenty twenty. Thus, we expect revenue growth and improved operational earnings margins in The U. S. Business, while still at a lower level than the rest of the group until the market matures. Indiana and West Virginia opened in Q4 and after the end of Q4, we received license to operate in West Virginia. A number of states are currently subject to internal review and commercial analysis. As regulation, including tax licensing processes and player registration, differs between the states, there are several factors impacting how BetaClix prioritizes its activities. The U. S. Market for regulated online betting is still in its early start. However, we are excited of this new market opportunity. Please turn to Page 19. Recapping our growth story, we initiated the M and A strategy in 2017, resulting in 15 acquisitions thus far. The IPO in 2018 was an important milestone in fueling the growth opportunities. And at the end of 2019, we raised additional capital to continue the growth track. We have several promising targets in our M and A pipeline for 2020 and beyond. And while I cannot share details with you on all of them, I would like to highlight that we are in advanced negotiations for the potential acquisition of 100% of the shares in an eSports company for up to €34,000,000 The target company's main business model is to promote and advertise sports betting operators, and We believe there will be strong synergistic effects between the two companies. The target company has demonstrated strong growth and has most recently disclosed annual revenue of approximately €5,000,000 and earnings before tax of more than €3,500,000 During the coming period, we'll negotiate the final purchase agreement and perform customary due diligence. Therefore, it cannot be guaranteed that the transaction will be completed. However, we assess that there's a likelihood that it can be completed in the first half of twenty twenty. Please turn to Page 20. I'll finalize this presentation with a short summary of the development that BetaGlassit has gone through since we listed the company's shares on Nasdaq's.com mid 20 eighteen. We have expanded from four to 13 local offices. We have almost doubled the number of employees, so we are now more than 400 employees. We have seen broad based revenue growth, including significant organic growth. We have established significant presence in The U. S. Through two acquisitions. We have started a media partnership division and signed two large partnerships. We have acquired companies and assets for more than €125,000,000 bringing profitable growth and market expansion, plus a much more diversified customer base. We have met the financial targets we set at the IPO. And not least, we continue to see a very strong performance in bringing new business to our customers through strong NDC performance. In conclusion, I'm truly proud of the achievements and I believe that 2020 will be yet a promising year, including the big soccer event Euro twenty twenty, the Olympics and many more exciting sports events. This concludes our webcast presentation for Q4 twenty nineteen, we will now open for questions from the audience. Thanks for listening in. Yes, sir. Thank you. Ladies and gentlemen, we will now begin the question and answer session. Just press star and one on your telephone keypad, and wait for your name to be announced. Once again, over the phone, just press star and one on your telephone keypad. And we have a question that came through over the phone line, sir. Your first question comes from the line of Christian Hellmann. Your line is now open. Please go ahead and ask your question. Hi, guys. Thank you. Just firstly, one very simple question. I just perhaps missed it, but you mentioned in the presentation that revenues were negatively affected because of this positive margin in 2019 by was that EUR 3,000,000? Just so you could confirm that. Yes, that's correct. Okay. And EUR 2,000,000 in Q4? Exactly. Okay. Then just on to The U. S, could you elaborate a bit more about you mentioned in the report that The U. S. Operation increased its profitability. Is it is The U. S. Profitable on a stand alone basis in Q4? Or where are we in terms of profitability? Yes. We The U. S. Operations as a whole, would say, is profitable. If we sort of look back, we also disclosed part of that when we, you can say, the framework when we acquired the businesses. The rotor grinders network is a profitable business. And you can say when we took over the the assets, Vegas Insider and Scores not with us, we had to change part of the business model. So that change is now, you can say, ongoing, and and also that part is turning into profitability. Okay. Okay. The third leg we have is that we have we have strengthened the the organization with, you can say, the whole backbone structure, governance structure. So but all in all, the the business is profitable. Alright. And coming back to Vegas Insider, where are we? Are you still on track with that? And you expect to sort of fully transform that that business during 2020 or at least the latter half of 2020? Yes. We are so we expect that for the NFL to launch sort of the first part of the new version and then ultimately, before the end of the year, to have it full and up and running. Great. And just to get an understanding of your U. S. Exposure at the moment, could you elaborate a bit on how much revenues you generated from The U. S. In Q4? We are not disclosing that number isolated by geography. But they we have earlier disclosed that it's around 15% plus the total revenue. So we don't give that in the field. Okay. But most likely a bit more than given the strong growth in Q4, I guess. And then just finally, if you could speak a little bit more about this potential deal that you have in the pipeline just to get an understanding of how you see the sort of the strategic rationale for it. It's an esports company, but they do sort of advertising for sports betting operators. If you could a little bit more about that. Yes. Indeed. So so so the way we view esports, and I think also if you talk to people within the esport community, how they view it is that it is just another sport, just like with football, tennis, and the likes. And it's growing rapidly at the moment and in recent years. And therefore, the natural thing is that people also bet on esports. So esports betting is growing very fast. And obviously, we would like to be exposed to that and taking part. And with this company, we feel that we found a very attractive company that is very strong in this sector. And as I hopefully, we'll be able to close this. But of course, it's still pending final due diligence and negotiations. Yep. Okay. We'll keep our fingers crossed, I guess. Thank you. That it for me. Thank you. Thanks, Christian. Thank you. And your next question over the phone comes from the line of Jonas Anderson. Your line is now open. Please go ahead. Hello, Jesper and Fleming. Congratulations on a really strong report. Thank you. Could you elaborate a bit more on the the progress of The US your assets in The US market? For example, which states do you have rev share and CPA revenues from in the third and fourth quarter? Yes. So on the revenue share, it's still very limited revenue that we see from revenue share. So The U. S. Is still for us predominantly a CPA market, but we are able to work on revenue share in both New Jersey and Pennsylvania. So the option is there, but as I said, it it's still, mostly mostly a CPA market. Alright. And, what what additional states do you expect to add during, during 2020? Which states do think it's closest for you to to enter into? I I think I think we've mentioned that before that that what we're quite excited about or or at least looking forward to see is how Tennessee will land because they they have taken this approach of focusing on on mobile only. So, basically, a framework which will be more similar to to to Europe. Okay. So apart from that, we will see Colorado on on on the move as well as Michigan as also a state. So we are preparing the business for that. But as we also just mentioned, for all states, we are sort of deciding which are the most attractive ones, so having a tier internal tier system in place for how aggressive we'll go on the individual states. Okay, cool. And what were the main drivers for the the increase in the staff cost q on q? Is it related to the acquisitions, or are you doing additional, you know, increase in staff? In the in the I have a bit missed the question. Was was it the the cost base you asked to? Yeah. Yeah. Exactly. The the staff cost. It it increased a bit from Q3 to Q4. I'm just trying to understand if it's mainly related to acquisitions or if it's something else that you're ramping up for The U. S. Expansion or Yes. You can say the cost base increased from Q3 to Q4 approximately €2,000,000 Half of that was increased direct cost and promotion cost directly related to revenue. And the rest basically relates to increased staff with also including a new warrant program that we have expensed as from Q4. What was the last one, you said? That was, you can say, the we're accounting for a new warrant program included in the staff costs that we launched in 2019. Okay. And you mentioned also that you're a preferred partner for operators. You mentioned that before, but I was trying to understand exactly what what what do you mean when, when you say that you're a preferred partner? You mean that we are a preferred partner to to an operator or vice versa? Yeah. But you prefer a partner to operator. Jonas, you have to repeat the question, I think. Ah, okay. Okay. Sorry. It's because you mentioned on those let's see which slide Yeah. So you mentioned on the slide 14, the strategic and the outlook slide, preferred partner for operator. Could you just elaborate a bit more on that point? Yes. Okay. Well, that goes back to sort of the product offering that we have. So one thing which is, of course, very important is that we deliver a big influx of new depositing customers. But what to us is equally important is that we add true value to all the users coming to our site, so they return. And thereby, we also have an effect on the users and customers of our B2B partners after they signed up, and therefore, sort of increasing the dependence on us and our impact on the business of our partners. I believe we are already in a good spot in that regard with our partners. Okay. Perfect. And on the same slide, you also have the target for 2020 that you expect to have above 10% organic growth. Just trying to understand because you have you said that you have 30% in January. Maybe it's, you know, a bit affected by a better sports betting margin. But is there any do you see see any events that's that's gonna decrease the the the organic growth phase? Or how do you look at it? Well, it's basically we have taken the technicalities about how we have guided it was that in connection with the IPO, we gave, average targets for three years. And now we are in the final year, so basically, you can mathematically calculate that. And we decided to qualify that we instead of just leaving the remaining year to the math, then we qualified and then say we also believe that 2020 will deliver double digit organic growth even though we could meet the three year average with less. So that's how it should be understood. It's not, lowering the ambitions in it by any means. Actually, I apologize. It's more and and it it is actually a legal requirement that we do this. So, so that's that's that's the background. Actually, Europe Okay. You can say 2020 is the year where we have the the Europe 20 20. So hopefully, a good year also for growth. Okay. So you shouldn't not draw any conclusions from the target for 2020 then regarding this quarter? It's more technical thing. Okay. Cool. Well, that was were my last questions. So thank you. Thank you, Hans. Thanks. Thank you. No further questions over the phone lines at the moment, sir. You may continue and take questions over the web. Yes. And then we have some some questions from Matteo's Durecek. First question, how long does it take on average when BetaFlex will start making profit from acquired customers? Well, we haven't gone too much into detail with that. But what I can say is that due to sign up bonuses, what we typically experience is that the first month and in the first few months, these players will actually have a negative impact on the revenue share simply because the bonus is being deducted from our revenue share also. And therefore, it does take actually some months before we will see a profitable effect from these new acquired customers. Second question, what do you expect this year from your U. S. Business? We haven't guided specifically on that. Flemingen, I think we can go this far as I say. Clearly, we expect The U. S. Business to grow. We are turning the business of Vegas Insider in particular, and that should add growth significant growth in the second half. Then the add on by new states coming on board will hopefully drive a natural market expansion and thereby also increase the profitability of The U. S. Business as a whole. I think we can say we believe we have the right platform now with the acquisitions done. We have the infrastructure in place. So it should be growth and increased profitability from here. And then next question, is there any estimation how much money you can spend on acquisitions in 2020? Well, after the capital raise and with also a new credit facility with our bank, we have 90,000,000 in firepower. So we believe we have plenty of room to be active on acquisitions. And last question, can you comment on media partnerships? How successful are those? Will you copy that to other countries? As I mentioned, we believe that potentially it could be a very attractive new leg to our business, but also that we're still looking to create a proof of concept. But what we experienced after announcing the media partnerships is a big interest from media groups, actually around the world, for for for this model. So so surely there are more opportunities, if, we will be successful with the proof of concept. I believe that was, the last question. So, thank you very much for, for listening in, and, and have a nice day.