Earnings Call: Q2 2020

Aug 25, 2020

Thank you very much, and welcome to Betaflex's webcast presentation in connection with the Q2 report covering the period January 1 to 06/30/2020, which we released today. My name is Jestro Serbo, Co Founder and CEO of the company. And with me today are CFO, Fleming Petersen and Head of IR, Kristina Thompson. I'm happy to share our Q2 report 2020 with you, although this has in many ways been an unusual quarter. As expected, online sports betting has been challenged as the pandemic set a halt on all major sports events. As a company, we have demonstrated the resilience of our business model and our ability to withstand a period of low sports activity. We will revert to these special business circumstances during the presentation. Please turn to Page 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 a presentation of the business highlights for Q2 and a walkthrough of the financials for the quarter. We will recap of the framework of our financial targets, which we have confirmed in the Q2 report and shed some light on the COVID-nineteen impact and the business prospects moving forward. Then we will continue with the business update and as always end the presentation with the Q and A session. Please turn to Page four. Put shortly, Q2 performance became the exception in an otherwise strong Better Collective growth story. But it has also proven the resilience of our business model and the strong team spirit in Better Collective in difficult times. Let me give a snapshot overview of the business performance and highlights of Q2. Please turn to page five. As expected, Q2 was a challenging quarter for online sports betting. Coming off a strong Q1, which was only affected by the pandemic from mid March, Q2 was significantly impacted. April was the low point, impact continuing through most of May. And in June, some of the major sports in Europe resumed with accelerated play offs. Given these circumstances, a quarterly revenue decline of 4% compared to last year satisfactory and in line with our expectations. Operational earnings declined by 7% and the EBITA margin at 41% remained in line with the financial target as the cost base was lowered significantly. Operational cash flow increased by 55%. New reposting customers naturally declined in the quarter correlated with the lower level of sports activities. We delivered 71,000 newly processing customers this quarter, which in our estimate is a loss of approximately 90,000 NDCs. Please turn to Page six. Even though the pandemic impacted Q2 in every way and will perhaps continue to do so for some time to come, our digital business model has proven strong under these difficult circumstances. As a business, we have demonstrated the flexibility to withstand a period of low sports activity. Various measures have been implemented at our offices in alignment with local guidelines to keep employees safe. We have seamlessly transitioned to remote work to the extent necessary and we experienced no loss of efficiency. Our resources have been redistributed internally to focus on the business areas that have remained active throughout and to prepare for sports return to their arenas. In the absence of major sports events, bettors turned to other sports that are not usually large betting events. We saw growth in online casino games and more predominantly we noted a strong and continuous growth in eSports that benefited our recently acquired business hltv.org. Whereas casino growth is most likely monetary, eSports seems to be more staking. ESports was already in a growing trend before the pandemic and judging by the numbers, this growth has accelerated during lockdown. In The U. S, we have made progress in regulatory matters, meaning that we are now live in eight states. And here I'm excited about the recent news that the first top five state, Illinois, has decided on an online regulation that initially required a physical registration of online registrations, which now has been waived and expectedly will be the permanent framework. We will comment on The U. In more detail in this presentation. By the June, we completed the share buyback program initiated on 03/19/2020. Please turn to Page seven and the word over to Fleming for more details on the financial performance. Thank you, Jesper. Let's look at the financials for Q2 and please follow me to Page eight. Zooming in on Q2 revenue, we saw total revenue was €15,300,000 which was a decline of 4% compared to the same period last year. The organic revenue decline was 24%. The total year on year decline in the quarter was significantly affected by the major sports events being canceled or postponed, as Jesper mentioned. The revenue drivers this quarter were some of the sports still ongoing, a momentary increase in casino and significant growth in eSports. Revenues here accounted for 66% of total revenue and 76% of player related revenue, with 16% coming from CPA, 5% from subscription sales in The U. S. And 13% from other income. We decided to pause subscriptions in The U. S. During the lockdown, but after sports coming back, they have gradually been reinstalled again. July 2020 revenue ended with a total of €6,100,000 with a total growth of 16%, of which 4% was organic growth. Additionally, NDC growth was 25% in July compared to last year. Based on the betting activity in our major European revenue share accounts, European sports wagering showed the second highest month ever recorded. Please turn to Page nine. Looking at the operational earnings, Q2 EBITDA was 6,300,000 before special items, resulting in an EBITA margin of 41%. The EBITA margin remained in line with our financial targets, aided by the cost saving program that we implemented in Q2 to counteract the effect of the lost revenue. The program included both a reduction of the organization, no salary to founders and Board of Directors and a temporary salary reduction for the remaining organization in Q2 as well as a reduction of both variable and fixed costs. The total cost for Q2 twenty twenty, excluding depreciation and amortization, decreased by EUR 3,300,000.0 or 28% when compared to Q1 twenty twenty. The cost base will expect to increase somewhat from July 1 with the lapse of intermediate measures and with the return to more normal activity level. Moving on sorry, please follow me to Page 10. Moving on to cash flow and balance sheet. In Q2, operating cash flow before special items was €10,400,000 resulting in a cash conversion of 154%. The high cash conversion was a result of lower revenue in the quarter compared to Q1 affecting working capital positively and changed payment terms for certain payments of employee taxes, etcetera, during the COVID-nineteen lockdown. Cash and unused credit facilities stood at €65,000,000 at the end of Q2 with a net debt to EBITA ratio of 1.2. Let me turn to page 11. Coming back to the revenue growth, let's take a look at some of our internal key performance indicators, starting with the sports wagering, which is the growth in the underlying betting volume in our revenue share counts. In this graph, we have also added historical numbers from the acquired companies The numbers are derived from accounts that represent 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, attributable to the many indices that we have been sending in 2018 and throughout 2019. In Q1, we saw a decline compared to Q4 due to the COVID impact, which was further enhanced in Q2. The month of April and May were severely affected, whereas June picked back up. July, which is not included in this graph, turned out to be the second highest month ever in terms of sports wagering in our revenue share count in Europe. Please turn to Page 12. In addition to the betting volume, we are looking at the average sports win margin on revenue share accounts, I. E, the percentage that is paid out on the volume. We have used the same indexing in the graph shown before. What can be seen is that the margins fluctuate over the quarters and that Q2 twenty twenty was below average at index 83. The average index number in the quarter shown is 93. The volatility in sports win margin is something we view as being transient, but it can, of course, affect short term performance up or down rates. Now please turn to Page 13 and then the word back to Jesper. Thanks, Glenn. In connection with the IPO, the Board of Directors decided a ton of financial targets for the short, medium term. As 2020 is the last year in the range of their 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 In our trading update dated March 17 and again today in our Q2 report, we reiterate these financial targets. In this unprecedented situation, visibility is limited, as I'll go over in the next slide. Please turn to Page 14. The cancellation and postponement of major sports events have created less visibility and thereby greater uncertainty than before the COVID-nineteen pandemic. Therefore, as mentioned in the Q1 report, there's increased uncertainty regarding the revenue growth for the full year 2020 compared to previous periods. The revenue growth for the full year of 2020 is expected to be 15% to 25% without any additional revenue contribution from new acquisitions. The M and A pipeline is progressing well, and we expect to complete one or more acquisitions before year end, which expectedly drove the total revenue growth, including M and A, above the financial target of more than 30% for the full year. Earnings margin for the full year maintained more than 40 independent of any new M and A, meaning that we are still running a tight cost control, but still we are certain that things have normalized. For 2021, we expect a normalized situation for major sports. In addition, several major events that have been postponed from 2020, including the Euro twenty twenty, now going 2021, are planned to take place. Financial targets for 2021 will be provided in connection with the full year report for 2020. Please turn to page 15. Let's see if there's an update other than the COVID related issues. Dear participants, please accept our apologies. So for the technical issue, please stay please standby, and we will resume our conference shortly. Thank you. All right. I think we are back on, and apologies for the technical issues. I hope you all can hear me. And I'll continue from Page 14. The cancellation and postponement of major sports events have created less visibility and thereby greater uncertainty than before the COVID-nineteen pandemic. Therefore, and as mentioned in the Q1 report, there is increased uncertainty regarding revenue growth for the full year 2020 compared to previous periods. The revenue growth for the full year of 2020 is expected to be 15% to 25% without any additional revenue contribution from new acquisitions. The M and A pipeline is progressing well and we expect to complete one or more acquisitions before year end, which expectedly bring the total growth, including M and A, above the financial target of more than 30% for the full year. Earnings margins for the full year is maintained at more than 40% independent of any new M and As, meaning that we are still running a tight cost control until we are certain that things have normalized. For 2021, we expect a normalized situation for major sports. In addition, several major events that have been postponed from 2020, including the Euro twenty twenty, now Euro twenty twenty one, are planned to take place. Financial targets for 2021 will be provided in connection with the full year report for 2020. Please turn to page 15. Let's look at the business update other than the COVID related issues. Please turn to page 16. While European sports picked up before the summer, The U. S. Is just beginning to start up, which is partly due to normal seasonality. Meanwhile, Theraplex has been making progress in regulatory processes, meaning that we are currently live in eight states. The type of licensing agreement and legislation differ between states, and correspondingly, so do our activities. One example is Illinois, where for a short while, online registration with bookmakers was allowed earlier this year. It was then shut down to offline registration only and just last week online registration was back on. Being a top five state based on GDP, we see great potential in Illinois. Our overall reach is increasing and more states are in the pipeline, including Michigan and Tennessee. In Tennessee, our licensing is already in place as we await sports betting to go live. In parallel, we are completing the transformation of our portfolio of leading US sports betting brands acquired last year. This includes the rebuilding of Vegasinsider.com, which we now are in process of relaunching in time for the NFL kickoff in September. We are excited to bring new design and features to our users. Please turn to Page 17. Before I sum up, I just want to speak to the fact that we have signed a letter of intent for a new acquisition that expectedly will come to final closing in the second half of twenty twenty. The letter of intent concerns the acquisition of an iGaming company for up to approximately EUR45 million. The target company has a global presence and is specialized within lead generation towards online gambling. The target company has disclosed its current expectations for financial performance for 2020 with revenue of more than EUR40 million and operational earnings of more than EUR8 million. The acquisition is pending due diligence and final contract negotiations and will, if completed, be an important strategic move for BetaPlective. In general, our ambition is still to seek more value adding acquisitions to the Beta Collective group, and we continue to see a very interesting M and A pipeline. Please turn to Page 18. I'll finalize this presentation with a snapshot of Collective. I would like to express my sincere thanks to all Beta Collective stakeholders, our employees and management team, our Board of Directors and all our business partners for their continued astonishing performance and flexibility in this extraordinary environment. The past quarter has really demonstrated a strong team spirit in Better Collective. We expect 2021 to be a year packed with major sports events, hopefully with the participation of spectators, so everybody can enjoy the maximum entertainment of sports and that our business can continue the strong growth we've seen in the past. This concludes our webcast presentation for Q2 twenty twenty, and we'll now open for questions from the audience. Thanks for listening in. Please turn to page 22. Thank you. Ladies and gentlemen, we'll now begin the question and answer session. The first question comes from the line of Eric Mobek from ABG. Please ask your question. Eric, your line is open. Okay, great. Thank you, guys. So first question, could you please help us understand the dynamics of the start of Q3 better? Organic growth was much weaker than I would have expected, especially given that you, in theory, should have easy comparables. Does this solely pertains to weak indices in q two? So you had less customers at the start of q three, and hence, we should expect a slower recovery, or is there anything else that I'm missing? There are a few factors to that, Eric. So one which we also mentioned is sort of the NDC momentum, which obviously has been affected by the numbers during the lockdown, meaning that we've been sending fewer NDCs, which is dampening activity levels. And then when we talk about what we see in the accounts with sports activity, that that relates mainly to the core European market, whereas we do see globally that that we're still affected to some degree by by lower activity levels also with ports that are not still active. So they will be the main reason for that. Got it. And also on your recent acquisition, could you give perhaps give us some more color? You mentioned it has a global reach. Could you perhaps elaborate a bit more on the geographic exposure? And also a bit on the margin, it appears to be on the lower side. There should be some room to expand this quite materially. Or what is your take on that? Unfortunately, we can't comment more than what you see in the report yet. It is just an LOI, and still, it's pending due diligence final contract negotiations. So hopefully, we'll be able to close this target, and then we would, of course, tell much more. Got it. But is it fair to assume that you could, in theory, boost this margin quite substantially over time? Again, sorry, we cannot comment on that for now. We'll come back to that Okay. Fair enough. And in terms of Latin America and specifically Brazil, could you give us some more color on how you're positioned for that market once it regulates? And what sort of your expectations are there? We're in a good position. We have some strong assets there. It's a market that we monitor closely and have been working with for quite a while. Coming back to sort of the effect of sports, Brazil is actually a country where we have seen games being postponed and canceled just prior to kickoff. So it's a market which is affected by the COVID-nineteen. But long term, it's a very exciting market, and we are close, and we'll stay close to that market. Got it. And if we turn our attention to the European side of things, could you perhaps just elaborate on the outlook of demand for the second half versus one year ago? Sorry. Did you say the demand for the It's like overall demand for affiliates in the European business. I think the talks and reactions we have from our business partners is pretty much in line with what we have experienced in the past. There is no doubt that during the lockdown, we did see sort of Betaflex wasn't the only company that made cost initiatives. We saw that across. But I would say in terms of the relationships, it's now coming back to a normal level, I think so since sports have picked up again. Got it. And if we look into 2021 and 2022 for Europe, you will have tailwinds from the Dutch regulation, but you will also have some headwinds from Germany, I suppose. Could you perhaps elaborate a bit on the net effect from this? It is very hard to say right now. As you rightly point out, currently, we have no exposure towards the Dutch market. So when that hopefully goes live at some point in time, that would be a growth opportunity to us. And where the German regulation will land, we'll have to see. It's a big market for us. So it's, of course, important where this lands. Got it. And in terms of The U. S, you previously mentioned that we should see it more as a sort of a gradual ramp up over time. Is there anything that has changed there or yes, for the outlook for the second half here? No. I would restate that comment. That is what we expect. Again, we are, of course, watching the development of COVID-nineteen and the effect that may have on sports in The U. S, which is, as all know, a country that has been heavily affected by the COVID-nineteen situation. But for now, a gradual ramp up is what we expect. Okay. And just it would also be helpful just to get an update on your expectations for Illinois as a market. Do you expect to see a similar ramp up for sports betting there as in New Jersey? We we we have limited data, but but while there there was the online registration available, we saw pretty good traction. So so that's what we we expect to to see again. But but, yeah, guessing more is is difficult. But but we we we we saw a a good effect and and decent traction when when it was open, and and that is obviously what the what we hope to to be able to achieve again. Yeah. Fair enough. And just lastly on The US, could you perhaps just give us also a general update in regards of where you see overall demand versus one year ago, both in terms of, yeah, in terms of CPA levels, etcetera, and also in regards of how how the competitive landscape currently is looking, is there anything that you've seen that has changed versus one year ago if we if we look at the outlook for the second half? Yeah. I would say that compared to a year ago, when The U. S. Was pretty new to us, our overall relationships with the different operators, have improved. We now have more product on the shelf and dialogue develops, so developing according to plan and positively. The entire landscape, I would say, is also it has developed as we expected, and there's competition. That's no surprise. But all in all, no surprises, I would really say. All right. Got you. Thank you very much, guys. That's all that's all for me. Thank you. Thank you. Next question comes from line of Eric Lindholm from Nordea. Please ask your question. Yes. Hi, guys. Can you hear me? Yes. Hi. Yeah. Yeah. Thank you. Thank you for taking my questions. Just a comment or a question on how we should look at the comments of higher uncertainty to your revenue targets and how we should couple this with the strong sports wagering in in July in in Europe? Is is the uncertainty mainly on The US coming back, or how how should we think about this? Yeah. Fleming here. Hi, Eric. Thanks for the question. Think in general, what we what we see and what we try to reflect in our report is that what we see in our European revenue share accounts is that when the sports are returning, the European betters are returning with normal behavior or even higher than before. But I think we all have to recognize that, of course, the sports calendars have been shifted, and we have playoffs in the June, July. So it is not a normal situation, and that's also why we take a cautious approach to the second half of twenty twenty. As Jesper mentioned and what we also have in our report, one thing is Europe, where we have seen the major football leagues coming to playoffs and thereby also the betting activity. But countries like U. S, LatAm and other places are still in or have been in a lockdown period and are gradually reopening. So that's why we basically have not just a European situation, but also a quite different global situation at least right now. We have seen that sports are coming back on these soccer football leagues in Brazil. They're starting up. We see US sports starting up. But but it is, of course, with a bit of difference to to what we normally see. And that's what we're trying to reflect in in in in the, in the bit higher on uncertainty than normal. Alright. Yeah. Thank you. That's clear. And and, just just on the launch of Vaccinesider, which is very exciting, how rapidly do you see this start contributing in a meaningful way to revenues? Is it already in September, or when should we expect meaningful revenues from Vegas Insider? We have now rolled out sort of the first new design, and there will be constant tests and improvements done to the site. The overall idea with that relaunch is to bring Vegas Insider up to modern day. It looked like something it was built in the end of the '90s. And thereby, we believe we can grow over time traffic. We can make the site more sticky, and we'll be able to convert better. But that is a process, meaning that we are not going to get that right from day one. I do expect that VIX and TAG should perform better this year compared to last year. But how much better and sort of how fast we'll be able to get this right and grow revenues is also something with uncertainty, we'll have to wait and see because it's simply based on us improving site, testing the site. But I'm very, very happy with what we have launched now. I think it's a very good starting point for the site. And the focus will now be to both grow the monetization on the site by being able to charge users and grow revenue by that, but also obviously by affiliation, where still we must remember that on Vegas insider, we have traffic pirated by states. So most of the traffic on that side, we can't monetize yet through affiliate marketing. So it would be also monetization being done by CPM sales. So it will take time. But again, the long term of this, when we have more states regulated and sort of see the full potential of The U. S, Vegas Insider will just be a prime position to be a leading site in such a market. Right. Thank you. And so so you're you're currently live in eight US states. By the end of twenty twenty or perhaps within 2021, how how what is this number? Is it ten, twenty, or what do see? We we mentioned just to choose other states. We we mentioned Tennessee and Michigan. And, again, we would like to be a bit cautious about this because we simply can't predict when states will go live. One thing is that they may adopt some legislation, but for them to actually go live and us being able to target the market is a bit differently in terms of timing. So yes, we'll be cautious there. But again, for the long term, we are very optimistic on this. Right. Thank you. And just a final one from me here. You mentioned that HLTV grew really quickly in the quarter and a strong uptick in Esports. Is it possible to say approximately what percentage of total revenues came from Esports in the quarter? And what do you see going forward here? We are not disclosing that. But what we said just after we acquired the company was that we would start working with the affiliate model and try to drive more depositors from the traffic. And that is going well. And overall, we believe that we'll we'll be able to increase monetization and thereby total revenue from the site going forward. Again, it will happen gradually, but things have gone well, and we expect them to continue to go well. But we're not disclosing the revenue of the side. Okay. That's it for me. Thank you for taking my questions. Thank you. I think we have one question from the webcast, and I will just read the question. Do you have any new information on legislation in Germany and how it can affect your business there? And I'll try to answer as best as I can. There's a regulatory process going on in Germany for a different framework. And it is now, as we understand it, with the European Union for review and for commenting from other member states. So that's where the process is right now. And from what we can understand, there are significant comments and debate about this. So so it's something that we'll have to to monitor and and see where it goes. But most of our revenue is for for sports betting where we believe that there will be a framework going forward. And, we also believe that that we we can find our ways in that market, also on the new framework. So, we'll have to see what comes out of it, but, but we don't have any material news from the process. All right. I think that was it for questions. So thanks a lot for dialing in. And again, we apologize for the technical issues. Have a have a great day, everybody. Bye.