Good day, welcome to the Better Collective Q3 2018 presentation. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jesper Søgaard. Over to you, sir.
Thank you. Welcome to Better Collective's webcast presentation in connection with the Q3 report, covering the period January 1st till September 30th, 2018, which we release today. My name is Jesper Søgaard, CEO and Co-founder of the company, and with me today are CFO Flemming Pedersen and IR Manager Christina Thompson. It is now our second quarterly report since we listed Better Collective in June. It has been yet a satisfactory quarter. We've been looking forward to share this with you. Please turn to slide two, where we display our disclaimer regarding any forward-looking statements in the presentation. Please pay attention to this. Please turn to page three. The agenda of the presentation is structured so that we will start with a short overview of how Better Collective is currently situated, followed by a presentation of the highlights of the quarter.
We will review the recent market developments with special focus on the U.S., where we have seen fundamental and positive progress in the recent months. Flemming will walk you through the financials and the acquisition we completed in the third quarter. Last but not least, we'll share our thoughts on the future strategy and recap the framework of financial targets we decided upon in connection with the IPO. We'll end the presentation with a Q&A session. Please turn to page four. Before we dive into the details of the quarterly performance, I just want to start with an overview of Better Collective. Better Collective was founded in 2002 by Christian Kirk Rasmussen and myself. It has shown revenue growth and been profitable every year since we founded the company. Up until the beginning of 2017, our approach was organic development and growth.
However, we changed our strategy and decided to take part in the ongoing industry consolidation as from 2017. Since then, we have completed 12 acquisitions of various size. Today, and including our most recent acquisition, we are approaching 250 employees, working in five offices throughout Europe and headquartered in Copenhagen, Denmark. Revenue has been growing steadily with a year-to-date figure of 54% over the last three years. In the first nine months of 2018, revenue amounted to approximately EUR 28 million. Our target EBITA margin before special items is above 40%. The business model we apply allows for high cash conversion. The IPO that we completed in June was the first time we took in external financing to the company. We did so in order to continue the M&A strategy that we started in 2017 by using the company's own cash flow.
Following the IPO, the ownership structure, of course, changed. Today, still more than 60% of the shares are held by founders and management. Both Christian and myself continue as part of the executive management team. Better Collective is today the leading affiliate company within sports betting, our strategy is focused on retaining and expanding that position. Please turn to page five. Moving on to the highlights of Q3. Overall, it was a quarter with satisfactory performance and fully in line with our financial targets. With regards to new depositing customers and to partners, we exceeded our expectations. Quarterly revenue reached EUR 11.1 million, which is a 68% growth compared to the same period last year, both through organic growth, which made up 15%, and growth from acquisitions.
We find the revenue growth to be satisfactory, not least on the back of the sports results in major markets where U.K. in particular were unfavorable towards the bookmakers compared to the same quarter last year. While Q2 saw a company record of 66,000 new depositing customers delivered to our partners, I'm happy to report that we managed to break that record with a slight improvement to more than 67,000 new depositing customers in the third quarter, even in a quarter with less activity in the larger sports leagues. This is a doubling of the number of NDCs in the same period last year, this is, in my view, a very strong performance and a result of a dedicated effort following last year's slowdown on the back of temporary compliance measures from some of our partners.
In Q3, we saw the first revenue coming in from U.S. online sports betting. We're shaping our future strategy for the U.S. market, here I will revert with our thoughts on this aspect. Both earnings and cash flow follow with the EBITA margin before special items that increased to 43% and cash conversion of 71%. We continued executing our M&A strategy, resulting in an acquisition of the leading sports betting affiliate in Greece. Looking further ahead, we see a very large pipeline of potential targets. I believe we can create a lot of value by continuing our M&A strategy, I'm looking forward to integrate more successful companies into the Better Collective framework.
Flemming will revert with a more detailed review of the financials and M&A, we'll discuss the U.S. market in more detail. Please turn to page six, looking briefly on how we see the market developments. Generally, we are focused on being present in markets that have a clear and transparent regulation for online betting. This offers visibility and predictability. Most of our business is focused on being strongly positioned within sports betting in the various markets. This is where we have our core expertise and where we believe our products and technology allow us to have a competitive edge. Furthermore, we can see that from a regulatory point of view, sports betting is, in some countries, viewed favorably compared to other online gambling, such as casino, et cetera. We always follow the market developments closely and welcome regulation that typically result in significantly larger markets.
We prefer to have local offices and employees with insight into local sports and betting behavior, also allowing for having a close contact with our partners. Please turn to page seven. Better Collective is attracting users from most of the world, and we establish contacts to new customers from almost all countries where online betting is allowed. However, most of our current business is in Europe, where we have strong positions in most of the important markets, and we continue to build on this stronghold. The European markets for both sports betting and online casino continue to grow, in particular the online part, where we see the strongest growth within gaming from mobile devices. Within sports betting, the majority of betting events take place during the game as live betting. All our products are therefore being developed with the approach of fitting the mobile devices as a priority.
In general, we can see that many European countries are adapting regulation that allows online betting as it limits black economies, provide national tax revenue, and not the least, provide the best possible environment for sound betting behavior. In the Q3 report, we have provided a short review of what we see as the most relevant market developments. In Europe, Sweden will expectedly be a regulated market as from January 1st, 2019, which we see as a very positive long-term development. U.K. will implement a slight increase of the taxation on online casino as from October 2019, but not for sports betting. In Germany, there is a continued unclear situation for online casino with different frameworks between states, whereas the framework for sports betting is clear. In Italy, the new government has introduced a ban on gambling advertising. It's still uncertain what this will entail in practice.
Our view is that the most European countries are moving towards regulated markets with a different speed and with some introducing adjustments to balance the different aspects. Based on these macro trends, we expect to see continued strong growth coming from the European markets. Outside of Europe, the U.S. market is of course the main focus. The activity level amongst all market players is immense since the federal ban on sports betting was removed in May. On this note, let me turn the focus to the U.S. market and our thoughts on that. Please turn to page eight. On May 14, the U.S. Supreme Court decided to repeal the so-called PASPA act that effectively prevented sports betting except for a few places. The case was brought to the Supreme Court by the state of New Jersey, and the ruling was that the act was found unconstitutional.
This has now opened so that the states can decide for themselves whether to allow sports betting. New Jersey, as a first state, is now open for business, and Pennsylvania has also decided on a regulatory framework. It is expected that Delaware, Mississippi, Nevada, and West Virginia will follow soon, making up an estimated market potential of more than EUR 1 billion. Soon after, some of the largest states, such as New York, Michigan, and Massachusetts, are expected to follow. New York alone is believed to potentially be a larger betting market than the entire U.K. The U.S. market is characterized by high player values, and we expect that the market long-term will exceed the European sports betting market. We also expect that it needs a different and dedicated approach in order to unlock this big potential.
It is now some time ago we launched our first U.S.-focused products. In Q3, we launched a number of U.S.-focused, well, even New Jersey-focused products. With regards to our global brands, such as bettingexpert.com, we're shaping the content on U.S. sports. We're teaming up with relevant online bookmakers wherever relevant and seeking necessary licenses. We have established a U.S. subsidiary, Better Collective Inc., and we expect to have a U.S.-based organization in place in the new year. In addition to the organic strategy, we're in discussions with potential partners that may provide for U.S.-focused acquisitions and all collaboration. On a very concrete note, we saw the first revenue from U.S. sports in Q3, and as the diversification is still moderate numbers, the high growth rates gives confidence in the potential. Please turn to page nine.
To give you a bit more flavor for how we think with regards to the U.S. market, we view each state as an individual country with different regulation, different bookmakers, and often with different views on individual sports. Some products can work in the entire U.S. market, whereas some needs to be tailored to the single state. As mentioned, we have launched a number of products that are driving revenue as we speak. We launch more products and our technology platform allows us big flexibility. Please turn to page 10. For our top brand, bettingexpert.com, the U.S. market already counts as a top five country in terms of traffic. A traffic that we so far haven't been able to monetize. This we can do now when states implement regulation on online sports betting. We have in addition, launched new U.S.-specific features.
As an example, we launched NFL Tipster competition in Q3, and we will continue to provide new entertaining features for our U.S. audience. This sums up the market review. Please turn to page 11 and the word over to Flemming.
Thanks, Jesper. Let's look at the financials for Q3 and also the nine-month period from January to September. In Q3, we fully consolidated BOLA. The strengthened balance sheet combined with the higher cash flow from operations allows us further to score M&A opportunities. Please turn to page 15. Speaking about the acquisitions. In Q3, we acquired the sports betting affiliate in Greece and to page 16. On July 31st, we acquired the market leader with the sports betting affiliation in Greece. The acquisition included the takeover of two companies in Greece and Malta, and a new office in Thessaloniki, in Greece. On pro forma measures for 2017, it showed a revenue of EUR 1 million and EBITDA of EUR 0.75 million, and the companies were consolidated into Better Collective books as from August 1st. The transaction value can amount to EUR 4.4 million, whereof EUR 3.2 was paid upon closing.
The Greek market has very high gross gaming activity. As we see an increase in player values and more operators entering the market, we expect that the market will continue to be a high-growth market. With this acquisition, we have completed 12 takeovers since April last year, and our experience so far has overall been very positive, as we see significant synergistic effect, especially with the larger transactions. Please turn to page 17 and I will hand back to Jesper for a strategy round-up.
Thanks, Flemming. During the last year, Better Collective has changed from a successful but yet quite small private Danish company with around 100 employees to a public company with close to 250 employees spread over five European offices. Revenue and earnings have almost doubled, and we have a totally different financial foundation for future growth. We strongly believe that iGaming and the affiliate marketing within this vertical will continue to grow, both in mature markets. As we have seen in the U.S. through changes in regulation, so far, this has mostly been a European venture. I'm sure this will change in the future. In my expectation, we'll see fewer affiliate brands that will grow alongside the operators. Please turn to page 18.
Organic growth and development by simply having the best product offering for our users. This has always been our key focus. By having that, we will attract high volumes of valuable traffic and thereby be the preferred partner for operators. We have seen success in our first year of taking part in the industry consolidation. We see so much value in continuing this path. We strongly believe that size matters. Therefore M&A will continue to be a cornerstone in our strategy. Last but not least, the regulatory change in the U.S. has created a major opportunity for us. We already pressed and have also launched multiple work streams to expand with the market. Please turn to page 19. Expressed in numbers, we have set some financial targets that define how we want to grow and be profitable and how we want to finance our company.
These targets remain unchanged from the IPO and our current financial framework. In this context, a small word of are not to be seen as quarterly targets, but as targets for the period till 2020. I would like to highlight and pre-warn that when it comes to comparing year-on-year organic growth, we might see fluctuations in the coming two quarters. As Q4 2017 was a record quarter with extremely strong sports book results and 72% organic growth of Better Collective, whereas Q1 2018 was exactly the opposite, only 1% organic growth. The NDC effect, as discussed earlier, also has an impact. When comparing year-on-year, this needs to be considered. This completes our presentation. We'll now turn over to the Q&A session. Thank you.
Thank you. Dear participants, if you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, please press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We'll take the first question from Christian Herman from Nordea.
A question on the U.S., both in terms of revenues and also in terms of costs. Could you elaborate a bit more on what you see coming from the U.S. in the next couple of quarters? I'm thinking particularly perhaps for the first half of next year when also Pennsylvania will go live. You're talking about Bettingexpert being a big size for you guys in the U.S. How much of this traffic is coming from the applicable states like New Jersey and Pennsylvania and possibly New York in the future? Are you generating traffic also from those states, or are the traffic from the U.S. coming from, I don't know, Texas or states that won't be regulated anytime soon?
Thanks for the question, Christian. With regards to Bettingexpert and the states, we have visitors from each state in the U.S. Of course, mentioning New York, that's one of the states where we have the most traffic from. It is pretty much pro rata based on the size of the states when it comes to Bettingexpert. Having New York coming aboard, that would of course be ideal for Bettingexpert. The current revenue we see from New Jersey is mostly the sites that target New Jersey specifically, and also our site US Bookies.
Okay. All right. You have sites that will also focus on Pennsylvania next year, I assume.
Yes.
In terms of cost, you've established Better Collective Inc. there, as you mentioned, but are your plans to sort of set up a small office in the U.S. and if you could just elaborate a bit on the sort of cost side for the U.S. venture over the next 12 months and, yeah, going forward. Yeah, what do you see to sort of near term in terms of cost?
Yeah. Flemming here, Christian. I think if we look at what we have done basically is that we have used, you can say, our current platform and infrastructure to take the first step launching U.S. and state specific products. You can say if you look at Q3. Right. Will there be a big sort of bump in the road in 2019 when sort of you're ramping up costs in the U.S. as you establish presence there, or will it sort of not be that material? Just sort of envisioning what I should sort of assume for margin developments going forward. I think I would be a bit boring in answering. We will stay focused alongside with our financial targets and also, say with that we can manage to invest in the U.S. at a pace that the business can evolve versus the strategic options.
As you mentioned, there are, you can say, a lot of marketplace that are active. There might be different forms of partnerships, and perhaps even acquisitions. We are looking at a whole, you can say, palette of opportunities, both nationwide, but also state by state.
All right. Great. Thanks. That was all the questions I had. Thank you.
Dear participants, once again, if you'd like to ask a question, please press star one on your telephone keypad. We'll take the next question from Mattias Lindberg from SEB. Please go ahead.
Good morning. This is Mattias from SEB.
Welcome.
I'm a bit curious about the revenues in the quarter per month. Did you see any special variation in Q3 that you had a very positive effect from the World Cup, or did you not have the positive effect you would have expected compared to then also August and September? Could you perhaps say something on that?
Jesper here. I can just comment on the World Cup effect. In terms of commission and revenue share for the World Cup, the World Cup was in general favorable towards the bookmakers, except for the final, which was the worst day ever for the bookmakers. All in all, I would probably rate the World Cup to be as expected for the bookmakers. To the month by month, which is we of course don't give that up. In general, you can say the middle of the period is often very dampened in activity. Late June, early August, where you don't have any major sports leagues, in particular European football ongoing. Q3 is typically, I would say, showing that pattern, so we can basically gauge that September is a bigger month than August.
Okay, great. You also mentioned that the first half of the year was affected by compliance measures at the operators. Is the signal that you get from your customers that this has now passed the negative effect from compliance efforts?
It's Jesper here. It was actually already roughly a year ago that they started to take such initiatives. We experienced that, I would say end of Q3 and Q4 as well, that what we were allowed to do in terms of communicating and advertising the different brands was limited. However, I would say after Q1 it has sort of loosened a bit. Still, there are some very clear guidelines, but we are now able to maneuver within these guidelines. All in all, I think it has actually been beneficial for the industry and going forward, we don't see it as something which will limit our ability to promote the partners and build high-quality content for our users. We do feel that we sort of have this behind us.
Great. Going back a bit to the topic of U.S., the subsidiary that you have established in the U.S., is it an office with people by now, or is it mostly on paper?
For now it's mostly on paper, but it is with the ambition of then being able to employ and have an office in the U.S.
Is it in New Jersey or Nevada?
Well, the exact office location we need to decide upon and that is work in progress. It's also, I would say, a placeholder for some of the licenses that we are applying for in the U.S., potentially. As you know, there are state individual licenses if you want to operate in particular on revenue share. That's the intention. Of course, independently on where the company will be situated physically, we will have a feet on the ground in 2019 as we see this accelerate now.
Well, that was all the questions I had. Thank you very much.
Thanks.
Dear participants, if you'd like to ask a question, please press star one on your telephone keypad. We'll take the next question from Mikael Jakobson from Danske Bank. Please go ahead.
Hello. Hi, guys. Thank you for taking my call this morning. I have a question in regards to, in your report, you state that the NDC growth dampens the revenue growth. I guess this is basically always the case with the revenue share model. Do you see a large shift from the CPA to rev share? I'm aware that revenue share is the biggest part of your revenue from now. Then also, in the U.S., is this still mainly CPA? Is this something that will change when the market matures, you think? Thank you.
It's Jesper here. We don't see any changes in the way we monetize. Revenue share is still our preferred way of monetizing for sports betting. Talking specifically about the U.S., it is actually a different case right now that it's primarily a CPA market. In order to work on revenue share in New Jersey, you need another license than what is required for a CPA. We are in process of getting that license. For now it's CPA in the States for us. Long term, we know operators, they are keen to work on revenue share in the States as well. We see that as an integral part of that market going forward.
Okay, thanks. Maybe if you could elaborate a bit on your M&A plans. I actually had a tough time hearing when Flemming was presenting that part because of the connection. On the M&A plan, both in EU versus U.S., then also what you plan in your report, you mentioned, as Jesper also alluded to here in the call, that Sweden is a very interesting market. Do you have any plans to go in here? Because as you stated in your report, this is not where you're big at the moment. Thank you.
In general, on M&A, as we mentioned, we have a very strong pipeline and are optimistic about the targets we have in that pipeline. That goes both for Europe as well as the U.S. Our thoughts on Sweden is that because it's regulated, it is a very attractive market. We are already there, but what else we do plan and to do in that market is something we will keep to ourselves for now.
Okay, thank you. That's all for me.
Thanks.
Ladies and gentlemen, once again, if you'd like to ask a question, please press star one on your telephone keypad. It appears there are no further question at this time. I would like to turn the conference back to you for any additional or closing remark.
Well, thanks for listening in, and we look forward to return after the next quarter. Bye.
This concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect your lines