Earnings Call: Q3 2018

Nov 23, 2018

Good day, and welcome to the Better Collective Q3 twenty eighteen Presentation. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jesper Sogard. Over to you, sir. Thank you. Welcome to Better Collective's webcast presentation in connection with the Q3 report covering the period January 1 till September 3038, which we released today. My name is Jesper Sugol, CEO and Co Founder of the company. And with me today are CFO, Clement Peterson and IR Manager, Kristina Thompson. It is now our second quarterly report since we listed Better Collective in June, and it has been yet a satisfactory quarter, so we have 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. Then 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. Clemens 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. Will end the presentation with a Q and 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 Beta Collective. Beta Collective was founded in 02/2002 by Christian Kierke Gaspersen and myself and 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 two fifty employees working in five offices throughout Europe and headquartered in Copenhagen, Denmark. Revenue has been growing steadily with the year to date CAGR of 54 over the last three years. In the first nine months of 2018, revenue amounted to approximately €28,000,000 Our target EBITA margin before special items is above 40%, and the business model we apply allows for a 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 and A strategy that we started in 2017 by using the company's own cash flow. Following the IPO, the ownership structure, of course, changed. However, 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. Data Collective is today the leading affiliate company within sports betting, and our strategy is focused on retaining and expanding that position. Please turn to Page five. Now 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 €11,100,000 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 UK in particular were unfavorable towards the bookmakers compared to the same quarter last year. While Q2 saw a company record of 66,000 processing 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 largest sports leagues. This is a doubling of the number of NDCs in the same period last year, and 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, and here I will reward with our thoughts on this aspect. Both earnings and cash flow follow with an EBITA margin before special items that increased to 43% and cash conversion of 71%. We continued executing our M and A strategy, resulting in an acquisition of the leading sports betting affiliate in Greece. And 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 and A strategy, and I'm looking forward to integrate more successful companies into the Better Collective framework. Glenn will revert with a more detailed review of the financials and M and A, and we will 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 has 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, etcetera. 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 insights into local sports and betting behavior also allow for having in close contact with our partners. Please turn to Page seven. Data Collective is attracting users from most of the world, and we established 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 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 expectantly be a regulated market as from 01/01/2019, 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. However, it's still uncertain what this will entail in practice. Our view is that the most European countries are moving towards regulated markets with 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. So 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 PASCAR 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 is now open so that the states can decide for themselves whether to allow sports betting. New Jersey as the 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 1,000,000,000 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. However, 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. And in Q3, we launched a number of U. S.-focused well, even New Jersey focused products. And 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. Subsidiary, Beta 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 are in discussions with potential partners that may provide for U. S.-focused acquisitions and or collaboration. On a very concrete note, we saw the first revenue from U. S. Posting in Q3. And as it is still early days in 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 for 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 launched 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'll continue to provide new entertainment features for our U. S. Audience. This sums up the market review. Please turn to Page 11 and the word over to Fleming. Thanks, Jesper. Let's look at the financials for Q3 and also for the nine month period from January to September. In Q3, we fully consolidated forward with Comptuen, which we acquired on June And the most recent acquisition that we completed in Greece is included in the books on March 1. Looking at the March '20 '18, Q1 showed low performance due to several factors including the outcome of major sports events, as Q2 showed record operating performance with high fees boosted by the FIFA World Cup in football. Q3 showed satisfactory performance in revenue and earnings and outstanding performance the due the disappointing customers. Overall, by less favorable results compared to last year and the large joint venture fees compared to the same period of last year, local revenue and also in short term as the SEC share bonuses. And these new products are on average floors in the first month when being transferred to revenue share contracts. Now let's review the numbers, and please turn to Page 12. Looking at our new development. Better collection has grown on average 54% in the last three years. From 2017 and onwards, it has been a mix of acquisitive and active growth. And before 2017, growth was EUR which was EUR $0.06 8,000,000 compared to the same period last year, and the organic growth was 15%. The split between revenue share and PPA, upfront payments, was 90% when we look at the revenue that is generated from Players Betting, where the 6% revenue came from other revenues such as advertising. We saw record high end ADCs with more than six than we said in the first nine months of twenty seventeen, where for a period of time, we were affected by enhanced measures temporarily dampen the conversion of NDCs. As mentioned, this last jump, the business model of almost all operators being on revenue share contracts gives us a short term drag on our revenue earnings. But as the bank of players grows, this will expect a differentiated growth. Revenue for the full nine months was €28,300,000 decrease 68%, up to Page 13. Now looking at the earnings. Q3 EBITA was 4,800,000,000 before special items, resulting in an EBITA margin of 3%. For the full nine months, EBITA before special items was €10,700,000 with a margin of 38%. The EBITA margin has increased from 28% in Q1 to 40% in Q2 and now 43% in Q3. We have seen the expected leverage from the organic growth as well as the effect from acquisitions. The cost base included added costs from acquired companies and also costs related to the launch of new U. S.-focused products. The effective tax for the first nine months is affected by special items that for most are not tax deductible. For Q3, the effective tax rate excluding special items was 27% and proportionally increased income in France and Austria. Better collecting the currently pays corporate tax in Denmark, France, Austria, Romania, Greece, Malta and Serbia. Please turn to Page 14. Moving on to the cash flow and balance sheet. Operating cash flow before special items was €3,500,000 resulting in a cash conversion of seventy one percent and €9,700,000 for the nine month period with a conversion rate of 85%. The cash conversion was negatively affected in the quarter by increased working cash. Cash investments related to acquisitions amounted to €4,000,000 in the quarter and €51,000,000 for the full nine month period. Cash for unused credit facilities stood at €57,000,000 end of September. The equity ratio increased to 65% in June from 38% beginning of the year. The strengthened balance sheet combined with the higher cash flow from Correthus allows us further to restore M and A opportunities. Please turn to Page fifteen and speaking about the acquisitions. In Q3, we acquired the Lidsvox betting affiliate in Greece and have On July 31, 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 the new office in Czerzoniki in Greece. It is on pro form a measures for 2017, it showed a revenue of €1,000,000 and EBITA of €750,000 And the companies were consolidated into better collection books as from August 1. The transaction value can amount to €4,400,000 whereof €3,200,000 was paid upon closing. The Greek market has very high gross gaming activity and 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, 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 the word back to years before strategy roundup. Thanks, Fleming. 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 two fifty 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, but also as we have seen in The U. S. Through changes in regulation. So far, this has mostly been a European venture, but I'm sure this will change in the future. In my expectation, we will see fewer affiliate brands that will grow alongside the operators. Please turn to Page 18. Our strategy for the coming years will stay focused on three main themes: 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, and we see so much value in continuing this path. We strongly believe that size matters, and therefore, and 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 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 will be our current financial framework. In context, a small word-of-mouth is not seen as quarterly targets, but as targets for the period until 2020. And 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 twenty seventeen was a record quarter with extremely strong Sportsbook results and 72% organic growth of Beta Collective, whereas Q1 twenty eighteen was exactly the opposite, only 1% organic growth. The NDC effect, as discussed earlier, also has an impact. So when compared year on year, this needs to be considered. Completes our presentation, and we'll now turn over to the Q and A session. Thank you. Thank you. We'll take the first question from Christian Hovann from Nordea. Just 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 betting expert being a big site for you guys in The U. S. But how much of the 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 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 regard to betting expert and the states, we have business from each state in The U. S. And 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 experts. So for having New York coming aboard, that would, of course, be ideal for betting experts. The current revenue we see from New Jersey is mostly the sites that target New Jersey specifically and also our site U. S. Bookings. Okay. All right. And you have sites that will also focus on Pennsylvania next year, I assume? Yes. Yes. And in terms of cost, you've established better collective ink there, as you mentioned. But are you plans to sort of set up a smaller 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 twelve months and yes, going forward. But yes, what do you see sort of near term in terms of costs? Let me hear that question. 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. So you can see, if you look at Q3, there's a bit of cost there that we have basically taken development costs directly to U. S. Product. That's worthwhile noting. We are monitoring U. S. Closures, as you can imagine, and what happens today. But it is a top priority for us. And so within our infrastructure and, let's say, do work to invest going forward. We will, let's say, take the cautious approach. But also, when we see a crisis, of course, we will be ready to invest. And I think what we will state so has stated already is that we will have an organization in The U. S. In the New Year. So this opportunity is and we in this market. But as you can see in the quarter, we have also sense that we will also do it in the pace that states regulate and we see business coming in. So I would say that in the third quarter, it has been a small negative investment for us, but revenue is beginning to be meaningful. Right. But 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 sort of not be that material? Just sort of envisioning sort of what I should sort of assume for margin developments going forward. I think that would be a bit boring in answering. We will stay focused alongside with our financial targets. And also, say within that, we can manage to invest in The U. S. Base that the business can evolve. There are many strategic options, as we mentioned. There are, let's say, a lot of marketplaces that are active. So there might be different forms of partnerships and perhaps even acquisitions. We're looking at a whole, I would say, palette of opportunities, both nationwide but also state by state. All right. Great. Thanks. That was all the questions I had. Thank you. We'll take the next question from Matthias Lindbergh from SEB. Please go ahead. Good morning. This is Matthias from SEB. 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? It's Jesper here. I can just comment on the World Cup effects. 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. So all in all, I would probably rate the World Cup to be as expected for the bookmakers. And then to the month by month, which is we do, of course, do that part. But 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. So Q3 is typically, I would say, showing that pattern. So we can basically gauge that September is a bigger month than August. Okay. Great. And you also mentioned that the first half of the year was affected by compliance measures at the operators. Is the signals that you get from your customers that this has now passed the negative effect from compliance efforts? It's Jesper. It was actually already roughly a year ago that they started to take such initiatives. So 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. And 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. So we do feel that we sort of have this behind us. Great. And 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 them 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 a work in progress. It is also, let's 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 for if you want to operate in particular on revenue share. So that's the intention. But of course, we independently on where the company will be situated physically, we will have feet on the ground in 2019 as we see this accelerate now. We'll take the next question from Mikael Jacobskort 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. And I guess this is basically always the case with the revenue share model. But do you see a large shift from the CPA to wealth share? I'm aware that revenue share is the biggest part of your revenue from now? And then also in The U. S, is this still mainly CPA? Or and 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. So 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. But 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. So we see that as an integral part of that market going forward. Okay. And maybe if you could elaborate a bit on your M and A plans. Actually had a tough time hearing when Fleming was presenting that part because of the connection. And on the M and A plan both in EU versus U. S. And then also what you plan in your report, you mentioned as you, I guess, also alluded to here in the call that Sweden is a very interesting market. And 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. In general, on M and A, as we mentioned, we have a very strong pipeline and are optimistic about the targets we have in that pipeline. And that goes both for Europe as well as The U. S. With 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 to do in that market is something we will keep to ourselves for now. Okay. Thank you. That was all from me. Thanks. It appears there are no further questions at this time. Sir, 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. This concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect your lines.