Earnings Call: Q3 2020

Nov 11, 2020

Thank you very much, and welcome to Better Collective's webcast presentation in connection with the Q3 report covering the period January 1 to September 30, 2020, which we released today. My name is Jesper Suggor, Co Founder and CEO of the company. And with me today are CFO, Fleming Peterson and Head of IR, Kristina Thompson. I'm happy to share our Q3 report with you as we have seen sports returning over this summer laying the foundation for a solid comeback. In general, the market development has so far been in line with the assumptions we made mid March when we decided to provide an extraordinary business update based on this unprecedented COVID-nineteen situation. I'm very proud of the way we are steering the business during these difficult times and that we can maintain our full year financial guidance considering these unusual circumstances. The front page of today's presentation illustrates our most recent acquisition of the Atemi Group that has its main operations in London, a very important acquisition that we completed just after the end of the quarter and the transaction that I've been looking forward to discuss and present at this presentation. Let's get going and please turn to page 2, 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 3. The agenda of the presentation is structured so that we will start with a presentation of the business highlights for Q3 and a walk through of the financials for the quarter. We'll recap the framework of our financial targets, which we have confirmed in the Q3 report. Then we will continue with the business update and as always, end the presentation with a Q and A session. Please turn to page 4. Shortly, Q3 showed strong underlying business performance, which was affected by headwinds in terms of low sports win margin. We have also disclosed the October revenue that ended at all time high, both with and without the acquisitions we have completed this year. So all in all, we see our business coming back strongly after some months with cancellations of sports and increased uncertainty. Let me give a snapshot overview of the business performance and highlights of Q3. Please turn to page 5. Our Q3 is characterized by significant opposite effects. On the one hand, we have seen record high sports wagering. And on the other hand, the sports win margin was lower than historical average. Given these circumstances, a quarterly revenue growth of 7% compared to last year is satisfactory. As a result of the cost control measures implemented in the spring, our operational earnings increased by 18% and the EBITDA margin at 44% is well above the financial target. Operational cash flow increased by 71%, landing at €8,400,000 New depositing customers are growing again, this quarter at 13%, which is at a level comparable to the time before major sports were halted in Q1. Please turn to page 6. Following the return of major sports, as seen over the summer, Q3 turned out to be a quarter marked by high sports betting activity. Recognizing that the COVID pandemic is far from over, sports are still ongoing with different precautions. The general expectation is that the remainder of 2020 2021 will be filled with sports activities. In Q3, we have upgraded the key U. S. Sites, vegasintana.com and scoresandarts.com, as we'll come back to later in the presentation. A year into the media partnerships with the Daily Telegraph and nj.com, we have concluded proof of concept for the first stage and gathered learnings for building future partnerships. Just after the quarter, we acquired Atemi on October 1. Atemi Group is one of the world's largest companies specialized within lead generation for iGaming through paid media, PPC and social media advertising. As we'll come back to in more detail, this acquisition is a very important step for us to reach our strategic target of becoming the leading sports betting aggregator in the world. Also after the end of the quarter, we acquired the platforms sagrania.com, which is a Polish sports betting media brand, and irisracing.com, which is a leading horseracing platform in Ireland, in 2 separate transactions. Lastly, we were very pleased to be awarded Affiliate of the Year at the EGR North America Awards 2020 and likewise to receive the award for commitment to compliance by an affiliate company at the Vixio Gambling Compliance Global Regulatory Awards 2020 for the 2nd year in a row. Please turn to page 7 and the word over to Fleming for more details on the financial performance. Thanks, Jesper. Let's dive into the financials for Q3, and please follow me to page 8 in the presentation. So zooming in on Q3 revenue, total revenue ended at €18,300,000 which was an increase of 7% compared to the same period last year. The organic growth declined by 3%. Q3 showed strong underlying performance on most KPIs measured in our revenue share accounts. Sports Wagering was at a record high as were the number of bets placed and active sport users in these accounts. However, the revenue overall was negatively impacted by approximately €2,000,000 in the quarter due to the low sportsman margin in our rev share accounts. Revenue share accounted for 65% of total revenue and 74% of player related revenue, with 13% coming from CPA, I. E. Upfront payments, 9% from subscription sales in the U. S. And 13% from other income. We decided to pause subscriptions in the U. S. During the COVID lockdown, but after sports coming back, we have gradually been reinstalling the subscriptions again in Q3 and now are back at regular levels. October 2020 revenue resulted in a total revenue of €12,400,000 with a total growth of 87%, of which 33% was organic growth. ATEMI Group is included in the group account from October 1. If we exclude ATEMI, the revenue growth for October was 20% over the same month last year. Both with and without this year's acquisitions, October ended with an all time high revenue. As from Q4, we will be reporting the newly acquired Atemi Group business as a separate segment. However, at this point, I would just want to remind you that Atemi is operating at lower operating margins than the rest of our business. Please turn to page 9. Looking at the earnings, the operational earnings, Q3 EBITDA was €8,000,000 before special items, increasing the EBITDA margin to 44%. The EBITDA margin remained well above our financial targets, aided by the cost saving program that we implemented in Q2 to counteract the effect from the lost revenue as sports were halted. While the temporary measures are now rolled back, we have continued with strict cost control and the total cost base was kept at the same level as Q3 last year. In the coming quarters, we expect continued revenue growth and are cautiously increasing the cost base again to ensure that we support our long term strategy. Please turn to page 10. Moving on to the cash flow and the balance sheet. In Q3, operating cash flow before special items was €8,400,000 resulting in a cash conversion of 100%. The high cash conversion is partly a result of changed payment terms for certain payments of employee taxes, etcetera, that are still in place following the COVID-nineteen situations. Cash and unused credit facilities stood at €70,900,000 at the end of Q3 with a net debt to EBITDA ratio of 0.89, and that is before the acquisition of Atemi, I should add. Please turn to page 11. Coming back to revenue and growth. Let's take a look at some of our internal key performance indicators that we usually share at our quarterly reporting, I. E, here we take a look at the sports wagering, which is the growth in the underlying betting volume in our revenue share accounts. We also have added historical numbers from the acquired companies over time and indexed them all back 100 starting in 2013. 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 accounts has increased significantly over time, as attributable to the many NDCs that we have sent especially in 2018 and throughout 2019. The COVID effect is notable in Q2. In Q3, we saw record high performance as illustrated in the green bar to the right in terms of sport wagering in these European rev share accounts. Please turn to page 12. In addition to the betting volume, we are looking at the average sports win margin in the same revenue share counts, I. E. What percentage is paid out on the volume. We have used the same indexing as the graph before and what can be seen is that the margin fluctuates over the quarters and that Q3 is close to a record low for the period, indexed at 75, whereas the average index number over this period is 93. The volatility in sports win margin is something we view as being transient, but it can of course affect the short term financial performance up or downwards. Please turn to page 13 and now the word back to Jesper again. Thanks, Fleming. In connection with the IPO, the Board of Directors decided upon financial targets for the short and medium term, As 2020 is the last year in the range of the financial targets, which are our average targets over the 3 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 above 40% and net interest bearing debt to EBITDA below 2.5%. In our trading update dated March 17 and again today in our Q3 report, we reiterate these financial targets. The general expectation for 2021 is a normalized situation for Major Sports. In this unprecedented situation, visibility remains limited. Please turn to page 14. Let's look at the business update. Please turn to page 15. On October 1, we completed the acquisition of Atemi Group for €44,000,000 Atemi Group is one of the world's largest companies specialized within lead generation for iGaming through paid media, PBC, and social media advertising. Atemu Group has been on an impressive growth journey since the company was founded in 2015 and has reached the large scale it takes to be competitive and profitable within paid media. The acquisition will immediately bring us in the absolute leading position when it comes to customer acquisition for the online operators, delivering premium traffic and high intent players. The main strategic objectives of the acquisitions are access to key acquisition channels and competences within paid media as well as access to key social media marketing platforms as an approved advertiser. We have the opportunity to swiftly expand into new markets, including the U. S. Overall, we see a lot of potential synergies from organic traffic, sports betting and paid media. Historically, Atemi has been most active in the online casino segment. With the introduction of the product Bet Compare, Atemi is growing within sports betting and has during 2020 been investing in a gradual build off of revenue share databases. This is a strategy that we expect to continue and expand to other markets. Please turn to page 16. The purchase price of the Atemi Group was €44,000,000 From a financial perspective, we will take a leap towards having pro form a annual revenue of an estimate of more than €120,000,000 with high operational earnings and cash flow. The earnings margin within paid media is lower than within organic traffic. The Atemi business will be reported as a separate segment. Through the acquisition, we have added a team of highly skilled employees with in-depth media no harm, superior tech and comparison ecosystems. We see many opportunities for expansion into new markets and for harvesting synergistic effects between our assets and competences. In the 1st month of ownership, Atemi generated revenue of €4,400,000 and we have already seen the first promising synergistic effects from combining the businesses. So far, most of the revenue stems from the U. K. Market. TEMIS' main operations is in London. Please turn to Page 17. This leads me to an overview of our global reach. As you can tell from the map, our flagship brands Betting Expert and HLTV are aimed at a worldwide audience. The recently acquired Bet Compare currently has a strong U. K. Presence, but over time, the site will be rolled out to a wider international audience. Note that traffic numbers from Bet Compare are not yet included. Our U. S. Sites include Vegas Insider, Scorson Arts and Roto Grinders. We have released new products and upgraded versions of both vegasinsider.com and scoresandarts.com. We believe that Vegas Insider has long term potential to become the home of U. S. Sports betters. And in the coming years, we'll continue to invest in quality content for our users. In Q3, we saw the return of most major sports in the U. S. And on the regulatory front, the 5th largest state, Illinois, has extended its temporary online registration permission until November 14. We expect this regime to remain open, and we have already seen more and more operators opening in this state. Our local brands include stronghold names, primarily in Europe. We remain focused on building strong brands, mainly within sports betting that are informative and entertaining for our users. We want to be the go to place when it comes to finding and sharing information related to sports and betting. Please turn to page 18. I'll finalize this presentation with a snapshot of Better Collective. I would like to express my sincere thanks to all Better Collective stakeholders, our employees and management team, our Board of Directors and all our business partners for their continued performance and flexibility in this extraordinary environment. The recent quarters have really demonstrated the strong team spirit at Better Collective. Cautiously expecting that the remainder of 2020 2021 will be filled with sports activities and high levels of betting activity, we believe that we are well positioned to take our part of a global market that is getting back on the growth track. This concludes our webcast presentation for Q3 2020, and we'll now open for questions from the audience. Thanks for listening in. Please turn to page 19. Thank Your first question today comes from Erik Moberg from ABG. Please go ahead. Your line is open. Good morning, gents, and thanks for taking my questions. So the first one, you guided that on a stand alone basis, when we exclude ATME Group, revenue was up 20% year over year in October. But sports book margins have also been on the higher side. If we would sort of normalize sports book margins organically on a stand alone basis, how much was your core business up then, ballpark number? To be honest, we haven't sort of normalized that figure. But what we can say is that basically the existing business achieved double digit organic growth in October. But we can't I can't give you a normalized figure. Fair enough. Could you perhaps elaborate a bit on the drivers in terms of geographic regions? Was it any particular region that sticks out? Or is it just improvements across the board? That would be across the board. We simply see high activity across all regions really. Any specific region that sticks out? Would you say that the underlying affiliate market in New Jersey is still achieving growth year over year? Yes, I would say that. But sort of more in detail, we can really comment on New Jersey. And coming back to the question with the specific region, it is really related to overall good performance from all geographies that we operate in. Fair enough. And just and the question then on M and A. You have completed numerous transactions the past couple of years. If could perhaps elaborate a bit on how the M and A process typically looks like. For instance, in times when you have to raise your bid, is it typically a matter of the target's board rejecting your offer or a matter of another industrial player that makes a competing bid? Well, we've been in so many different processes. So I think there's not one single answer to that. But we do, in most cases, experience that it's either an exclusive process or it's a process with few participators. So we think that climate in general is quite positive for us to get a good price and strike a good deal. We differentiate a bit in sort of the types of targets. So as we have a few good examples recently with Atemigroup being a very large acquisition for us, where we have spent it has been ongoing for a very long time and also really in-depth due diligence. And then most recently, 2 smaller asset deals where we just see a good fit with different parts of our business, which obviously are processes that are dealt with quite faster and also easier to integrate. Fair enough. And hypothetically speaking, if you had to raise your bid 3 times, is it fair to assume that it would most likely be a combination of the board rejecting the offer as well as another industrial player making a competing offer as well? I can't really say anything to that, Erik. Sorry. Thank you. Fair enough. And just in general on the consolidation of the U. S. Markets, your general view on it. What would be the benefits of adding another major player to your offering, both in terms of cost synergies as well as pricing power? If you could elaborate a bit on this, it would be much appreciated. Yes. I think which we actually see in most markets that by size and traffic and valuable traffic, you get more leverage towards the operators. And that is definitely also the case in the U. S, which is less developed and definitely much less mature affiliate market. So there's no doubt that as times goes and our business grows there, we get more valuable traffic that will give us more leverage towards the operators. So that's surely the ambition. And again, it's still early days in the U. S. Market when it comes to the affiliate market due to it having fewer market participants and also sort of not as fragmented market ownership among the operators. Got you. And in terms of general cost synergies there, could you perhaps elaborate a bit on that? Obviously, like on a general note, when we acquire, we don't acquire for cost synergies we acquire due to revenue growth opportunities. That said, occasionally, we do see cost synergies as part of a transaction. And specifically for the U. S, maybe but it wouldn't be the driver of an acquisition for us in the U. S. That's a sure thing. Got it. But just on average, historically looking, when you have made it when you complete an acquisition percentage wise, how much of the typical OpEx space can you, in general, realize in the cost synergies? I can't give you a good answer there, Eric, because that is not the focus of our acquisitions. It is more about the growth of revenue. So we are not factoring sort of large cost synergies when we acquire. Basically, we would in most almost all cases operate with a fixed cost level because what we care about is to continue to grow revenue. Fair enough. But could you perhaps just elaborate a bit on, in terms of margin, how much of a margin improvement you typically gain from the acquired assets from the revenue synergies? I think, Erving, on a general note, many of the acquisitions we have done of, you can say, historically have been businesses that have been operating at very high margins in a local area, not investing a lot in brand building and so forth. So often, we actually see that we are adding cost to maintain and even improve brand building in order to secure the growth that Jesper is referring to. So for us, this is really to find the good brands, whether being at the global or national brands that we can develop further on and grow also for a long time. But clearly, adding profitable businesses has over time also allowed us to do exactly that while staying, you can say, with a strict focus on our financial target of staying above the 40%. So it is also allowing us to invest in growth. Got you. And just in terms of TME Group there, is it fair to assume that the cost base, if we exclude for PPC, will remain relatively fixed going forward? So sorry, what was the last part? Relatively fixed or sorry? Yes. If we exclude for PPC, would the cost do you assess that the cost base for a team group will be relatively flat going forward? Yes. That is what we expect. In that business, there's no doubt that the PPC costs are sort of the vast majority of cost. Got you. Thank you very much, guys. That's all for me. Thanks, Harry. Thank you. I'll now hand the call back over to you, Jesper. Please go ahead. Yes. I can see we have online questions. I'm just reading out loud now. Thank you very much for the comprehensive Q3 update. A question regarding and it's from Michael Huppert, sorry. A question regarding the low sports win margin in the revenue share accounts. What is the reason for this? Is it an issue related to temporary changed betting behavior driven by COVID-nineteen, increased competition among betting operators? Or what is your take on this? Kindly regard, Mikael Westrupolz, H. C. Anderson Capital. It's actually due to the outcome of sports results, which we see again and again in every quarter that sometimes the sports results are more in favor of the punters and at other times, it's more in favor of the operators. Whether there is a slight COVID-nineteen effect, I really don't know. But looking at the sports results in Q3, surely, they have had a significant effect on the outcome of the Sportsman margin. And we have another question online from Paulo Cipriani. Could you please elaborate a bit more in details the fact that the Q3 organic revenue is minus 3%, whereas October is plus 20%. Yes, I can take that. Again, going back to the very low sports win margin in Q3 is affecting the organic revenue growth. And in general, we have to say that there's, you can say, also different sports compared to last year. So it's not it is a bit difficult to make a direct comparison in this year, I would say. But the most profound effect is the sports win margin that was extremely low in Q3. In October, we have seen both sports activities coming back and at a more normal level for the month and also again a normalized and even higher, I can say, margin than we have seen in Q3. So clearly, things are, as we see it, from mid September and again into October, getting back to a normalized picture throughout. Hope that clarifies. And then we have another question online from Mateusz, Eurocheck. What percentage of Atemig Group revenues are CPA? And what percentage is revenue share based? Yes. Those are numbers that we have not disclosed. And but what we can say is that the majority of the revenues of Atemi are CPA based because of the high direct cost. However, with the product Bet Compare that was launched by Atemi. The company has during the last year plus invested you can say in building revenue share database around sports betting. So that's a strategy that we are evaluating with and how to pursue and perhaps even accelerate around this product that we are pretty excited about. Yes. And I can add to that, that it goes for the entire Temi business that we are considering if there could be some opportunities with switching a bit more from CPA to revenue share. Obviously, that would affect short term negatively, but long term have a positive effect. But it's early days, and it's an ongoing sort of evaluation of the type of traffic and the deals we can have in place. I think we'll go back to a few questions on the phone line. Thank you. Your next question on the phone line comes from Matthias Lundberg from SEB. Please go ahead. Thank you and good morning. I have two questions relating to USA. You have earlier stated that the investments in the U. S. Has burdened the profitability in the company. I don't find any similar statements this report. So is that so that the U. S. Business has improved its profitability? Is it perhaps closer to group level right now? No, U. S. Is still a drag on the margin and an area where we continuously are investing. Great. Clear. And also, you stated that the U. S. Affiliate market is less mature than the other markets. Do you have any sense of what share of NDCs is generated from affiliates versus from the operators themselves? And is this trending up or down? We don't have access to any market data in that regard. So I can't give you a figure there and only sort of relate to the comment I or the answer I gave early on that there are less operators and it's a less fragmented market. So we have a few operators holding a large market share, which is not an ideal situation for the affiliate market. Okay. I get it. Well, thank you very much. That's all for me. Thanks. Thank you. Your next question comes from the line of Jonas Amstein from Redeye. Please go ahead. Hi, Jens. Congrats to a strong report. I have just a few questions. First up, the organic growth you mentioned 23%, including iTunes Group in October. Just to clarify, is that including the whole TV acquisition as well? Jonas, it was a bit difficult to hear you. But as far as I understood, the growth reporting in October, whether it included the acquisition of Fatemi Group. And the answer is yes. We also gave the number isolated for, you can say, excluding ATEMI and that the growth was 20%. And including ATEMI, it was 87. Yes, yes. Okay. It's just that I want to understand if it's including whole TV dotorg as well. Yes. HVTV was included from 1st March in the group accounts. All right. Okay. Going on to Germany, it seems like you're having quite I think it's going to be a quite minimal effect on your business in the German market with new regulation. Can you explain a bit in more detail in how you think actually what's going to impact? Because right now, it looks like we're going to have some deposits limits and so on. Is that nothing that you think is going to impact the revenue levels? Levels? Yes. In general, the German regulatory landscape is, I think, for everybody involved, a bit hard to fully understand and always navigate. But as things are right now, we have the interim regime, which is now implemented That sort of sets some limits for casino and slots. And most operators have then sort of changed the business to be compliant with that. We haven't seen any negative effect from that in our business. We will then next summer, expectedly, we will see the final regime come in into operations. And we are right now preparing our business, having dialogue with our partners about how to then work together at that point in time. Overall, we are quite optimistic about the outcome of that. But as you mentioned, with deposit limits and sort of different changes, We will have to see what kind of impact it will have. But we think that it looks fairly promising, but we will also have to see. Okay, great. And since the COVID-nineteen pandemic seems to be spreading even more in Europe as well as in the U. S, do you have like any expectation on how that will affect the sport event markets in both Q4 and Q1? Can you give your view on that? In general, from the sports leagues, there seems to be a very sort of strong intention of going through with sports events. We have now seen lockdowns in France and the UK and professional sports continued. So based on sort of that general market expectation, we are cautiously optimistic that sports will continue. And that said, you never know. Yes. Perfect. The last question regarding ATM Group. Do you expect to increase your commission fees on the agreements with operators on that considering you being a larger group together and have a bit stronger purchase power there? It would be a market by market approach. Atemi has a very strong position in the U. K. And what is also quite unique about their PVC model is that they're able to acquire high value traffic and charge premium prices. So in the U. K. Market, they are at very strong levels in terms of the deals they have in place. Outside of U. K, in general, Better Collective order the old Better Collective has stronger deals in place. So that's, of course, something we are looking at. All right. And could you then just elaborate on how big these other markets are in relation to U. K? Is it like fifty-fifty? Or what are we talking about? No. U. K. Is significantly larger than rest of the world for the Atemi Group. Perfect. Thank you. That's it for me. Thank you. I will now hand the call back over to yourself, Jesper. Please go ahead, sir. Thank you. And we have a question online from Edi Palmring. The question is, what's your outlook on organic growth opportunities and M and A targets in South America? We see South America as a market which is growing quite fast. We have a good position with our existing assets. But it's also a market where we are actively looking from an M and A angle. We think that region is a very exciting region that are passionate about sports and also betting in general. So both from the organic approach, we are quite active. And from the M and A angle, it's a market of interest to us. And that was the last question. So thank you very much for listening in and have a nice day. Bye.