Earnings Call: Q1 2018

May 4, 2018

Good morning, everyone, and welcome to the Catina Media Q1 2018 report, the Q1 numbers and also key events during the quarter and also after the quarter. Over the past quarter and the quarters before that, we have seen our on where we are and where we are present. So you can see part of our offices as well. So before going into the numbers, we'll show you a short video clip of Catina Media and the history. There we go. So Q1, the strongest quarter so far for the company. We're truly proud this morning. We're proud of the Catina Media team who made this possible. Once again, we are proving that we are the market leader for lead generation within the gaming and also the financial vertical. We delivered Q1 revenues of €23,900,000 almost 60% year over year growth and a Q4 to Q1 revenue growth of 19%. We also deliver our strongest EBITDA margin or EBITDA number with €12,400,000 a 63% year over year growth and a quarter on pace and we strive to be so also within the financial vertical. We have now presence in everything from the U. S. To Tokyo. We have presence in Australia. We're close to 300 people full time only thinking, living and breathing lead generation. Some of you have seen this before, but I think it's truly important to understand our business model and how we work and why we try to be in the value chains. Everything starts with the customer. The customer searches for information to the left. We are then capturing their interest through search engine optimization, Yahoo! Google. We're also on Facebook, Instagram, Twitch, YouTube, where we then lead them into some of our products. And we say products, we don't say sites or affiliate sites. We work on products. We try to give our users and searchers value, so they can compare what's in the market, so they can compare offers, so they can read up and get information on the market channels. All of these products are connected to something that we call the Catena Core and I will mention a bit more about how we work with that later in the presentation. We have close to 300 products. We focus on most of our revenue comes from 35 to 40 of those. We then charge our customers on basically a no cure, no pay business. That's why we can have the margins that we're having. So they only pay us once they actually have a customer or an investor that invests or plays for real money. We charge them through revenue share, cost per acquisition, a fixed fee or in hybrid. And hybrid is a mix between rev share and a CPA. We work with a diversified portfolio of customers. Just to give the rev share is lifetime agreements. It's not a one time payment. CPA is a one time payment and the hybrid again a mix between rev share and CPA. During the quarter, we have spent a lot of time in growing our management team. You will see 3 new faces since the last presentation. You would have Per Helberg who will be taking over as CEO during June. He's here present in the room. So for everybody who's here, you can grab him afterwards and will also join us for the roadshow after. We have recruited Nigel Frith as a GM for our new financial vertical based out of the London office where he will be growing that and the team and also the assets. We recently hired Michael Dally, who will be heading up our U. S. Teams and assets where we also intend to expand further. We're truly blessed to have such a great team on board and I feel that the management I think is truly important. That is the key backbone on how we make money. A record in Q1 with 133,000 new depositing clients, quarter on quarter 18% and almost 70% year over year. We grew from Q4 to Q1 almost by 20 1,000 new depositing clients, which is a record amount. And Peiallena will now guide you through the other financial slides and I'll come back again soon. Thank you. Has an outstanding financial track record, and so also in the first was paid revenue. Looking at our revenue streams, 51% of our total revenues came from rev share, revenue share and 39% came from cost per acquisition, CPA and 10% came from flat fees. CPA and fixed fee or flat fees are growing more at this moment than revenue share. This is due to that many of our new acquisitions have purely CPA revenue models and also that some markets that are growing really fast also have purely CPA models like the U. S. Market for example. We have ever applied for to do revenue share, our run rate is much higher than the revenues were last year. Run rate then is our total revenue times 4, and that amounts to €95,400,000 compared to last year where we had total revenues of €67,600,000. We prefer to be on regulated markets. We are here not for short term profits. We're here for the long term and to secure our profits in the long term. 65% of our total revenues came from regulated or taxed markets. We also are on markets that are soon to be regulated, where Sweden is one of those markets and they are expected to be regulated in January 2019. And we have been growing fast and we have been growing in combination of organic growth. On the 1st January 2018, we have 2 segments, the iGaming segment and Financial segment or Finance segment and total revenues of EUR 22,700,000 and an adjusted EBITDA margin of 50% or 11. We don't think that 91% is sustainable over time. So we will expect the margins to go down slightly when we have an operational team in place. The finance segment delivered 5,000 NDCs in the Q1. And just look how our EBITDA model margin has been doing. We grew our EBIT margin from 49.6% the Q1 2017 to 52% in the Q1 2018. And the improvements was that we have spent less money on PPC in regards to revenue. In real money, we have been spending more, but in relation to our total revenues, we have been spending less and thus improving our margin. We also have economies of scale on personal costs and that of course is adding to our positive margin. We have however have higher spend on other operating costs, especially personal fees for work with GDPR and also with the applications for the U. S. Markets. Just to give you a bridge between our reported EBITDA and our adjusted EBITDA. Our reported EBITDA was €10,400,000 and our adjusted EBITDA was €12,400,000 And the difference is our non recurring costs where most of it is related to the new bond that was SEK1.9 million and then we have also reorganization cost of SEK 100,000. Then we have an early redemption fee that is affecting our interest on borrowings on SEK 3 400,000,000 and also we have a reversal of previously recognized fair value movements on the old bond. So I just want to highlight that of course these non recurring costs are affecting our earnings and also our earnings per share during this quarter. Looking at the balance sheet, our main asset is our intangible assets. That is from our successful acquisitions. And also the new bond has made our cash a larger portion, which we believe will be lowered with new Agnes acquisitions going forward. Looking on the liability side, our equity amounted to EUR 105,800,000. Then we have amounts committed to acquisitions that was €68,000,000 and that is our best estimate on how much earnouts we will pay. It's important to stress that they have to perform very well to get this money. And if they don't, then also the earn outs will be reduced accordingly. The maximum amount of earn outs that we can pay is 124,000,000 and also important to stress is that up to 50% of these earnouts can be paid in own shares if we choose to do so and thus that will become equity. And then the borrowings is the new bond, the new bond, the new unsecured bond that we have on the market that is €150,000,000 really solid cash conversion in its underlying business. Our net cash generated from operating activities grew with 158 percent to EUR 10,300,000 and our cash conversion was 99%. So out of EUR 100 that we made in EBITDA, EUR 99,000,000 became cash. That's really strong. Over to you, Henrik. Thank you. Okay. Back and back to funding. We during Q1, we did a very successful bond. We did a new framework of €250,000,000 together with Danske Bank and Carnegie. We raised €150,000,000 in less than 10 days. We used €100,000,000 of those to refinance the old one. An unsecured structure and interest rate of 5.5%. We also have a carve out for a potential €30,000,000 bank credit or 75 percent of adjusted EBITDA. And we are currently working on that solution on the €30,000,000 credit line. So we believe we have the funding in place and together with our cash conversion and very nice cash flow, we believe that for the target for the €100,000,000 EBITDA for 2020, we have solid financing in place. And together with our strong organic growth, we are optimistic. Talk a few, let's talk about the few improvement things that we are working in internally besides actually working on making our products better. During Q1 we have made a big effort in our BI team to get better insight on what and how to convert traffic. It was a big exercise that is now finalized, where we have better we can better target the users and how they actually convert and what makes them convert. We made a huge investment into the London Affiliate Conference where we sent a big team to build better relations with our customers and grow our customer base. We've also made an effort when it comes to PPC with Google AdWords and Facebook out of the U. K. Office where we have a dedicated team now to get so we potentially can see better returns and or even better returns in our PPC spend. Competitive Edge, I mentioned it before, but I think it's vital for the group and investors to understand the broad range of customer base we have. I think there's very few companies out there that has invoices, 750 different customers on a quarterly basis and works with over 1200 brands. We are truly diversified both in terms of nationalities, regions and products. We still enjoy very low market shares in the industry with strong underlying growth. We have advanced and made our technical platform better. That's a constant work and it can always get better. Worked a lot with our culture, made the investment in our new offices, increased our C level management and operational management team. We've shown strong record and we have increased and had a solid shareholder base that we're proud of. Product development, key to our organic growth and what we do there. During the quarter, we launched a strategic initiative called slotfighter.com, which is an entertainment product on Twitch where 2 casino players can battle against each other for prices. You should truly go in and watch that and try it. It's state of the art. No one has done it before. It's to get interaction between the casino players in an entertainment show but they're actually a host for every single battle. We are also using our Tokyo office to expand our with our other products. So the Slot Ciar brand is now rolled out in Japan and we're also doing the same with rightcasino.com. During the quarter, Betting Pro has launched a new website design. We have continued to work with Squawka, the big sports betting community and forum that we bought in the U. K. To also prepare it for the World Cup coming up here June, July. We have also worked on 2 new football and racing products that we aim to launch here mid May, but still haven't released what the names are of those. Acquisitions during and after the quarter. During the quarter Q1, we expanded our offering in the U. S. Through bonusseeker.com acquisition. We felt that we wanted to add a bonus product into the U. S. Market to complement our already existing news driven products. We bought into Germany both for sports and the financial sector through an acquisition of the assets in DreamWorks. After the quarter, we have acquired gg.co.uk, which is one of the bigger horseracing products on the U. K. Market. We haven't been very active in horseracing before, but it's growing both in the U. K. And in Australia, where we end to use this platform to expand into that within sports. We also tapped into the French market for the first time. The regulated French market for sports and poker through Paris Sportifs which we're proud of having specifically for the World Cup but also long term. As we have stated, we want to be in the financial sector, which is brokerdeal. De. We talk a lot about the U. S. We have in the market. Pool poker liquidity, first time in U. S. History. From May 1, WSOP began sharing online poker liquidity. So Delaware, New Jersey and Nevada, these players can now play against each other, increasing the pool for poker and also increasing the potential gameplay. We have submitted our rev share license in New Jersey as we've discussed before. We've been getting initial feedback and we're responding to that. But nothing that we see would potentially stop us from having a rev share license. Pennsylvania license, we intend to send in our application very soon and aim to be the 1st lead generator to get the Pennsylvania license. Product development. We launched a new product for sport. So key takeaways for 2018 or the Q1 2018, we have the financial platform to continue our aggressive pace forward. We have recruited our the company's new CEO, Per Hilberg. We see very good underlying growth in our traffic. We are preparing for the World Cup. That is happening soon. And I think we have a very overall strong management in place. We're delivering the strongest quarter that we have done in pretty much all parameters, everything from organic growth, revenue, EBITDA and traffic. So it's hard to leave this room today not being pleased by what the team has achieved. And we are looking forward to the Q2, Q3 and onwards report. I'll now open up to Christian Helman for potential questions both from him and from the floor or from the video. Thank you, Henrik. Yes, Christian Hellmann with Nordea Markets. I'll be moderating. I'll start off with a couple of questions, and then I'll open up the floor. Just the first question, a bit of a highlight question. Just if you could walk us through the development of the quarter, it was a very strong quarter a lot of growth. But if you could talk a little bit about January, February, March, just sort of give us a picture of how the quarter developed. Normally, January, people are just getting back from holidays. It's a bit slower. February is a shorter month naturally. In comparison, the revenues will be lower because it's only 28 days. But it was a strong quarter ending at the high as we have also stated in our report. All right. So strong end to the quarter then. Perfect. And another question. You spoke about the finance segment that you're trying to expand. And you were talking about that you expect that part of the business to grow faster than your old business, so to speak. Is that in terms of acquisitions? Or are you also talking about organic growth? If you could just clarify that. We're coming from very small numbers yet. We now have the GM in place to run with our existing products, but also new products and build the organization. We shouldn't really forget we only tapped into financials in Q4, which takes companies years to build up in other sectors. What we have done in very short period of time, I think, is tremendous. But and we will continue to focus on that. And percentage wise, yes, we will probably see that growth go quicker because it comes from smaller numbers. And yes, we will do acquisitions in that space going forward. But in terms of market growth, iGaming versus Finance, is there I think both are still seeing very good growth numbers, both on the iGaming space and the Financial vertical. All right, okay. But it's more of a base issue then in terms of fine. And also on the margin, we were touching upon the EBITDA margin therefore for the finance business, 90%. Obviously, that's not sustainable. But long term, what should we sort of think there in terms of margins between iGaming Finance? Should it be roughly the same or anything that is structurally different? I think long term, both these products are potential high margin products. We would see high margins in these. You still 90% is not sustainable because we are now building up the team. So that will go down as the team grows bigger, but we will see high margins. I think that's the guide we can give now. All right. Okay. And then a question on Norway. That was a big topic in the industry last week with some news coming out of Norway in terms of IP blocking or whatnot. And could you just clarify what your stance is sort of in terms of your exposure and what you believe will happen there potentially? I think yes, I think it was initially over exaggerated. However, there is a discussion in Norway as potentially something could happen. We've never been very active in Norway. We have taken decision to be in markets that is regulated or soon to be regulated. And Norway is not one of those countries. So our exposure to Norway is very, very limited as we also stated officially last week to the market just to be clear that in the event that something would happen there, that would not have an effect of our potential growth forward or our existing revenues. Great. Loud and clear. And a final question also touching upon Leo Vega's report, which came out I believe 2 days ago. There were some comments in that report on breaches in the U. K. And that a lot of those breaches were related to affiliates and that they had closed down parts of their affiliate base. If you could just sort of touch upon that. I assume that LEO Vegas is one of your partners. And yes, just what you see in the market in terms of political changes and regulation and that sort of thing? I think for the U. K, affiliates is one of the areas. I think most of the operators has pressure on all sides of their business on being compliant. We have worked and we work with all the big ones in the U. K. And we've been working closely with them both with our compliance team, which I think is quite unique because we have an internal compliance team. So we have not been affected by no eventual fees or penalties from our end and we make sure to be compliant. And we get instructions from our bigger customers on what can and cannot be done. Some are more advanced in their instructions to us and we try to apply that on all our customers, not to get any swings on potential revenues going forward. So I think we take a very we try to be careful. We wouldn't be the company going out there and trying something that potentially could be questioned. So for us, it's more being very close with our customers and making sure that we can also assist them. And I think most of what those fees are pretty much the smaller affiliates that might not have their compliance team in place. But through what we do internally now, we have a big legal team and a compliance team internally to make sure that we follow the rules and guidelines there is in the market. Great. I'll open up the floor for some questions if there are any. Good morning. Richard Engberg here, Pension Bank. I have one question regarding the World Cup. We have seen the CPA share of revenue increase during the quarter. And I think you said in last quarter that you see that during big events such as the World Cup, it will continue to increase. Am I correct? My question is therefore, will you see get a lot of new deposit customers in the start of the World Cup and when you believe it will decline towards the end of the Hybrid. So we would do a CPA and a rev share not to lose out on future revenues on these clients because it's going to be a big driver of new clients and we want to make sure that we can tap into their future revenues as well. So it will most likely or will be a hybrid form of deals that we would do with the operators. No other questions from the floor. Mikael Lasseren, Carnegie. I just want to follow-up on Christian's last question here on the U. K. Market. Can you explain the difference between affiliates not, I mean, doing the right sort of marketing work and the larger affiliates, what is really the problem for the U. K. Gambling Commission and the operators? What are sort of smaller affiliates not doing right? I think the pressing issue there is normally when it comes to wording of the campaigns, what you actually can promote, how the bonuses can be structured, how you word the offerings, how we also use the brand, how we actually position it in connection to a bonus number. It's more on actually how to structure their offering that they're really tricking down to. It comes down to a lot of these Facebook groups on how you promote bets, how aggressively and how you can word that, that they're quite strict on. But the compliance and the instructions for us is quite clear and the risk guidance for it that comes from the U. K. Gaming Authority. So it's very easy. If you have it to read and just follow it. Okay. What about the overall market in the U. K, the affiliate market? How has that developed in the second half and in the first quarter this year? Has this been sort of an issue for the total market? We haven't seen it at least. So not what we can see so far. Okay. And my final question is regarding sports betting. How large part of your revenues was that area in Q1? Actually, we have a picture on that. Okay. I came in later. So 29% of our total revenues came from sport betting. Hello. Great report. I have a question regarding paid media. It doesn't seem to grow that much. Can you explain? I think we do paid media when we see an opportunity in the market as we're quite picky about our margins. We don't want to go into a bidding war and just to buy traffic because of the sake of we could potentially buy them at the high price. So we see that we're also getting better specifically for sports prepaid with our dedicated team in the U. K. And London doing that. But it is an art form and it's always going to be bidding. And we have said that we're going to interact when we see that there's value to be made. A follow-up question on that one. Do you see paid media decrease when markets getting regulated in the sense that the operators will do it themselves? [SPEAKER CARLOS ALBERTO PEREIRA DE OLIVEIRA:] No, I think it's no, would be the fast question or answer. It is not an easy thing to do and it's very easy to spend too much money. So the risk of when it gets regulated is that it gets very crowded, prices go up and people don't keep track of their margins and they actually lose money on doing PPC. Great report as well. I was wondering about you talked about Ask Traders, I think, 2 quarters ago. How is the development going for that? [SPEAKER CARLOS GOMES DA SILVA:] We actually we decided during this that we would, at this point in time, not mention it due to competition risk, but we are working a lot with it internally. And the second question is AskGamblers U. S, are you searching license or do you have to have license to open up Ask Gamblers in U. S. Or is it? [SPEAKER CARLOS GOMES DA SILVA:] What we do when we want to introduce a new asset to New Jersey or Pennsylvania in the future, it would be an addendum to the existing license and it would have to go through and be accepted. But for some of our bigger assets, it would make sense to roll them out in more states in the U. S. Stefan Knudson from Remium. Just to follow-up on the PPC. I don't have the number here, but I think it was €2,700,000 in cost this quarter, which makes the margin roughly 20%. Have you has that been affected somehow by the World Cup already this quarter? No. So that's like the level that you see going forward like I think to do PPC, it should be between 20% 25%. That's normally where it should be. Okay. And a follow-up question on the acquisition costs, especially on the acquisition in France. You seem to pay a bit higher price. Do you see that trend coming or was it just that it was a really interesting acquisition for you? I think it was still very cheap. But when it comes to regulated in these newer markets, there isn't a lot of bigger acquisitions to be made. There's still a lot of small ones. Paris Portif was the leading one. We really wanted to be a part of France. France is one of those countries where there it was regulated 2010, so quite early in Europe. Very high taxes, you're talking 9.3% on turnover for sports, 2% on Poker Rake. Casino is still not regulated, but there is a very, very big dotcomcasino market, which we believe that the French government will regulate. We also believe that in the future tax levels will get harmonized. It might not happen next year or in 2 years 3 years, but when that's happened in France, France is already a massive market and it's growing quickly, will be an even bigger one and then we want to be there. And that's why we really wanted Palisbolatifs as part of our product portfolio. Thank you. Hi, Perfors Beratte, Veralla. Can you describe how big your biggest customers are in terms of percentage of revenue or something like that? We normally state that no customers of ours is above 10% of our total revenue. And then maybe top 10? We haven't stated. Okay. Thank you. But to say that, as I've said in the presentation, we are truly diversified. We work with so many different brands. We are so globally the ones that is very strong in the U. S. Might not be as strong in Europe and the European ones might not be as very strong in Japan or Australia. So the blend is very, very good we believe and we worked a lot on becoming that diversified over the years not to have as big of a risk if something happens with 1 operator. Okay. Thank you. Any other questions from the floor? If not, I can just add one more question. On the acquisitions that you've done year to date, you've done a number of different acquisitions in the U. S, in Europe, in sports and so forth. But could you just if you look at what sort of what is the optimal acquisition for you? Are you more looking into sports, could sort of rank in order of importance to you strategically, what type of acquisitions? What we're looking at now. Looking at, looking for, yes. Yes, we're looking for in the future now, we're looking continued in the U. S. We want to tap into financial in the U. S. We want to do continued sports. And we also want to do casino in countries where we might not be present that is regulated or to be regulated. Prime targets, Spain, Portugal, Italy, which is still not very large in France. So where regulation is clear and is becoming clear, that's where we want to be. Financial is different because it's highly regulated already. So it's more where we see the potential of faster growth and where there is established products already. And those will be both European and American. And do you think that those types of acquisitions will be more expensive than the ones you've done in the past? We touched upon it earlier with the French one being a bit more expensive than historically because it was a regulated market and so forth. What do you think should we? It all depends. It all depends on the seller, timing of the purchase. I still believe that we acquire at very, very good multiples. And we wouldn't go into an acquisition if we didn't see the great potential in the product. But it's hard to guide if price is going to go up or it's going to go down. They've been between 26 EBITDA multiple over the years. They will fluctuate between there. Fair enough. That was it for me. And if there's not any more questions from the floor, then I'll hand the word over to you. Yeah. Thank you once again for coming. Sunny day in Stockholm. We're looking forward to continue having you on board and potential new shareholders as well. Thank you and reach out if you have more questions during the day or afterwards.