Earnings Call: Q3 2017

Nov 7, 2017

My name is Victor Hagberg. I'm an analyst at Pareto Securities here in Stockholm. And I'm going to moderate be moderating the Q and A session after the presentation. So welcome and forward to yours, the CEO of Catena Medya, Henrik Petrone. Thank you so much And welcome to the 2017 quarterly report for Catena Merja in lovely sunny Stockholm. I welcome everybody in the room. I welcome everyone on the phone, on the live cast as well. And a special thanks go out to the, I know, Catena Meda team who is watching this now for brilliant work and a brilliant quarter. The people that we'll be presenting is myself, Henrik Paaso Nektar and our group CFO, Claus Wenzel. I'm not going to tell you my life story, but this is who I am. I joined the company as the acting CEO from October 3 this year. I've been with the company since pretty much day 1, father of 3, and I have been in gambling or gambling related areas for the past 15 years. I'm very much looking forward to the work ahead of us as the CEO of the company and the work that we already have achieved during the past couple of years. As I said, we celebrate this day as the record quarter for the company. We saw an all time high in revenues of EUR 17,300,000 which is a year on year growth of 61%. We saw an all time high in new depositing clients of over 100,000 unique depositing clients, which is a true landmark for us as a company. We had an adjusted EBITDA of €9,500,000 which is equivalent to a 55% margin. For everybody who's new here to the Catena Medea model and what we're doing, we are a lead generation company. We are in our industry, we are the true backbone of the industry. We provide the customers to our operators and our customers. We give the users the power of choice through our platforms. We build our own web portals and this is casino, sports betting and poker. We have our own brands and some to mention here are Ask Ambler's, John Slots, Wright Casino, S Bet, Betting Pro, etcetera, which are all customized to target a specific target market and a certain customer. We drive these customers through search engine optimization, e mail promotion, adverts, social media, YouTube, you name it. Where the customers are we should be. We then drive them to the operators, which in this sense is the gambling operators, Casumo, Betsson, Unimet, Mr. Green. And we then get paid through different methods. We have rev share, CPA, hybrid or fixed fees. Normally, our industry is equivalent to between 30% 50% of the operator traffic depending on the size of the operator. So I state it again, I see ourselves as a true backbone in the industry and giving the customers the choice that they should be able to have when they pick an operator. Looking close at the agenda for today, I wanted to highlight a bit of our KPIs. The Q3 activities itself, M and A activity during the quarter, an update on the exciting Pennsylvania. Our financials will be presented together with myself and Claus and the Capital Markets Day that's also coming up. Search revenue record for the quarter. We saw 84% growth year on year on search revenue. We saw a close to 25% increase from quarter to quarter, EUR 14,500,000 revenue in Search, which is by far the highest number we've ever seen. Drilling down to this is also the first time that we're actually presenting what we believe is our organic growth on search on our search traffic and search revenue. We had, as I said, an 84% year on year growth in search, 54.4 percent in acquired growth and 29.3% in organic growth for the quarter. If you look at the description of organic growth, it's increasing revenue adjusted for acquired portfolios and products. Organic growth includes growth in acquired portfolios from the day of acquisition. So in the event that we buy a company that's making €100,000 a quarter or a month at the time when we acquired it. That's the acquired growth. 1 year later, if it's doing 150, we had a 50% increase in organic growth. That's due to the work that our team at Catena Media is performing and that is why the company is growing or the asset is growing that we have acquired. The second KPI that is new to the market that we're presenting today is the revenue split between sports and casino. We have for the past year focused more on sports and you've also seen that in the acquisitions that we have done. You have seen acquisitions like Online Media, Betting Pro, SBAT, etcetera. In Q3, 21% of our revenues was sports. As you have seen, if you compare it to Q3, twenty sixteen, it was only 5%. We see a continued positive trend and it's also one of the verticals that we're looking at when we're targeting in M and A. Back to new deposit declines, an all time high in Q3, over 100,000 new depositing clients for the first time. I want to emphasize to you, this is the first time they've done a deposit with any of our customers. It's a huge number that we are very proud of and that we will celebrate through our offices during the day. It's close to an 80% year on year growth. Q3 has also been a quarter where we have prepared the company for the next phase. We have reviewed the organization and the skills that we need to take this to the next level. I think we have done a brilliant job there. We are now a workforce of close to 250 people. Looking back a year ago, we were just over 100. I think we have the organization and the skills now in the company to take the next big steps ahead. We have reviewed the strategic agenda and also the goals going forward. And our GEO expansion is continuing focus for us, both in terms of M and A, but also rollout with our existing products. This leads us to an exciting Q4. We are very positive at 2018. We are set for continued growth both organic and through M and A. Another big step for us as a company is on the 4th September, we started to trade on NASDAQ Mid Cap. The team worked very hard for it. We're very proud of being able to do the move. We believe it's a great platform for what we want to achieve going forward. It's improved liquidity in the share price. We've been able to attract more institutional foreign investors into the company. And we believe it was the right step for the company. And we're very happy with the work that we have done together with NASDAQ, our auditors and the company to achieve this. Next, I want to talk about geo expansion. We have in our company, we have hundreds of domains. We have a few that we would call Tier 1 prime assets. Those are between 2030 of them. We have worked hard in scaling them. These are top of the line assets and websites where people continuously come back to read up on news on sports or in casino. On slots, we have moved out in Germany. As gamblers, we have moved out in Italy and Germany coming next. We will continue to roll out these prime assets in further countries. We've seen that they are very much appreciated by the customers. Something else I want to highlight is new verticals of traffic. We have traditionally been very strong in search engine optimization. We are good in There could be Instagram There could be Instagram, big traffic drivers for the potential customers that we have. We launched a segment or a product called Ask Fans on YouTube. We have recruited 20 journalists, 1 for each Premier League team and it's fans driven YouTube channel. So far very successful and I believe we will see this format going further and I believe it's being a big part of lead generation going forward. I talk about how proud we are with the team. We are very proud of our team through our different offices, the 250 people. We were this year voted the best employer in the industry by the industry itself. We were also granted equality certified for the 2nd year in a row. We are now 60% male, 40% female in the company, which I believe is very unique for our industry, something that we're proud of when we have a great workforce. We have also re ramped our offices. We have a really nice new office in Malta. We've also built a new office in Serbia Belgrade and just launched our new office in Tokyo. Next up, M and A. We've been active during the quarter as always. We did our first investment into Asia into Japan, dollars 130,000,000 big market. We now have an office in Tokyo with 8 people. This is our first tap into Asia and in a market itself that is very big that we will use as a platform for further expansion. We also made the acquisition of Betting Pro, an Australian and U. K. Focused sports news site. It is very news driven. We have 30 freelance journalists on updating on a daily basis what's happening in the sports world. They're located in London. We are doing close to 6,000 NDCs per quarter. And once we acquired, they were doing 1,200,000 in revenues per quarter. We believe this is the type of assets that we're looking for. Tier 1, prime, news driven, where the customers on a daily basis come back to see what's happening in the sports world. Also regulated markets, both Australia for sports and U. K. For sports. And I think you've all been following what we have done in the U. S. We acquired a company in the U. S. A while back. We are to date one of the largest lead generation companies within gambling, legal lead generation. We've been active in Nevada and New Jersey. Now we have seen that the 4th state to regulate online gambling will be Pennsylvania or is Pennsylvania. On the 30 October, Governor Wolf signed a bill, which actually in effect made it legal. It means that online slots will be taxed at 54 percent online poker, 16% and online table games, 16%. We are very well prepared to the U. S. We have a team in the U. S. We will continue to focus on the U. S. We drive domains like Play Pennsylvania, Play USA, U. S. Poker and PokerScout. Poker will be a product for the U. S. And with our latest acquisition of PokerScout that happened after Q3, we are well prepared for Poker in the U. S. As well. We get questions on when we believe that we will see revenues from Pennsylvania. The indication we have is that it will take between 9 to 12 months. So we've been talking about Q4 potentially for revenues out of Pennsylvania. But it's still a lot this happened very recently. We follow it on a daily basis. I hope this will be the starting point for other states related to seeing what's happening in Pennsylvania if everything works fine there. So we can see continued progress in the U. S. Pennsylvania is almost 13,000,000 people. If you're comparing that to New Jersey with 9, New Jersey is doing $20,000,000 revenues per month. That's it for the U. S. We're looking closer to financials and Klas will come up here and do a bit of slides as well, which touched on it. Record quarter, EUR 17,300,000 in revenues, 61% year on year increase. We have continued to work on the strategy that we put up in Q1, Q2 regarding rev share as the base of our income. It has continued. We are continuing to focus on paid revenue, but it's also driven by seasonality and we invest when we see that we can get return. And once again, all time high in revenue share for the quarter. Looking at the breakdown on the revenue, you see rev share on all time high of 66%. You have CPA, which is 28% and flat fees around 6%. I believe this to be around the levels we should be. I think that this is the most mature way to see the business. I think pushing it more up on rev share or CPA other way around, I think this is the right level for us. You can see percentage going up a bit or down here, but I wouldn't expect us going too high on the rev share either, just as a guide. I'll leave the floor for the minute for Claus to go through the next couple of slides. Yes. If we look on the cost side, as you can see here, our cost for our employees are stable and have been stable since the last quarter. What is increasing is the amortization related to our acquisitions, but that is also according to plan. If you look on our other operating costs, they are up in this quarter, but that's more or less all related to the move of our office and also some one off cost we had related to the move and also that we celebrated 5 years as a company during this quarter. The next slide here, you see the development of our EBITDA result. And as you can see, it's close to 60% up compared to a year ago and is up 90% compared to last quarter. And here on the next slide is just to describe our financial cost. And as you can see, the biggest part here is cost the interest cost for our bond. But as you also can see, we have a gain here on €250,000 which relates to the market value of the bond that goes up and down. So it has no cash flow effect. And then we have this called calculated interest, which is related to our future calculated forecasted earnouts costs. So we have to calculate an interest on that as well according to IFRS. So that is also not a cash flow related type of cost. And then we have some currency gain during the quarter as well. And here, you can see our balance sheet. And what is important here, of course, to see our cash situation, but at all set, we have announced related future costs depending on the performance that is DKK36,900,000. This can be paid in cash, but this can also be paid by our shares. Then, Samir? Thank you. So some key takeaways before we leave it up for the questions. We see continued strong underlying growth with our SEO work. We see OpEx stabilizing. We have done we've taken a little cost and we believe that we have scaled the business as much as we really need for now. We are excited about 2018, which is a big sports year, Winter Olympics and the World Cup in soccer, football in Russia. And we believe we have a strong M and A pipeline going forward. I also want to take the opportunity to once again invite you all to the Capital Fotogofiska. I think it's a great opportunity for everyone to come and listen. It's a way for us to open the hood on the car and show you what we actually do. You would be able to see C level management, operational management, where they will do presentation on how we work with SEO, how we see on the potential new markets, sports betting and new potential traffic channels. We already see a huge interest. We will also stream the event live and so you can download the link and follow this afterwards. That was all for us right now. We open the floor for questions. Okay. Thank you very much. I'll start off with some questions on my own and then I'll leave over to the telephone conference. Just begin with the revenue shift into more rev share. Yes. My take here on what you just said is that your is this shift done as of now? I think we are in a level now where we're comfortable. I think it's a very solid position that very few other lead generators have. I think pushing it, we still want to have flexibility. In certain markets, it's better for us to do CPA. We don't see the lifetime revenue on the customer as good as the CPA that we have on offer. Specifically, if you look in the U. S, we like we have to do CPA. In certain with certain customers, we also only want to do CPA. So I think this is the level that we should expect that we as a company also more comfortable with. Okay. So previously, I think the markets have been taking it as a rev share shift until Q4, maybe Q1. But now the with the rev share shift, the revenues will have longer tails. This is starting to see as of now. No. I think we can still see an effect of it going forward. But I think we the contracts and the agreements we have in place with our customers, we have concluded the shift itself that could be a long tail that could affect it going forward. But the backbone work is done now. Okay, great. So moving on to the OpEx space, could you talk about your acquired OpEx from companies the shift from Q3 to Q4? What's your current run rate on your personnel staff? Well, it's quite limited as it's not too many employees we take over. So the effect, as you can see, of our employees' cost this quarter compared to last, it hasn't increased much. Okay. And this is the normalized level as well? As we see it at the moment, we have organization that now could be able to grow without increasing our employees' cost as much as we've done historically. Over to you, Henrik. If you were to put on the more long term hat, where would you where do you see revenue growth? What are the drivers like in 1 or 2 years, not next quarter? I think in many ways we're still a startup. We just started. We're 5 years old. We are very strong in the Nordics. We're strong in the U. K. We're growing strong in the U. S. We're now tapping into Asia. We have a lot more to do in regulated markets in Europe. I think that's also where we focus much of our M and A activity for the time being. We also have new channels of traffic, which we're just starting to explore, which would be channels like YouTube, like Twitch and on the social channels that we're just getting started. So I think we will see it from new markets and I think we will see it from new and existing channels for traffic. Okay. So in front of FIFA next year, are there any other markets that you want to position yourself more in? Or are there any markets that you're not in that you want to be in front of FIFA? No, I think when we look at M and A now and we look in sports and casino, you would see that we are looking a lot in Germany, the DAC region. We're looking Spain, Italy, Portugal, France. That's where we but naturally as well, now we have an office in Asia, in Japan. So naturally we're looking there and the same in the U. S. Okay. Great. So for further growth, that will be partly acquisition driven. Could you talk us through your like financial position given earn outs, the structure of them, the duration of them and your financial position and how you would finance further acquisitions? I think as we showed here now, we have close to €30,000,000 in bank. We are very cash flow positive. We I'm seeing the stance and I'm looking at the acquisitions I want to do. And we are in a platform now where if we would need further funding, we don't see an issue with it. We are currently working on and exploring potential moves that we could do, which is due to the fact that we have been very successful in our M and A work and the bond that we have in place. So and that is potentially something that we also will discuss more in the Capital Markets Day when we meet up there again. Okay. So could you elaborate something about that, the potential moves? Would it be like refinancing the bond or? For now, all the options are explored or being explored. Nothing final has been done. As I said, we are working out knowledge that we're looking at what kind of deals we want to do, how much do they cost. I think for the short term, we have enough funding now to explore and do what we want to do. But we always want to plan a few steps ahead and that's what we're doing and have been doing. So there is a lot happening behind the scenes here which I'm very excited about. Okay. We'll have to wait and see then. So regarding Australia, many of your clients left Australia, the casino market in Australia in Q3. What was your what is your exposure to that market? We are sports exposed through regulated sports operators in Australia. So they are focused. So casino exposure minimal? Very no. We are a sports driven Australian lead generator. Okay. So could you talk about the recent the acceleration in crackdowns on the non compliance mainly in the U. K, but also Netherlands of late? How that affects you and your competitors? No, I think U. K. Is a brilliant example where the regulator now have started to impose restrictions on how to do marketing and how to position your brand. We believe it's good. I think it's good for the industry as a whole. We have worked within compliance for a long time and with our biggest customers. So for us it hasn't been we haven't seen the effects. We're still active with all these operators. It's a bit of a cleanup in the industry. We welcome it. And I'm sure that we will see other regulated nations going down the same route. Okay. So you're still in the contracts you were before. Have you been forced to leave any of your We're still working with the operators, yes. Okay. Great. So, yeah, seasonality. Paid media, revenues and costs were rather low here in Q3. Was there seasonality here? Should we expect more revenues and thus more costs with lower margins on these revenues in Q4 and Q1 or? No, I think I don't want to guide too much about the future. But overall, PPC is always going to be more seasonality in it. It's much driven by sports. And when there is no sports, there is no sense for us in spending money either. However, we have also we're going to spend when we see we can get returns and we can get the margins that we want to do. Q4 and Q1 is normally good sports months. They're very active. And we will continue to be active in PPC within sports. Okay. Great. So could you maybe talk about some of your it's your operators, clients, but what areas, what markets are performing at the moment? I would say like most of our where we're active, we are performing. We're seeing our biggest assets are growing nicely because they are driven by the people want to come there. They want to read up on it. They want to see what's happening in sports and casino. So it's hard to pinpoint any specific region. We see good growth overall. We see good tractions in the countries that are smaller countries where we're starting to be active like Italy and France and Spain, where we see that the countries are maturing a bit. They're getting better Internet accessibility. Deposit methods are improving as well. Conversions are improving. But overall, we have a solid base and we're growing in most of our countries. Is there any country that's performing below expectations? Not for now, no. Okay. Well, that's it for me at the moment. I'll hand over to the telephone conference. Thank you. Okay. It seems like there's no further questions. I'll see if I have something left. Sorry, from the audience. I wonder the companies that you acquire, it's normally 1 or several entrepreneurs behind them. And after the earn out, they have a ton of money to focus on. How do you ascertain that you can retain the people that you really want to stay in the companies? I think we have done this. We have done this now, I think it's 27 times. So we have a very good structure on how to integrate the people and the businesses that we acquire into the Catenamedra culture. There's always when you do an acquisition, some people will maybe we want to move there to the new offices or new premises, some people will leave. But overall, we work very actively with our integration team to make sure that people get answers to the questions that they have. That could be uncertainties in terms of the new owner. We are there a lot in these offices with these people. In terms of the entrepreneurs itself, we see many times that these entrepreneurs will want to continue with the business and are now actively employed by Cateno Media as employees. In terms of security from an investment point of view that they have a lot of money and potentially want to do something new that we have no compete in our oil acquisition contracts. That limits them to what they can do to be potential competitors of ours. But normally it's a very smooth transition, I must say. We have bigger acquisitions where we add 30 like 30 people and we have smaller ones as you mentioned that could have 2, 3 people. So far we've been fortunate to work with really good people that want to join the Catena Medea road ahead, I would say. Okay. As there seems to be no further questions, I just the latest news here is Pennsylvania. If I just could talk some further about that. Given the tax rates in Pennsylvania, won't the market be rather limited? Will the operators apply for licenses? What do you see the true market being there? I think it's too early to say here, but we know I think it was 10 licenses to casinos. We will probably see that the CPA levels that we would get for online slot players will be lower than we would have in Nevada or New Jersey. But for table games and for poker, they would be at similar levels. For us, it's the signal effect that something is happening that is the most important. We will see revenues that we didn't have coming in, which is also a step forward for us. So I think this is this could potentially be the starting point for a lot more positive things happening in the U. S. Going forward. Yes. Do we have some more questions from the telephone conference? Yes. Do have a question from the line of Rasmus Engelberg from Handelsbanken. Please go ahead. Yes. Hi. Good morning. I was wondering, Henrik, if you could talk a little bit about the organic growth rate that you have in this quarter. Is that an extraordinary good quarter or is it a normal quarter or relatively weak quarter as you look into the future? What do you think? I think we've seen I think this is a good quarter. I think it's a stable quarter for us. If you see also if you compare the last 9 months year on year, you can see it's fairly the same. You're talking about 29% organic growth. We will continue to report on this. Now it's the first time we do it, but we're happy with it. It clearly shows that we have organic growth. We take care of the assets that we acquire. We integrate them well. So we are happy with it and we will continue to report on the KPI going forward. All right. Thank you. There are no further audio questions at this time. Okay. We have one more from the floor. Yes. I just wonder if you can broaden your view on the U. S. Four states are open for operation, but there are 47 more to go. Is this an exclusively state decision? Or are there any federal overriding regulations? And what will the U. S. Be in 5 years' time? Will do you expect more or less all the states to open up? Or will there always be states that are closed for gambling and sports betting? I think the one that could answer that one would make a lot of money. But I think when it comes to state and federal, I think specifically for Pennsylvania, if you look on sports betting, that is still to be a federal decision and discussion. Otherwise, it's been the states and the governor who signed the bill, which now came to legal force. For the other states, there is a lot of discussions in many of the states to say who's going to open up next and how many is too early to say. Things can happen quick. It can also take a long time as we have seen. We have followed the market for many years and I've followed the market for 15 years. And I think what happened now in Pennsylvania was a lot quicker than anybody thought. In less than a week, it passed the House, the Senate and the Governor. So I think it's still too early to say. We're positive and we hope that this will be the starting point of further states taking the step on legalizing or online gambling. How well positioned are you in, example, other states like Michigan, Illinois and the other states that are talking about regulating the market? We are positioned in a lot of the states. We have assets in a lot of them already. We are not monetizing them at all as it's not as we cannot, but we are prepared and we will continue to prepare. And that's part of it why we actually have a U. S. Office and we have U. S. Presence and it's a key strategic market for us going forward. Because New Jersey is bringing in a lot of money and Pennsylvania is bigger and Michigan is big as well, Illinois is big as well. So if you're well positioned then maybe next year we'll see some of the new markets open up. Let's hope so. And I'm set. Okay. Well, I have nothing further, so I'll leave over to you for some closing remarks. Thank you so much for coming. Thank you so much for listening in and watching this on the live stream. Once again, we are very proud of the quarter. We're very proud of the team itself who has delivered on what we have said that we should deliver. We are looking forward to the next quarters and wish you a pleasant day. Thank you. Thank you for coming.