Earnings Call: Q2 2017

Aug 18, 2017

Is Robert Anson. I'm the CEO. Today's agenda, if we look at it, we're going to go through some Q2 highlights, then a chapter which we call speeding up innovation, then some events during and after, and then we will get into the financials. And after that, we will take Q and A, which Mikael will lead again. So starting off, revenues totaled €15,100,000 We also had record search revenues and also record earnings. The EBITDA margin is 53% adjusted, which is an improvement since last quarter. The same goes for the EBIT, which is 47% adjusted, which is also an improvement from last quarter. And nowadays, about 60% of our revenue comes from regulated markets, which is also an increase from Q1. And our focus to change towards revenue share from CPA model also continues. You will see that later in the presentation. We have been impacted by a slow sports season during the summer, mainly impacted paid revenue. You will see that later as well. There has been some Dutch regulatory changes as well that's had a limited impact, but still an impact. But something that I'm really proud of is the NDAs, which is now up 13% since Q1. We went over 91,000 indices. So that's an all time high. Continuing some highlights. We have the highest rate of product and channel innovation that we've ever seen in the company. We will go through that in more detail shortly. And the move to mid cap is on track for second half. One thing that I also would like to show you is the fact that we have moved to a new office. You say this later, but first, we go through some of the key KPIs. So as we said, €15,100,000 in revenue, €7,100,000 in operating profit adjusted, 60% of the revenue comes from regulated margins. The EBITDA margin, 53% adjusted. This is when you look at the indices, it's a 92% year on year increase. And for revenue, that is 58%. We have a cash and cash equivalent position of €50,700,000 at the end of the quarter. And we are now at 64% perpetual revenue, which is revenue share, so reoccurring revenue. And this is a figure we will start reporting from now on. But as I said, we have moved to a new office as well. It's been a great lift for the company and really motivating for the staff. We sat really crowded before. And finally, our new office is ready. It's 4,500 square meters, so it actually can house up to 450 people. And if you compare it with what where we are now, we have about 170 staff there, which means that we have room to grow. It also makes it easier to build our culture and recruit top talent because the office is really wow at the moment. And we also have installed a top notch kitchen, which is quite unusual in Malta, that we serve complementary healthy food to our staff. It's really appreciated by the staff, and it's a really easy and cheap way for us to actually give benefits to our staff as well. We also built a gym and recreational facilities. So this is something that we're really proud of to be able to move into now during the summer. But let's go into something that I'm particularly proud of is that the company has we have had great success, but we have also had a hard time keeping up with all the new products that we have kept acquiring, etcetera. And for the Q1, it feels like we caught up and now we are ahead of the curve again in terms of products and developing our own products. It was a lot of, you know, positioning ourselves for future growth. And now we're seeing the result here where we can add new channels. We have launched new products. So to start with, we have launched something called quickspincasinos.com, which is a cooperation with QuickSpins. It's a fan site where you will have Sid, which casinos has the Quick Spin games, etcetera. We also relaunched John Slots, which is one of our oldest sites, which is actually the founding site of Katriana, if you will, from back in the day. This site has now been relaunched and we have seen really good uptake in traffic and conversions now that it's been relaunched. We also have taken it to Germany. We also launched a site called Live Betting. I encourage you all to check all the sites out afterwards. We have also actually launched a new inroad into esports, which is very exciting. It's a joint venture with Gamers, which is a global esports TV reality show, which basically definitely something that might grow and it's not big at the moment and has basically have zero revenue effect so far, but this is something that positions us well for the future. Also, as you might have noticed, Football Station is back on. And in conjunction with that, we launched a new site in U. K. Called askfans.co.uk. It's fan content driven, but very professional writers, always reviewing all the games, etcetera. But we are also doing TV. And what we are doing well, TV, but streaming at least on the web. And what we are doing is we're really focusing on quality and I wanted to show you a clip here. Hello, and welcome to Ask Fans TV. I'm Math Brown. Now I'm not anybody to tell Zulu Isadan what team should pick, especially in headbutt distance. But come on, Zuzy. Play the British guy so English fans could pretend his English were a bit. He's basically the Andy Murray football. Our first guest on Ask Fans TV is none other than Emil Heskey. But he was good. He was good, but I do know. Yeah. I liked I liked the challenge. Yeah. Yeah. When you're going in shoulder to shoulder in addition to losing a who's gonna go. And now we come to our challenge. We're gonna start from £25. We're gonna aim to get to £1,000. So keep coming back to us, fans. We're gonna roll it over until we get to £1,000. Chelsea fans feeling relatively confident going into the new campaign, fairly confident in fact that they can retain the Premier League title. Cheers, Matt. As you can see, I'm at Old Trafford. So that's the diamond bet of the week. So a cheeky 5 earned that from one bet, return £375. That's a good night out of town with Nads and maybe a cheeky carry after. He's out. It's August. The football season is back. So these type of efforts is something that I'm really proud of. You can start seeing that, you know, if you think of a traditional affiliate that has a website which ranks 10 different casinos and tells you which bonus is the best. I mean, yes, we still have all this and comparable services, etcetera, but it's very clear that the movement towards quality content is really important also for Google and ranking in Google. You can say that. So these old ways of just trying to make a quick buck for some people, so to say, it's you really need to put effort into it nowadays, and I think we've positioned us perfectly. Another proof of being innovative with channels is that we have started a podcast, which is called Up Snack with Sladjian and Jonas, 2 sports TV commentators. And it quickly became one of the most listened to podcasts in Sweden. We've also launched a YouTube channel that does slot reviews, etcetera. And another thing that for me is also really good for the company, but I'm really proud of is that we have been successfully granted license by Facebook, not many companies has this, to promote SPAT as gamblers, Ride Casino and John Slots in the U. K. Version of Facebook. This means that we can actually promote them with commercial gaming messages. And Facebook is cheaper than Google to advertise with PPC, which is great. And this also gives us an inroad into other markets where it's allowed to promote commercial gaming messages. Actually, in New Jersey, in U. S, it's allowed. And we just now got the license to promote our websites in New Jersey as well, which is also great. And this is I don't know who else has it actually, but this is really good for us. And what we are now trying to do is, of course, complement all the channels where we can do Facebook, we can do PPC on Google as well as SEO, so that we actually amplify everything we do through different channels and actually use our benefits of scale where we can promote in John Slots on Facebook or for that matter, do it on PPC or via SEO. So it really amplifies and creates synergies between them. All right. Some events. No one of you have missed that we are quite active within M and A. It should come to no surprise that we were that in Q2 either. We did acquire online media, which is focused on display advertisement. This adds to our paid marketing mix and also yet another channel diversification. I think from a strategic point of view, it's important that you can reach through as many channels as possible, obviously. And this really added display marketing for us. We also acquired new casinos. They are an SEO search based, but they are focused on the niche of just reviewing new casinos, how strange that might sound, which is working really well for us. And they have markets in the market is in U. K, Sweden and Norway. We also strengthened our German presence with an acquisition there. In June, we also tapped up the bond and added the €50,000,000 so that now it's €100,000,000 And also we issued some new shares as part of a payment for the U. S. Acquisition. Events after, we did acquire Betting Pro. I think this is one of the best acquisitions we have done in a while. This is basically as gamblers of sports, super high quality content, good updates all the time. People keep coming back for more information. It's a lot of good writers that are involved in this. And I mean, now we've started integration. It came with a bunch of great people. I'm ecstatic about this acquisition. It's going to really add, especially positioning ourselves now for the upcoming really sports season with football, Winter Olympics and next year, of course, you have the world championship as well. Then as I already said, we launched Ask Fans and Live Betting. So financials. Many of you have seen this image before, but I think it's good that we kind of look at it again and this is how we make money. So we're a lead generation company, which means that we don't chew too widely. We don't do TV commercials, etcetera. For us, a potential player is when it is a lead, when it has an interest to do something, you search something, you have clearly had an intention to do something, that's when we step in. And we do that either via search traffic, which is when you Google something normally, or e mail, you have signed up to actually get this information. Or we do it in AdWords or social media, such as Twitter, etcetera. We have a lot of followers for certain sites, for example, SPAT. And then the person comes to 1 of our sites as gamblers, free spins, John Slots, SPAT, now also Betting Pro, amongst a few. They find the information they need. They get an offer. They go on to one of the iGaming operators, sign up, deposits money and start playing and become a player. And that's when we start making money. And you see here, we say revenue share, CPA, hybrid or fixed phase. And revenue share, as I've said, this is where we are focusing and trying to put our deals towards because that does build long term strategic value. And once the player is playing, as I said, we make money. But even if the player then decides that it wants to try another casino, maybe it wasn't so lucky then, Hopefully, it knows that we have great services and keep coming back and maybe try another offer, etcetera. So it's really the fact that players tend to move between operators does not really affect us that much because either a player stays on revenue share and keep playing or it goes to different operators. But we still have revenue share there as well then hopefully, which means that whether you have one account or 5 accounts that you play upon, hopefully we will have revenue from all of them if you come through us, which is a strength compared to many operators. Record in new depositing customers, up 13% since last year or last year, but last quarter. This is something that says a lot in terms of combination with our move towards revenue share. It's an indication of what is to come. And if you look at it when we talk about revenue share, you can say that it's significantly gone up our revenue from revenue share model, while CPA and Flatface has gone down. Some of you might know that I talked about this in Q1 as well, and you can say that it's a little bit odd here because it's gone down to 51% in Q1. But what we did do during quarter 1 was that we added the U. S. Acquisition, which was very CPA heavy, which skewed the numbers a little bit there. But you can say that now the trend is very clear. We are moving a lot more towards revenue share, and you will see this trend continuing. And what this means is that we are instead of taking money now, we are hopefully taking more money later. So this should, in the long run, increase profits, increase margins, and it's a strategic move that we really believe in. So this is very important to understand. And that together with the NDC figures that I showed you before, which is the underlying KPI for growth, I think we're really well positioned for the coming year. Looking at the revenues, you can see that we made €15,100,000 in revenue. Search revenues is at an all time high, it's 11.5%. So that has continued growing. What you can say is the paid media has declined. This is due to what we have said, the lack of sports. You will also say later that we have also spent less money in paid, of course. You still have this other operating revenue that we had for the first time in Q1. This is with regards to a deal where we had a partner that did not deliver as promised and they have reimbursed us. So this is probably the last or this is the last quarter where you will see there's other operating expenses from that day. And as you can see also, revenue increased year on year with 58%. We've said that before. Earnings, record earnings, EUR 7,100,000 adjusted. It's an increase of 41% since same time last year. And I might sound like a broken record, but I'm going to repeat it. The shift towards revenue share is something that is key in what we're doing during this year. And you will say that it will have that this had had an effect, but will start having a positive effect later on. Then worth mentioning is also this Dutch regulatory impact that we have had. It impacted the quarter with about, I would say, 300,000 bottom line. We got we have been in dialogue with KSA, which is the Dutch authorities, and they have asked us to take down any Dutch speaking sites. And we have complied fully with everything that they've done, which means that we are well positioned to be active in Holland when it re regulates. We believe in being fully compliant with authorities, so we did that. But it also had an impact of about SEK 300,000 in the quarter. Expenses. Another thing that I'm actually proud of is that we have had really strong cost control during the quarter that this was also led to improved margins. You can see that OpEx here is actually flattening out. I mean it's still increasing because we're still growing the company, but it's not increasing in the same pace as before, which is really good. And this is what I talked about that we are catching up to ourselves. We're starting to see operational efficiency in the company. We don't need to add as much people as we add revenue. It's not the same linear business no more, which is great. And as we also saw before that we had a reduction in paid revenue. At the same time, you can say that we have a significant reduction in paid expenses where you have the direct PPC costs here have gone down. We also have quite a large significant posting €1,700,000 that relates to our bond basically, and some of it also relates to the move to NASDAQ. So hopefully, before the end of this year, you will stop seeing anything related to a move to NASDAQ, for example, because this should happen this half year. Move The financial position. We have a continued strong cash position. As I said, we have in the case, we have 50 €700,000 in cash and cash equivalents by the end of the quarter. And our current bond is valued at market rate in our balance sheet. Some key takeaways from the presentation. We have continued strong organic growth with search revenues and NDSA intake. We have strong cost control. We are we keep focusing on building long term strategic value that we on perpetual revenue and regulated market. You will see this focus going on. We have been and have become more sensitive to seasonality in sports. However, it's really good because it's 1 in 4 years where you don't really have anything in the summer and that summer just passed. So next year we have world championships, Olympics and then that following year you should have there is a lot more sports coming. So that feels good. We are out of this dead summer, so to say. We have had the best quarter ever when it comes to product output and innovation, something that I think really positions ourselves going forward. Of course, we have a solid M and A pipeline. So all of this coupled together makes me really optimistic for the coming year. So we are well positioned for continued growth. And with that, it's the end of the presentation. So we'll do some Q and A. All right. Great. Thanks. I'll start off with a few questions here right away. Well, first of all, can you say approximately how much revenues you have from casino and sports betting sites? At the moment, something that we haven't shared, so we can't share that now. We will start reporting that as well later on. Okay. So my other question was related to that and the comment about seasonality, of course, and you highlight that it's important to remember that sports betting is seasonally weak in Q3, and it sort of would be great to understand. And you can explain maybe the impact in more detail. We have the thing is, as you can see, the main impact is in paid media. That is because when it's events, it's really quite powerful to do targeted advertisement around these events. And when you don't have events, it will have an impact. And now we are seeing with Premier League starting in mid August that everything is kicking off again. So you still have July and half August that is seasonally weak compared to other summers where you might have had a world championship in the middle of summer, etcetera. Okay. So it's affecting Wright Casino and SBAT? I would say it's affecting SBAT and it's affecting latest betting sites. To some extent, it's been affecting Spielblogere even though it's that's not a really big site. But you also see the opposite effect when it starts. It has it's a tremendous difference in activity on the sports side when sports starts kicking off again. Okay. So how should we think about paid media in Q3? Will it be lower than in Q2 given the sort of normal seasonality that happens in that part of your business? I appreciate your question. But as you know, we don't guide on these things. Okay. And I think that a lot of investors are curious about the organic growth. Can you say something about that in the quarter year on year and maybe quarter on quarter? As we have said before, I mean, this quarter has been a little bit special considering that we have had this in paid media and that we have had to remove our Dutch sites. So but the underlying organic growth has still been about and still is and as we have guided, about onethree of our growth comes from organic and twothree comes from acquisition. This is a general rule of thumb that is still applicable. Okay. Great. And also, can you say something about the U. S. Market? It was the largest acquisition you made last year, I think, and to date? Yes. New Jersey is going well for us, I have to say. Very happy with that so far. Of course, what's interesting is what's going to happen in other states like Pennsylvania, etcetera. And U. S. Is U. S, it's hard for me to comment on the outlook. Sometimes you hear positive things, sometimes you hear negative things. But this is nothing that's really included in our business plans. We are not counting on Pennsylvania, for example, regulating in our business plans. If they do, it's a great upside for us. Okay. And the performance in New Year's is that On track, as expected. Okay. Perfect. And the Netherlands, you had a negative effect from that that market. And it was not a huge surprise, I guess. But and it was related to this .nl site. Yes. What you can't do is to have .nl sites and you can't also have your information in Dutch, which means that because then they will deem it as targeted towards the Dutch market. So what we have done is that we have moved it out. It doesn't mean that we don't have revenue from Holland, but it means that some of the sites that were in Dutch, we have had to remove. But some are our largest sites are still there, but under dotcom and in English. Okay. So those are fully compliant. Yes. Okay. Okay. Otherwise, the impact would be larger than the 100,000 Yes. Because I mean the acquisition you did a couple of years ago should be larger than SEK 100,000. Yes. Okay. All right. Any questions here in the room? Yes? Victor Hargberg, Preto. Could you talk about the M and A pipeline and earn outs and how that could affect the your possibilities to make further acquisitions? I think we're well positioned to make further acquisitions. I mean, yes, we have earn out liabilities, but we also make a lot of money. That is something that needs to be considered when you look at what we have in cash and what we have in liabilities and earn outs as well. So I think we will have a very active M and A year up coming as well. I'm happy about the pipeline. What I can say is that our focus is, of course, the bigger we are, the less impact and the less worth it is for us to look at something that contributes €50,000, €80,000 a month, it's just becoming too much overhead. So of course, the bigger we become, the bigger targets we look at. And the bigger targets you look at, the more time it takes to execute them. We saw this with Betting Pro. It actually took a lot of time to close that tail. Okay. So in your report, I believe it wrote that you had SEK 8,000,000 to SEK 9,000,000 in possible earnouts upcoming years. Could you talk anything about the duration of the earnouts? The maximum duration that we have done is 3 years, I believe. So it's over this. And some of these, it's also important to understand and that we will do, especially with the U. S. Deal, we have the right of using shares as means of payment as well. And that is something that we will continue to utilizing going forward a bit more. Maybe a quick follow-up on that. You had a reversal of an earn out commitment, SEK 11,000,000 in the quarter. Can you explain why you did that? And what's It's like this. We do recalculate all our maximum earnouts every quarter. So that's something we do with all the whole portfolio. And this is an adjustment according to that and in line with accounting rules. So that's why this has been done, and it's only a balance sheet effect on this. Okay. Can you explain the accounting effect in the balance sheet? How does it work? Well, if we reduce the value of that asset and we reduce the future earn out cost for that asset as well. Okay. As simple as that. Yes. Okay. And it's quite a large amount, SEK 11,000,000. And that's because the maximum earn out can be that high in this situation from the beginning, and that is what we have adjusted here. Okay. Is it one deal or several? It's mainly related to any, but still, it's important to say impairment test and the value of the company is still as high as before. I mean, we still have a high overvalue according to our impairment test for these assets. Okay. Yes. I think that's one thing that's really important to take away here is that with our impairments test, we have gotten questions regarding that Gig had to readjust. We have such an overvalue when we do a impairment test that we don't see any risk of this happening. And secondly, we are in line with what our auditors and everybody says, and this is how it's done. Why Gig had to do it, it's hard for me to comment on. Okay. Thanks. Any more questions here in the room? Anything from the telephone And as there are no further questions no questions in queue, I would like to return the conference call to the speakers. We have a question here in the room. About the U. S. Market, I'm not in any depth knowledgeable about it. Will there be a mix of federal restrictions and state restrictions? And how independent are the states in deciding on the gaming situation? It's a very good question. I'm not also an expert on the legal matters in the U. S, to be frank. When it comes to casino, the states are able to legislate around this. But I do also know when it comes to sports betting, there is a federal law that protects the professional athletes in a way. So if Donald Trump were to lift that because he actually could, it would open up the sports market for sports betting in the U. S. But whether that's going to happen or not, your guess is as good as mine. Anything more? I have a couple of questions also here. First of all, Facebook, the news that you discussed today, can you say something about the effects of that, how you will use that and the cost for it? It will remain to be same. What we have seen with SBA before is that the cost of acquisition per player is much lower than if you were to do PPC on Google. We are still at early stages as we just acquired the licenses. So to comment on what the effects are, obviously, we are very positive with this. But what the end effect will be, it's going to be hard to say now. But you haven't used it so far? We have, to a certain extent, via third party been able to use it on S pad. But now we can 1st of all, we are not reliant on a 3rd party. And now we can also do it with our own all our own properties and not just on SPAAT. Okay. And when it comes to paid media, the margin seems to be better now in Q2, if I read the math correctly. What has happened there? What has happened is online media. You as we wrote when we acquired online media, it because that's a higher margin business. So it has contributed positively to paid media margin. Okay. And the underlying casino sort of operating dynamics and how they operate, Has that changed fundamentally? It hasn't changed fundamentally, but we have changed and shifted our focus again towards different keywords, etcetera, where we see a more long term value and not so CPA driven. And it changes the methodology a little bit. Long term, I'm convinced that we are doing the right thing. As you say, short term, it has a little bit of an impact. So nothing has changed in the market. It's basically only you that has changed the revenue model that you take more regarding the PPC. Of course, Google PPC is heavily competed as well. And depending on how many people wants to go in, I mean, PPC and Google, it's a bidding. And of course, if 2 operators decide at the same time also to do a campaign, it can drive up prices, which means that we won't buy as much because it won't for us, make sense and we will focus on different keywords. So it also can fluctuate depending on competition basically. Yes, of course. And a question regarding cash flows in the quarter, operating cash flows. I think that working capital changes were negative also in this quarter. Klas? Or was this related to any earn out payments? Can you explain the net working capital changes? What is behind that? Yes. I just have to dig it up there. Does it take longer to get from the operators nowadays than it was a year ago? Or is that the effect that we see or something else? Well, I think as the company is growing, then of course, more capital will be tied up in working capital. But on the other hand, we can see that our customers are paying better and better also. So that will not have any other impact than that the company is growing. Then of course, we have our payouts of the earnings that's going on. So it developed to plan for us. Okay. Okay, perfect. And my final question from my side is about Betten Pro. You mentioned that it's an extremely interesting sort of site and value and assets. Can you talk about the magnitude and the impact of this? I think for us How does it differentiate itself from other sports betting sites, for example? I would say it differentiates with the quality of content, the frequency of updates and the fact that it has organic visitors. There is no SEO behind it. It's a proper site which brings real value to the user. And the model, I think, why we were so interested in it also is that we say that it can scale beyond U. K, the same as we see in Ask. It has some really interesting possibilities and the underlying technology that they have in terms of their CMS, etcetera, really enables that we can scale it and scale it quite quickly once we have integrated it. And that's also why we bought it without an earn out, same as our scammers. Okay. Any questions from the floor again? From the telephone conference maybe? And there are no questions in queue on the telephone line. All right. In that case, I leave it back to you, Robert. Yes. And then I would just like to thank everybody here in the room. And I would also like to thank Mikael for hosting today and asking some really brilliant questions as always.