Earnings Call: Q1 2017

May 17, 2017

So welcome to this presentation of the Q1 with continued strong growth and solid and the same numbers. If we start off with a snapshot with what everybody is mostly interested in, we had revenues of €15,230,000 That's revenue growth of 104 percent and operating profit of almost €7,000,000 giving us an adjusted operating margin of 46%. But to go into some other numbers as well, we are currently 228 employees. As I've said before, we're very proud of being such a multicultural company. We're still growing. We have quite a few open positions. And we are quite diverse and equal in terms of gender as well and the revenue growth and profit I just said on the last slide. I also wanted to highlight what happened during the quarter Ask Gamblers won our acquisitions that we did last year, won the best casino website at the awards, which of course we're very, very proud of. It's one of the acquisitions that has developed really good for us. But again, we are not only numbers. I wanted to show you So to that point, what we're trying to say here is that we are in a very aggressive phase of building a company. We have been building it very quickly. When I started 2 years ago, we were 30 employees. We're 230 now. Obviously, that comes with its challenges and the needs in investment in culture, in office spaces, etcetera. And just to give an example of that, we had both our offices in London and Serbia, got completely new offices during the quarter, really nice. And we ourselves, the headquarters is at the moment preparing a move into a completely new facility in the beginning of July. So that's going to be very good. We're going to be have a very competitive workspace, which is in Malta key, I would say. Malte is becoming highly competitive when it comes to staff and the expectations that they have. But moving on, repeating a little bit of what this we actually do. We're a lead generation company driving traffic to casino and sports book basically. But I also have a little more film that explains this in the version of basically Meet Dave. He's looking for an online casino. Dave wants a safe and secure place to play. He's also keen to get the best value for his money. But there are hundreds of casino websites out there. How does he know which ones to trust? That's when Dave found rightcasino.com. He told us exactly what he wanted, his favourite games, devices and bonuses. And then our intelligent filtering system found his perfect match. Dave was so happy, he invited his friends to the right casino community, where he earned points and prizes for writing casino reviews, finding bonuses, and helping others So what are you waiting for? Join Dave today at rythecasino.com. So in detail, this is our business model. And as you can see, we basically drive traffic or leads to one of our sites, like the one you just saw now, right? Casino, for example. And we can do that in several ways, either via search traffic or AdWords. Those are the 2 most common ones, but we also do it via e mail and social media. Once there, as you saw, they will select the casino. They will move on to a gaming operator. They will pay or deposit money and we will start getting paid either on revenue share or CPA or a mix of them both. One thing I want to highlight that has happened during Q1 and we continue to strive to do that during Q2 is predominantly when you work with AdWords, you also have a fixed CPA. A fixed CPA is because we need to take the investment upfront and then we get the fixed sum of, let's say, a few €100 or €500,000 or completely depending on which word it is. Of course, that's good for cash flow. That's also good because you don't have a downside. You know exactly what you get. However, you lose the long tail of that player. You don't have that reoccurring income over time. And what we have now decided to do is to, as much as we can do it, move AdWords also to a revenue share model or at least part share revenue share model, which means that we might have a lower upfront, but then we don't lose the tail. Of course, that has an effect in this quarter and probably will have a bit of an effect in next quarter because it takes now a bit longer until we have recuperated the investment that we did. However, we then have the player with us for the long run. So this should help stabilize also the paid media and also increase margins over time in paid media because we will have recurring revenue in paid media as well. Moving on. So our vision is to become the world's number one provider of high value iGaming leads. I would say that we have proven that we are on the way. There's still plenty out there that's very big. There's very many markets that are regulating, that's opening up, that's looking interesting. You have the whole South America, Asia and then, of course, continued expansion in Europe. That is very interesting for us. What we try to do is to transform iGaming through the power of choice, which means that we do want to help the consumer have a better offer them better choices when they are going to gamble. This is why we want to do this. And hopefully, that also leads to better gambling experience and gambling environment for the user. And looking on how we are doing this, what's our strategy, we focus on organic growth in combination with geographical expansion as well as acquisitions. And I think we have done this well during the quarter. We went into the we started operations in U. S. Through that acquisition. And we've also added new geographical markets as well as organic growth. So some of the recent developments. As I just said, we closed the deal with our U. S. Acquisition in January, part shares as well. So we issued new shares. So from I think it was 15th or 16th January, they were consolidated into the group 16th, it says here. And then, of course, in February, we also acquired Slotsia, which is more of a bread and butter. It's a good site that's focused on casino in Nordics. Some significant events during and after the quarter. The board has decided to postpone the IPO to second half this year simply due to strategic initiatives. We also, as you saw yesterday, announced that we are exploring to tap the bond. And then in we also secured a long term cooperation with Gary Gils, the founder of SVAT. That's a fantastic solution. He's turned out to be very talented and passionate in what he does, and we saw that there was an option for him to help the whole group with his talents in sports. And then we also just announced the acquisition of OLM. OLM is a bit different, but also complements us really well. If you look at in paid media, we have been doing PPC with Google. This is not dependent on Google. This is display advertisement, more traditional advertisement, also explore their technology to drive normal display advertisement to our properties. Their model of Sofen and very successfully so been to drive traffic straight from the advertisement to the operator, but their payment model is the same. It's revenue share and it's port focused and U. K. Focused. So it fits our portfolio really well. And as you can see, we continue our good development with NDISAs, one of our most important KPIs. We did over 80,000 in the quarter, which is 149% up since the last since the same time last year. And we keep seeing a strong development in NDCs. So Klas, I give you the floor. Thank you. Good morning. If we then go into the financial numbers, As you can see here, as Robert said, we had good growth, 104% now the first quarter, up to SEK 15.2 1,000,000. Paid revenue stood for an amount of 24%, which is not so far away from what we had before, but it has had an effect on our margin, which I will come to on the next slide. We also have operating other revenue in this quarter, which was a compensation from a partner regarding lost revenues. If you look at the expenses, you can see the part of the increase in the operations is related to the move from CPA to shared revenues on the paid media on the paid revenues. And also, as you can see, our personal cost has increased as we now are 2 28 employees. And we also have increased a lot of other costs in the organization to be able to handle the growth of the company. If you look at the financial cost, as you can see, it's almost SEK2 1,000,000, but only SEK850 1,000,000 of them are related to really cash out for our loans. The rest, the SEK 827,000 are related to the value of the bond we have. And the other financial costs are mainly related to calculated interest on the future acquisition costs. This is IFRS related cost. It has no cash flow effect at all. If we then look at the revenues, the adjusted operating profit is now SEK7 1,000,000. The decrease in adjusted operating margin is mainly related to the shift from CPA over to shared revenues for the pay revenues. And then if you look at our financial position, as Robert said, we are at the moment or now exploring the opportunity to tap the bond. And we have at the moment at the end of the quarter NOK 23,000,000 in cash. Then if you look at the financial targets, it's, as we said before, the growth over this medium term of 20 75%, including acquisitions. The operating margin should exceed 50% and the dividend is something that we will look into after this short to medium term. Thank you. All right. So if there are any questions, I'm guessing that you have a few. Yes. I have quite a lot of questions. Thanks. Maybe we can start with the quarter, the details there and explanations possibly. The shifts that you mentioned in the report where you are pushing search traffic over paid. Can you explain how you do that? No, no, no, no. We're not pushing search traffic over paid. We're still paying for it in the same way, but our recoupment model in the back is different. Instead of an operator paying us a fixed upfront fee, we are changing the deal with the operator saying that, okay, we will take 100 upfront and then 30% revenue share for Life instead. Okay. So you're driving the mix towards more rev share deals in the organic side or so? No, no, no, in paid. In paid? Yes. And that's why you will say that the margins goes down because if you do 100 percent upfront payment in paid, you get all the money all the time. And however, what happens is when you take the decision to make this shift where you put the long tail on, but the thing the issue with paid, even though it's very good to be able to drive revenue short term, is that if you see if there were to be a dip in paid for some reason, you have 0 income because they are a one off payment. So you don't have the recurring revenue. And what we want to make sure is that we start building up the database of recurring revenue also in the paid media. Okay. So I thought that you're referring to the whole company and specifically to No, this is specifically, we have in Search, we are mostly on revenue share already. Most of the CPAs have come from paid media before. We're still doing CPAs, but you should be able to say over the during this year, very strategic shifts to more and more revenue share deals or hybrid deals, so that there is recurring more recurring revenue. Okay, I see. Yes. Thanks. And the other income that you had in the quarter, can you explain what that was about? I can explain it as much as I'm allowed to. We have had an issue with the partner where I think it proves a couple of things. We have good systems in place that caught this quickly. And we have good agreements in place where we could also show the loss in revenue, and we have been compensated by the partner. And this is how we had to write it. We couldn't take it as normal operating revenue, so we needed to highlight it. Okay. So it's an operator that has not paid you before and you are now taking that's an income? I'm not as we have settled on this, I'm not at liberty to talk about it. Okay. But it will not continue going forward? It was a one off effect. There might be an effect in Q2 as well, but after that, no. Okay, good. You changed and updated the on slots in the quarter? Yes. How has that change developed and impacted your? It's like always when we saw that with Ask Gamblers as well. When you change something, Google, you get the honeymoon week where everything goes really a lot better in terms of how it ranks. And then you have a dip that's a little bit longer. It's just how things work before it reindex and it populates properly. And then it starts climbing. We saw the exact same thing there. And but what I can say is that, for example, outbound conversions are significantly much better and we're still going to make that site a lot more feature rich. There's more uptake that's coming. Okay, good. And can you maybe also talk about the U. S. Acquisition? That was a very significant transaction last year and it came in this year. How has that company performed or? As planned, I would say. As planned there has been they have had some really good months, but that's basically according to the expectations we had. So there is nothing it hasn't been way above expectations, but it's been on what we actually believe they would do. Okay. Can you say something about how that market works in New Jersey? And also maybe relating relations to that comment on Pennsylvania and other states, what do you see there? Yes. At the moment, first of all, I mean, New Jersey is basically the only market we can be active in at the moment, at least where there's significant revenue. Then of course, we are all cheering for that they are going to regulate Pennsylvania. At the moment, it seems to be people tend seems to agree that they should regulate it, but they don't seem to agree on how they should regulate it. And that's where it is at the moment. Hopefully, they can agree soon because Pennsylvania has a quite big hole in their budget as a state, and it's commonly discussed that this would be the way of patching this hole, but they just don't seem to be able to agree on the license system and the tax rates, etcetera. But I believe it's coming. And how is the New Jersey market working in terms of affiliation and lead generation? I mean, we are one of the absolute biggest affiliates there. It works the same way. You Google a casino, you go to a website, you read about it. However, land based and online, land based is very big. Online is growing. It's not such a mature market as you will find here in Europe that people play online. I think once U. S. Comes to and matures and more and more states do this, it's going to be an absolutely massive market. Are you working with us in the same way with all the operators that are on the online side? Or is it very focused on only a couple of them? We have, of course, stronger relationships with a couple of them and some of them are really aggressive in their payments, in the deals that they are willing to make. Okay. Great. It would be interesting to hear how much of your 200,000 approximately NDCs last year that is actually coming back and continues to be active. I don't know if you have statistics on that, but if you can say something about what you think and what you feel when you are monitoring your business versus the upfront? Yes, absolutely. I mean, there is a reason why we shifted paid media around as we did. We have been investigating that quite heavily. And let's just say that we have more of our revenue are recurring than we expected it to be when we did this. So and this is something that we want to be certain of, and it's quite complex. So we have as soon as we have this that we know it's reliable because the issue is that the operators aren't sharing enough information with us in terms of lifetime and who spends what, so that we don't feel comfortable enough with reporting it. But our aim is to have as good and reliable KPAs so that we can also start reporting how much revenue share, how much CPAs, lifetime, etcetera. But I can just say that it's more than we thought it was. That's at least I can't get into specifics because it's management estimations. Okay. Good. How many sites are you managing today? And how many are real money sites that actually are generating revenues? That's a very good question. I would say we definitely have we have about 100 sites that generates revenue, I would say. Then you have the good old eighty-twenty rule on that. I would also say that you have 20 of them. They are basically 80% of the revenue, but then there is quite a few niche sites as well. But there is also a consolidation within this and as a strategy, we do believe that fewer, bigger, more global sites and global brands is going to be the way to go forward. Okay. Do we have any questions in the room? Yes, here. Thank you. Martin Nagel with DNB. My first question is on this strategic shift in paid media. Is it possible for you to quantify the effect from this shift in the Q1? We haven't really done that because you can say if you yourself look at the graphs and you can say that it looks like paid media hasn't grown as much during the quarter. That's because we basically pushed revenue ahead of us. It's hard to quantify exactly. I wouldn't want to give you a proper figure. It's something that we probably could come back with. Okay. Could you tell me a little bit more about your acquisition strategy when you acquire these sites? And how do you keep the drive, so to say, of the assets you acquired, the people behind it? And how do you keep them motivated to keep going? It differs a little bit on case by case, depending on how you feel that the owners are structures, how would you want to keep cooperating with these persons or not. So if we say that it is often when you find something that's just about to take off, which is something we aim for, The owners aren't usually that stupid so that they do want to have they want to be on that journey a bit. And then we do things on a year earnout or 2. That obviously motivates them a lot because they kind of have a multiple on the revenue anyway. And then as you've seen in a couple of cases, during this journey, we have realized that we like each other a lot and we want to go further in the relationships like we did with Espad. And then we have made a deal and changed the deal around. So Gary now, for example, bought also shares, which is great because now he's a part of thinking bigger than just a SPAT. So that's one way we're doing it. Other times, we simply don't want the owners there. The best case would actually be as gamblers, where we acquired it right away, and we felt that we needed to do it from day 1 basically. It hasn't been easy all the time, but it's turned out really good. So it's a very adaptive model. We don't have one mold where we put things through. Okay. Thanks a lot. More questions here in the room? Can we maybe check the telephone conference? Operator? We get a question from the line of Vanessa Adams, CMB Financials. Please go ahead. Your line is open. Thank you. Hi. I have 3 short questions regarding regulation of the markets you work in and gaming operators you promote. As it seems to me that you might be working in quite a few prohibited markets with operators licensed in the Caribbeans and some other places. The first question would be, while looking at your portfolio, it is clear to me that you target both the U. S. Dotcom market as well as the French one would say like Adgamblers, Ripe Casino, The Stars, Atlantic Club and many others. How do you address the legal concern that you are promoting illegal operators that do not own local license? And the second question, shall I ask the second question or should I wait for the answer first? Answer first. Okay. Yes, that makes it easier. So if you look at, for example, U. K, which is a regulated market, we only promote casinos that has a U. K. License. It's that simple. Then there are more gray markets, obviously, like the Nordics, which remains unclear where we promote licensed operators, but they might be licensed, such as Kasuma, for example, in Malta. Okay. There was a second question maybe, Horne. Yes. Regarding old revenue sharing, I look at Ask Ambler's when you acquired it and it was working with many dot com operators targeting the U. S. Are you still collecting on revenue sharing for that? We have completely blocked U. S. From them. Cool. That's awesome. And third question, you never mentioned the underlying organic growth of your acquired assets. Will we be getting more clarity on that? That's something that our aim is to be as transparent as we can when we have reliable data basically. And as our business intelligence tools gets better and better and grow, we invest a lot in building our own system. Our goal is to definitely to start building out more details in our reporting to the public as well. So going forward, hopefully, yes, but we need to make sure it's reliable when we do it. Okay. Thank you very much. Thank you very much. No further questions in queue. And there are no further questions from the callers. Okay. Thank you. Thank you for that. I have a few more questions. First of all, we have noted and seen that your competitors also are becoming more they take in funds through debt issues, bond issues and they want to also acquire a lot of companies. Have you seen an increased competition in the Nordics and in Western Europe for the most interesting? I would say yes, more than we have done before. I guess it's natural that we proved the business model and people realize that they can do the same. And we have certainly noticed Gig and Raytech, for example, they have been active. They have been we have met them a few times on what I would consider the smaller side so far of what we are looking at. But yes, it would be naive not to say anything else. Okay. What can you offer the companies that you are discussing with that your competitors maybe have not possibility to offer? I would say when it comes to if you want to compare with a company that only has this as a side business, there are a few of them that basically has this as a part of their business, while their core might be something else. Of course, when you especially if you're on an earn out, it's probably a lot easier to reach the earn out together with us. We have done this so many times that that's definitely an sell, and they can look at cases from the past and we can prove to them that we're a good partner. So I would say that's one of the things that they that we can offer above, for example, Cherry or Gig. Okay. Can you also talk about the affiliate market in terms of how it's structured in each market. I guess there's a lot of huge difference in terms of maturity and number of affiliate companies in Italy, for example, compared with U. K. And Sweden, Norway and Germany. Yes, of course. How fragmented the market really is? Yes, of course. I mean, if you look at Sweden and you Google online casino, you will see an abundance of sites. I would say it's all markets are still very fragmented, but clearly the consolidation is happening. The smaller ones are starting to fail the fact that it's harder to compete. It was easier when they only had to compete against other people in the basement. But now if you go head to head with us, which has, well, I can put a lot of technology and 200 people behind something, it's going to be tough. So we do also get quite a lot of people reaching out to us that wants to sell. While in Italy, even though it's not great, I mean, we're revenue from Italy isn't huge by any means. However, we are the largest affiliate there already. So So there are still a lot of companies to There's still a lot of companies. I would say that at the moment, we have the biggest pipeline we've ever had. Okay. And what will happen to this market? I mean, eventually it will be more consolidated and there will be other drivers, more organic drivers in place. What do you think will happen with the market in 2, 3 years' time? I think we have a year or 2 of consolidation, this type of really active consolidation left. I said it a year ago. I said I think we have 1, 2 years left. So but I still say that we have 1, 2 years left. And once the market is consolidated or to a much larger degree consolidated, there will still be new companies coming and there will be still acquisitions. The pace will reduce. And what I think there is that it will be the people that have invested the most in technology during these couple of years, scalable platforms, and then building out more global brands. Because also the best example is still, for example, Expedia with their Hotels dotcom, Bookings dotcom, everything. They are global brands. They're top of mind, basically unthreatened in that space. And I think this business will go towards that as well because you can see that in any other type of online business activities for I mean to create this larger, stronger brand. Yes, that's going to be that's going to obviously be needed is to create not only search visibility, but also do brand building activities. Okay. And how much do you do that today? What are you doing there? At the moment, we are not doing that much. At the moment, things are growing very well organically. We have other competitors that are running TV ads, for example. So far, we're an online marketing company. And to do print ad and to do a TV ad is kind of saying you don't believe in your own model really. So but now when we have when we also bought online media that does display advertisement, etcetera, that's going to be a natural way of also being able to use them to build our own brands. Okay. Great. Just one final question. You mentioned that Q1 is seasonally strong. Yes. Historically, we haven't really seen any seasonality at all. Is that implying that Q2 will be sort of flat compared with Q1 or how should we rate that? I don't want to comment that too much, but like Q1 has been seasonally strong. And Q1 also, actually where we saw maybe it wasn't noticeable for people that much, but when we saw you can see that the underlying search volumes for searches on Google period goes down in summer and we are dependent on searches on Google. That's why it's also really good if you have recurring revenue unpaid, for example, because if searches goes down, volumes goes down. But if you have recurring revenue, that's not such a problem. Okay. I think we have to stop there. Good luck in Q2.