Earnings Call: Q4 2016

Feb 15, 2017

And welcome to this Q4 presentation. So to start off with, as he said, my name is Robert Anderson. I'm the CEO. With me, I also have later Patrick Bloch, who is the CFO of Operations. To start off with a brief introduction to our company, there might be some new shareholders. We were founded in 2012, so we're actually this year turning 5, a bit of a milestone for us. We're over 200 employees. I think we're about 210 actually to date. We're a very diverse company in the sense that we have over 28 different nationalities, about 40% women. We now have offices in three locations. The headquarters is in Malta. We also have office in London and in Serbia. Looking at the last quarter, we had 108% growth with a profit margin of 50%. And looking a little bit more at the financial snapshot of the Q4. So we did €12,300,000 in revenue and that's 108% growth and €6,200,000 adjusted operating profit with a margin of 50%, as I said before. Summarizing the year a little bit, that means we totaled over €40,000,000 in revenue and the year on year growth for the year was 168 percent and an adjusted operating profit of little above €21,000,000 And operating margin for the year was 53%. I do get the question a lot actually, what are we and what does it mean? So we are a lead generation company and what that means is that we do drive traffic to operators in the online casino and sportsbook market. And looking at this in a little bit more detail than how the value chain looks, This usually starts out with or do start out with a laid, as we call it. That's someone that has already an interest, a given interest in playing. So what we don't do is basically shoot wide and do TV ads and market to people who doesn't have an interest. So you're already interested, which means that you either do a search information or through AdWords, and AdWords is basically an other version of search. It's only that you have the paid results instead. And then social media, you've liked one of our, for example, betting pages on Facebook, etcetera. And through there, we drive traffic that has interest in already playing. And we have a variety of our own websites. A few are mentioned here, Ask Gamblers, Free Spins, John Slots, Wright Casino and Espaat, which we acquired during the quarter, which is sports book focused. In this way, we drive the players to the operators where they then sign up, play, deposit and generate revenue. And we generate revenue in predominantly 4 different ways: revenue share, which is exactly what it sounds like. It means that we have a cut of the revenue somewhere between depending on the deal structure, I would say between 40% 50% revenue share. Then we have the CPA, which is a cost per acquisition. It's an upfront payment that we get from the operators when someone deposits money. This is predominantly used in conjunction with paid media since we need to pay Google a lot of money every month for this. Hybrid deals is simply a mix between the 2. So it could be that we get an upfront and a smaller revenue share. And then we have fixed fees, which are featured position basically advertisement. What then often happens is the player will continue to play at 1 operator, but this is an entertainment product and a lot of people will want to try to change. Maybe they didn't feel as lucky, maybe they didn't enjoy the product or simply just want to try something else. So either they then go back to one of our products where they know that they can get information about the latest games or really good bonuses, etcetera, or they simply start searching again and the cycle starts over. But if this cycle keeps going through and a player has an account with, for example, 7, 8 operators that they have come through us, we are agnostic to where they actually play, whether you then go to your that one operator play and we get revenue share or if we get revenue share from over there. So in that sense, we are quite we have quite low risk in the sense that we have spread that risk. So if one operator grows on the expense of another one, it simply just differs the flow of revenue for us between these operators instead. So in that sense, it's quite low risk. Looking at our vision and mission before we get into the actual financials, our vision is to become the world's number one provider of high value iGaming leads. And looking at what this actually means, world's number 1, well, it's simple. We want to be not only the best, but also the largest and most profitable lead generation company in this market segment. High value, we want to have the best quality players and we want to have the highest conversion rates, which actually says something about our own focus. Instead of going into many different industries, we get a lot of questions, why aren't you doing loans? Why aren't you doing insurances? But I think one of the things that has served us well is our focus and working hard on building underlying products that's really good at what we do instead of spreading us too thin. So our mission is to transform iGaming through the power of choice. This is why we do what we do. We do want to be a really good consumer service and give information that actually helps the AIG and the player make really informed decisions. Looking at the strategy on how we grow this company, organic growth, This comes mainly from making our products better, but also from having better underlying systems. We have our own platform that has worked many years on building and continue to work on, which is called Catena Connect that connects basically all these systems to give us benefits of scale. Then we have our BI systems. Data is incredibly important to make sure that we promote the right things to the right people with the right operators. And also, of course, keep enhancing product development. One of these examples is that Ask Ambler's launched a new site in the autumn. And again, we won the award for best casino website now at LAC, which was really nice. Geographical expansion is part of the strategy. This company started out with the Nordic focus when it started in Svein and then moved into the Nordics. And after that, we have slowly but surely or depending on your definition of slowly, but we have entered new markets. And now these are our markets. And of course, we have during 2016 put a lot of emphasis in growing in the U. K. Because it's a regulated market with really sound. But we also then went into United States. I will get more back to that in the end of this quarter. So our current markets are Sweden, Norway, Finland, United Kingdom, United States, Italy, Belgium, Netherlands and Germany. Acquisitions, as you have seen, we have been active in the acquisition side of things as well and we will continue to pay. There's still a lot of work to be done and a lot of attractive acquisition prospects out there. So we will see us continue doing that as well going forward. And as Patrick will show, we still have quite some money on the bank left from the bond. So this is something we can expect going forward as well. Looking at the recent developments a little bit. So in the quarter, we did some really important acquisitions. So we entered the U. S. Market. We consolidated this after the quarter, however, but we did sign the deal in the quarter. And we have strengthened our position even further in the U. K. Through the acquisition of Espaat and Casino U. K. I think Espaat is really worth highlighting here. It's a social media sportsbook focused site, which has a lot of underlying data. They recently launched an app, a first iteration that will continue to improve. There is a lot of important technology in this acquisition as well, not only of course that it makes good money, but I think there is a sound technology base that can and will be integrated into our underlying systems that's going to make this technology available for Caten as a group. And then of course, we have continued to strengthen our organization. We have here also Klas with us. That's the new group CFO that just started. And then just recently in January, COO started, which I'm extremely happy with. And then we still have a strong need for Talendog. The management teams, you could say, is quite complete now after a year of rebuilding it. But with that said, we still need to keep growing the company and especially recruiting technology and competent people. As I said, taking a leading position in the U. S. With this acquisition, we are the largest regulated affiliate in the U. S. We only work with the licensed operators. With this, we also entered poker and to some extent also fantasy sports. Of course, the opportunity in the U. S. Is also going forward quite tremendous. We're seeing the positive indications from, for example, Pennsylvania, etcetera. So if it were to be regulated, we are well positioned to continue growing in the U. S. A lot. To end off with, and I've said this before many times, but creating all these indices, the new depositing clients that we do and considering that a lot of them are on revenue share, now this quarter we generated over 67,000 new depositing clients. This builds a long term strategic value in the company since even if for some reason you were to have, let's say, that Internet disappears, no, that would it's a bad example. But while our sites were to go down, we would still have the revenue from all these old players that has already signed up. And this growth compared quarter on quarter was almost 20%. And year on year it was 170% up. Patrick, some figures? Yes. Thank you. Let's start at looking at the revenue. As Robert mentioned before, we ended up at €12,300,000 for the quarter, which is 108% growth year on year. If we look at those two numbers, paid revenue and search revenue, you see that we are growing paid revenue significantly in the quarter. This is basically because also because of the SBAT acquisition, because now from now on, we will have SBAT in the paid revenue. SBAT is social a lot of social, but we are paying a lot of money for actually social advertising on Facebook, Twitter and other channels. So that will be included in the paid revenue going forward. Search revenue, we have Casino UK for December in search revenue. If we look at the expenses, we are growing very fast. We are increasing the number of employees in a rapid pace. We are, in the end of the quarter, 190 employees. And that is, of course, reflecting in the personnel expenses. The direct costs related to paid revenue, which is now both SBAT and Catina Media U. K. Is increasing, but quite in line with the expectations. Depreciation and monetization is going to increase due to our acquisitions as we are depreciating a small amount of each acquisition as player values. And these are depreciated over 3 years, and they will be seen in the depreciation and amortization. Other operating expenses are increasing in line when we are growing as we are both with organic growth, but also when we are increasing the number of employees like we are doing right now. And the nonrecurring bond and IPO expenses is mostly IPO expenses as we are working on the mid cap move during the first half of twenty seventeen. But also, we had some legal fees remaining from the bond which we did in Q3. When we look at earnings, we had a very good month quarter, sorry, and we had an increase of 98% compared to Q4 2015. Strong margins, and we are still at 50%, and this is a slight decrease compared to last quarter. But it's due mainly to the acquisition of Aspat and the increase in our paid revenue as well as the very rapid expansion of employees or the growth of employees. When we look at the full year result, like Robert mentioned before, we reached over $40,000,000 We had a margin adjusted operating profit margin of 53%. And we can see that we have an adjusted operating profit of €21,000,000 And if we look at the balance sheet, we are having a couple of interesting lines here which we can dig into. First of all, we are having noncurrent liabilities. Noncurrent liabilities is partly earn out structures as when we are doing our deals, we usually do them with earn outs. When we do earn outs, we sometimes do 12 months, but usually we do over 12 months. If we do over 12 months, we put that liability into non current and that's why we are increasing non current. Also in noncurrent, we have the bond, which is a 3 year bond, and that's why we are having this big amount of CHF 58,900,000 in noncurrent liabilities. If we look at the earnouts, we see that CHF 26.9 million is related to earnouts. And if we look at the cash, we have almost €45,000,000 as cash and cash equivalents currently or end of Q4 actually in the company. We want to restate that the financial targets are remaining. And like we see here, the growth in short- to medium term, which is 2016 to 2018, should be exceeding 75%, including acquisition, and this is the average. And in long term, we are saying that we are going to exceed 25% in average and that's including acquisitions. And if we look at the short to medium term of margin, we are saying that we are going to have a margin above 50%. And in long term, we are going to have a margin above 40%. And when it comes to dividend, it was a slight change in Q3 there because before we had exceeding 50%. But due to the bond, we now say that we are going to have annual dividend of up to 50% of net profit. But that is long term and not the short to medium term. So I hand over to the moderator and questions. Thank you. So time for the Q and A session. I will start off with a question of my own, then we will hand the word to the room and also check for questions through the web and telephone. But congratulations on yet another very strong quarter and a good wrap up of 2016. I'm curious, you're growing at a very high pace and with very strong profitability. How do you see the pricing environment changing? Is there any changes in the pricing environment? I mean, the operators are obviously very prone to pay quite generously for traffic and new depositing customers. Do you see any change in trends there? I mean the trend that we have seen over the last years is a higher willingness to pay for traffic, if anything. I think we've gotten to a point where it's kind of stabilizing. I think it's important that we will continue to have a win win situation for us and the operator. I know that some people in our fields, they try and push the margin as high as possible. I'm a strong believer in the long term business of it and making sure that both the operator and ourselves make money. So I think that we have found quite a level. We have seen this increase in payments to the affiliate themselves. It's starting to level off, I'd say, but definitely not decreasing. Okay, great. And I'm thinking a bit about this paid media channel. It's clearly an important and very powerful tool to grow your revenues. Do you intend to increase that of your total revenue mix? Or how do you view that channel? For us, this is still a bit of a balance. I mean, if you look at Aspat, that's something that's paid media, slightly higher margin paid media. Paid media is a strategically important part of what we do because it makes us flexible really quickly because you can react much quicker with paid media than what you can do on the normal search traffic. But still, I believe that we are going to be keeping our financial targets, the 50%. So that's always going to be a bit of give and take going forward. Okay, great. And do you have many, let's say, blanks on the map for using paid media channel? Or is it interestingly enough, Google is opening up a lot of countries during this year. That's the information we have. We have gotten we have a good relationship with Google and the indications we get from them in opening up PPC around Europe is very positive. Great. So do we have any questions in the room? Then perhaps we could check the here, question. Yes. Perfect. I was wondering about some of your sites. Some of them are getting a little bit old. Is it something you're maintaining? Or is it something going forward you're thinking about? I think well, obviously, since if you have an online product, you need to update them. And looking at some of our products, it's been a while in the product cycle. So naturally, we are investing in building new better versions of them and that's something that you will see coming out during 2017 as well. Part of our also investments in was increasing the speed in product development or in Q4, sorry. And how is Ask going? Is it going as expected or better than expected? I am guessing you're referring to Eskamler. Yes, Eskamler, sorry, Eskamler. Yes, it's going really well. I think that we are very happy with that acquisition, and it's been performing really well since the product update. And the margin went down slowly around 50% a little bit. Is it something that Yes. If you're wondering if it's a trend, what I would say, it's rather it's a balance in investments. We are very careful to always hold our margin targets. But as Patrick said, an increase in paid media will also reduce the blended margin. With that said, we also took some extra investments to increase our technology Budapest as well, albeit outsourced. So of course, when we saw that we had space to actually take these investments in the year while maintaining our financial targets, that's a choice we did because that's going to pay off in 2017. So that's a natural variance quarter to quarter. You can see that go up and down a little bit around there because of investments either in paid or increase in technology, etcetera. And you mentioned mid cap listing. Is it still going on H1? That is going exactly according to plan, and we aim to finalize this within the first half year. Perfect. Thank you. So any more questions? Perhaps on the telephone? Thank you. As there appear to be no questions on the audio, I'll return the conference to the speakers. Great. Thank you. It appears you were very clear in your presentation. Excellent. I could follow-up with another question of my own. Usually, when you do acquisitions, one could read through the earn out targets that you sometimes have quite ambitious growth forecast or targets for these acquisitions. What kind of measures do you implement to your targets to aid them in this financial performance? First of all, I mean, we do have a large technology base that we can integrate them in. And then we have all our tracking methodologies that we can actually increase conversion rate, etcetera. But also then they become a larger part of a larger family, which means that we can usually increase the revenue deals that they have. So for example, if they have revenue share of 35%, we might be able to move that to 45% simply because our bulk gives us that bargaining power. Okay, great. And as we now have wrapped up 2016, I'm a bit curious about what you're most excited for in 2017. That's a good question. There's a lot I'm excited about. I think very little that I can talk about. We do have obviously a lot of money left for acquisitions. The entry to U. S. Is extremely exciting. And I'm also really happy with where we got in the organization. I mean, we have been I shouldn't say a victim of our own success, but we have been growing really fast. But I feel that we are kind of catching up to ourselves and surpassing. Our technology is getting to where we wanted it a while ago, and we can say that things are happening a lot quicker in the company now. So I think 2017 is going to be our most exciting year yet. Great. Thank you very much. I think we can wrap up there.