Hello, ladies and gentlemen, and welcome to the Evolution Gaming Group third quarter of 2019 report. For the first part of this, all participants will be in listen-only mode, and afterwards there'll be a question and answer session. Today, I'm pleased to present CEO Martin Carlesund and CFO Jacob Kaplan. Please begin.
Thank you, operator. Welcome everyone to the presentation of Evolution's interim report for the third quarter 2019. My name is Martin Carlesund, I'm the CEO of Evolution Gaming. With me, I also have our CFO, Jacob Kaplan. I will start off the presentation with the quarterly highlights and achievements and give some comments on our geographical breakdown. Jacob will then go through the financials, and I will then conclude by providing some thoughts on the future, followed by the Q&A sessions. Next slide, please. I'm very satisfied to report a consistently strong result for the third quarter. Our investment in new games and studios are having an increasingly strong impact, which is also reflected in both the high growth as well as the stronger margins. We also have seen a further increased demand for Evolution products globally.
We now see clearly that we are reaching completely new player types who to a large extent are playing Live games for the first time. These new players are being converted from other game categories such as slots, which is very encouraging to see. Through our expansion and construction of studio capacity together with the 10 new games launched during the first half of 2019, we're also very well-positioned to take advantage of the growing general demand for Live. Everyone in Evolution is fighting to increase the gap to competition. We are paranoid, we are full of energy, and I want to express how happy and grateful I am for all the hard work all Evolutioners do every day. Simply great to see. The revenue growth in the quarter was 47%, which is proof of our games' global reach. We also continue to see positive margin development.
The profitability is the highest that we have ever reported in a single quarter, and the full-year margins will likely also be on record levels. We constantly work hard to prepare the company for the future, enabling investment by being cost-efficient and right-structured for continued growth. However, don't forget we always prioritize growth over margins if needed. Other highlights in the quarter include the license that we have been granted in Pennsylvania, where we will launch a new studio during 2020. Just as in New Jersey, we treat it as a long-term project where we will grow over time. Two days ago, we're also very pleased to announce a new agreement with Flutter Entertainment to provide Live Casino to their brands Paddy Power and Betfair. One important factor to land this deal was all our latest innovations.
Since many of our titles are exclusive to us, it gives us a strong competitive edge. This is a milestone for Evolution, We very much look forward to see what we can do with Paddy Power and Betfair in the future. Next slide, please. Product innovation is the main theme of 2019. We experience every day how our latest game launches, especially game shows, continue to find new players. MONOPOLY is by far our most successful launch to date. A combination of an innovative gameplay and strong brand appeals to wide player groups, both old Live players as new. We're also seeing how our in-house developed brand gain more and more traction. Dream Catcher was the first big hit, Despite being around for two years, it continues to build its audience.
Our Lightning range also continues to grow and is now including both Lightning Dice, Lightning Roulette in Live, as well as first-person versions. The mix of RNG elements into Live games continues to be something that appeals to players. By volume, the traditional table games continue to be our biggest category. We expect it to continue for many years to come, and we continue to optimize them to always stay ahead. Very important. Next slide, please. Based on the demand, we continue to invest in our studios. The new studio in Malta is now operational, and we are transitioning out of the old studio until year-end. Last year, we launched new studios in both Tbilisi and New Jersey, and this year we are doubling their capacity. Both projects are well underway, with Tbilisi just being completed and New Jersey being done in December.
For every new studio that we build or expand, we gain new knowhow and experience that can be used in the next project. All that we learn in Riga, we use in Tbilisi, and all that we learn in Tbilisi, we will use in Pennsylvania, and so on. Our not goal, but absolute target is always that the last studio we build is the best one ever. Always pushing boundaries. Next slide, please. Continuing on that same theme, just as we build knowhow from the studio constructions, the same applies to operations. To be successful in Live Casino, it is crucial to understand that the player experience is dependent on the quality of each individual table. Based on this, our philosophy is quite simple. Every new table should be our best table ever. By offering an unparalleled delivery capacity on top-of-the-line operation, we make sure to increase the gap to competition.
By the end of the year, we expect to have more than 700 tables live across our studios. That is quite a remarkable number. Next slide, please. In this chart, you can see the activity in the network. In total, we have had about 5.8 billion bet spots in the third quarter, which is equivalent to an increase of 48% compared to last year. The bet spots continued to be somewhat higher than the revenue growth as a result of our latest games attracting smaller and more numerous bets and new software players. However, the difference is not quite as large as before, meaning that bet sizes have increased slightly this quarter. Next slide, please. I usually describe Evolution as a product company, a software company, but most of all, a people company.
Connected to this, we continue to increase the number of employees, and in the quarter, we passed 7,000 people. This is yet another milestone, which I'm very proud of. The Evolution family consists of super talented people with a winning mindset. We always explore new ways to optimize recruitment and to share the best practice between our markets. Next slide, please. Our products have a global demand. Starting in this quarter, we're taking a step further in how we report geographical breakdown. There are two main changes compared to the earlier disclosure. The first one is that we show the breakdown of revenues compared to the old breakdown, which was based on GGR. This is more accurate and affects both player activity and other operator-related fees.
The second change is that we are breaking up the old rest of the world in three regions, Asia, North America, and other, which then is with remaining part of the world, also including South America and Africa. Let's quickly go through these regions. U.K. shows 12% year-on-year growth. It is the most mature gaming market in Europe, where regulation has evolved over the last year. Even though it's slightly lower rate, there's a lot of potential, and development goes in the right direction with Live product gaining ground. Growth in the Nordic was 30% year-on-year. As mentioned in previous reports, following the intense start of the year, growth has been somewhat slower in the last quarters. The rest of Europe continues to develop well and constitutes about 50% of revenues. As we talked about before, Asia is growing quickly.
It has more than doubled the size since last year and constitutes about 15% of revenues. North America is another region growing rapidly with a good potential for further growth, partly driven by the opening of Pennsylvania during 2020. The remaining part, other, also including South America as well as Africa, also grows fast and constitutes about EUR 9 million revenue during this quarter. The total share of regulated revenue is 42%. All in all, I believe that we have a healthy geographic mix. Evolution is no longer only a European Live Casino leader. Our customers and their end users can be found all over the world. I will now hand over to Jacob, who will guide you through the financials. Next slide, please.
Thank you, Martin, and good morning to all of you listening. I'm on slide nine, titled Financial Development. Looking at the financial performance per quarter, we see that the strong trend during this year continues in the third quarter, with revenue amounting to EUR 94.7 million, an increase of 47% year-on-year, and EUR 9 million increase compared to the second quarter this year. We have seen good momentum all through the year with growth across the whole product portfolio. Both the core table games and also the new game show type games are contributing. The new games were mainly launched during the second quarter and are now included for a full quarter. As Martin mentioned, it's encouraging for us to see, and for our operators to see new player groups finding live gaming. The very good revenue development is also reflected in earnings.
EBITDA is at €48.5 million for the third quarter, a 63% increase from the same period last year and more than double where we were two years ago. As we grow top line and business volume, we also see increasing benefits from economies of scale in our studio operation, our administration, and our product development. We are keeping a relatively tight cost control even though we are in the growth phase right now. This gives us room to invest where it can contribute directly to revenue and also enables us to add resources quickly when we need to. The absence of major sporting events this year has also made growth in tables slightly more steady, which also helps efficiency. Growing revenue and good controlling cost naturally has a good effect on margins. EBITDA margin is 51.2% in the quarter and 48.9% year to date.
Strong development during the quarter means that we will end up in the upper end or even over our revised full year 2019 margin guidance of 47%-49%. Compared to 2018, margin is positively affected by the introduction of IFRS 16. Adjusting for that, EBITDA margin year to date would be 48%. Still very strong compared to the previous year, which had EBITDA margin of 43.9% for the full year. We will share our assessment on margins for 2020 when we present the year-end results in the beginning of next year. We will not cover that today. Let's go to the next slide, please. Looking at the more detailed profit and loss statement for the period, we can again see revenues for the quarter at EUR 94.7 million.
For the first nine months of the year, revenues are almost EUR 260 million, a 48% increase compared to the previous year. For the full year, for the year-to-date period, it's helped by the acquired business in the beginning of this year, organic growth is 44% year-to-date. Moving down, personnel expenses total EUR 33.7 million in the quarter, up 31% compared to the same quarter last year. Similar percentage increase looking at the corresponding nine-month periods. Personnel cost is mainly driven by increase of staff in our operations, we are also recruiting in other areas as the business continues to expand. Depreciation is EUR 6.5 million in the quarter, up 36% compared to the same period last year. For the nine-month period, depreciation is up 37%, which includes the effects of IFRS 16. Other expenses include, among other items, consumable equipment, communication cost, consultants, royalty fees.
The line amounts to EUR 12.6 million in the quarter. A bit lower increase this quarter compared previously. It increases by 7% compared to the third quarter last year. Earlier this year it increased more, so the January to September period has an increase of 39%, more in line with other cost items. Summing up, total operating expenses increased by 28% year-over-year in the third quarter and by 34% for the period January to September. Tax is EUR 2.2 million in the quarter, tax rate of just over 5%, and all this sums up to a profit for the three-month period of EUR 39.8 million, equal to an earnings per share of EUR 0.22 per share. For the rolling 12-month period, EUR 0.7 per share. All periods are showing EPS figures adjusted for the split five to one, which took place in the second quarter of this year.
Let's go to the next slide, please. Starting with the chart to the left in the slide, we show capital expenditure. Martin mentioned earlier how our investment in studios and product development have supported the strong result during 2019. As you see here, we continue to invest quite heavily also this year. The gray part of the bar shows CapEx in tangible assets, meaning investment in our studios. It amounts to just over EUR 5 million in the quarter. The main projects this year, as outlined earlier, are the new studio in Malta, where we're moving to a new building. The expansion in Tbilisi, which Martin mentioned, and also the expansion in New Jersey. In addition, we will start development of our Pennsylvania studio during the fourth quarter, but we will not be live until next year.
Blue part of the bar represents investment in intangible investments, and it's related to development of new games. It is EUR 4 million in the quarter. Also in product development, looking at the nine-month period, we are on a similar level to last year. We're very much looking forward to showcasing some of our new games at the start of next year. Altogether, CapEx is just over EUR 20 million for the nine-month period, similar level to 2018. We forecast to be at or slightly higher than 2018 for the full year 2019. In relation to revenue, however, it will be lower this year, as you also can see in the slide. In the middle of the slide, we show cash flow. Operating cash flow very good in the quarter, EUR 42 million, and cash conversion for the 12-month period has been steady this year at just over 7%.
Finally, to the right in the slide, look at the balance sheet. No big changes here during the quarter. It shows a continued strong financial position. Our cash assets have increased to just over EUR 140 million at the end of September. I'll comment on potential uses of cash already here. It's a question we normally get, and our answer is the same as it has been during the past year. Reminding that our current dividend policy is to pay out 50% of earnings, so a fair share of cash will be paid as dividend in April next year. A strong balance sheet gives us the possibility to act quickly in an M&A situation or if we should need to increase the pace on investments. That was the end of my prepared comments. I'll hand back to Martin for some closing words, and then we'll take Q&A.
Martin, over to you.
Thank you very much, Jacob, for the financial comments. A few words to conclude this report presentation. This slide is pretty similar to the ones we've showed in previous reports this year. I think it's still valid to point out that Live continues to be the really strong vertical of gaming and therefore continues to find new players. The next time we present the results, we will have just finished ICE 2020. We will have showcased many new titles this time as well. Product innovation will very much remain our top priority going forward. We will also continue to invest based on customer demand. As we stated in the last report, investment will be somewhat higher in absolute terms during 2020 compared to 2019.
As always, everything we do is about increasing the gap to competition in every way possible and improve our offering a little bit every day. We're full of energy, as I already stated. We are as paranoid as ever, and we look forward. Thank you all for listening. Now, let's move to questions.
Thank you. Ladies and gentlemen, if you haven't already, please press zero and then one on your phone keypad now to enter the queue. Then after I announce you, just ask that question. If you find that question has been answered before it's your turn to speak, just press zero and then two to cancel. Our first is over the line of Per Hagman of ABG Sundal Collier. Please go ahead, sir.
Good morning. I'm covering for and I have a couple of questions for you. If we look at your reported regulated revenues, how large share of this stem from operators that actually have a license in each regulated territory? I don't mean the aggregator, I mean the actual operator.
The share of revenue from regulated market is 42%.
Yeah, I mean from actual operators, not the aggregator that integrates your games into the platform.
We don't have that information.
Hi, guys. Good morning.
All right. Going on to my next question. Yeah, sorry.
Your trading update was rather underwhelming.
Please go ahead.
All right. You recently decided to stop serving your games to Swedish customers from operators that do not possess a Swedish license. Do you think that this is something that you will have to do in other jurisdictions as well?
We are in close cooperation with the regulator, and we follow what they demand us to do. We have a constant discussion with them, and it could happen that we are having those discussions with others in the future.
All right. My third question, looking at your contract situation, could you perhaps elaborate on how many of your contracts is currently based upon NGR versus GGR, on whether you find this mix to be sustainable in the long term?
We don't really comment on our contracts.
All right. Just a question about the geographical breakdown. The other section, what is that consisting of? What countries?
As stated South America, Africa, and all others that are not included in the other split.
Sorry, South Africa?
South America, Africa.
Yeah
All others that are not included in the other geographical split.
Okay, perfect. Thank you.
Now we go over to Pareto Securities and Lars-Ola Hellström . Please go ahead, sir.
Hi, guys. Congrats. I just want to shoot some questions on studio efficiency. The Tbilisi studio, it's the most efficient in the group now as I've learned. Is there further improvement to be done? Is there some learning from Tbilisi that can be implemented in other studios, even Riga and the new Malta studio? Will it be possible to raise efficiency throughout the studios in the group?
The simple answer is of course, yes. I believe that you can always increase efficiency. Be better, you can fight, you can do things better every day. The simple answer is yes. The little bit more nuanced answer would be that yes, we learned a lot in Tbilisi. We are of course pushing the boundaries also there, and we will implement of course learnings in the other studios as we move forward.
For example, the new Malta studio, will efficiency be higher in the new Malta studio compared to the old Malta studio?
The most important thing with the new Malta studio is to increase the quality. That's the top goal. I also believe that we can learn things from what we have done over the last years and increase the efficiency also there, yeah.
Okay. On the market growth in rest of Europe, we know that Germany is a really good market. Can you give some flavors without being super specific, but which market are you seeing being strong in rest of Europe and which market is a little bit weaker? We expect that the Netherlands might be somewhat slower. Germany is strong. Italy, on back of the marketing ban, how has it played out? Can you give us some flavor?
We're taking the steps now to be more transparent and split up in those geographies that we see now. By that time, we have selected not to comment on specific countries. I'm very happy to present this news clip, and I hope that it's a bit fulfilling, but won't comment it further on the specific geographies.
Okay. Do you see that Live Casino is taking share from slots? Can you give us some examples, or is it in Europe you see the strongest effect from that, or is it across all regions?
We have a global demand and a global appeal. We see it all over the regions. That's the fundament. We see that players come from other parts of the online gaming and play Live for the first time. We can also see that those players are softer, playing a little bit less, but enters into our beautiful world and tries also other games.
Okay. A more specific question on the U.S. Have you been testing Infinite Blackjack in New Jersey yet?
We're on the way doing that.
Okay. My final question, the lower bet sizes in Q3, is that due to the success of the MONOPOLY Live?
Come again?
I would say, the broad trend has been that bet spots has grown a little bit to the revenue, and that we've attributed to more players with the lower bets, which to a large part is on lot of the new games which attract different type of players. In this quarter, the trend was actually not so strong that way. It was probably a little bit the other way around, but it's also a little bit up. I think broadly you could say that, yes, the new games attract players who have maybe. You can still have variations, of course, but a little bit lower than that.
Thank you.
Thank you.
We now go to the line of Richard Stuber at Erik Penser Bank. Please go ahead. Your line is now open.
Morning, guys. Great reports.
Thank you.
I was hoping you can shed some light on the Flutter deal. Will this mostly be on regulated markets, which they will be expanding?
We're very happy, of course. It's a milestone deal for us after the quarters, this quarter that we're reporting. We very much look forward to engage and start working with Paddy Power and Betfair, and see what we can do to help them grow their live business and also help them to expand their total revenues.
Okay, thanks. Also since we have a European Championship coming year and the Olympics, is it a fair assumption to make that CapEx relating to this deal and others will be more heavy towards the first half of the year than the second half of the year, like was the last year?
I think that it's a fair assumption to say that we're going into a very active period and by that, investments will probably increase prior to these events. However, we are large now, and the effect of these investments are less significant than it was before to us.
Okay, thanks. I don't have any more questions.
Okay. In that case, we are now over the line of Anders Rudolfsson at DNB Markets. Please go ahead. Your line is now open.
Good morning, and congratulations to a great report again. I'm covering up for Martin Arnell here, and I have two questions. The first one, perhaps you can give us some more flavor on the Flutter Entertainment agreement. Is it possible for you to sign up more U.K. incumbent operators that's currently with Playtech, like Bet365 or Ladbrokes or something?
I will answer like I did before. Really, it's a milestone deal for us. We look forward to work with Paddy Power Betfair right now. We'll start with that.
All right. Looking into next year, I heard that you're not going to talk much about what's going to happen then for 2020 until the Q4 report. Looking into next year's consensus growth rates, it looks like they're supposed to be 50% lower than you're growing at the moment. Is that really possible, so to speak, to grow 50% lower than next year?
I don't know. I won't comment on the consensus numbers. That's up to you guys. You're in control of those.
All right. I'm done there. Thank you very much.
Thank you very much.
Thank you.
Okay. Before going on to the next question, which is Christian Hellman at Nordea, if anyone has any final questions at this stage, please do press zero and then one on your phone keypad now. Christian, over to you.
Hello.
Hi. Thanks. Congrats, guys. A really good report, obviously. Please, the geographical split, can you explain that to me again? You did some changes to the way you're calculating it this time around, I'm just having a bit difficulty trying to sort of understand why regulated revenues last year in Q3 was 29%. Now you're giving a comparable of, let me see, I think it was 46% or something.
Yeah
Q3 last year.
Yeah, let me try to help you out there. The previous disclosure of the regions that we had was based on GGR, so not revenues. The two changes you could say dimensions is this, now we're moving to revenues, which is, I would say, more accurate and kind of it really reflects revenues. It's not just approximate GGR. Also, breaking up the rest of the world category. It's been big changes.
Yeah, okay. That change increases the amount of regulated revenues you had in Q3 2018.
Yeah
from 29%-46%.
Yeah. The way the revenues are structured for us, you could say part of the revenues are directly related to player volumes. They are spread by player location in this table. Another part of revenues are more fixed fees related to table fees and setup and management fees. They are not dependent on player volumes, so they are allocated by the location of the operator. You could say Malta has a higher share there, and Malta has regulated revenues. That explains part of the difference between the two numbers.
Okay. Also, if you look at sort of the trend, at least given the way you displayed it before, it moved from 29% and then it decreased throughout the quarters, then it was 35% regulated revenues in Q2 this year. The way you're structuring it now, it's been a decline from 46% last year to 42%.
It's not completely comparable since the 46 is the Q3 of last year, so it's a year-on-year number. I would say that during this year, the trend is probably right, especially since the U.K. has declined as share of the total, even though we're still growing there, that affects the regulated revenues.
Okay.
Of course, we're going forward in increasing that.
Okay. The trend this year has been that regulated revenues have declined and not increased.
That's the same thing, right?
Oh, yeah. Sorry. Given the old way you structured it, regulated revenues increased throughout the last couple of.
The old way we structured it was on GGR. That is different from revenues. Revenues are revenues, and GGR is GGR. That is the difference.
Yeah. I understand. I am just surprised it can be that big of a difference. Yes, it is. Yeah, I guess that was the only question I had, really. Thanks.
Thank you.
Okay. Well, it looks like we have one final question. That's a follow-up from Lars-Ola Hellström at Pareto. Please go ahead. Your line is open again.
Hi again. I just wanted to follow up. Playtech was letting on the GVC brands. You are still not on the Ladbrokes Coral brands. Have you seen some effects on growth on the GVC brands?
We don't comment on individual deals like that, but I would comment it like this, that we are happy with the growth in Europe. We're pushing forward basically on all markets, so we're happy with that.
Okay. Thank you.
Thank you.
Okay, back to you for any closing comment at this stage, please.
No. Thank you very much all for listening. Look forward to see you, if not earlier, in February.
Thank you. This now concludes today's call. Thank you all very much for attending, and you can now disconnect.