Ladies and gentlemen, welcome to the Evolution Gaming Group Q2 Reports 2019. Today, I am pleased to present CEO, Martin Carlson and CFO, Jacob Kaplan. Gentlemen, please begin.
Thank you, operator. Welcome, everyone, to the presentation of Evolution's interim report for the Q2 2019. My name is Martin Karlsson, and I'm the CEO of Evolution Gaming. With me, I also have our CFO, Jacob Chaplin. As we used to, I will start the presentation with some general comments on the quarter.
And after that, I will hand over to Jacob to take us through the financials. And then I will we will round off with some comments on what we see ahead and followed by questions. Next slide, please. We are very pleased with the development in the Q2, which is a result of all the hard work performed of our teams over the past year. The main highlight of the quarter is, of course, all the new games that we have launched and the great reception that they have had among operators and players.
You can see how the games not only contribute to Evolution's performance, but also to the live casino vertical as a whole. We can now also clearly see that we are expanding with our new product into new player segments, expanding live. Let's have a look at the numbers. Revenue growth of 45% amounted to €85,700,000 compared to €59,300,000 Q2 2018. EBITDA increase of 63% amounted to EUR 42,700,000 compared to EUR 26,200,000 Q2 2018.
EBITDA margin of 49.8% compared to 44.2% same period last year, and an EBIT increase of 69% compared to the same period last year. I'm particularly happy to see that with revenue growth of 49% in the first half of 2019, we even outperformed the revenue growth of the same period last year, amounting to 35%. I'm also satisfied with the margin in this quarter. We are constantly working hard to restructure the cost base to reach effectiveness and cost awareness, Also adjusting and optimizing our studios together with investments in our new scalable games creates an efficient operation, and the margin for Q1 Q2 is a good sign of this work. Looking at revenues.
Live Casino continues to be the strong vertical of online gaming, and we see good growth across markets. We continue to invest in studios and game development to meet demand, and we have also started to build a new studio in Pennsylvania in this quarter. During the quarter, we have also went live with our first table in our fantastic new studio in Malta, and we continue to migrate tables throughout 2019. Next slide, please. We show best spots as an indicator of activity in the evolution network.
We had about 5,600,000,000 best spots in the 2nd quarter, which is equivalent to an increase of 56% compared last year. As have been the case for several quarters, BEST was continued to be higher than revenue growth, which is because of the latest gains attract smaller and more numerous debt and new software play types. This development underlines our strategy to develop games that find new players in new parts of life. Next slide, please. We continue to recruit the best talent in all our markets, and we are now both the young people who enters the labor market for the first time as well as for the super talented tech developers and best product people in the market.
No matter the age or experience, everyone in Evolution's family share the winning mindset that plays the crucial role for the company's performance. Evolution successes of thousands of young, ambitious and fantastic persons that is very important and well worth to remember. Next slide, please. I've talked about innovation and all our game launches for several quarters now, and this will remain the main theme for 2019. 2019 is the year of innovation, where evolution increases the gap to competition even further.
It's the year where all our customers get an even stronger competitive advantage, reach new player segments and gain market shares by using Evolution. In the Q2, we went live with all our new titles of this year, and the search engine has simply been amazing. The game shows are a big hit, and Live Monopoly continues to deliver way beyond our expectation. It's actually already bigger than Wing Catcher. As we have aimed for the game shows, the game shows find new player types and such they continue to overall growth of the Live vertical.
We're also very pleased with the reception of our dice games. Even though there have been some dice games in the market before, we have clearly filled a gap and players love our take on the lightning dice as the main attraction. In addition to the new game categories, we also continue to focus on table games, which is with new innovations, Deal or New Deal, Free Backjack, Cyber City have also been off to a strong start. Innovation is key for our long time growth and continued leadership in the market. However, not to forget, our core games continue to perform, and Live!
Is closely connected to traditional casino players and their preferences. That's why we continue to optimize our core offering as rollers, blackjack and baccarat will likely remain our main gains in terms of revenue for many years to come. All in all, Life continues to grow, and our portfolio is the one to have if you want to leverage on this trend. We see how the operators really are putting a lot of effort into their live offerings and how live players increasingly how live is increasingly important and plays a strategic role for the brands and attraction. Evolution exists to deliver the best live stream experience out there, and we will continue to innovate the industry going forward.
Next slide, please. Let's look at our market. As you can see, the relative share is quite constant quarter on quarter at the moment. Rest of the world increases slightly as share of total GGR, where Asia and North America both are growing faster than the group average. As mentioned, we are now working on a new studio in Pennsylvania, together with a substantial investment in the studio in New Jersey, which both will contribute to the growth in the U.
S. Market. The Nordics have grown at a somewhat slower pace following the intense Q1 connected to the Swedish regulation. We continue to see a stabilization in U. K, with a healthy growth year on year.
I will now hand over to Jacob, who will guide you through the numbers. Next slide, please.
Thank you, Martin, and good morning to all of you listening. I'm on Slide number 7, titled Financial Development. Revenue amounts to SEK 85,700,000 in the Q2, that's a 45% increase year on year. Adjusted for the business acquired at the beginning of this year, organic growth is 40% in the quarter. This is in line with the growth rate achieved in the same quarter of last year, which was a quarter supported by the World Cup.
So strong top line development in this quarter, which we are very happy with. The main event for us during this quarter has been the launch of our 10 new games. As Martin mentioned, the games themselves have contributed to growth as many of them attract new players into the network. And also the launch events themselves have attracted traffic to other existing live games. There's a natural a lot of focus on the new games and should be since they're new.
But from a revenue point of view, the core cable games, Blackjack, Pacquiao, will continue to be the most important ones. And we still see a good development for all the core games in this quarter. 3 months ago, we stated that many of our clients have a good momentum in their live business, leveraging investments made in tables during 2018. That continues to be true also this quarter. We have added new tables also during Q2, but at a more even pace than during 2018.
This helps efficiency in our production of cable environments and in the studio operations in general. As we grow top line, we also see effects of economies of scale in our administration and product development. In all our supporting functions, we constantly look to increase efficiency and lower costs. We believe a tight cost control gives us room to invest and add resources quickly when the need arises. EBITDA amounts to EUR 42,700,000 or a margin of 49.8 percent in the quarter, a very strong margin.
It exceeds also our own expectations from earlier this year. As you have seen in the past, margins do vary quarter to quarter. This quarter, we see a lot going our way. I mentioned the positive revenue momentum coupled with improved efficiency and also many of the smaller one off items that come every quarter. So they're not really one But a lot of that is going our way this time as well.
It should also be noted that compared to 2018, margin is positively affected by IFRS 16. Adjusting for that EBITDA margin in the quarter would be 48.1%, so still very strong. We signaled already at our previous interim report that we would be in the upper end of our previous margin guidance for the year. And based on the strong first half of the year and where we are right now, we think we can maintain the margin achieved during the 1st 6 months, which means that we increased our margin expectation to 47% to 49% for the full year. Adding the caveat that we always mentioned when discussing margin that our main priority is revenue growth, and we will sacrifice margin for revenue if there is such a trade off.
Operator, let's go to the next slide, please. Looking at the more detailed P and L for the period, we can again see revenues for the quarter at €85,700,000 For the 1st 6 months of the year, revenues are just over €165,000,000 a 49% increase compared to the previous year. That is helped by acquired business during the year. Organically, it's 45%. And this is a higher growth rate than achieved during the full year 2018 when we grew 38% for the full year.
Moving down. Personnel expenses totaled EUR 30,400,000 in the quarter, up 26% compared to the same period last year. Increase in starts, mainly driven by increase in game presenters, but we're also recruiting actively on the engineering side. Depreciation is €6,100,000 in the quarter, up 37% compared to the same period last year. Similar increase for the 6 month period with depreciation up 38% comparing to the January to June periods.
This includes the effects of IFRS 16 of about EUR 600,000 per quarter. Other expenses include, among other items, consumable equipment, communication costs, consultants and royalties. The line amounts to EUR 12,500,000 and increased by 42% compared to the same period last year. Summing up, total operating expenses increased by 31% year on year in the Q2 and 38% for the 6 month period, January to June. Further down, tax is at €2,000,000 in the quarter.
It's a tax rate of 5.6%. All this sums up to profit for the 3 month period of 34 point €5,000,000 equal to an earnings per share of €0.19 per share. For the rolling 12 month period, euros 0.6 per share earnings per share. Since our Q1 report, our share has been split 5 to 1, which of course affects the EPS figures shown here compared to what we have shown in previous quarters. We can go to the next slide, please.
Showing cash flow and financial resources. To the left in the slide, we have a chart showing capital expenditure. The light gray part of the bar shows CapEx in tangible assets that mainly relates to investments in our new studios. It amounts to just under €4,000,000 in the quarter. The main projects this year are the new studio in Malta, as Martin mentioned, were live with the first tables during this quarter.
Charter expansion in Tbilisi also ongoing. And the second half of the year, we plan the studio in Pennsylvania and also expansion in New Jersey as the major projects. Also in the second half, we expect CapEx related to new studios for new games to increase. In general, CapEx for the game show style games are significantly higher than for our previous games. The blue part of the bar represents investments in intangible assets and is related to development of new games and features to the platform.
Normally fairly stable, a bit lower in this quarter at around €2,000,000 We mentioned it before, but in Q4 of 2018, the intangible figures will be boosted by licenses for some of the newly launched games. Altogether, given our plans for expansion in production studios and also in dedicated game studios, we now see that our total CapEx 2019 will be slightly higher than 2018 in euro terms. We have previously said it would be the same. So we're increasing our estimate of CapEx slightly. CapEx in relation to revenue, we still expect to be at the lower level in 2019 than in 2018.
Moving on, in the middle of the slide, we show cash flow, operating cash flow almost at EUR 30,000,000 in the quarter. Cash conversion for the 12 month period is more or less unchanged from the previous quarter at 73%. And to the right in the slide, look at the balance sheet. Dividend has been paid out during the quarter. Apart from that, no big changes.
It shows a continued strong financial position. That was the end of my prepared remarks. I'll hand back to Martin for some closing words, and we'll take questions after that. Martin?
Thank you, Jacob. A few words on the next slide then. Looking ahead, a few words to conclude this report and the presentation before questions. Live games continue to take market share. We will continue to support this with our new games, many of which have only been out in the market for a couple of weeks.
We will also continue to invest. As I mentioned earlier, Pennsylvania is a project that we're working on right now. We're also expanding in other studios. We showed strong margin in this quarter and have increased our margin expectation to $0.47 to $0.49 for the full year. And as always, we will do our utmost to continue to increase the gap to competitors and improve our offering to operators a little bit every day.
Thank you all for listening. Enjoy the rest of the summer, and we'll speak again in a couple of months. Now let's move to questions.
Our first question comes from Ora Teckerscheld of B.
I was wondering if
you could
talk a little bit. You have increased your expected margin, as you mentioned, the range from 47% to 49% for the year 2019. And I was just wondering if you could shed some light on how sustainable your thesis of this margin is in a long term perspective.
We increased the guidance of 47% to 49%. We expect that for the full year. We don't have any guidance for the coming period after that. We see the level that we now guide on as sustainable
for the full year.
Okay. That makes sense. And then moving on to my next question. Regarding the development of the U. K.
Market in general, we see that there's been sort of a slow growth. However, you keep to be staying at a stable level. And I was just wondering if you could talk about your presence there.
Sorry, I didn't really get the question. Could you please repeat it? I'm hearing you a little bit viscously.
There. Okay. I was just wondering if you could talk about your preference in the U. K. Market.
We've seen that margin in general has been slowing down in growth, but you seem to be keeping a stable at stable levels.
We are keeping a stable market share in our opinion. The U. K. Markets have been under pressure. I think it's important to remember that it's still growing.
It's not so it's relatively growing. I don't have any estimates for the future, but we maintain our market share.
Okay, perfect. And then final question. If you could talk a little bit about your capacity in terms of PPOs. You are growing and you're investing in growing through the experience. And I was just wondering when are there any future or close-up decisions of another studio?
We haven't communicated any decision regarding new studios. We have communicated that we're expanding in Georgia. We're basically doubling in New Jersey, and we are built we're initiated to build in Pennsylvania. We built the new studio in Malta. And as we continue throughout 2019, we will look into exactly how to dimension and in an effective way increase the studio space further.
And as soon as that is, we will inform and comment into the market.
Okay. Thank you. That's all from me.
Thank you very much.
Thank you. Our next question comes from the line of Erik Sanderson of
ABG.
So I will be asking this question for Erik Lou, but if you were unable to attend. So in terms of Asia, the aggregators we have spoken to all indicates that the volumes are higher than Europe, but the commission levels are lower. So just how sustainable do you perceive the current commission levels in Asia to be?
In general, we don't comment on
the commission level. Okay. But do you think it will be
on the same level? Or you don't comment on the development?
We don't comment on the commission level. Okay.
So in terms of the competitive landscape in Asia, what is your comment on that? How is the competitive landscape?
There are numerous of life providers in Asia. The competitive landscape is different from Europe. There is there are other markets either.
It's a very, very big market with a number of significant life providers. Okay. And looking at the personnel costs per employee, it has been relatively flat last 8 quarters. But since there are an expense in North America, which should have like significantly higher minimum wage than in Latvia, Georgia and not is it? How is that possible?
Could you give some flavor of what is the native language of your recent hires? Is there anything else there?
On the wage cost, it's I think you outlined it you answered it almost yourself. I mean, it's, of course, varying in different parts of the world. And we are growing in North America, which has relatively a little bit higher wage costs, and we're also expanding in Eastern Europe, where wages are a little bit lower. So the mix in total has been fairly stable. But of course, as we continue to expand in North America, that it will have a little bit higher wage cost in that sense.
But there's no dramatic shift in the kind of the position of the workforce right now. Okay.
Thanks. And
last question for me. In regards of rest of Europe, we have a hard time understanding what regions are driving growth there. Could you give us some color on the growth from Russia and various Bitcoin channels relating to growth?
We haven't broken it down that way. I think in Europe, with almost all markets still growing, and of course, not exactly at same pace, but I think all the developments where live casino takes increasing share out of online, that's we see that in many markets. So I would say that's probably the main driver. But how many are the same as everywhere else.
Okay. But in terms of regulated markets versus unregulated markets in Western Europe, which do you think grows the most?
We haven't broken it down like that. As you said, in the quarter, about 35% of GGR is from regulated markets. So that's
And our next question comes from the line of Lars Olof Helstrom of PagSeguro Securities.
Sorry, we didn't get you. We lost you a little bit. Good morning. Thank you.
Do you hear me now?
We hear you now.
Perfect. To start on the strong margin, Jacob, you explained it a bit, but can you give some flavor how much of the effect that is increased efficiency in the Tbilisi studio and how much that is that the new games is actually affecting in Q2? It can't be that much of an effect to the margins in Q2.
They're all contributing. And of course, increasing or increasing volumes in Tbilisi and the good efficiency there is definitely part of supporting the margin. But so is also kind of the scalability in general. And also not just in studio operation, as I mentioned, I think also when we look at supporting functions and administration, also there, we constantly look to place those functions in the most cost efficient places and to be we don't want to starve ourselves, but we also think that it's kind of a lean diet, it's good, even when you're growing. And it will go a little bit in phases.
I think maybe in this quarter, it's a quarter where we a lot of these things are kind of going our direction. I think we will, of course, have periods where we need to add more resources and in more rapid pace in administration. But all in all, we think that we can sort of looking over the full year, we think that we can keep roughly the level that we've had during the 1st 6 months also during the second half. And that's it's not a one off effect. But I guess, could you I think I put it this way earlier.
It's in every quarter, you have a number of things that are one offs. And since there's always one offs, we don't make adjustments for them. And sometimes, you have a quarter like this one where kind of a lot of that goes in your direction. We had a similar quarter in Q3 2017 when also kind of a lot of things just went our way in the quarter. So we do have a very the margin varies quarter to quarter, that should be remembered.
But we do see possibility for our expectations are higher on margin right now than they were 3 months ago.
And comparing Tbilisi with the Riga Studio, is it as efficient as the Riga Studio now? Or is it even higher margins in Tbilisi?
The Tbilisi Studio is now growing significantly. It's reaching a scalable point. If you remember, we talked about during 2016 that we proved the business model and it became scalable. And now we have grown so much in Tbilisi that it's reached a scalable bond. So Tbilisi Asset Sud is more efficient now and contributes more to margin now than it did earlier.
So that's very positive.
And also on the new games, as all of the new games is fully scalable, as they increase the share of revenue, it should be supported for a margin.
Yes. It will be supported for margin. Important to remember that some of the gains have only been live in the network for a couple of weeks and some a little bit longer, but mainly during Q2. So it contributes and it's growing and it has been an amazing reception. And we're really fulfilling our strategy to expand the live work in our market.
All in all, that is fantastic. But we see that this contribution will, of course, increase during Q3 and Q4.
It should be said though, just in that context, I'll just add to that, that even though the new games are all scalable and a little bit more less stat intensive, the investment in them are substantial. And that's part of why we slightly revised upward our outlook for investments in the second half. So you could say we put more into the studio build, but then that doesn't show up immediately in EBITDA.
And the final question on margins. I ask this question every quarter. In New Jersey, do you see is it more similar to Europe still than you initially thought in terms of game mix? Or has it more turned out to be as you expected in the U. S?
I would say that it's the game mix in New Jersey is still as we what we expected, if it's exactly like what we expected or not. But it's more it's a blackjack heavy market. It will continue to be so, but we are also adding other gains to the mix. But it's more as expected.
And when will you try to launch Infinite Blackjack there?
Soon. It's the I don't want to give you an exact date, but soon.
Okay. Also on growth in Rest of Europe, is the Dutch weakness that we have seen from for operators, is that reflected in your numbers as well? And moving on, what do you expect from the marketing ban in Italy?
It's as you know, we don't break down the market in this, but yes, I mean, I think we commented on that also last quarter that Netherlands, even though it's still growing, it's relatively slower within the rest of Europe category. So that still holds true. And the marketing ban in Italy, I think, less dramatic. We have no real strong views there. Italy is still doing well.
And the final question for me is your customer, GVC. As far as I have understood, Playtech is let into the BVIM brands. How is your negotiation nations going with the GVC regarding Landbrooks and the Koral brand?
We naturally don't comment on the negotiations. I can comment on the competitive landscape a little bit. I believe in competition. I believe that we will as we are strong, we are growing, we are the market leader by far, and we are increasing the gap competition. There will be we will see competitors on more and more of our brands.
We are not particularly worried about that. We see that as a challenge. It keeps us on ourselves. So that's it.
Okay. Thank you, guys.
Thank you.
Thank you. Our next question comes from the line of Michele Lefjena of Carnegie.
A
couple of questions on your new games. Can you talk a bit about the reception? You mentioned that it has been really good. Can you maybe say something about what type of games that have performed the best, the strongest start or give some more color on these new games that you have launched in Q2?
Yes.
The easy comment is that our flagship release of Monopoly is fantastic. The reception has been amazing, and we see really interesting player numbers. So the one that stands out will be Monopoly. And then it's a bit early for some and it's early for every game. And all of the others have been received very well, both the Dice games, Deal or No Deal, Cyber City, they are all performing and finding the play categories and the players.
And as you saw on the best spots, we are also driving now constantly the number of smaller bets up. And you can see that by that, we find the new players.
Okay. Great. And how have they been adopted by your network, your customer base so far?
We are doing we are much better in releasing, and we are, of course, not to 100% of the network. As you understand, it's still early. We're working on it. But we have had good releases, and they have been adopted well
so far.
So there's still quite a lot
of operators that so far not yet started to market them or We don't comment on the penetration of the new games to the market. It will be too detailed and it will be a competitive advantage.
But I think it's fair to say that, I mean, the games have been rolled out quite broadly from the start, of course, with kind of step by step approach. But it's not that they're only on a couple of operators in a PSR launch or anything. They all the 10 games are launched. And that's actually been a big event for us this quarter that we have managed to do that. It's gone well from a technical perspective.
Collaboration with operators have gone well. And I mean, we've never launched 10 games in this short given time before. So that's something that we're just from all of that, that will show up in GL, but it's kind of just from an operative point of view, it's worked well, and we're really happy with that.
Okay. And you mentioned that you will invest in a new studio for new games. Can you say something about that?
Yes. Let me clarify there. When what I mean is, when the new games, they are, you could say, a game like Monopoly, it's a little sub studio within our Riga studio in that case. So just meaning that the game studios themselves become they're like small, quite extensive builds in themselves, each of these new games, which is a larger investment than adding one more blackjack table or fewer left. So that's what I meant.
So it's not a new location. It's studios within the current studios, put it that way. So thanks for that question, so I can clear that up.
Okay. Thank you.
Thank you. Okay. As there are no further questions at this time, I'll hand back to our speakers for the closing comments.
Okay. Thank you, everyone, for listening. I'm happy with the report, and have a very nice end of
the summer. Thank you. Bye. Thank you. Bye.