Ladies and gentlemen, welcome to the Evolution Gaming Group Q3 2018 Report. Today, I'm pleased to present CEO, Martin Carlesund and CFO, Jakob Kraflin. For the first part of the call, all participants will be in listen only mode and afterwards there will be a question and answer session. Speakers, please begin.
Thank you, operator. A warm welcome to everyone on the call and also those following up online. My name is Matti Carlison. I'm the CEO of Evolution Gaming. With me today, I also have our CFO, Jacob Kaplan.
I will start by giving some comments of our performance in the Q3. I will then hand over to Jacob for a closer look at our financials. And after that, I will run off with some outlook for the future followed by questions. Next slide, please. The Q3 has been intense with lots of progress and hard work.
It started off with the final weeks of the World Cup, and then we have exited good demand throughout the period. My overall view is that once again, we have managed to increase the gap to competition, this time manifested by the launch of New Jersey Studio as well as continued success for our newest game innovations. Let's look at the numbers. We have a revenue growth of 41%, 64,300,000 compared to 45,700,000 last year, EBITDA increase of 28 percent. We have an EBITDA margin of 43.5 percent and an EBIT increase of 27% to €23,200,000 I'm especially happy with the growth.
We have reached 500 tables at the end of the quarter, ahead of plans due to a very high demand for our customers. We've continued to see high demand also in the beginning of Q4. The margins were slightly impacted by faster than expected growth in the number of tables. Remember that we always prioritize our long term goals before short term margins. The main highlight of the quarter was the launch of the new studio in New Jersey, of which I'm very proud.
It's our 10th studio globally, our 2nd in North America and our first in the U. S. The initial response has been very positive, and we will go live with additional operators in the Q4. The outlook for the U. S.
In total is, of course, very positive. But as we have said before, it will take time before it reaches its full potential. In the quarter, we have also looked at our future plans for Mota, where in 2019, we need to expand to fulfill the demand for international papers. Next slide, please. That spot is an indicator of activity in the dilution network, and we saw a healthy growth of 66% in Q3 compared to last year.
In the beginning of the quarter, the number was supported by the World Cup, but the number has stayed on high levels driven by good player numbers and our new games. Next slide, please. As you know, our success is built on talented people, and our recruitment pace remains on a very high level. The number in the quarter was mostly driven by new people joining our studio in Georgia. It takes a lot of effort to find the best people, and we continue to refine our recruitment process in all markets with good progress.
Looking at the actual numbers of employees, we are now more than 5,000 people in 11 different markets. This is a great accomplishment. Next slide, please. Let's continue with a look at the development of our new studios. In Georgia, we continue to see good progress, and studio will be our 2nd largest at the end of the year.
As said, Georgia has been the main driver of employees in the quarter. And in the end of Q3, 600 persons were on board to be compared with the 300 in the end of the second quarter. The New Jersey studio put line on the quarter and initial development has exceeded our expectations. The studio is located in Atlantic City and serves some very strong brands already, like 888, Brush Street and Hard Rock. We are in discussions with several new operators and expect to be live with more than 5 at the year end.
Among our tables, 3 car poker and Ultimate Texas Holders have proven extra popular. We continue to see the U. S. Market as the long term project that will support Evolution's growth over time. New Jersey by itself is relatively small, but as more states regulate, the more U.
S. Will grow in importance. We look forward to the potential opening of Pennsylvania in 2019, and we see the good start of New Jersey as promising for the future potential of U. S. A.
In total. During the quarter, we have also looked at the possibility for expansion in Malta. It's a clear increase in demand of tables and services in local languages. Sweden is a typical example where more operators want to expand with Swedish speaking games when the new regulation starts in 2019.
Next slide, please.
Our global exposure continued to increase in the quarter, and we see growth from all over the world, in line with our customers' increasingly diversified properties. As you can see in this report's breakdown, the rest of the world areas continues to increase while the U. K. Market is under pressure from the latest regulatory requirements. We have around 150 customers today, including several platforms.
This means that our games are literally available on thousands of websites in more than 200 countries. However, Europe remains the basis of operations and U. K. Is the single largest market. Going forward, we expect rest of the world to continue to increase, driven by Canada, New Jersey and also more European licensed operators going into Asia.
Next slide, please. We continue to invest in product innovation, and I'm very happy to see the strong and positive response for our new our customers and their users. It's clear to us that our new product significantly support growth from all type of customers. Our most recent addition, Lightning Roulette, continues to prove very popular among end users. It also gained a great industry recognition as we, after the end of the quarter, won the Product Innovation of the Year award at G2E in Las Vegas.
Last year, we won digital Product of the Year with our DreamCatcher. The product innovation of the year is, however, a wider category and targets both digital and land based products, which is why we are immensely proud of this award.
Looking forward, we have a
very strong product pipeline. Our R and D suite have been refined and is currently in testing with 4 customers. We're encouraged by the operators' demand for these games and report our full rollout over the next quarter. We're also nearing completion of our BSFFs of Infinite Blackjack. This game will allow unlimited players of unlimited number of players on to Blackjack for a single table.
We're especially proud of this game, which has the most technically advanced table we have ever built, but is still providing a simple pure blackjack experience to end users. I look forward to telling you more of this after the rollout. Now I hand over to Jacob for the financial highlights. Next slide, please.
Thank you, Martin, and good morning to all of you listening in. We see a continued strong revenue development in this quarter. Year on year growth is 40.8%. After a slower start to 2018, the past two quarters have been stronger with volumes and play in numbers picking up. As Martin mentioned, we continue to see growth across all regions similar to what we saw in the Q2, even though also as in Q2, the UK market in general continues to be tough at the moment.
Also looking across our different customer types, we see growth in all categories. Customers that are new to the live product normally have a rapid growth trajectory, but we are also happy to see that customers who've been with us for several years continue to grow. There is an underlying growth in the Leica Sinu product, and our market leading product development makes our offering richer over time and helps operators grow their live business. EBITDA in the quarter amounts to €28,000,000 for an EBITDA margin of 43.5 percent. This is slightly lower margin than our own expectation from earlier this year.
The main reason is that the expansion of tables has been faster than expected. Our target of over 500 tables live at the end of the year was reached already at the end of the Q3. Very, very positive in the long run, but the expansion of tables drives some short term costs. We expect good demand for tables also for the rest of the year and expect to improve slightly on margins in Q4 with the result that the full year EBITDA margin will be in the lower end of our earlier statement of margins in line with 20 Still, as you can see in the slide, this year's level around 44%, the clear step above where we were during 2015 2016. We will try to give continuous guidance of where we see margins in the short term.
But as Martin also mentioned at the top of the call, we will prioritize top line growth if there is a trade off with margins, and you can see that also in this quarter. Let's go to the next slide, please. Walking through the more detailed P and L table, we can see revenues for the 3 month period, July to September, totaled just over €64,000,000 For the 1st 9 months of the year, revenues amount to €175,000,000 That's an increase of 37% compared to the first half of twenty seventeen. Personnel expenses totaled €25,600,000 in the quarter, that's up 41% compared to the same period last year. The increase in staff is mainly driven by the increase in new tables.
Depreciation is almost €4,800,000 in the quarter, that's a 33% increase from last year. And other expenses, which includes, among other items, rent, consumable equipment, consultant, is up by €5,000,000 compared to the same period last year. Summing up, total operating expenses increased by 60% year on year and 41% comparing the 9 month period January to September 27, and 2018. We have had a year with 3 larger studio build projects and that drives spending. Large part of that is capital expenditure, of course, but it also affects P and L and drives costs there.
The increase in cost during this year is definitely a conscious decision to support delivery of new tables and top line growth. Moving on in the table. Tax for the period is €1,900,000 That's a tax rate of 8.4 percent. And that brings us to profit for the period of €21,200,000 which is equal to an EPS of €0.58 per share. And for the rolling 12 month period, lower €2 per share at €2.09 per share.
Let's go to the next slide, please. Looking at capital expenditure to the left of the slide. We have spoken about studio build projects in Vancouver, Tbilisi and New Jersey and how that drives tangible investments all through this year. In the Q3, tangible investments investments are down compared to earlier this year as those projects are completed or going into phases with less investment spend. 11 in Q3 is somewhat lower than what I expected 3 months ago.
The reason is that the New Jersey project was completed as planned. I might have little contingency in my expectation. And a couple of other items have been pushed into Q4. For Q4 and the next year, we will continue to have investments, both in new studios and existing studios. However, investments as a percentage of revenue, we expect to go lower for the full year 2019, even if the absolute number will be similar to what we have seen this year.
The next largest studio project will be the new studio on Malta. Demand for local language tables continues to be strong as more countries regulate, and we have rich capacity in our current facilities. We will also see continued capital expenditure in Tbilisi during next year. Beyond that, it's not specified, but there are a number of projects pending, and we are in the process planning next year right now. So I expect we will be able to come back to investment plans when we talk about the 4th quarter.
CapEx in intangible investment intangible assets is mainly related to development of new games and features in platform, fairly stable this year, while Apple is in the quarter expected to continue roughly on the 2018 level also 2019. Moving on to cash flow. It has improved during the quarter as investments were lower, and we also continue to see effects of our improved collection strategies. Accounts receivable in relation to revenue is back to a more normal level after having increased during the first half of this year. Still a little further improvement, and it will be continued to be a focus area of this at the level than before.
To the right in the slide, a look at the balance sheet. No big shifts during the period. 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 then we'll take your questions after that.
Back to you, Martin.
Thank you very much, Jacob. I'm very happy with the Q3, and demand for new service tables remain high, and we will have more than 500 tables live at year end. We are actually already at the level where we thought it would be in the end of Q4, in the end of Q3, and that makes us very proud to be able to deliver that. As we have stated before, each new table can be leveraged better over time. So it will be a little bit short time P and L effect.
We noticed an increase in demand for local languages services, which is why we are prepared to expand on North Star next year. This will likely be in the form of a new studio. With this being said, we expect the investment level of 2019 to be par with 2018 in absolute numbers. At the end of the quarter, we were approximately 5,300 persons employed in the company, and we are well on our way towards 6,000. To find the best talent is crucial for our continued journey.
And to continue to increase the gap to our competitors is sort of the main task for all of us on board in Evolutcheon. Together, we work to make Evolutcheon and all our customers better every single day. Thank you all for listening. Now let's move to questions. Thank you.
Our first question comes from the line of James Gippman of Barclays.
So it's encouraging to see sufficient top line demand that you can accelerate your investment program, I think. But I guess the market is struggling to answer the question of whether this margin move is purely a consequence of the new table investment or whether there is something else that would mean a like for like structural decrease in the margins. So if you could sort of confirm that, that's purely related to the investment, that would be helpful. And then related to that is another way to think about this is some commentary around the 2019 revenue outlook that this additional investment might be supporting maybe in relation to where consensus is currently looking, I think, just north of 20% growth?
I would like to comment on the margin. I mean, we are constantly trying to increase revenue cost before margin. Whenever that's paid off, right now, when we build more tables than we actually expect, there is a P and L effect. I'm comfortable with the scalability of this company's business model. I'm not worried with the margin going forward.
That's the simple answer. What was your second question, sorry?
It's related to that and maybe some commentary that you can provide at this stage of the year around the sort of minimum level of revenue growth that you're seeing for 2019 given the significant investments that you're able to put into the business at the moment?
We haven't given any specific guidance for 2019 at this stage. I mean, of course, we see continued strong demand and that's encouraging for the future. But in terms of exactly what that means, we haven't given any any other guidance.
Okay. Thanks.
Thank you.
Thank you. Our next question comes from the line of Erik Moburg of ABG.
Please go ahead. Your line is open.
Hi, guys. Good morning and congratulations on a good quarter.
Just in terms of the Rest
of the World segment, which 10 operators are the largest contributors to the strong growth?
We don't comment on the revenue split on operators. Okay.
All right. Then if we look at the rest of
the world segment, what would you say if we put the commission levels in
relation to the regulated markets, could you give us some flavor on that?
Actually, also there, we don't as you know, we haven't commented on salvage commission levels or in fact that's in the past. And your main reason for that is that it's the scope contract with each operator and through individual contracts.
Okay. But if we my take is at least that Asia should be one
of the main driver behind the rest of the world segment. And you give us some flavor on what Asian regions in terms are experiencing most rapid growth? Where do you see the high volumes?
Again, we have moved forward to give the geographical split as you got basically this year. And we haven't moved further into that split, splitting out different countries or regions other than part of what we say. Okay. But in general, what do you
see as the largest risk of operating in a gray area market versus in a regulated market?
The most important thing for us is that the operators that we take on should have the proper licensing in Europe. That's where we want them to be licensed. And we want the regulatory aspect to be as clear as possible, and the regulator has to see that each operator is compliant with those rules for that regulation. So in the aspect of judging where the how the operator performs, we leave that to the regulator. Okay.
But in general, what type of payment solutions does the majority of your rest of the world customers use? Is there anything you can comment on? No. Honestly, I don't exactly know. Okay.
Well, that's all for me. Thank you very much. Thank
you. And we have one further question coming through so far. That's from the line of Rasmus Enve of Handelsbanken.
Please go ahead. Your line is open.
Yes. Thank you. Good morning. As we expect to see some margin improvement in the Q4, can you sort of explain whether that is due to a year on year gradual slowdown in expansion or how does that come about? I guess it has some bearing as we roll into the next year, so to speak.
It's
an analysis for the Q4. It's not stronger, so that will contribute. However, we see strong demand on off tables coming into Q4, which is very positive. I'm very happy with that. There are similarities to the situation in 2016, not to take that too far, but still.
But why is the margin going to be up in the Q4 year on year?
We are, of course, working also on the cost side, seeing to that we will improve the margin also in Q4. And I would also expect that the demand and the increased number of sales will be slightly slower than what we've seen in Q3.
And why can you sort of explain this significant expansion in the Q3 at the sort of I guess, it's after the World Cup. Where does that expansion come from? Where does demand for that come from?
It's in Europe, and it's probably a little bit surprising that the continued demand was at that high level, as we stated. I think that many prepare for new regulations. There's good preparation, and we also see that the operators are doing probably on average better.
So and then one final question. I'm just trying to sort of get some sort of guess on the margin for next year. Is it fair to say that even with the strong expansion in Q3, Q2 was sort of the peak expansion in terms of percentage number of tables and then it's sort of getting a little bit slower in Q3 and Q4? Or when was the peak in
Maybe then the peak would be Q3, Q2, and we expect a little bit slower maybe in Q4, but still very high demand. And generally, normally, it's fantastic.
Yes. Good. That's all for me. Thanks.
Thank you.
Okay. There are no further questions coming through at this time. I'll hand back to
our speakers for the closing comments. Okay. Thank you very much for listening and taking any time. Look forward to see you again in the next quarter. Thank you.