Ladies and gentlemen, welcome to the Evolution Gaming Group Q2 2018 report. Today, I am pleased to present CEO Martin Carlesund and CFO Jacob Kaplan. For the first part of this call, all participants will be in listen-only mode. 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 of you following us over the web. My name is Martin Carlesund. I'm the CEO of Evolution Gaming. With me today, as usual, I have our CFO, Jacob Kaplan. I will start by giving some comments of our performance in the second quarter. I will hand over to Jacob for a closer look at the financials. After that, we will round off with some outlook for the future, followed by questions. Next slide, please. I'm pleased to sum up a good quarter, both on financial and strategic level. I'm truly happy with the performance of our organization. We are ever so paranoid and full of energy and look forward to the second half of 2018.
As stated already in Q1 report, we focus on increasing the gap to competition even further and to prepare for being able to cater for the growth in tables, both in short and long term. In this quarter, this was evidenced mostly by our progress of our new studio in New Jersey, the rapid expansion of Georgia, the very good delivery of Malta and Riga, as well as by the preparations and delivery of the Football World Cup. Let's look at the numbers. Revenue growth, +40% to EUR 59.3 million. EBITDA increased +36% to EUR 26.2 million. EBITDA margin, 44.2%. EBIT increased +36%. We are happy with the revenue growth, which was supported by the launch of many new tables. The margin has improved compared to Q1. We reiterate our guidance on the full year with the margin being in line with that of 2017.
Looking at activities in the quarter, the organization worked relentlessly to deliver many new tables ahead of Football World Cup. We're also working hard to deliver our new studio in New Jersey, which will be launched in Q3. The studio will provide a great Live Casino experience with many games to multiple operators and their end users at launch. I would also like to highlight agreements with Svensk Travsport and ATG in Sweden that were signed after the end of the quarter and marks the strategic importance of live on the re-regulated Swedish market. We are committed and look forward to the reopening of the Swedish market. In June, we were crowned the Live Casino Supplier of the Year at the EGR B2B Awards. More or less the industry Oscar. We won the award for the ninth consecutive year, which is a great accomplishment. I'm proud of that.
I think it sums up our ambitions in a good way. Throughout our history, we have always strived for excellence and to provide the very best in Live Casino. Despite being a market leader, we stay true to our roots and continue to improve our position as well as the industry standard. We don't build the company with a quarterly perspective, but for the long term and to stay ahead of the game now and always. Next slide, please. bet spots is an indicator of activity in the Evolution network, we saw a healthy growth of 62% in Q2 compared to last year. We also noticed that World Cup contributed in a good way to bet spots during the quarter. The activity is also driven by good play numbers of new games, some of them which generate many smaller bets.
This is also the reason for the growth of bet spots being higher than revenues. However, over a long time period, the growth in bet spots and revenue correlate. Next slide, please. As you know, our success is built on talented people and our recruitment pace remains on a high level connected to the launch of new tables and studios. We have a good recruitment process in place. I'm proud of that, I aim to be an attractive employer in every market where we operate. I think we are successful, reflected by the many applicants we get for our open positions. Looking at the actual number of employees, we are starting to get close to 5,000 persons in 10 different markets. Next slide, please. One of the main drivers in employee numbers is the studio in Georgia, which went live in the previous quarter and continues to grow.
There are now more than 300 persons in the studio, which we expect to be our third largest studio 2018 and our second largest studio 2019. We have also seen some good progress in the New Jersey in the quarter where we aim to launch a studio during Q3. The new purpose-built Live Casino production studio will be Evolution's 10th Live Casino studio worldwide. It will provide a state-of-the-art Live Casino service for multiple operators, we will initially launch 10 online live tables and a wide range of Evolution games. We have already signed deals with 888 and Ocean Resort Casino. Further game launches and additional tables include dedicated tables that can be used by operators for live sporting events, promotions, and cross-promotion of land-based casino attractions will be rolled out gradually. Our entry into the U.S. market has been carefully considered and a long-term plan.
Back in 2013, Evolution became the first Live Casino provider to gain New Jersey preliminary waiver approval. Now, having reinforced our position as Live Casino market leaders in Europe over the past decade, we feel that 2018 is the right time to launch with a fully-fledged studio facility in the U.S. Next slide, please. Geographical breakdown. As highlighted in the last report, our global exposure is increasing, we are experiencing growth from all over the world, in line with our customers' increasingly diversified geographies. Demand is ever so high in actual numbers. In this report, we are for the first time providing an overview of where the end users are located. Our games can be played in more than 200 countries, Europe remains our basis of operation, U.K. is the single largest market.
We are carefully monitoring our operators' licenses. Most operators are licensed in several jurisdictions. As we stated earlier, we now follow our European licensed operators into Asia, which also then drives the growth of the rest of the world, together with expansion in North America, initially Canada, but soon followed by New Jersey. Next slide, please. I touched upon the win of the Live Casino Supplier of the Year in the quarter highlight. We actually won one more category of the EGR B2B Awards, the Multi-Channel Supplier of the Year. This was a really tough category to win with 11 other shortlisted companies. The award was thanks to our Dual Play solution, which allows on-premise and online players to play at the same land-based table.
Throughout our state-of-the-art Dual Play, we established ourselves as the provider of choice for land-based casinos that want to take their brands online and support many top-notch casinos in Europe and soon in New Jersey. Another example on how we innovate Live Casino is Lightning Roulette product, which has become one of the most popular games in the market. Invented, created, and built by Evolution. We're truly proud of this development of the classic roulette game, which appeals both experienced players as well as the whole new player group that isn't normally playing table games. Now, I hand over to Jacob for the financial highlights. Next slide, please.
Thank you, Martin, and good morning to all you on call or following via the web. Overall, the financial performance in the second quarter is quite strong. A number of metrics are looking better compared to the beginning of the year. As you can see in the chart, it's to the right in the chart, revenues amount to EUR 59.3 million in the second quarter of this year. That equals 40% growth year-on-year and 15% growth quarter-on-quarter. While a lower growth rate compared to what we saw during 2017, it's an improvement from Q1 and definitely in the high end of our own expectations from three months ago. The recently finished Football World Cup was a key event during the quarter. As we have spoken about earlier this year, major sporting events are for us, primarily a driver of table sales.
It generates some immediate revenue in setup fees for those tables, which are up a little bit compared to Q1. Primarily, the effect is over time when utilization of the newly launched tables increase and operators drive new traffic to their live casino environments. That's when we see the benefit. As Martin mentioned earlier when discussing bet spots, we have had some really good days also for casino volumes in June. We also indirectly benefit from higher traffic in general from many operators. The Football World Cup does support some growth in the quarter, even though the main effect for us is more long-term. The gray bars in the chart show EBITDA and amounts to EUR 26.2 million for the second quarter, resulting in 44% EBITDA margin. As mentioned, we've had a high pressure on table delivery during the quarter, adding some 350 headcount since the end of March.
Together with the building of studio environments and the continued development of this brand-new studio in Georgia and also in New Jersey, this altogether drives costs. The second half of the year, we're expecting a more stable growth in number of tables. Provided good top-line development, we expect some further improvement in margins during the second half of 2018 compared to the first six months of the year. Having said this, I reiterate what we have stated in many previous quarters that margins do vary quarter to quarter, and while we definitely try to be as efficient as possible, we don't primarily steer on margins in the short run. We will prioritize top-line growth if there is such a trade-off. Operator, let's go to the next slide, please.
Looking closer at the P&L, we can see revenues for, again, for the three-month period, April to June, total a little over EUR 59 million. For the first six months of the year, revenues are EUR 110.8 million. That's an increase of 35% compared to the first half of 2017. Personnel expenses, EUR 24.2 million in the quarter. That's up 38% compared to the second quarter last year. The increase itself is mainly driven by the increase in new tables. Depreciation, EUR 4.5 million in the quarter, increased from 35% compared to previous year. The other expenses item include rent, consumable equipment, consultants, and other advisory costs is also up by EUR 3.4 million compared to the same period last year. Summing up, total operating expenses increased by 43% year-on-year and 37% comparing the six-month periods January to June 2017 and 2018.
Tax for the quarter is EUR 1.6 million for a tax rate of 7.2%, that brings us to profit per period of a little over EUR 20 million, which is equal to an EPS of EUR 0.55 per share, and for the rolling 12-month period, EUR 1.96 per share. Go to the next slide, please. Moving on to capital expenditure. As mentioned, investment in new studios has continued in the quarter, mainly related to studios in Georgia and in New Jersey. As I have communicated earlier, we are in an investment phase since the end of last year, second half of last year, in the chart to the left, you can see CapEx as a share of rolling 12-month revenues increasing to 15% in the second quarter, reflecting the high investment pace at the moment.
The New Jersey studio will drive investment in tangible assets also in Q3, towards the end of this year, we should see CapEx come down in relation to revenue, as we have no other studio builds planned right now. That might change, of course, but that's the way it looks right now. CapEx in intangible assets is mainly related to development of new games and features to the platform that's expected to continue to be stable. Moving on to cash flow, it has improved during the quarter as we start seeing some effects of our increased focus on collections. Accounts receivable in relation to revenue, a metric which has increased during both the fourth quarter of last year and the first quarter of this year, is now down to a level lower than the fourth quarter.
We still need to improve further when it comes to collections, and it will continue to be a focus area. But we are moving in the right direction, and we will continue to work to do so. To the right in the slide, at a look at the balance sheet, it shows a strong financial position. There is no real big material changes there in the quarter. That was the end of my prepared remarks. I will hand back to Martin for some closing words, and we will take questions after that. Over to you, Martin.
Thank you, Jacob. While the end of Football World Cup now has come, the demand for new tables remains on a high level for the rest of the year, and in our current stand, we will have more than 500 tables live at year-end. It is important to remember that we can leverage each table better over time as they have initial startup period and need to be optimized to perform in their full potential. We will work hard to finalize the New Jersey studio before its launch in Q3, as well as install several new Dual Play tables in land-based casinos. New Jersey is still a relatively small market, so we do not expect an immediate effect on growth and earning at launch. But as always, we expect it to contribute more over time, and we also look forward to the potential opening of Pennsylvania during 2019.
You are probably getting tired of me repeating that we will increase the gaps to our competitors, but this is still our main focus. We stay paranoid, we continue to innovate the industry, and we continue to make Evolution better every single day. Thank you all for listening. Now, let's move to questions.
Thank you. If you have a question for the speakers, please press zero one on your telephone. There will be a brief pause while questions are being registered. Our first question comes from the line of Rasmus Engberg from Handelsbanken Capital Markets. Please go ahead. Your line is now open.
Hello. My first question has to do with the FIFA World Cup. You did mention and talk about this a little bit. The event seemed to be having a big role in contributing to the results of the quarter. I was just wondering if you could possibly comment on the revenue and what the development might have looked like disregarding the profit gain from the World Cup.
I wouldn't say that the effect of the World Cup is big when it comes to revenue in the quarter. It has an effect, maybe even slightly more than what we initially thought. Player volumes and activity increases more than revenue. It's hard to quantify it. The revenue effect is not as big. The activity and the number of players for the first time coming in contact with Live is high.
Okay, that makes sense. My second question is that in the report you comment on how the regulation of the Swedish market is approaching and how you look forward to working with new as well as existing customers in Sweden. I was just wondering if you could comment on how the work with already existing customers might change and how you plan to reach out to new customers, if you have any new market strategies, et cetera.
I don't see any real big changes in the way we're working with already existing customers. I expect that there would be a marketing boost or activity in the Swedish market as it regulates. I don't see any difference there. We will continue providing the best solution for all our existing and coming customers. We are constantly working with any new customers or potential customers in the Swedish market. We're very proud of being able to sign Svenska Spel on ATG as one of the two most prominent customers in the Swedish market. We constantly continue to work with other potentials.
Okay, perfect. That's all from me. Thank you.
Thank you. Our next question comes from the line of James Goodman from Barclays. Please go ahead. Your line is now open.
Morning, gents. Thanks for taking the questions.
Morning.
Morning. First one from me was around the country and regional splits that you've given. Thank you for the detail there. Of course, you've given us some insight into the growth rates of those regions as well, I was wondering if you could comment a little bit further around the growth seemingly in Asia, which is probably over 100% in those numbers, equally on the U.K. side, where growth of around 12% or so year-on-year would suggest
I guess some maturity in that market. Perhaps you could just comment around that. Thank you.
Yes. Hi, James. I think you're right, that the rest of world region is where we're seeing the most traffic growth at the moment. As Martin commented a little bit on earlier. As regards U.K., it's still growing, but it's definitely a market that has been a little tougher during this year. Part of it is, of course, that it's also a market that's maturing a little bit. I think also many operators are trying to kind of find their way a little bit right now since after they might have made some changes. You're correct in that assessment.
I take from that it's not competitive in the U.K. It's a market development.
Yeah. We don't see that we're losing share in the U.K. It's always difficult with the market share since the assessments of the total markets are rough, as you will know. We have no signs of losing share in the U.K.
The regulatory activity in U.K. is very high at the moment, it affects the market, I would say.
Okay. Thank you. The other question is on the performance as you went through the quarter. As you said, you're at the high end of your own expectations. Was that because of a very strong final month? If you could comment on the phasing and what that does for the start to the current quarter.
Yes, I think that's also fairly accurate. It was a decent start, then it was a little bit more of a push from World Cup activity than we were expecting. That helped towards the end of the quarter. That's about right. There's no big drama, I think, in terms of how this quarter has started. It's still so early, it's hard to say anything. Nothing that stands out.
Okay. Just on housekeeping, the impact from foreign exchange in the quarter, it looks like about a 2% headwind. Have I modeled that correctly?
That could be correct. We've not broken it out specifically. I think it's about right.
Okay. Thank you.
Thank you. Our next question comes from the line of Lars-Ola Hellström from Pareto Securities. Please go ahead. Your line is now open.
Hi, Martin and Jacob.
Good morning.
Hi. A few of my questions has already been answered, Maybe you can talk us through a little bit of the quarter month by month, April, May, June, how the development was. Was June specifically strong, or has it been increasing throughout the quarter?
We won't comment month to month, Roughly like I said earlier, we had a good start Then maybe the boost at the end from the World Cup was slightly higher than what we had in our own expectations. Good start to finish. Let's put it that way.
Yeah. You have seen the U.K. effect. We have been talking about that earlier.
Q3, can you say how it has started? Has the activity among operators remained high in connection to the World Cup finals?
It's too early for the Q3. We're happy with the outcome on Q2.
Okay. On the table rollout, can you say something about the timing? Was most of the tables rolled out ahead of the World Cup, or has it been rolled out?
I would say that we have had a very high pressure on delivery since basically mid-January, and during the period up until the end of Q2, we have more or less delivered as much as we can for the demand. There have been deliveries almost through the quarter.
You still have tables in backlog to deliver in all studios?
We see good potential in the tables going live in also H2.
I also noted on the staffing that it was 350 people. Is that partly all ready for tables to be launched in Q3 as well?
The answer to that is yes.
Yeah. Okay. Also on the geographical split, I must say I was quite surprised that the Nordics was only 9% of total GGR. I believe I have overestimated the Swedish share. You have signed ATG, and you are negotiating with Svenska Spel. Do you expect that Live Casino as a percentage of total casino revenue in Sweden will increase with the rollout of a Live Casino product for those two?
We will continue to focus to deliver the best product and to see to that the share of Live is the absolute highest possible. I cannot comment on the exact development.
Concerning ATG, will they hold the branded tables as well, or will they just use generic tables?
It's too early. We don't comment on how exactly or how many tables each of our customers have.
Okay. A question here for both of you concerning the full year margin guidance in line with 2017. The higher-than-expected commission revenue we've seen during Q2, is that a positive thing for reaching that level on the full year in your view?
We reiterate that we are expecting an EBITDA margin in line with last year. We haven't really changed that. We're happy with the momentum in Q2. We're looking forward to the second half of the year.
Finally, about the U.S. expansion. Is there quite a number of leads of additional operators to sign up for your Live Casino solution?
We are working with potential customers in New Jersey, naturally, we expect to sign up more.
Okay. Thank you.
Thank you.
Thank you. Our next question comes from the line of Oscar Erixon from Carnegie. Please go ahead. Your line is now open.
Good morning, guys, and congratulations on a very strong report. A few questions from me. You mentioned in the report that you are continuously, of course, optimizing tables, delivering more over time. Looking at the number of bet spots, can we expect an acceleration of growth as bet size increases for new games and you get more players on the new tables that you rolled out quite aggressively?
The tuning in of tables will be constant, and when you add large numbers, it will get more better leverage over time. When it comes to looking at the second half of the year, we have stated that we expect a strong second half in comparison to the first half.
Okay, thank you. Looking at H2, which you've said before that should be strong, is there anything we should think about in terms of differences between quarters? You're rolling out New Jersey now quite aggressively, and as you said, the revenue per new table should accelerate as well during the year. I'm thinking in terms of margin differences primarily now.
I think that when it comes to margin, again, we're seeing a strong development as a result of that. We have stated that we'll be in line with last year, and therefore we see a stronger H2. I think that's the comments on that.
Okay, fair enough. Also wanted to touch upon the. You mentioned that you expect to have 500 tables at the end of 2018. Could you give us an idea of how many tables you have now, roughly at the end of Q2?
We don't report the table numbers quarter by quarter. We report them annually, actually. It's a moving material. It would be difficult. It's annually we make a report on it, and the 500 is sort of the indication for that of the year.
Okay.
I think it was just the statement was that we will be over 500.
Over 500, yeah. Is it fair to assume that it will be quite even across the year or is it more in H1, would you say?
We haven't commented that, but the table sales have been positive, as we said, so I won't say anything more than that.
Fair enough. Finally, the geographical split, which you've discussed a bit already, but 25% rest of world, really a bit surprising to me as well. Could you say something more about the split between different countries and different regions there? Asia, for example, is it 10% of sales or is it 20%? Just a rough idea would be very useful.
We have decided not to disclose individual markets of different regions, we're taking this step now to disclose the total split. We won't comment on a specific region or market individually.
Okay. Got it. Thank you.
Thank you.
Thank you. Our next question comes from the line of Christian Hellman from Nordea. Please go ahead. Your line is now open.
Hi. Thanks for taking my questions. The first one on the World Cup. You mentioned that it's been a positive effect during the quarter. Sounds reasonable. Just to give us some flavor on that additionally and some magnitude, perhaps. Are we talking that it's contributed one, two percentage points, or are we talking four or five percentage points to grow? Just to give us some idea.
The activity in the network has increased a lot. There's a lot of new players coming in. To single out the effect on revenue would be very difficult. The players naturally coming in from the World Cup is not high-value players. They're coming in for the first time, and it's really important because they will contribute to the growth over a long time period going forward. I don't have the exact figure for the revenue, but it's not significant.
Okay. Not significant. Thanks. Coming back once again to the market split that you released now. It's very helpful. Thank you for that. Coming back to Rest of World, there was one question about the different regions or markets in that segment. Am I missing something? Is it Asia and Canada, or is there anything more than Asia and Canada in Rest of World?
As we stated, there's 200. We're truly worldwide. There's a lot of small from a lot of different countries. Asia being a region, naturally Canada is also a portion of that. Yeah.
I understand that Canada must be in there. We got Asia, we got, I guess, South America, we pretty much covered the world. You have some business also or some revenues from South America then?
There would be limited, but some.
Okay.
Very limited.
A large amount of those 25% must be Asia, because you just launched in Canada, I guess. I'm assuming as well. The question on Asia then, are you going into Asia with Asian aggregators, or are you going through European operators? How's the go-to market strategy in Asia?
We are going with European licensed operators. That's how we follow them into Asia. We don't put boundaries for their expansion into Asia. That's the way we go to market.
Okay. You don't use any Asian aggregators at all?
We want a European license. I don't know exactly the term, how you define it, but we need an European, so we follow European license operators, and if there would be an aggregator, we could make a deal with them, but then they have to have a European license.
All right. The regulated market, the share of revenues, that's declined from 34% last year to, well, it was up at 35% in Q4, now it's down to 31%. It seems to be declining. Could you comment on that? What's the reason there? Is it growth in Asia, obviously, or?
Mainly the declining rate in the U.K. that's behind it.
Sorry?
It's mainly the declining share from U.K. that's behind the lower.
All right. Asia growing, that's not a factor in the regulated market share coming down.
The rest of the world is growing, that's one factor, but also the effect of the U.K. market not growing as fast is one effect. The U.K. effect is probably higher as you see in the figures.
All right. Okay. Thanks. I think that was it for me. Thank you.
Okay. Thank you very much.
Thank you. There are currently no further questions at this time, I will hand the call back to the speakers. Please go ahead.
Okay. Thank you very much all of you participating. I look forward to see you all again. As a rounding off, I would say thank you from Evolution, and we're happy with the report. Bye.
This now concludes our conference call. You may now disconnect your lines.