Welcome to
the Evolution Gaming Group Q4 2017 Reports. Today, I'm pleased to present CEO, Martin Karlsland and CFO, Jacob Kaplan. Gentlemen, please begin.
On the call and also to those calling us over the web. My name is Matti Kallesen, and I'm the CEO of Evolution Gaming. With me today, I have CFO, Jacob Kaplan. I will start by giving some comments on our of our performance during 2017 and also the Q4 in particular. I will then hand over to Jacob who will also look at our financials.
After that, I will round off
with some outlook for the future followed by questions. Next slide, please. Q4 was a very good finish of an exceptional year for Adjacent. During 2017, we see 54% revenue growth, while at the same time improving margins. We have also improved our position in many other ways and increased our gap to competition even more.
Lots of hard work, but naturally also external factors supporting our development. We established ourselves at the higher margin level and clearly proven the scalability of Evolution's business model. I think that is very important. We're really working hard. Our management is performing, and we're staying every so far on our mission to continue increasing gas to our competitors.
So let's look into the figures and highlights of Q4 2017. We had a revenue growth of 48% increasing to 50,700,000 EBITDA increased by 74% to €22,600,000 EBITDA margin increased to EBITDA margin of 44.6% and comparable to 37.8% last year. EMEA increased by 86% to €18,800,000 To the close of the quarter, we have gone live with our studio in Vancouver, Canada. I'm very happy with that. We went live first in February.
We're still on plan for our launch of our new fantastic studio in Tbilisi, Georgia. It will go live during Q2. We are increasing the efforts and the focus and the activity of the product development and continue to win that mission, increase our gaps with the competitors. We participated in ICE, Europe's major B2B gaming event, where we in total released 7 new products, which is really a record in comparison to COVID on the 4th. Even with this fantastic year, Diamond, I want to reiterate.
We are paranoid. We want to see more. 2,008 is a new year. While 20 70 gives us a great foundation, we will have to own our success again this year, every day. We have to make evolution better every day.
Next slide, please.
When we continue strong trading activity across the network, we give you best spots as an indicator. When we see the earnings increase of 66%, I'm happy with that with the development in 2017. Our liquidity in the network, the largest in the live industry, is a very valuable asset in many ways. We use it with our and we need to have a solution when creating, for example, chatbots on our device. Next slide, please.
Q4 was in tariff cuts. We delivered many new tables, and as a consequence, we continue to increase the number of employees during the quarter. We also foresee this development continuing during the first half of twenty eighteen and most likely peaking just before Cooper World Cup starting in June. As we see as we at the same time are operating opening the city into DC, development of a new studio in Jersey and increase our efforts in the product development, we are coming into an investment credit for evolution. Next slide, please.
We are on plan for Golar in Q2. So this is to do with 8,500 square meters will be our next major delivery hub and the best studio we've been so far. We cater for the expansion in the coming 2 to 3 years. There are multiple challenges to set up a studio of this magnitude in the new country, and I'm proud of how our EVO team and management takes on this task. At the moment, we are about 30 employees, but within a month, we will be 100.
I think we want to share the excitement and I feel for this expansion. It's simply amazing. In parallel with the Tepes project, we have set up our first new Molecular Studio in Vancouver, Canada. It's on July 1st February. We are still in the tuning phase with our customer DCR team, and I look forward to good developments on that market.
We will, during the second half of twenty eighteen, start building our second city in North America, New Jersey. At this moment, I also want to highlight the importance of evolution in being able to handle several large projects in parallel. That not only got the business model scalability, but also have the real delivery of physical scalability. I'm very happy with that, and it has been a big challenge. Next slide, please.
During IIT, 5th December February, the largest European B2B show, as you already know, released a record breaking satellite. I would like to highlight the groundbreaking new lightning rollout, which is a classical lab with an ROG generated multiplier, hitting 1 to 5 numbers each time. It's world news, and I believe it will be attractive for both new segments as well as existing roulette players. I also want to mention that we now enter into the RNG table games with the first half of that. We have the ambition to make the world's best table games also in RNG and head down this to make our offer in TV games complete.
At the last highlight, I would also like to mention our fantastic news of April 3, where the most valuable players can experience a very exclusive and proud game. Game. In total, this marks our increased focus on product development and our ambition to increase the gas competition year and more. As mentioned, we will come into an also aim to make more soft games as our green cash during 20
Next slide, please. Thank you, Martin, and good morning to all of you on the call and also those of you following the other web. Yes, Roland, thanks. As you heard Martin state earlier, Q4 was a good finish to a very good year. Revenues amount to €50,700,000 in the 4th quarter, up 48% year on year and up 11% quarter on quarter.
EBITDA, as you can see in the gray bars in the chart, EBITDA amounts to EUR 22,600,000 for the quarter, significantly up comparing to the same quarter last year and slightly up also compared to Q3. EBITDA margin is, while higher than the same period last year, at 45%. It's slightly lower than in Q3 when it was 48%. So far up in Q4, mainly driven by expansion in number of tables and studio space. Our expectation from last time we spoke after the Q3 report of around 400 tables at year end turned out correct.
During 2017, growth in number of tables has been tilted towards the second half of the year. This has put pressure on our recruiting, and it's a cost driver in the Q4, as mentioned. As we also said in Q3, we feel that we have established ourselves at the higher margin level towards the end of this year compared to where we were coming into 2017. For the full year 2017, EBITDA margin is 45%, and that's compared to 38.6% for full year 2016. However, also as stated previously, margins will vary quarter to quarter.
In the short term for Q1, given the investment in new studio capacity, if anything, I'm expecting slightly lower margin compared to Q4. Quarter in terms of growth, 2017 has been exceptional with the normal underlying seasonality pattern drowning in the overall growth. In Q1 'eighteen, top line growth will be slightly lower than in Q4 as we state tougher comparables. So in percentage terms, that level continues. Our increasing size, of course, also makes keeping the growth rate more difficult.
It's interesting to note that during 2017, we've added business basically the size of an evolution from 2, 3 years ago. So somewhat normalized growth, coupled with investment in studios and new product launches as if our marketing outline will affect financial results during the coming months. That growth prospects for beer remain very strong, and we're extremely excited about the new products that Martin got the convention. And we believe they will also support increasing growth in margin during the second half 2018. Let's go to the next slide for a closer look at the P and L in the period.
Thank you. As I think in the first column and then comment on the previous slide, revenues in the 3 month period, October to December, totaled 50 €700,000, up 48% year on year. For the full year, revenues up 54%. So moving quickly down to expenses. Personnel expenses totaled €20,000,000 in the quarter, up 25% compared to the same period last year, mainly driven by increase in new tables, but we've also increased resources in IT and product development compared to the same quarter last year.
So the full year percent of expenses are up 36%. Depreciation is €3,800,000 in the quarter and €30,800,000 for the full year, increasing 33% 41%, respectively, compared to the previous year. Other expenses include rent, consumable equipment, consultants, other advisory costs, also up year on year. Summing up, total costs increased by 32% year on year for the quarter and 38% for the full year compared to full year 2016. As mentioned a couple of times now, we are in a period of investment for the future, both in terms of studio space and also when it comes to product development.
All this to meet future demand and make sure we keep increasing the gas to competition. We were in a similar situation in 20 16, where we laid the groundwork for a great 2017. Of course, circumstances are not identical, but I can't see similarities between the start of 2018 and what we were facing then. We're taking important steps now that we will benefit from in the quarters years to come. Moving down from expenses.
Past full period is just €700,000 We have been slightly conservative in some of the estimates used for tax calculations during the year. And when doing the full calculation now at year end, we get a positive effect, so hence, unusually low tax rate in Q4. Full year tax rate is close to 7%, similar to what we had in 2016. And going forward, yes, 7%, 8%, 9% is a better estimate than the Q4 level, of course. That brings us to cost for the period of €18,000,000 equal to earnings per share of €50 per share and for the rolling Panama period €1.71 per share.
Operator, we can go to the next slide, please. Grab to the left shows CapEx. It's 6 €500,000 in the quarter. We're off €3,300,000,000 in CapEx intangible assets, mainly related to our studios. It's roughly in line with what we had in Q3.
As mentioned previous quarters, we will remain at this level, also in Q1 and likely was at least part of Q2. As a share of revenue, total CapEx is significantly down 2017 compared to 2016, as you can also see in the slide. Operating cash flow and cash conversion both slightly up in the 4th quarter. To the right in the slide, look at the balance sheet. At the end of the year, it shows we maintained a very strong financial position.
LORD has proposed a 100% increase of annual dividend, proposing €0.90 per share, meaning we pay out €32,400,000 to shareholders in a few months. I think that was the end of my prepared remarks. I'll hand back to Marcio for some closing words, and we'll take questions after that. Over to you, Marcio.
Thank you, Markus. The next slide for the last one, look ahead. As mentioned earlier, 2017 was also moving our position forward. Lots of hard work behind that success, but also naturally, many external factors going our way. I'm truly happy with 2017 and Q4, and I look forward with excitement to 2018.
We see good opportunity to continue growth 2018. We have a long growth runway left with lots of opportunities in the coming years. The vial testing is still a relatively small product, making up maybe 10% to 15% of the casino market in EU and less in the global context. 2018 will be a year with the new enhanced products in focus. We launched 7 record breaking new product advice, groundbreaking world leading new products.
I'm very, very proud of that. I believe that we, with those products as well as Cummins, have a good chance to expand the line of verticals even further. We're very excited about that, and I look forward to it. At the same time, we will continue to build new studios, and we'll also see large demand on new tables together with our customers. We continue to take market shares and increase the average competitors.
We stay in the average of Paraguay and Hungary, and we will fight to make evolution better every single day. With that, I would like to thank everyone for listening. And let's move to the next slide and questions, please.
Our first question comes from Rasmus Enghvi from Handelsbanken. Please go ahead. Your line is open.
Good morning. Thank you. Can I ask you, you say that you see the margin declining in Q1 compared to Q4? With regards to the full year, how do you think about that? You talk about the new level here, about 45%.
Is that something that you think you can defend this year or increase or decrease?
Hi, Rasmus. Jacob here. Yes, I think $45,000,000 is probably a decent estimate for the full year. It's the level for 2017. And as we said, we feel that we have established that level, which is higher than we had coming into the year.
So that said, I mean, we've not given any new firm guidance or sort of launched any new long term objectives when it comes to margins. So it will still vary quarter to quarter. But I think as a starting point, that's probably reasonable points.
And can you repeat what you said about what you think a good tax assumption was? Was it 9% or 7%? Or what was it for the year?
We have 7% for 2017. I mean, maybe slightly higher, but yes, 7%, 8%, somewhere that's.
Thank
you. Thank you. And our next question comes from Martin Arnell of DNB Markets. Please go ahead. Your line is open.
Hi, guys. Hello. My question my first question is, this you're talking about this investment phase, and we see we can see it in the costs, and I guess it's a lot of recruitment here. Should we see this as a similar sort of situation that was the case end of 2016 in the second half and then it resulted in payoff 2 quarters afterwards. Is this a similar situation is my question?
Okay. I will answer it like this. I think that there are similarities. I think that it's not you shouldn't say that it's all similar. What we are coming into right now is that we are focusing on product enhancement and new products.
That's important. So we are really pushing to increase the gap to competitors. And I'm very proud of the ICE and the 7 new products there, which I understand is remarkable. That comes out of, of course, some investments, but also efficiency. At the same time, we have the World Cup, which I know will drive the increase of number of tables in the first half twenty eighteen.
So that is that's in the cards and that are similar to the situation that we had 2016 where many cases need to go live at the same time. In parallel with that, we are building the studio to cater for the growth for the coming expansion in Georgia. And that, of course, naturally drives a bit of cost, and we will move on to go live there in Q2. And in parallel with that, we are entering in the second half of the year New Jersey. So there are I mean, we ended basically roughly a 2016 evolution on top of 2017 evolution to create 2018.
So that even though there are similarities, we are a different company. We're doing much more at the same time at the current than what we did done. But yes, there are similarities.
Thanks a lot for that. And talking about the World Cup tournament, have you already received a lot of orders? Or how does it work when the operators order from you ahead of such an event?
There is an increase in demand, yes. I would say that we are currently monitoring our delivery capability in comparison to the waters, but there are demand right now, yes.
Okay. Thanks. And in Georgia, when you go live in Q2, roughly how many tables will you have up at the end of Q2, do you think, in Georgia specifically?
I don't comment on that number of tables per geography. But I gave you a hint of the size of the studio where I indicated 8,500 square meters. And it's a large studio, and it will cater for a lot of pay, but naturally, since it's going to cater to growth of 2 years or 3, it won't go live with that huge amount initially.
Okay. And just to clarify there, I mean, it won't be sold from I think your question was end of Q2. So it starts more like everything else. So but there's lots of room to grow there.
Sure. And all these products, 7 new products that are presented at the ICE, If you would have to choose one of them as sort of something you expect a lot from, what would you choose? What do you think we should look out for in terms of products?
If I would choose 1, I would actually take 2. And then I would say, I mean, the lightning of that, it's a world new type of that, never been seen in neither land based or online. It's an RNG multiplier on the numbers, and you can win up to 500 times per number. It's a fantastic mix of RNG where we add that little thing to it, which will bring both new players as well as the current, I'm sure. It's a fantastic program.
I'm very proud of that. The second one, which I won't mention or the one that I'm mentioning, would be the R and D table game. We're releasing 1st person game in Golar, which means that we have, I would say, in my opinion, revolutionized the table games. We're doing something competing with R and D table games. And we intend to also take and make the world's best R and D table games to make our offer in the table games complete.
Okay. Great. Something that I would imagine.
Super. Thanks. I can add one. No, that's fine. Thank you.
That's a good flavor. And finally, can you tell us more about this studio in New Jersey? The
sort of could
you summarize the business case? I know you've been a little bit skeptic towards entering New Jersey before. And what's changed? And what should we expect from there?
We are planning to we are in the plans to initiate the studio build in New Jersey. We're looking to it right now, and I indicated that it will be during second half of 2018. I'm still you should be realistically defensive when it comes to the business case of New Jersey. Don't expect any it's still only 9,000,000 people and it's not the largest market in the world. And the indications I have is not that.
But it's clearly the first entry into U. S. And why we choose to do it right now is also that Pennsylvania are coming. If it's now or a little bit later, we will see, but we need to prepare for that. So I think the right moment to go in is right now.
And you can cater Pennsylvania from there, if you would like to, you think?
It's not up to me to decide, and it's not 100% clear, but opportunity of that is there, yes.
Thanks so much.
Thank you. And our next question comes from James Hooper of Barclays. Please go ahead. Your line is open.
Yes, good morning. Thanks very much for taking my questions. My first one is on Evolution's industry leadership and I guess the assumption that the growth primarily comes here from market expansion. But I wanted to ask you, if you look beyond, say, your key number 2 competitor in the market, are there still material pockets of market share that you think you could win? And if so, could you call out a few countries perhaps where you think you're or regions where you're underrepresented?
That's my first question.
I think that we are driving the growth of Life in total. And I believe that there are pockets of growth still there. As I said, we have a long growth runway ahead where life still in Europe only is like 10%, 15%. And I think it will increase quite a lot from those levels, and we are driving that. We are bleeding right now when it comes to competitors and the product.
And I can't point out any specific geography where I think that we can actually gain more on the competitors than others. But in general, I with these investments that we're doing now in the product, we will continue increasing the gap. And I believe that the players will choose continue to choose our products before our competitors.
Okay. The other question I wanted to ask was around the opportunity you see for potential acquisitions or mergers in either the sort of content or technology space. You're taking some steps yourself towards the purer sort of RNG offering, albeit tentative steps. I mean, would there be opportunities for you to acquire any sort of studio content or to initiate any JV type relationships with any RNG type suppliers? I wanted to ask how you're thinking about that.
Thank you.
When it comes to M and A, we are, as we have stated before, constantly evaluating. We're looking. We are we want to do some mergers or acquisitions, but we are not stressed about it. We have a fantastic growth path ahead of us with our core product, And we want to do the right deal and the right deal to the right price or the right deals to the right prices. So we are constantly evaluating.
We're looking. We haven't decided or communicated it will be content or technical. So it's constantly evaluated. Then the M and A is a little bit sarcastic in its nature, and we're not we haven't revealed anything. And it is what it is, and we will continue to look for the right targets.
Okay. Thank you.
Thank you. Our next question comes from Mikael Lasiam of Carnegie. Please go ahead. Your line is open.
Yes. Hi, good morning. Yes, I have a question about Q4. And in connection with Q3, I think that you said that margin should be in the range of maybe 45% to 50%. You had reached another level.
And now, I guess, that you were below 45% not long ago, not long time after that comment. And you're signaling even lower margins in Q1. What has happened? Can you talk about the other expenses and personnel expenses? And what happened late in the quarter?
Or was it a sales
phenomenon? Yes. Hi, Richard. No, nothing dramatic really. I think we were you're right, we were higher in Q3, close to 48%.
And I think when we talk about the level, it's more also for the full year, the margin is 45% and up from 38% previous year. So we will vary quarter to quarter for the reasons we've talked about, mainly the pace of expansion of tables, but also some of the pace of product development and also studios, of course. So no real shift there. I mean, of course, we always want to have a little bit higher margin. We will work hard to do that, of course, but nothing dramatic towards the end of the quarter.
Okay. And when it comes to seasonality and Q1, the start of 2018, can you say something about that on the top line?
Yes. I think what we said as we said during the presentation that growth in percentage terms likely to come down a little bit. I think, of course, the comparables are tougher, like we talked about. But so a little bit more, I mean, we don't see any real blockers to growth as we talked about in the past. We feel that there's lots of opportunity left.
And as Martin highlighted, I mean, lye is still a small product and sort of really excited about the new products. But just sort of for Q1, in the short term, yes, the growth rate comes down a little bit. 2017 was really an exceptional year for us. We have had to sort of remind ourselves of that. And we're working hard to have another year like that, but we won't we can't just extrapolate the development from 'seventeen directly.
So I would say maybe that for Q1, at least my expectations are maybe a little bit lower than previously.
Okay. Well, that in combination, a bit lower top line, you're not talking about, I mean, well below 40% in combination with the investments comments that you made earlier today. It doesn't mean that the margins will be significantly lowering quarter on quarter? Or can you explain the dynamics?
No. I don't have that much more to add, really. I mean, I think what we said was that margins vary. If anything, so right now, I would say probably they could vary a little bit downwards in Q1. For the full year, I don't see a big shift.
And same when it comes to growth, what we said is that in percentage terms, it's probably lower in Q1 than it was in Q4. So those are the statements we've made. So nothing
else. Okay.
All right. Do you think that consensus expectations for your sales growth in 2018, I think it's around 30% is a fair assumption? Or are there other things that could, I mean, stimulate this, what you have done recently at ICE, for example, and World Cup?
I don't have any direct comment on the could constantly move. So I couldn't predict anything with that, but that we are excited about our new products, as we've said a few times here. We think that there are we're widening the GAAP competition. We think this won't be immediate effects. Of course, it takes a bit time to launch.
But towards the second half of the year, we think they will all contribute. So yes.
Our Our next question comes from Lars Ola Hellstrom of Pareto Securities.
Just some follow-up questions on
the other costs development in the Q4.
So I wonder if there is some extra cost or is this a new level? Is this cost also including rents for the Tbilisi facility? And my second question is, have you decided on any CapEx budget for the New York's expansion?
I'll take the middle question first. Yes, there is ramp cost for Middle East. We are there right now, so it's already included. There isn't any one offs in that sense in Q4. On the other hand, naturally, we're expanding quite drastically in the end
of the year, driving the
cost up. But then on the other hand, we continue to expand. So we'll go into that. So maybe there are some timing things that it comes a little bit earlier. That's about that.
What was the last question just CapEx? Was it CapEx or New Jersey? There hasn't been any decision on New Jersey CapEx.
Okay. So in Q1 and Q2, in absolute term, we shouldn't expect to see a tight step that we saw between Q4 and Q3 in other costs. We won't comment at that detail on other costs in particular. I have no statement there.
And we have one further question coming through so far. That's from Matthias Lundberg of SEB. Please go ahead. Your line is open.
Good morning, guys. Good morning. Good morning. My question relates to a trend we're seeing in many operator reports that the Nordic casino market was a bit weak in Q4. Did you also see this trend?
Or can you perhaps give some more flavor on geographies in general? I wouldn't say that we in particular see it, but there is a very which have been mentioned by operators, there's a very high sports margin right now, which is, of course, lowering the growth and the actual caffeine market a little bit. And it's been mentioned by other operators. And maybe we even underestimated that effect, but it's an underlying thing.
Thank you. As there are no further questions at this time, I'll hand back to our speakers for the closing comments.
Okay. Thank you all for listening. I appreciate all your questions, and I hope that you found the technical informative. Looking forward to seeing you all and listening to the next quarter in a couple of months. Thank you.