Welcome to the Evolution Gaming Group Q4 2017 report. Today, I'm pleased to present CEO Martin Carlesund and CFO Jacob Kaplan. For the first part of the call, all participants will be in listen-only mode. Afterwards, there'll be a question and answer session. Gentlemen, please begin.
Thank you, operator. A very warm welcome to those of you on the call, and also to those following us over the web. My name is Martin Carlesund, and I'm the CEO of Evolution Gaming. With me today, I have CFO Jacob Kaplan. I will start by giving some comments of our performance during 2017 and also the fourth quarter in particular. I will hand over to Jacob for a closer 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 Evolution. During 2017, we achieved 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 ever so paranoid on our mission to continue creating gaps to our competitors. Let's look into the figures and highlights of Q4 2017. We have the revenue growth of 48%, increasing to EUR 50.7 million. EBITDA increased by 74% to EUR 22.6 million. EBITDA margin of 44.6%, comparable to 37.8% last year. It increased by 86% to EUR 18.8 million. To close on the period, we have gone live with our studio in Vancouver, Canada. I'm very happy with that. It went live 1st of 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, with that mission, increase our gaps with the competitors. We participated in ICE, Europe's major B2B gaming event, where we in total released seven new products, which is really a record in comparison to what we've done before. Even with this fantastic year behind us, I want to reiterate, we are paranoid. We want to achieve more. 2018 is a new year. While 2017 gives us a great foundation, we will have to earn our success again this year, every day. We have to make Evolution better every day. Next slide, please. We have a continuous strong increase in activity across the network. We give you bet spots as an indicator. Well, we see there has increase of 66%. I'm happy with the development through 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 BI to understand player behavior and what the player likes, what they like. As we introduce more soft games and also turning during big update as we will see a healthy higher increase in activity in the network than in revenues. This liquidity is also very important and unique to Evolution when creating, for example, jackpots on our products. Next slide, please. Q4 was very intense. We delivered many new tables, and as a consequence, we continued to increase the number of employees during the quarter. We also foresee this development continuing during the first half of 2018, and most likely peaking just before football World Cup starting in June.
We at the same time are opening the studio in Tbilisi, start development of a new studio in New Jersey, and increase our efforts in the product development, we are coming into an investment period for Evolution. Next slide, please. We are full speed ahead with the Tbilisi studio setup, and we are on plan for go live in Q2. Tbilisi studio with its 8,500 square meters will be our next major delivery hub and the best studio we've built so far. It will cater to the expansion in the coming two to three years. There are multiple challenges to set up a studio of this magnitude in a new country, and I'm proud of how our able team and management takes on this task. At the moment, we are about 30 employees, but within months, we will be hundreds.
I simply want to share the excitement that I feel for this expansion. It's simply amazing. In parallel with the Tbilisi project, we have set up our first North American studio in Vancouver, Canada. It went live on the 1st of 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 second half of 2018, start building our second studio in North America, New Jersey. At this moment, I also want to highlight the importance of Evolution is being able to handle several large projects in parallel. We have not only got the business model scalability, but we 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 ICE, 5th to 7th February, the largest European B2B show, as you already know, released a record-breaking seven new products. I would like to highlight the groundbreaking new Lightning Roulette, which is a classical app with an RNG-generated multiplier hitting one to five numbers each time. It's world news, and I believe it will be attractive to both new segments as well as existing roulette players. I as well want to mention that we now enter into the RNG table games with the first out roulette. We have the ambition to make the world's best table games also in RNG and head down this route to make our offer in table games complete. As the last highlight, I would also like to mention our fantastic new Salon Privé, where the most valuable players can experience a very exclusive and private game.
In total, this marks our increased focus on product development and our ambition to increase the gap to competition year-on-year. As mentioned, we will commit an investment phase during 2018 to deliver more and completely new games to the market. We also aim to make more soft games as our Dream Catcher during 2018, which by the way, have been a great success. With that, I will leave it over to Jacob Kaplan. Next slide, please.
Thank you, Martin, and good morning to all of you on the call and also those of you following via the web. Yes, we are on the next slide, thanks. As you heard Martin state earlier, Q4 was a good finish to a very good year. Revenues amount to EUR 50.7 million in the fourth 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 22.6 million 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%, is slightly lower than Q3 when it was 48%. Costs are 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 is a cost driver in the fourth quarter 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%. That compares to 38.6% for full year 2016. However, also as stated previously, margins will vary quarter-to-quarter. In the short term from Q1, given the investment in new studio capacity, if anything, I am expecting slightly lower margin compared to Q4.
Also in terms of growth, 2017 has been exceptional with the normal underlying seasonality pattern drowning in the overall growth. In Q1 2018, top-line growth will be slightly lower than in Q4 as we face tougher comparables, so in percentage terms, that level continues. Our increasing size, of course, also makes keeping the growth rate more difficult. It is interesting to note that during 2017, we have added business basically the size of an Evolution from two, three years ago. Somewhat normalized growth coupled with investment in studios and new product launches, as you have heard Martin outline, will affect financial results during the coming months. That said, growth prospects for the year remain very strong, and we are extremely excited about the new products that Martin just mentioned, and we believe they will also support increasing growth and margin during the second half of 2018.
Let's go to the next slide for a closer look at the P&L in the period. Thank you. As seen in the first column and commented on the previous slide, revenues in the three-month period October to December totaled EUR 50.7 million, up 48% year-over-year. For the full year, revenues up 54%. Moving quickly down to expenses. Personnel expenses totaled EUR 20 million 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. For the full year, personnel expenses are up 36%. Depreciation is EUR 3.8 million in the quarter and EUR 13.8 million for the full year, increasing 33% and 41% respectively compared to the previous year. Other expenses include rent, consumable equipment, consultants, other advisory costs also up year-over-year.
Summing up, total costs increased by 32% year-over-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 gap to competition. We were in a similar situation 2016 where we laid the groundwork for a great 2017. Of course, circumstances are not identical, but I can 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 and years to come. Moving down from expenses, tax for the period is just EUR 0.7 million.
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. Hence an usually low tax rate in Q4. Full year tax rate is close to 7%, similar to what we had in 2016. Going forward, 7%, 8%, 9% is a better estimate than the Q4 level, of course. That brings us to profit for the period of EUR 18 million, equal to earnings per share of EUR 0.50 per share, and for the rolling 12-month period, EUR 1.71 per share. Operator, we can go to the next slide, please. Graph to the left shows CapEx is EUR 6.5 million in the quarter, where EUR 3.3 is CapEx in tangible 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 also 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 fourth quarter. To the right in the slide, a look at the balance sheet at the end of the year. It shows we maintain a very strong financial position. The board has proposed a 100% increase of annual dividend, proposing EUR 0.90 per share, meaning we pay out EUR 32.4 million to shareholders in a few months. I think 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. Over to you, Martin.
Thank you very much, Jacob. The next slide for the last one, look ahead. As mentioned earlier, 2017 was an exceptional year for us, both in terms of growth, but also in 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 opportunities for continued growth 2018. We have a long growth runway left with lots of opportunities in the coming years. Live Casino is still a relatively small product, making up maybe 10%-15% of the casino market in EU and less in the global context. 2018 will be a year with new enhanced products in focus. We launched seven record-breaking new product at ICE. Groundbreaking, world-leading new products. I'm very proud of that.
I believe that with those products as well as coming, we have a good chance to expand the Live portfolio 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 also see large demand on new tables together with our customers. We will continue to take market shares and increase gap to competitors. We stay ever so paranoid and hungry, and we will fight to make Evolution better every single day. With that, I would like to thank everyone for listening. Let's move to the next slide. Questions, please.
Thank you. If you wish to ask a question, please press zero one on your telephone keypad now to enter the queue. Our first question comes from Rasmus Engberg from Handelsbanken. Please go ahead. Your line is open.
Good morning. Thank you. Can I ask 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. Jakob here. I think 45 is probably a decent estimate for the full year. It's the level for 2017. As we said, we feel that we kind of established that level which is higher than we had coming into the year. That said, we've not given any new firm guidance or sort of launched any new long-term objectives when it comes to margin. It will still vary quarter to quarter. I think as a starting point, that's probably a reasonable point.
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. Maybe slightly higher. Yeah, 7%, 8%, somewhere there.
Thank you.
Thank you. Our next question comes from Martin Arnell of DNB Markets. Please go ahead. Your line is open.
Hi, guys.
Hello.
My first question is, you're talking about this investment phase, and 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 two quarters afterwards? Is this a similar situation? It's my question.
Okay. I will answer it like this. I think that there are similarities. I think that 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. We are really pushing to increase the gap to competitors, and I'm very proud of the ICE, and let's have a new product there, which I understand is remarkable. That comes out 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 to the first half 2018. That's in the cards, and that are similar to the situation that we had 2016, where many tables 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. That, of course, naturally drives a bit of cost, and we're going to go live there in Q2. In parallel with that, we are entering in the second half of the year, New Jersey. We added basically, roughly a 2016 Evolution on top of 2017 Evolution to create 2018. 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 then. Yes, there are similarities.
Thanks a lot for that. 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 increasing demand, yes. I would say that we are at the current monitoring our delivery capability in comparison to the orders, there are demand right now, yes.
Okay, thanks. 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. I gave you a hint of the size of the studio where I indicated 8,500 sq m. It's a large studio, and it will cater for a lot of tables. Naturally, since it's going to cater to the growth for two years or three, it won't go live with that huge amount initially.
Okay.
Just to clarify there, it won't, of course, be full from, I think your question was end of Q2. It starts small like everything else. There's lots of room to grow there.
Of these products, seven new products that 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 product?
If I would choose one, I would actually take two, and then I would take the Lightning Roulette. It's a world new type of roulette. Never been seen in land-based or online. It's an RNG multiplier on the numbers. 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 thrill both new players as well as the current, I'm sure. It's fantastic. I'm very proud of that. The second one, which I won't mention of the one that I'm mentioning, would be the RNG table games. We're releasing First Person game in roulette, which means that we have, I would say, in my opinion, revolutionized the table games. We're doing something completely new with RNG table games, and we intend to also take and make the world's best RNG table games.
To make our offer in the table games complete. Those two games are something that I would mention.
Super. Thanks.
I can go on if you want.
No, that's fine. Thank you. That's a good flavor. Finally, can you tell us more about this studio in New Jersey? Could you summarize the business case? I know you've been a little bit skeptic towards entering New Jersey before, what's changed, what should we expect from there?
We are in the plans to initiate the studio build in New Jersey. We're looking into it right now, I indicated that it will be during second half of 2018. You should be realistically defensive when it comes to the business case of New Jersey. Don't expect. It's still only nine million people, it's not the largest market in the world. The indications I have, it's not that. It's still the first entry into U.S. 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. I think the right moment to go in is right now.
You can cater Pennsylvania from there if you would like to, you think?
It's not up to me to decide, it's not 100% clear, the opportunity of that is there, yes.
Thanks so much.
Thank you. Our next question comes from James Goodwin of Barclays. Please go ahead. Your line is open.
Yes. Good morning. Thanks very much for taking my questions. My first one's on Evolution's industry leadership, I guess the assumption that the growth primarily comes here from market expansion. 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? If so, could you call out a few countries perhaps, or regions where you're underrepresented? That's my first question. Thank you.
I think that we are driving the growth of Live in total, I believe that there are pockets of growth still there. As I said, we have a long growth runway ahead where Live still in Europe only is 10%-15%, I think that it will increase quite a lot from those levels. We are driving that. We are leading right now when it comes to competitors and the product. I can't point out any specific geography where I think that we can actually gain more on the competitors than others, in general, with these investments that we do now in the product, we will continue increasing the gap, I believe that the players will continue to choose our product before our competitors.
Okay. Thank you. The other question I wanted to ask was around the opportunity you see for potential acquisitions or mergers in either the content or technology space. You're taking some steps yourself towards a pure sort of RNG offering, albeit tentative steps. 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 if you were thinking about that. Thank you.
When it comes to M&A, we are, as we have stated before, constantly evaluating. We're looking. We want to do some mergers or acquisitions, we're not stressed about it. We have a fantastic growth path ahead of us with our core product, we want to do the right deal and the right deal to the right price, or the right deals to the right prices. We're constantly evaluating. We're looking. We haven't decided or communicated it will be content or technical. Just constantly evaluating. The M&A is a little bit stochastic in its nature, we haven't revealed anything, 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 Laséen of Carnegie. Please go ahead. Your line is open.
Hi, good morning. Yeah, I have a question about Q4. In connection with Q3, I think that you said that margin should be in range of maybe 45%-50%. You had reached another level, now I guess that you were below 45% not long time after that comment. You're signaling even lower margins in Q1. What has happened? Can you talk about the other expenses and personnel expenses, what happened late in the quarter? Was it a sales phenomenon?
Yes. Hi, Mikael. No, nothing dramatic really. 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 that the margin is 45% and up from 38% previous year. We will vary quarter to quarter for the reasons we've talked about, mainly the pace of expansion of tables, but also sort of the pace of product development and also studios, of course. No real shift there. 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. When it comes to seasonality and Q1, the start of 2018, can you say something about that on the top line?
Yeah, I think what 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. A little bit more, 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, Live is still a small product and we're really excited about the new products. That's for Q1, in the short term, yeah, growth rate comes down a little bit. 2017 was really an exceptional year for us. We have to remind ourselves of that. We're working hard to have another year like that, but we can't just extrapolate the development from 2017 directly. I would say maybe then for Q1 at least, my expectations are maybe a little bit lower than previously.
Okay. That in combination, a bit lower top line. You're not talking about well below 40% in combination with the investment comments that you made earlier today. Does it mean that the margins will be significantly lower quarter-on-quarter? Or can you explain the dynamics?
I don't have that much more to add, really. I think what we said was that margins vary. If anything, right now, I would say probably that they could vary a little bit downwards in Q1. For the full year, I don't see a big shift. 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. Those are the statements we've made.
Okay
nothing else.
Right. Do you think that the 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 stimulate this, what you have done recently at ICE, for example, and World Cup?
I don't have any direct comment on the consensus. It constantly moves also. I couldn't really say anything about that. We are excited about our new products, as we've said a few times here. We think that we're widening the gap to competition. We think that this won't be immediate effects, of course. It takes a bit of time to launch, but towards the second half of the year, we think they will all contribute.
Okay. Fair enough. Thanks.
Thank you. Our next question comes from Lars-Ola Hellström of Pareto Securities. Please go ahead, your line is open.
Hi, guys.
Hello.
Just some follow-up questions on the other cost development in the fourth quarter. First, I wonder if there is some extra cost or if it's a new level. Is this cost also including rents for the Tbilisi facility? My second question is, have you decided on any CapEx budget for the New Jersey expansion?
I'll take the middle question first. Yes, there is rent cost for Tbilisi. We are there right now, so it's already included. There isn't any one-offs in that sense in Q4. Naturally, we're expanding quite drastically in the end of the year, driving the cost up. On the other hand, we continue to expand, so we will grow into that. Maybe there are some timing things that it comes a little bit earlier. That's about that. What was the other question?
CapEx.
Was it CapEx or New Jersey?
New Jersey.
There hasn't been any decision on New Jersey CapEx yet.
Okay. In Q1 and Q2, in absolute terms, we shouldn't expect to see a high step as we saw between Q4 and Q3 in other costs?
We won't comment that detail on other costs in particular. I have no statement there, really.
Okay, great. Thank you.
Thank you. Once again, if there are any further questions, please dial 01 on your telephone keypads now. We have one further question coming through so far. That's from Mathias Lundberg of SEB. Please go ahead. Your line is open.
Good morning, guys.
Good morning.
My question relates to a trend we've seen 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 which have been mentioned by operators, there's a very high sport margin right now, which is then, of course, lowering the growth and the actual casino market a little bit. It's been mentioned by other operators, and maybe we even underestimate that effect, but it's an underlying thing.
Okay, great. Thank you.
Thank you. Once again, if there are any further questions, please dial 01 on your telephone keypads now. 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. Appreciate all your questions, and I hope that you have found the telco informative. Looking forward to see you all and listening to the next quarter in a couple of months. Thank you.