Ladies and gentlemen, welcome to the Evolution Gaming Group Q3 2017 report. Today, I am 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 will be a question and answer session. Speakers, please begin.
Thank you, operator. A warm welcome to those of you on the call and also to those following up on the web. My name is Martin Carlesund. I'm the CEO of Evolution Gaming. With me, I have CFO Jacob Kaplan. I will start by giving some comments on our performance during the third quarter. I will hand over to Jacob, a closer look of our financials. After that we will round off with some outlook for the future, followed by questions. Please, next slide. Q3 is nothing but a fantastic quarter. I'm very proud of the quarter. I'm happy with it. We continue to see very strong growth momentum. We have established ourselves at the higher margin level. By that clearly proving the scalability of Evolution's business model. We're working hard to make this happen.
I also want to state that our management is performing very well. We're staying ever so paranoid in our mission to continue increasing the gaps to our competitors. Let's look a little bit on the figure highlights of Q3 2017. We have the revenue growth of 56% year-on-year. It amounted to EUR 45.7 million. We have an EBITDA increase of 103%. The EBITDA margin is close to 48%. The EBIT increase is 123%. During the quarter, we have made investments in the studios in Canada as well as in Georgia. I will come back later in the presentation. Give some more information about the Georgia studio. I also want to point out that Dream Catcher continued to develop positively during the quarter. Well above our initial expectations.
Also worth mentioning is that we separately sent out a press release regarding the Latvian parliament have decided to do a tax on Live, or a fee on Live. It will not be a material effect on Evolution figures. It's still unclear exactly how it will be calculated. It's still a little bit up in the air. After the quarter had ended, also Dream Catcher won a new award, Digital Product of the Year on the Global Gaming Awards 2017 in Las Vegas. It's the first time an online award is given on that to Live. It's a fantastic recognition. Yet again showing that we are leading the development. We also signed agreement with the Bulgarian National Lottery after the quarter ended. It's a strategic deal for us. Even with this fantastic quarter behind us, I want to reiterate, we are paranoid. We want to achieve more.
We want to make Evolution better every day. Next slide, please. We have a strong increase in activity across the network. We give you that spot as an indicator of the activity in Evolution network and see a year-on-year healthy increase of 80%. Increasing activity is all good, and we attract new player segments with Dream Catcher Live games. We could in the long run see that the activity increases more than revenue. However, don't take too much into that in a single quarter. I also want to comment on the activity and player base in general. Our liquidity in the network, naturally the largest in the Live industry, is a very valuable asset. We constantly monitor and use our BI to understand more and develop further. We also capitalize this liquidity by, for example, internal jackpots on our products. This is a business-to-business very important part.
Next slide, please. Increase in slots. Demand for dedicated environments was increasing during second half of 2017. We all stated that already in the Q2 report. As a result of increased demand, we intensified the delivery of environment in the end of Q3, which we continue also during Q4. By the end of 2017, we will reach approximately 400 tables in total, making Evolution the largest casino in Europe seen to number of tables, also comparing with land-based casinos. We constantly master all parts of the network and use BI to optimize our customer tables, opening hours, and efficiency to create the best possible result. This has been successful, and we've seen the starts of those efforts during 2017. To grow in the right way contributes to the higher margins. Next slide, please. The project to build the next major studio hub has moved into an active phase.
It's going to be sitting in Georgia, and our plan is going live in Q2 2018. The new Georgia studio, in its planned size, will support our growth the coming two, three years. In this context, I also want to inform that we in parallel are preparing for 40% growth of the remaining studios. We're happy with that, and it's an exciting time. Now I hand over to Jacob, our CFO, for deeper look in figures. Next slide, please.
Thank you, Martin, and good morning to all of you on the call or following via the web. Operator, we can go to the next slide, please. As Martin stated earlier, Q3 has been another very strong quarter. As shown in this chart, the past four quarters, we've achieved very good top-line growth coupled with improving margins as scalability is increasingly coming through. These trends continue in the third quarter and result in a very good financial performance. Revenues in the third quarter grew 8% quarter-on-quarter. That's comparing to the second quarter of this year and 56% year-on-year comparing to Q3 2016. EBITDA increased to EUR 21.8 million in Q3, up 13% quarter-on-quarter and over 103% year-on-year. As we stated previous quarters this year, we are in a phase of very rapid growth and are seeing good growth numbers both across our different games and across the customer base.
Our larger customers who have worked with the Live offerings for a number of years are still growing, as well as customers who joined us more recently. We think this indicates an underlying growth in the Live product as such, but it's of course also a result of our active work with operators, sharing our best practices and supporting them in getting the maximum out of their investments with Evolution. We see this broad base for growth as encouraging when looking ahead to next year. We remain focused on supporting the high demand for our products and reiterate what we said in the second quarter that we see no blockers of continued growth in absolute terms in the near future. That said, it's worth noting that comparables do become significantly tougher in Q4. As seen in the chart, we had a very strong finish to the year last year.
EBITDA margin is 47.7% in the quarter. We have increased margins throughout this year, a very positive development and to some extent also exceeding our own base case expectations from three months ago. The strong margins are due to several factors. As mentioned, casino volumes have been strong with many of our operators. Also, as we've talked about in previous quarters this year, utilization of tables has been high as many customers have grown into environments expanded heavily during last year. So far this year, the number of tables has increased at a lower pace than in 2016. Still, we have increased the number of tables also during this year, and as Martin just said, we expect to end the year at close to 400 tables. However, last part of the increase this year is still to come in the fourth quarter.
More stable growth so far this year has made finding the right balance in recruiting staff easier and has contributed to better margins. In addition to these external factors, we have also worked very hard to realize economies of scale in our operation, and we are seeing clear signs of that now. So with the close to 48% margin delivered in Q3, we see that we have established ourselves at a higher margin level than previously, and we have proven the scalability in the business model. That said, margins can still vary from quarter to quarter, but from a higher level than what we saw coming into this year. Operator, let's go to the next slide. We'll also look at the P&L. Thank you. As seen in the first column, revenues in the three-month period July to September total EUR 45.7 million.
That is up 56% compared to the same period last year. That's also in line with the growth for the first nine months of this year, which is up 57% compared to the first nine months of 2016. Moving down to expenses. Personnel expenses total EUR 18.1 million. That's up 33% year-on-year, mainly driven by increase in the number of game presenters, but also IT engineers and admin staff have increased between the periods. Depreciation at EUR 3.6 million is an increase of 39% year-on-year. Other expenses include rent, consumable equipment, consultants, and other advisory costs, also up year-on-year, this category by 18%. Summing up total costs increased by 31% quarter-on-quarter and 41% for the first nine months compared to the same period last year. Moving on down in the table, tax for the period, EUR 1.4 million.
That's a tax rate of just under 8%, that brings us to profit for the period of EUR 16.8 million, which is equal to an earnings per share of EUR 0.46 per share and for the rolling 12-month period, EUR 1.47 per share. That completes that. We can go to the next slide, please. To look at our cash flow and the financial position. The graph to the left in the slide shows our capital expenditure. It's EUR 6.4 million in the quarter. As we mentioned last quarter, we will increase capital expenditure during the second half of the year due to investment in the new studios in Vancouver and Tbilisi. Also, we are planning some expansion in our studio in Romania. This affects mainly tangible investments, where I'm expecting the level from this quarter to be maintained also Q4 and Q1.
We are in a period of a little higher investment. Operating cash flow is slightly up in Q4, while cash conversion is down, partly due to CapEx, also some increase in working capital. If we look at the balance sheet to the right in the slide, at the end of September, we maintain a strong financial position. That was the end of my prepared remarks. I'll hand back to Martin for some closing comments, we'll have questions after that. Martin, over to you.
Next slide, please. Thank you. Looking ahead, we don't see any blocking issues for our continued growth in the short-time perspective. We have prepared ourselves now with the new delivery studios in Georgia. We are preparing ourselves with the new coming studio. We are aiming to continue to take market shares and increase the gap to all competitors. We will stay paranoid. We keep fighting to make Evolution better every day. I'm happy with the quarter, I thank you all for listening. Operator, please move on to questions and answers.
Thank you. Ladies and gentlemen, if you do have a question for the speakers, please press 01 on your telephone keypad now. Our first question comes from the line of Martin Arnell from DNB. Please go ahead. Your line is open.
Hi, guys.
Martin, hello.
My first question is on this capacity from the new production hubs. Could you remind us what the total number of additional tables could be when you have this full capacity in the new hubs?
We don't comment on specific number of tables on locations. We are the only market that will support our growth for the coming two, three years.
Okay. Is it expansion in the next two, three years that could double the number of tables where you are today? Or is it a lot lower?
We don't give an outlook either on the number of tables for the coming two, three years. According to our promos right now, the size that we've been managing for it will be sufficient for two, three years.
Okay. Also, could you elaborate on where you are on discussions for new signings, and potential for new customers in the pipeline?
I'm sorry, but we don't give any comments on the pipeline or prospects of several reasons, and haven't done either, so I can't comment on that either. Sorry for that.
Okay. Could you elaborate a little bit on the cost in the quarter and the outlook in Q4? You mentioned that you had a ramp-up at the end of the quarter of expansion of dedicated environment of customers, and therefore your cost was a little lower than you expected. Can you say something about where you are so far in Q4?
I hand that over to Jacob on actual figures. I can give one just comment before. We see an increased delivery phase right now in Q4, where we are reaching 400 tables in the end of the year. I can't see that affecting the figures substantially. I hand it over to Jacob.
That's actually not that much more to add. As you see, we have increased staff also in this quarter, but a lot of that is towards the end of the quarter. That's connected to increase in table deliveries. Maybe when we spoke three months ago, we were expecting tables to increase a little bit more gradually during the quarter. I think in total numbers it's still the same. Maybe we'll do a little bit more. It's September, October, November, December, more than August and July as we talked three months ago.
Okay, thanks. Just finally, you mentioned that you have established yourself at the higher margin level. Does that mean that you have a target of at least 35%, and you're above 45% here. You should clearly be able to raise that target, or can you just elaborate on the margin outlook?
I can give some comment. The object remains on the 35% level, we don't think that it sees a real purpose in the current phase. With the 48% that we've delivered in Q3, where we've clearly established ourselves on a higher margin level. We have by that clearly, which is most important, that it's proven the scalability in our business model. Even with that said, the 48% in Q3, and the proven scalability, margin can actually vary from quarter-to-quarter. That's the statement on that question.
Okay, thank you, guys.
Thank you.
Thank you.
The next question comes from the line of Christian Hellman from Nordea. Please go ahead. Your line is open.
Hi, thanks.
Thank you.
Hi. A question on the margin there, as Martin was alluding to in terms of, you're reaching new highs on the EBITDA on the margin side every quarter. Where I hear you guys is that the number of new table launches, or whatever you want to call it, that's going to increase in Q4 at least versus Q3. Is it reasonable to assume that the utilization rate of tables will most likely be lower in Q4 than it was in Q3?
I can comment first, then I can hand over to Jacob, but we don't see the table delivery in Q4 significantly change the figures in any way for our Q4. Again, we reiterate that we have established ourselves with the 48% in Q3 on a higher margin level and clearly proving scalability. Even with that, naturally, a quarter is quite a short time period. There might be things happening that could affect the margin quarter by quarter. I wouldn't say that the table expansion in Q4 is significantly affecting P&L.
No, hopefully it will help P&L in the long run. Yes, I think what we're saying is that when we've spoken in Q1 and Q2, we kind of related our margin to the 12-month run rate, which has been around 40%. Now we're saying that we're a notch above that. We see that we're at 45% in the second quarter and a little bit higher in this quarter. That's okay. We're not putting up a new objective or new number. We just think that we see that we are at a higher level, and it's due to scalability coming through and we see that also in the future. Martin said, depending on what happens, of course it can vary, but we thought that We talked earlier about when we have rapid expansion in tables, that that also affects margins, and that's true.
What we're seeing now in Q4, in a single quarter, might not be that significant as we see it now. It will be an increase, but we will be able to handle it. Maybe looking into next year, we have a World Cup coming out. We will see how that develops. We might have a situation where the rapid growth actually affects margins. Yeah, that's what we want to say.
Okay. Yeah, remind us, in 2016, you did have a rapid buildup of new tables ahead of the World Cup because operators wanted to have a licensing offering in conjunction with the World Cup, or is it a risk that that happens again? A risk, but yeah. Risk and opportunity, I guess.
Actually, we think more it's an opportunity. I think for many operators, a big sporting event drives traffic, and that can also sort of indirectly affect our products. We definitely see that as a positive. We try to keep margin as high as possible, but in the end, it's bottom line. If we have a quarter or two where margins are a little bit lower, we think that that's fine as long as we're supporting growth. I think we're also looking back at the development 2016 and this year, we've shown that when the growth is maybe a little bit more stable, margins can come back. That's why we say what we're saying now.
Okay. Another question on the tax rate in Latvia, or table fee, or whatever it's called. Could you give us an indication on the probability of that coming through in any form? Is it final that there will be some sort of fee, or?
Well, I can answer it. When it comes to political things, it's better to just stick to exact facts. The exact fact is that there has been a decision in the parliament of an 11% on the table fee. It's unclear exactly how that will be calculated. Naturally, we are talking to the authorities to try to, in a favorable way, either remove the tax or try to get changes in any way possible. Naturally, that we do. Again, it doesn't substantially affect us. The decision is made to have it. That's the fact right now, and it's not clear exactly how it will be calculated. There is no more to say, basically.
Okay. Has it been said when it's going to come to? What date?
Sorry, please. I think that you asked about what date it's effective, right?
Sorry, I missed you there.
Okay. I don't know if you have a bad connection or I, but you asked about the date that it's affecting us, right?
Yes.
1st of January 2018 they still decide the date.
Okay. Final two questions. One on CapEx. The tangible CapEx was, I think it was three and a half million EUR or something in a quarter. I just want to make sure I heard you correctly there. That's the level you also envision for Q4 and Q1, right?
Yes. Three and a half million EUR, four million EUR. Somewhere there.
Three and a half. Okay. Finally, a question on Dream Catcher. Could you give us some numbers, figures, percentage points, ratios, whatever, KPIs on that product? It seems to be going extremely well. You're mentioning it a lot, but I haven't seen any single figure on it.
I'm sorry, but we don't comment in particular terms or figures on separate games. We mention it, that it goes well above our expectation and that it's been a great success. We don't comment on the exact figures of the game.
Okay. Final question, just on the Latvian tax. Where will that be reported in your P&L? Will it be a tax item, or more like a fee in OPEX, or?
Yeah, more a fee in OPEX. It's comparable to a license fee or something. Likely in other expenses it would be inserted.
Okay. Thank you. That was it for me.
Thank you very much.
Next question comes from the line of Mikael Laséen from Carnegie. Please go ahead, your line is open.
Yes, good morning. I have a couple of questions also.
Good morning.
Good morning. You grew by 56% year-on-year, and you said it was, I think, broad-based. Could you shed some more light on growth drivers in Q3, type of operators or maybe regions? Was it really strong growth or below the average?
I would only make a comment that we are growing quite all over. That means that there's not any specific tier, size, or market which is growing more than the other. We are growing healthily over all parts of the company.
Comments maybe on the U.K., how that market is developing?
We don't comment on specific market figures. The only comment we made on U.K. historically is that it's our largest market, and it remains so.
Okay. How has the new Live Casino Dual Play Roulette side worked for you now in Q3?
It's working well. We have a strong position and a strong demand for that. It's also important to notice that the land-based and Dual Play is a long-term play. Still, it is not affecting the total P&L that much. Besides that, I have no additional information. You want to add something, Viggo?
No. We have launched a couple of new Dual Plays in the quarter, so I'm happy about that. We continue to get traction. As Martin said, in terms of revenue impact, it's a smaller product right now. Long term, we see that strategically very important.
Yes. All right. Excellent. Can you talk about the jackpot product that you launched early this year?
Yeah. That's an exciting product, naturally. As I mentioned in the presentation, that's one way of what we can use the player base and the liquidity we have in our network to make something extra for the players and a stickiness to our network. We're happy with that. We are looking to how to, in a better way, use that type of products even more in the future.
Is it live already?
Yes, it's Live.
Okay. How many operators have that?
We don't comment on the explicit agreement with operators, if they have it Live or not. It's delivering, and we're happy with it.
All right. Would be great also if you can comment on the commission development, if you see any price pressure on dedicated table fees maybe, or if you have scale effects in the contracts that reduce the commission maybe when they are growing really fast, and if that is affecting the relationship with the sportsbooks.
We don't comment on the commission level as such. Naturally, which is a question we get quite often, if a customer doubles and doubles again and doubles again, we have discussions on commission levels with them naturally because they have become sufficient, but we don't see any general price pressure or any general situation when it comes to commission levels.
All right. Quite stable overall, I guess.
I would say so, yes.
Okay. My final question is about the utilization of the tables. Can you explain how this works? You said that utilization has improved, and can you tell us how the operator can utilize the resources even more? How much more they can take out, and what levers they work with?
I can give one example just to get the feeling for it. If you open a table, let's say that you open it at 5:00 P.M., then immediately when you open it, you have seven players on the blackjack table. You know that you actually opened it late, because it should be open and gradually being filled, because otherwise you lose out players. To constantly, on that little figure, to see how it opens and what happens, and when you close it and how many plays. That trimming and tuning when you have a studio of 400 tables is significant. It makes a lot of table hours, it makes a lot of money, and it makes a lot of difference. Other things are how you treat the bet levels and how you do or what you set to that to attract players and others.
We constantly work with that during the quarter and earlier as well.
Okay, thank you.
Our next question comes from the line of Rasmus Engberg from Handelsbanken. Please go ahead, your line is open.
Yes, hi. Good morning.
Good morning.
Congratulations on another great set of numbers. When that achieves some sort of 10% of your revenues, would you report that separately if it does that at some point, or is it sort of integrated into how you account for this anyway?
I think that we, in the long run, without setting any time to it, will report that separately. I think that is an adequate question and the right question. Not to say if it's 10% or 9% or 5% or 15%, I can't comment on that. In the future, we need to report that separately, yes.
I guess that given that it's so small, is that probably growing faster than the traditional online business? Is that correct assumption?
I would rather see the Dual Play as a spearhead into the land-based and the coming bridge from the land-based players into online. It's a very strategic tool rather than a fast-growing revenue maker. It's a tool where we will actually open up for the land-based players coming into the online world. That's why we work that hard with it at the moment and creating that strategic bridge.
Right. Just a final question. In your mind, the expansion to Georgia, does that have any impact on your anticipated profitability as you ramp that up next year?
We will make the Georgian studio the best ever studio we made. It will be a high-quality, fantastic studio, and I look so much forward to it. We don't do it to lower the cost, no.
Do you think it will have as you ramp it up, will it sort of have a lower efficiency and maybe impact your entire group margin or not? Is it hard to say, maybe?
A bit early to comment on that.
Right. Okay. Thank you.
Thank you.
ladies and gentlemen, as a reminder, if you do have any questions for the speakers, please press 01 on your telephone keypad now. There are currently no further questions registered, so I'll hand the call back to the speakers. Please go ahead.
Thank you very much for all of you listening. Look forward to speak to you again in the fourth quarter. Thank you very much.
Thank you.
This now concludes the conference call. Thank you all for attending. You may now disconnect your lines.