Ladies and gentlemen, welcome to the Evolution Gaming Group Q3 2017 Report. Today, I am pleased to present CEO, Martin Carlson and CFO, Jacob Kaplan. Kaplan. 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 Patrick Collison. I'm the CEO of Blue Shell Gaming. And with me, I have CFO, Jacob Kaplan. I will start by giving some comments on our performance in the Q3.
I will then hand over to Jacob to close the call on financial. And after that, we will now walk with some outlook for the future followed by questions. Next slide. Street 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, and we have established ourselves at the higher model level and by that, clearly improving the capability of evolution business model. We're working hard to make this happen, and I also want to state that our management is performing very well. We're staying ever so far in our mission to continue increasing the gaps to our competitors. So let's look a little bit on the figure highlights of Q3 2017.
We have a revenue growth of 56% quarter on quarter. It amounted to €45,700,000 We had an EBITDA increase of 103%. The EBITDA margin is close to 48%, and 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 and give some more information about the Georgia studio.
I also want to point out that Dream Cash App pretty significantly during the quarter and well above our initial expectations. Also, worth mentioning is that we set that we sent out press release regarding the Latvian Parliament that decided to do tax on life or fee on life. It will not be material effect on the literature figures, and it's still unclear exactly how it will be calculated. It's still a little bit up in the air. 17 in Brazil.
It's the first time an online award is given on that to that to buy for buy. It's a fantastic recognition and yet again show that we are leading the development. We also signed agreement with the Bulgarian National Lottery We are paneled. We want to achieve more. We want to make evolution better every day.
Next slide, Chris. We have a strong increase in activity across the board. We give you that spot as an indicator of attract new player segments between cash flow like with the business like games, we put in the long run to see that activity increases in other revenues. However, don't take too much into that in the same quarter. I also want to comment on activity and trade base in general.
Our liquidity payment effort, naturally the largest in the live industry, is a very valuable effort. We constantly monitor and use our data to understand more and develop further. We also capitalize this liquidity by, for example, using our injectables in our products. This is a business to business very important part. Next slide, please.
Decrease in stocks. Demand for dedicated environment was increasing during the second half of twenty seventeen. We have stated that already in the Q2 report. As a result of the increase demand, we will satisfy the delivery of environment in the end of Q3, which we continue also during Q4. In the end of 2017, we will reach approximately 400 tables, with total making evolution the largest casino in Europe, opening hours and efficiency and creating best possible results.
This has been successful, and we see results of both efforts here in 20 17. To grow in the right way contributes to the higher margins. Next slide, please. The project will be the next major studio hub having been in active phase. It's going to be completed in Georgia, and our plan is going live in Q2 2018.
The new Georgia studio is in its planned site will support our growth in the coming 2, 3 years.
In this context, I also want
to inform you that we parallel our performance for 4% growth in the remaining studio. We're happy with that, and it's an exciting time. Now I hand over to Jacob, our CFO, to give some details. Next slide, please.
Thank you, Martin, and good morning to all of you on the call following the 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 4 quarters, we achieved very good top line growth coupled with improving margins, but scalability is increasingly coming too. These trends continue in the 3rd quarter and result in a very good financial performance. Revenues in the 3rd quarter grew 8% quarter on quarter, that's compared to the quarter on quarter, that's comparing to the Q2 of this year and
66% year
on year compared to Q3 twenty sixteen.
EBITDA increased to €21,800,000 in Q3, up 13% quarter on quarter and over 103% year on year. As we've 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 their 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, the result of our active work with operators sharing our best practices and supporting them in getting the maximum out of their investments with evolution.
This is a broad base for growth that's 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 Q2 that we see no blockers of continued growth in absolute plants 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 3 months ago.
Strong margins are due to several factors. As mentioned, casino volumes have been strong with many of our operators. Also, as we talked about in previous quarters this year, utilization of tables have been high as many customers have grown into environments expanding expanded heavily during last year. So far this year, number of tables have increased at a lower pace than in 2016. Still, we have increased 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 Q4. More stable growth so far this year has made finding the right balance in recruiting sales this year 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 dilutive in Q3, we see that we have established ourselves at a higher margin level than previously, and we're improving 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 and L. Thank you. As seen in the first column, revenues in the 3 month period July to September totaled €45,700,000 That is up 56% compared to the same period last year.
That's also in line with the growth for the 1st 9 months of this year, which is up 57% compared to the 1st 9 months of 2016. Moving down to expenses. Personnel expenses totaled €18,100,000 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 €3,600,000 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 31% quarter on quarter and 41% for the 1st 9 months compared to the same period last year. Moving on down in the table, tax for the period, €1,400,000, that's a tax rate of just under 8%, and that brings us to profit for the period of €16,800,000 which is equal to an earnings per share of €0.46 per share and for the rolling 12 month period, €1.47 per share. And that completes that. We can go to the next slide, please. So to look at our cash flow and financial position.
The graph to the left in the slide shows our capital expenditure. It's SEK 6,400,000 in the quarter. As we mentioned last quarter, we will increase capital expenditures in the second half of the year due to investment in the new studios in Ambat Hoover and Birlisi. 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.
So we are in a period of a little bit higher investment. Operating cash flow is slightly up in Q4, while cash conversion is down, partly due to CapEx but 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. Now looking at the Michael's remarks, I'll hand back to Martin for some closing comments, and we will have questions after that. Martin, Martin?
Next slide, please. Thank you. Looking ahead, we don't see any docking issues for our continued growth in short time course, respectively. We have prepared ourselves now with the new digital 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. In the state panel, we keep fighting to make evolution better every day. I'm happy with the quarter, and I'm happy you all can listen. Now operator, please move on to questions and answers.
Thank you. And our first question comes from the line of Mark Narnell from TMB. Your line is open.
Hi, guys. Hi, Amar. Hello. My first question is on this capacity from the new production hubs. Could you remind us what sort of 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. So we are the only market that will support our growth in the coming 2, 3 years.
Okay. But is it like is it sort of expansion in the next 2, 3 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 2, 3 years. But according to the our premium of right now, the size that we've been in that financial pool, it will be sufficient for 2, 3 years. Okay.
And also, could you sort of elaborate on where you are on discussions for new signings and potential for new customers in the pipeline?
I'm sorry, but we won't give any comments on the pipeline or prospects of several reasons and haven't done that. So I can't comment on that either. So for that.
Okay. I'll try 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 at 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 can give one just comment before. We see an increased delivery phase right now before where we are reaching 4 100 basis points in the end of the year. I can't see that affecting the figures substantially, but I have to take it. No,
that's actually not that much to add. We have as you see, we have increased stock also in this quarter, but a lot of that is towards the end of the quarter, and that's connected to increase in table collateries. So maybe when we spoke 3 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, but maybe we'll do a little bit more. It's kind of September, October, November, December more than August July as we report 3 months ago.
Okay. And just finally, you mentioned that you have established yourself at the higher margin level. Does that sort of mean that you're I mean, you have a target of at least 35% and you're above 45% here. Could you just sort of why don't you sort of you should be able to raise that target? Or can you just elaborate on the margin outlook?
I can give some comments. The obvious remains on the 35% level, but we don't think that it seems to be a purpose in the current phase. With the provisions that we delivered in Q3, where we clearly established ourselves on a high margin level, We have, like, that clearly, which is most important, the improvement in scalability in our business model. Even with that said, the 487 in Q3 and the prudent scalability margin can actually vary from Q1. That's the statement on that question.
And the next question comes from the line of Christian Hellman from Nordea. Please go ahead. Your line is open.
Hi, thanks. A question on the margin there and as Martin was alluding to in terms of I mean, you're reaching new highs on EBITDA on the margin side every quarter. But where I hear you guys is that the number of table new table launches or whatever you want to call it, that's going to increase in Q4 at least versus Q3. So is it reasonable to assume that the sort of utilization rate of tables will most likely be lower in Q4 than it was in Q3?
I can comment it first, and then I can now hello, it's Jacob. But we don't see we have established ourselves with a full H7 Q3 on a high margin level and clearly, proven scalability. Even with that, naturally, I mean, the quarter is quite a time period. There might be things happening that could affect the margin quarter by quarter. But I wouldn't say that the trade with expansion in Q4 is significantly affecting P and L.
No, I mean, 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%. And now we're saying that we're not above that. We see that we're at 40 5% in the Q2 and a little bit higher in this quarter. So we're that's for them. We're not it's not a new we're not putting up a new objective or new number.
We're not saying that we feel that we are at a higher level, and it's due to scalability coming through. And that's we see that also in the future. But as Mark said, I mean, depending on what happens, of course, it can vary. But it's not that the Q4 we talked earlier about when we have rapid expansion in tables that, that also affects margins, and that's true. But what we're seeing now in Q4 and a single quarter might not be that significant as we see it now.
And it was an increase, but we won't be able to handle it. And maybe looking into next year, we have a World Cup coming out. We will see how that develops. We might have situation where the rapid growth actually affects margins. But yes, that's
what we want to say.
Okay, okay. But because yes, remind us, in 2016, you did have a rapid buildup of new tables ahead of the World Cup because operators wanted to sort of do you have a licensing offering in conjunction with the World Cup or Risk, but yes, risk and opportunity, I guess.
Yes, actually, it was too much an opportunity. I think for many operators, it's a big sporting event, drives traffic and that can also indirectly affect our products. So we definitely see that's a positive. I mean we try to keep margins high as possible, but in the end, it's bottom line. So I mean if we have a quarter or 2 where the margins are a little bit lower, we think that, that's fine as long as we're supporting growth.
I think also looking back at the development 'sixteen and this year, we've shown that when revenue growth is maybe a little bit more stable margins can come back. So that's why we say what we're saying now.
Okay. And another question on the tax rate in Latvia or table fee or whatever it's called. Could you sort of 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. When it comes to political, as you say, it's better to just stick to exact facts. And the exact fact is the debt. It's not been a decision in the parliament of an 11% on the table.
It's unclear exactly how that will be calculated. Naturally, we are talking to the board of this to try to, in a favorable way, either remove the tax or try to get change it in any way possible. Naturally, that's what we do. But again, it doesn't substantially affect us. And the petition is made to have it.
That's the fact right now. And it's not clear exactly how it would be calculated. There is no more to say basically.
Okay. But has it been said when it's going to come to? What date?
Sorry, please. I think that you're asking about what date is
Sorry, I missed you there.
Okay. I don't know if you have a bad connection or aye, but you asked about the date that it's effect us, right?
Yes.
1st revenue in 2018 is the decided date.
Okay. Okay. And then final two questions. 1 on CapEx. The tangible CapEx also, I think, was €3,500,000 or something in the quarter.
I just want
to make sure I heard you correctly there. That's the level you also envisioned for Q4 and Q1,
right? Yes. 3, yes, 3,500,000, 4,000,000 somewhere there.
3,000,000, okay. And finally, a question on DreamCatcher. Could you give us some numbers, figures, percentage points, ratios, whatever, KPIs on that product? It seems to be on 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 of figures on separate gains. We mentioned it that it goes well above our expectation and that it's been a great success. But we don't comment on the effectiveness of the game.
Okay. Final question just on the Latvian tax. Where will that be reported in your P and L? Will it be a tax item or is it more like a fee in OpEx or?
Yes, more fee in OpEx. It's comparable to a licensee or something. So in likely in other expenses, it would be included.
Okay. Okay. Thank you. That was it for me.
Thank you very much.
Our next question comes from the line of Mikael Lissing from Carnegie. Please go ahead. Your line is open.
Yes, good morning. I have a
couple of questions. Good morning.
Yes, you grew by 56% year on year. And you said it was, I think, broad based. But could you shed some more light on growth drivers in Q3, type operators or maybe regions where you see really strong growth or below the average?
I would only make a comment that we are growing quite all over. So that means that there's not any specific tier of size or market that is growing more than the other. We are growing constantly over 1 side of the company.
And comments maybe on the U. K, how that market is developing?
No comment on specific market figures. They're only comments we've made in U. K. Historically, but it's our largest market, and it remains so.
Okay. How has the new live casino, do you have plenty of that side work for you now in Q3?
It's working well. We have a strong position and a strong demand for that. And we don't and it's also important to notice that the land based and dual plays are long term term loans on play. Still, it is not affecting the total P and
L that much.
Besides that, I have more additional information. You want to add something to that? No.
We have large group of
new deals placed in the quarter. So I'm happy about that. It continues to get traction. But as Martin said, it's still a in terms of revenue impact, it's a smaller product right now, but long term, we see it as strategically very important. Yes.
All right. Excellent. Can you talk about the jackpot product that you launched early this year?
Yes. That's an exciting product, naturally. As I mentioned in the presentation, that's one way of what we can use the base and the liquidity that we have in our network to make something extra for the players and a stickiness to our network. We're happy with that, and 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, yes, it's live.
Okay. How many operators have that?
I what's the difference? We don't comment on the explicit agreements with operators if they have a glass or not. But it's given very limited, it's we're happy with it.
All right. It will 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 sort of scale effects in the contracts that reduce the commission as when they are growing really fast and if that is affecting the relationship with that spot?
Again, we don't comment on the commission level as such. Naturally, which is a question we get quite often, I can if the customer doubles and doubles again and doubles again, we have discussions on commissioning others with them naturally because they have because they have become sufficient. But we don't see any general price pressure or any general situation when it comes to commission dollars.
All right. So quite stable overall, I guess?
I would say so, yes.
Okay. And 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 sort of the feeling further. I mean, if you open the table, let's say that you open at 5 And then immediately when you open it, you have 7 players in the back half table. Then you know that you actually opened it late because it should be open and gradually being paid because otherwise you lose out players. So to constantly only backlit the figures to see how it opens and what happens and when you close it and how many fails. Only that trimming and changing when you have a Zoom studio of 400 tables is sort of significant.
It makes a lot of table hours and it makes a lot of money and it makes a lot of difference. Other things are how you treat the debt levels and how you do or what to set to that to attract players and others. We will constantly work with that during the quarter and earlier as well.
Okay. Thank you.
And our next question comes from the line of Rasmus Inberg from Handelsbanken. Please go ahead. Your line is open.
Yes, hi. Good morning. Congratulations on another great set
of numbers. I was wondering a little bit about your dual play or your ambition to grow with offline casinos. 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. Then not to say if it's kind of 9 or 5 or 15, I can't comment on that. But in the not in the same period, we need to report that technically, yes.
And is that is it
I guess that given that it's so small, is that probably growing faster than the online, the traditional online business? Is that correct as I'm sure?
I would see I would rather see the dual players, spearhead, into the NAND base and the coming bridge from the land based players into online. So 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. And that's why we work that hard with it at the moment and creating that strategic bridge.
All right. And then
just a final question. In your mind, the expansion to Georgia, does that have an impact on your anticipated profitability as you ramp that up next
year? We will name the Georgian studio the best ever studio we made. It will be high quality, fantastic studio, and I look so much forward to it. And we don't do it to lower the cost. No.
But 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 all you're saying maybe? A bit early to comment on that.
All right. Okay. Thank you.
Thank you.
And 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 Q1. Thank you very much. Thank you.
And this now concludes the conference call. Thank you all for attending. You may now disconnect your line.