Welcome to the Raketech Q3 2022 report presentation. For the first part of the call, the participants will be in listen-only mode. During the questions and answer session, participants are able to ask questions by dialing star five on their telephone keypad. Now, I will hand the conference over to CEO Oskar Mühlbach and CFO Måns Svalborn. Please go ahead.
Good morning and welcome to Raketech's Q3 report for 2022. My name is Oskar Mühlbach. I'm the Group CEO. With me as always is also Måns Svalborn, our Group CFO. As you can see here on your left, we have three topics on the agenda today before we open up for questions. Once again, warm welcome, and let's get started, and that's on the next slide. On this slide, we have, as always, selected financial highlights starting off, however, with some high-level reflections. We noticed that activity, just as expected, picked up during the quarter, and that the positive momentum from Q2 was carried over nicely. This resulted in stronger KPIs and financial metrics across the board, spanning from revenue margin, organic growth to profitability.
Starting off with perhaps the most important one of these, the blue number in the top left box, revenues amounted to EUR 13 million, which is 35% more than last year and 15% more than previous quarter. Considering the positive momentum we had coming out of Q2, and thanks to seasonality, we projected growth quarter-over-quarter. I'm therefore happy to be able to conclude that we did manage to deliver on these projections. The year-over-year increase is driven primarily by two factors, acquisitions and solid organic growth from primarily Sub-affiliation as well as affiliation in rest of the world. Organic growth was 14.2%, which is the blue number highlighted in the bottom left box.
Considering last year's comparison contains full Finland and Dutch numbers as well as a generally COVID-boosted digital activity last year, I'm very pleased with this 14.2% organic growth. In our last presentation, we projected our EBITDA margin to increase during Q3, which it also did. Quarter-over-quarter, EBITDA margin grew with 27%, totaling EUR 4.8 million. This is the number in the top right box. Our EPS grew to EUR 0.05 per share, which is sixty-seven percent higher than last quarter and 6.2% higher than last year. Looking ahead, we have had a good start to Q4 with October revenues amounting to EUR 5 million, which is a new record for us in a single month.
We still see strong organic performance on core affiliate assets, and we have more clients lining up to be onboarded onto the AffiliationCloud than we currently have capacity to handle, which is why we've also decided to increase investments into this further to maximize the opportunity as early as we can. In general, Q4 looks exciting with the FIFA World Cup coming up as well as the casino peak season. We can move on to the next slide. Here are operational highlights, and this slide is highlighting our three main business areas. Affiliate marketing, on your left, is our bread and butter. This area is typically made up from various consumer-facing assets, such as Slotjava, and TV Sports Guide.
We attract users by offering them comparisons, quality ratings, or aggregated sports data, and if they click on any of our promotional links and later convert to a casino or sportsbook customer, the operators pay us a finder's fee. This business area is very high in margin and the very core of what we do. During Q3, we grew affiliation marketing by 18% year-over-year, thanks to continually strong organic momentum. With organic momentum, I'm referring to the fact that we have seen good results on search engine rankings lately, which is key for us and its segment. We are growing faster on fast-growing markets and actually slower on more mature markets, meaning growth in the rest of the world was leading our way during Q3.
During the quarter, we handed over the operational responsibility Slotjava from the Slotjava team, which we acquired last year, to our central team. On the same topic, we have a full dream team in place to take over the CasinoFeber asset once this earn-out ends in February next year. If we quickly also look at the yellow section in the middle representing our Sub-affiliation business area, one can see that during Q3, this was our fastest-growing area. Sub-affiliation is simply put when we help other affiliates and operators to maximize their businesses by allowing them to use our proprietary infrastructure. They do this either through AffiliationCloud or through what we call Raketech Network. The cloud is used primarily by organic affiliates, much like our own products, and the network is used primarily for specific campaigns with traffic often coming from paid or social media.
Margins within this area are naturally lower than affiliate marketing, but the risk is also significantly lower as we don't invest into products or assets. As from now, we will not report AffiliationCloud and Network separately every quarter due to competitive reasons. However, I can tell you that the AffiliationCloud, by the end of Q3, had 20 clients and more in the queue to be connected. Also, SBC awarded us with the Product Innovation of the Year award for 2022, which is telling me we might be onto something here. On your far right in the blue section, you can see our third business area, which is betting tips and advice. Currently, this is something we only offer in the U.S. and something we did not have before last year's U.S. acquisitions.
In a nutshell, we offer predictions on games to the U.S. audience, and we charge subscription fees, one-offs, and we get bonused when predictions are right, which we call win share. This business area is very much driven by seasonality, but due to the win share component, also a bit volatile. So far this year, we have seen great progress in terms of organic visibility, traffic numbers, user engagement, et cetera, but unfortunately, the win share results are somewhat okay, but not more than that. As I mentioned on the previous slide, we do have most of the sports season ahead of us, so I have high hopes and expectations on this area for Q4 and Q1 of next year. Long-term, we want to monetize further on these great assets by adding more affiliation revenues to reduce volatility and increase growth. Next slide, please.
Before we move on, I wanted to also quickly revisit what I presented last time, which was this slide with the expected growth drivers for H2, which is Q3 and Q4 of this year. This slide is essentially unchanged since last time. However, I've added green tick boxes to showcase the fact that so far our expectations on the second half of the year seem to be reasonably right. We did and still do expect sports to add to our growth for this specific time, considering the U.S. sports season is peaking, and in addition, we have the FIFA World Cup in Qatar. We have already seen activity pick up and interest from operators maximizing the opportunity is comforting. We do, however, still have most of the sports boost ahead of us, which is also exciting.
Secondly, our currently strong organic momentum and the AffiliationCloud as well as last year's acquisitions being with us for 12 months now, we anticipate organic growth to continue to be strong. I do, however, want to point out that, and this is the blue text in the bottom of the middle box, that we are experiencing somewhat capacity constraints, meaning that we currently cannot onboard as many partners as we would have hoped simply due to lack of resources and minor technical development still waiting to be finalized. We're doing everything we can to speed this up, of course, and working intensively to accelerate this opportunity as quickly as possible. Finally, with a quite fixed cost base, we should naturally also see an increase in EBITDA during Q4, just like we did in Q3.
Depending on which business area and which market that grows the most during Q4, it is difficult to assess exactly how much this effect will be. We can move to the next slide. Looking even further than this year, here's a slide on where I see that our best chances of creating value are. As you might remember from a few years back, we had something similar, but that time expressed as operational strategic goals. In short, they focused on ensuring Raketech established a solid global footprint, reduced its dependency of the Nordic markets, widened its product portfolio, and better balanced the mix between sports and casino-related revenues. For those who have followed us, you might also recall that we managed to deliver all of these goals even quicker than we first anticipated.
With that said, I believe we have a solid strategic position, and additionally, our finances are in order. Our net debt to EBITDA ratio is among the, if not the lowest in our industry, and our operational cash flow is expected to significantly increase soon, thanks to the CasinoFeber earn-out finally coming to an end. With that said, it's time for us to explain how we think we can best capitalize on this solid financial and strategic position. In short, we have three areas where we believe we could make an impact. The first one to your left is our flagship assets, and with flagship, I mean products that are of significant size, have solid and high margins, and a good strategic fit. The affiliate industry has been moving more and more and will be moving even more towards high-quality end-user products.
With our position, our talented organization, and 10+ years of industry experience, we believe that we have what it takes to increase the distance to competition even further by concentrating efforts towards our largest products more than we've done historically. Concretely, this means that we will be dedicating more and more highly skilled resources towards these products. We will also use the central team to focus more on developing new and unique features and functions, conquer new markets, and potentially market these products if it fits in paid channels. The second area in which I project growth to come from in the future is, of course, affiliation in the U.S.
The market in itself is projected to grow with somewhat 25% year-over-year in the coming years, and we have great products that are right in the center of the target audience for the U.S. iGaming Operators as our products today target U.S. tipsters. We have had this product in the group less than a year, and I've therefore not yet seen the full potential of what we potentially could generate in terms of affiliate revenues, but I'm confident we'll be able to deliver this within the coming years. Therefore, we are planning to increase resources and investments here and also create a tighter collaboration between our central affiliate team and the local U.S. tipster team. For reference, our tipster assets in the U.S. alone had 2 million unique users in the month of September. Finally, to your very right in this slide, we have AffiliationCloud.
This is the unique SaaS solution that helps operators and affiliates maximize their respective business by reducing admin, providing valuable insights, and great commercials. The interest so far has been great, and I'm looking forward to accelerating growth within this area already next year and the years to come. With those words, over to Måns and the Q3 financials in detail.
Yes. Thank you, Oskar. As suspected, we saw revenues increase sequentially in Q3, and we are with EUR 13 million at an all-time high for the group. Starting with affiliation marketing, revenues are up with 6% from Q2, which is an expected development through seasonality, but also performance related as a number of assets saw positive development following the recent Google updates. Sweden is standing out positively. Casumba continues to outgrow the market, and some of our smaller assets in LATAM are seeing positive results. Sub-affiliation has increased significantly in Q3. There is an increased activity within network sales, but we've also seen added revenues through the launch of AffiliationCloud. Our U.S.-focused betting tips and subscription services accounted for 10% of total revenues in Q3.
As Oskar pointed out, we are seeing activity pick up towards the latter half of September with the start of NFL, and there is good momentum in both traffic and leads. As we mentioned, the start of the season is so far somewhat below expectation with regards to win share based on predictions. The table on the right-hand side of the slide provides a brief product overview. Affiliate marketing is by far our most profitable product. We expect this side of the business to maintain high margins of between 60%-80% and scale as performance improves. Sub-affiliation with a significant growth in Q3 and with direct costs correlating directly with revenues, the margin is expected to remain stable between 10%-20%.
Lastly, betting tips and subscription is, as we pointed out throughout the year, very dependent and correlated with the U.S. sports season. This area has a mix of direct and indirect costs, and as such, the EBITDA margin will fluctuate in line with activity. During the off-season, the margin can go as low as around 5% and then peak at around 40% during high season. However, with an expected yearly average of about 30%. This mix of products and the fact that the share of revenues vary between the periods leads to more volatility between the quarters with regards to our EBITDA margin. The mix of products is, however, something we believe is strategically important and leads to a better risk profile for the group, as well as a better positioning for the group to ensure further growth.
We can go to the next one. This slide illustrate our revenue diversification split on regions. Nordics took a jump in Q3, driven to some extent by Sweden through improved performance from affiliation marketing assets, as well as seasonality effects. Nordics were also impacted by added revenues through AffiliationCloud, which has so far been concentrated primarily to the Nordics. Finland, as we highlighted, as decreasing in Q1, has remained stable throughout the quarter compared to Q2. Rest of World grew with 13% from Q2 through Casumba, increased activity within Sub-affiliation, and also some positive growth from LATAM, which is still small but showing potential. U.S., as we mentioned, started to see an increase in activity in the end of September, but again, it's somewhat short of expectation with regards to win share based on predictions for subscriptions. The next one.
With regards to our vertical split, sports revenues represent 25% of total revenues in Q3, which corresponds to a growth of more than 100% from last year, driven primarily by the U.S.-focused sports assets we acquired at the end of 2021. Compared to Q2, there's a decline of 9%, which relates to a shift of efforts within Sub-affiliation from sports to casino revenues. This was to some extent offset by an increase in U.S. sports, and as we enter Q4, we expect this to grow, and we consider the increase in total share of sports revenues that we've seen so far in 2022 to be an important strategic milestone for us. Casino revenues came in at 75% of total revenues for the quarter, driven by improved performance on affiliate marketing assets as well as seasonality.
Additionally, there was an increase in casino revenues relating to Sub-affiliation. The next one. The slight decrease in NDCs year-over-year relates to a shift in markets with a growth tilted slightly more towards high-value leads. It's also an effect of us on all markets actively targeting brands and traffic that generate higher value ahead of a high number NDC count. Compared to Q2 of this year, we're up in NDCs, both within affiliation marketing as well as Sub-affiliation. Again, this is a combination of seasonality and performance. Next slide. EBITDA in absolute numbers have grown with close to 22% from Q2, and our EBITDA margin has increased from 35% to 37.1%. The growth, as we have highlighted, is an effect of increased revenues across all products.
Our predominantly fixed cost base consisting of employee costs and operating costs are stable in the quarter, and very much in line with what I covered earlier is that an increase in Sub-affiliation drives direct costs with a margin of around 10%-20%, as you can see in the slide. As this area increase as a share of total revenues, it leads to an increase in EBITDA, but has somewhat a dampening effect on the group's combined EBITDA margin. As an opposite effect, the fact that our other costs are scalable means that when an increase in our high margin assets within affiliate marketing has a positive effect on our margin.
As we enter Q4 with expected further growth within affiliate marketing and improved margins with better performance from our betting tips and subscription area, we expect the margin to improve even more, and for the full year, we are targeting a margin of just slightly below 40%. As I've highlighted, it depends a little bit on how the product mix develops. Next slide. The largest items below EBITDA are depreciation and amortization on intangible assets, other finance costs, which represent the discounted value of our outstanding earnout liabilities. Important to note is that these items are non-cash items, which is why cash conversion remains close to our EBITDA, which we can see in the next slide. As I mentioned, we continue to see high operational cash flow. Cash conversion was close to 90%.
This quarter, the cash flow is somewhat impacted by a timing effect for trade receivables, which is expected to even out in the coming quarters. Earnout payments of EUR 1.1 million relate to CasinoFeber, which is an earnout that comes to an end towards February of next year. As from that point, we expect net cash flow to improve significantly. As a last point, we have capitalized some costs relating to the development of AffiliationCloud of about EUR 0.2 million. Back to you, Oskar.
Thank you, Måns. It's time to wrap things up. Let's start with the financials. Q3 revenues totaled EUR 13 million, equivalent to an annual growth of 35%. We grew organically with 14.2%, which considering tough comparison numbers and changed regulations in Finland and the Netherlands is strong. EBITDA amounted to EUR 4.8 million, corresponding to a margin of 37.1%. With regards to milestones, our U.S. revenue share of total amounted to 11.5%, and Nordics amounted to 49% of group total. Finally, sports came in at 25% of total. Looking ahead, Q4 is, as expected, off to a good start with revenues totaling EUR 5 million in October. We do expect Q4 to continue to be strong, thanks to the casino peak season, but also the FIFA World Cup.
I want to point out, however, that having the World Cup in November is an untried concept and difficult to, with certainty, predict the effects from. Furthermore, this is our first year with significant U.S. revenues, and we are also humble to the fact that we don't have multiple years of experience predicting the seasonal effects just yet. With that said, we predict our revenues to come in comfortably within our full year guidance, but depending on which market and which product that grows the most, EBITDA margin for the full year will most likely land slightly under 40%.
Through continued growth and a strong margin with high cash generation, I'm happy to be able to continue to invest in the strategically important U.S. market, our flagship assets, as well as the AffiliationCloud, which we feel confident will enable Raketech to continue to grow. With those words, we are now ready for questions.
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Marlon Värnik from Nordea Markets. Please go ahead.
Yeah. Hi, good morning, Oskar and Måns, and thank you for your presentation. A few questions here. Maybe we can start on the AffiliationCloud. Seems to do pretty well, but how should we view this going into the seemingly strong Q4, but maybe more importantly, going into 2023 in terms of growth and profitability? If you can elaborate a bit further, it would be great. Thank you.
Yeah. Good morning, Marlon. Thank you for the question. We haven't guided specifically on the AffiliationCloud as such. We've said that we're aiming at EUR 10 million in revenues within two years from this business area. It is, however, picking up a little bit faster than we first anticipated, which is a positive problem. But we don't have a good guidance for the next year just yet, so we'll have to get back to you with that as soon as we have those projections ready.
Okay. Thank you. On back of the EBITDA margin cut here for 2022, is it solely due to the AffiliationCloud investments or what other things have impacted here?
Yeah. It's primarily the sort of mix of products. We came in slightly with a higher share of Sub-affiliation revenues. And apart from that, the other costs are actually quite stable. It's primarily the sort of mix of the products we had in the quarter, and that we're expecting to see in Q4 as well.
Yeah. Okay. Fair enough. Also on your 2022 outlook here, on revenue, but also a bit the margin, when you communicated your outlook earlier this year, what effects did you pencil in for the World Cup? Basically what do you expect here for the World Cup to impact for revenues?
Yeah. We haven't quantified that in the projections, but obviously there is a natural effect. One has to, however, also keep in mind that we have roughly 25%, or we had during Q3, 25% of our revenues coming in from sports. Obviously if it would've been a casino World Cup, it would've been impacting us more than a sports event. It is having a significant effect, but it's not as dramatic potentially as if it would've been casino. We haven't quantified the exact effect officially, but there is an effect baked into our own projections.
Yeah. Okay.
Perhaps important to note as well that the U.S., we're tilted obviously towards the U.S. sports and this, the World Cup is not as interesting for the U.S. consumer as it's structured as of now.
Yeah. Maybe finally for now, have you seen any indications of weakening consumer spending or any other KPIs you follow for activity for your business yet?
Yeah, that's an interesting one. We have been so far, knock on wood, fortunate enough not to see any major effects from that. We're of course humble to the fact that this might impact the gaming industry eventually, but so far we haven't really seen any effects from that. If you look at the gaming industry as such, it's also growth driven by the fact that there's a shift from offline to online. Exactly how this will play out in the long run, it's hard to predict, but we don't at this point see any major effects from those macro factors on our ability going forward.
Okay, great. That was all from me. Thank you.
Thank you.
The next question comes from Rikard Engberg from Erik Penser Bank. Please go ahead.
Morning, guys. My question is that I've noticed that some U.S. operators have seen a decreased customer acquisition cost lately. Have you observed this, and how will this affect you?
Good morning, Rikard. We've noticed what's been written as well about this. We haven't seen the dramatic effects that we read about that others have experienced so far. To simplify the answer, no, we haven't seen those effects as of yet.
Okay, cool. Is that related to income mix that you have, tips rather than CPA?
No, I was interpreting it as a question with regards to more of the CPA levels. That was excluding that. Obviously, due to the fact that we have a significant share of our revenues in the U.S. coming from tipsters, we would be less affected by changes in CPA levels on the U.S. market, as for now at least.
Okay. Thank you. That was all for me.
Thank you.
The next question comes from Marlon Värnik from Nordea Markets. Please go ahead.
Yeah. Hi, Oskar, Måns. Me again, Marlon here at Nordea. So just a few more questions here. The other cost post increased a bit here, Q- on- Q. I assume you are taking costs related to CasinoFeber here. Can you specify how much of the other costs is related to CasinoFeber? And also, how should we expect the effect here going to Q4 and maybe Q1 next year?
Yeah. You want me to take the first one, Oskar, perhaps?
Yeah.
You can elaborate a little bit on 2023. There is, there's a little bit of an impact and, not a lot in Q3. We're expecting a little bit more in Q4. The team that Oskar mentioned we brought on is obviously resources we've found internal, so they've been with us for a long time. Obviously us taking over operations and investing in the product will have a little bit of an impact. I don't see it being material for Q4, and then I'll hand over to Oskar on 2023 and the plans for next year.
Yeah. With that said, obviously CasinoFeber is one of our largest assets. It's very important for us, so we're gonna put enough effort into that product to make sure it grows even into the future, which means that we need to have enough resources and marketing money dedicated to that product. If you look at what's important to maybe keep in mind here is that because it's been run as an earnout, we haven't been able to keep all of the cash because that's how the earn-out is structured.
You would anticipate the future for CasinoFeber and isolated to be slightly lower in margin than it has before, but still on a very, very high margin at around 80%-90%, but with a significantly higher cash contribution. That will be the effect, and that will be more of a technical bookkeeping effect than anything else. Not sure if that was an answer enough for your question, Marlon.
Yeah, absolutely. Thank you, Oskar. Maybe just lastly, more generally here from my side, the Tipster business, I mean, it accelerated as expected from mid-September onwards in the U.S. Can you maybe walk us through a bit on the dynamics in tipster business? What's the sport split? What's the average length of contracts? And maybe also profitability compared to the rest of group. Any comments there would be great. Thank you.
It's partly subscription-based or fixed fee based. A tipster typically opts in for a full league or for a specific game. Those two types. I'd say that the subscription part where you stay with us for quite some time for an entire league or for two entire leagues is the most common one. There's also the component which we mentioned in the presentation, which is the win share. One of the unique offerings that we have in the U.S. is that we also price ourselves sometimes a bit lower in order to get the players in.
We get bonus basically on how well we are able to give them facts and predictions for the leagues and for the games. If we're doing well, we get bonused that. That is also a significant share of the US business, and that makes it a little bit volatile, just like a sportsbook margin, if you would be in an operator. It varies a little bit between the quarters depending on the outcomes of the games.
Yeah. On the sports split, I assume it's NFL is the bulk. How does it look?
Yes, yes, definitely. It's just like you would expect it to be in the U.S.
Okay, perfect. That's all from me. Thank you.
Thank you.
There are no more questions, so I hand back to the speakers for questions from webcast and closing remarks.
We actually do have two questions. One is relating to CasinoFeber and earn-out and impact on revenues and cost, and I believe we covered that through the question from Marlon Värnik from Nordea. The second one relates to if we are benefiting from any new states opening up in the U.S. in 2022 or 2023. If you have anything to add on that one, Oskar.
Yeah. Yes, obviously we like regulations in the U.S. because that means that states are targetable for our affiliation efforts. Obviously the more regulated states we see, the better it is. One need to remember that we're still not as big in the U.S., so for the group, it might not have a significant impact if one or two states open up. Obviously in the long-term perspective, it's super important that as many as possible of the states in the U.S. are open up for online gambling. There aren't any, to my knowledge at this point, major game changers in the short perspective. There was discussions about California, which seems to unfortunately go in the wrong direction, which would have been obviously a massive opportunity. I don't think the last word is said with regards to that. We'll just have to wait and see.
Yeah, I think that was it. We can go to closing remarks.
All right. Thank you for listening in today, and thank you for all the clever questions. We look forward to talking to you again in connection with the Q4 and 2022 report in February next year.