Thank you for standing by, and welcome to the Codere Online third quarter 2023 financial results call. I would now like to welcome Guillermo Lancha, Head of Investor Relations, to begin the call. Guillermo, please go ahead.
Thanks, operator, and welcome everyone to Codere Online's earnings call for the third quarter of 2023. Today, you will hear from our CEO, Aviv Sher, and CFO, Oscar Iglesias. Our Executive Vice Chairman, Moshe Edree, will also join us in the Q&A section. Before turning the call over to Aviv, I'd like to remind everyone that during this call, we will be referring to a presentation we uploaded to our website earlier today, which includes non-GAAP financial metrics such as Net Gaming Revenue or adjusted EBITDA, for which you can find reconciliations in the appendix of the presentation. Let me also remind you that our accounting information is prepared under IFRS accounting standards, and that throughout this presentation, all monetary figures will be in Euro, unless expressed otherwise.
Finally, please note that a replay and transcript of this call will be available on our website at codereonline.com, where you can also sign up for our investor email alerts. With that, I will go ahead and pass the call on to Aviv.
Thanks, Guillermo, and thanks, everyone, for joining the call today. I'm thrilled to be sharing our third quarter 2023 earnings and dive into yet another record-setting quarter for our company. During this quarter, we continued to focus on enhancing both our sport and casino product offering and providing our customer the best experience, enabling us to once again surpass expectations. But we are not stopping here and remain fully focused on sustaining, if not improving, upon this momentum, especially now that we have a clear line of sight to becoming a profitable company next year.
Jumping into the highlights of the third quarter of 2023, on page 7, we delivered EUR 43 million in net gaming revenue, a 41% growth versus the prior year quarter, despite a lower than usual sector-wide sports betting margin toward the end of the quarter, which at least for us, was partially offset by higher level of amounts wagered by our customers. In the quarter, we also continued to see further increase in the contribution from the casino segment, which accounted for 58% of our net gaming revenue this quarter. This growth was driven by both our recent effort to acquire more casino-first players and continue to focus on managing our existing portfolio of casino customers, together with the usual seasonal slowdown in sports during the quarter.
The growth in net gaming revenue was driven by a 19% increase in our active customers to nearly 124,000, together with a significant 19% increase in average monthly spend per customer to 116 EUR. Mexico drove most of the increase in active customer, with 38% more than in the third quarter of 2022. In terms of customer acquisitions, first-time deposits declined by 20% versus last year, with 69,000 in the quarter. This decrease was driven by substantial decline both in Colombia and in Argentina. But as we have discussed with you in the past, this is a result of our decision to prioritize investment in our core Spanish and Mexican markets, which combined, contributed 11,000 FTDs more than in Q3 last year.
Beyond the impressive top-line growth, we continue to see very attractive return on investment across the markets. In terms of CPA, we had a blended EUR 200 CPA per player, flat versus the prior year quarter and largely consistent with our average cost since 2022. Perhaps what is most relevant about this set of earnings is that everything that we have done and continue to do is coming together in a way that will allow us to continue delivering on the plan we set out almost two years ago. Also, this quarter, we are posting for the first time since going public, break-even adjusted EBITDA, compared with negative EUR 13 million we had last year. With these results, we take yet another meaningful step in our path to profitability.
With this, I will now turn the call over to Oscar to gather the financial highlights of this quarter.
Thanks, Aviv. Before diving into the numbers for the quarter, I wanted to remind everyone that, as we anticipated in our call last quarter, we are now reflecting on a pro forma basis, the impact from the non-deductible value-added taxes in Colombia, which have resulted in a reduction in the reported Adjusted EBITDA for 2022 of approximately EUR 1 million. Turning now to the financial performance, consolidated net gaming revenue grew 41% to over EUR 43 million in the third quarter, driven primarily by our Mexican business, which grew by an impressive 63% to EUR 21 million, together with an equally impressive 27% growth in Spain to nearly EUR 19 million. And with these results, Mexico has now firmly established it, established itself as our largest business by revenue.
Adjusted EBITDA was break-even in the third quarter and included a record high quarterly contribution of EUR 8 million from Spain, 71% more than in Q3 last year. Mexico also showed a meaningful improvement with an adjusted EBITDA loss of EUR 2.6 million, versus the negative EUR 8.1 million in the prior year period. Colombia and the rest of the markets also reduced their losses materially on the back of the reduced level of investment, as commented earlier. All in all, this break-even adjusted EBITDA represents a EUR 13 million improvement versus the prior year quarter, and reflects the significant progress we are making in furtherance of our sustainable growth objective.
Looking now at our P&L on page 10, the EUR 13 million improvement in adjusted EBITDA in the quarter was driven by the combination of significant growth in net gaming revenue, together with a nearly EUR 5 million reduction of marketing investment in the quarter, along with the slower growth in certain other operating expenses as compared to the growth in revenue. Turning to the Spanish operating and financial metrics, net gaming revenue in the third quarter increased 27% versus the prior year, driven by a 17% increase in the number of active customers and a 9% increase in spend per active, on the back of a strong casino business, which accounted for 55% of our revenue in the quarter.
In Mexico, net gaming revenue reached EUR 21 million in the third quarter, ahead of Spain for the second consecutive quarter, and an increase of 63% year-over-year and 17% sequentially. This strong performance was driven by a 38% increase in the number of active customers and an 18% higher spend per active customer. Moving to Colombia, net gaming revenue remained around the EUR 2 million mark in the third quarter. We continue to focus our efforts in Colombia on improving both the quality of our customer acquisitions and our portfolio of active customers, without deploying significant marketing investment. Turning to the balance sheet, as of September 30, we had EUR 43 million of total cash on the balance sheet, of which approximately EUR 37 million was available.
In terms of our net working capital position, we ended the quarter with negative net EUR 19 million, or around 12% of our last 12-month net gaming revenue, which we believe reflects a normalized level of working capital for this business. On page 16, you have our cash flow statement for the first 9 months, together with further details regarding the variation in net working capital. In the first 9 months of 2023, we have utilized, in total, approximately EUR 10 million of available cash, and the year-to-date FX impact on cash balances has reduced our position in euro terms by EUR 1 million. Turning now to our 2023 outlook on page 18, we are increasing the net gaming revenue and adjusted EBITDA guidance we provided in August when we reported Q2 earnings.
We now expect to generate between EUR 155 million and EUR 165 million in net gaming revenue, which reflects a 10% improvement in our guidance at the mid versus the initial 2023 outlook we provided in February. For Adjusted EBITDA, we now expect a range of EUR -10 million to EUR 18 million, and otherwise continue to expect that we will be Adjusted EBITDA and cash flow positive for the full year in 2024. In regards to specific net gaming revenue and Adjusted EBITDA guidance for 2024, we will be providing that information when we report Q4 earnings in February. That's all from my end. I will now hand it back over to Aviv for closing remarks.
Thanks, Oscar. Before we turn to Q&A, I would like to thank the Codere Online team for their hard work and unwavering commitment to the business. I would also like to send, on behalf of our company, and of course by myself, our support and gratitude to our colleagues in Israel who are working under extremely difficult conditions, and especially to our four employees who have been called up to military duty. As always, thanks to the analysts, investors, and other participants for your interest in Codere Online. We look forward to speaking with you again soon. With that said, we'll turn it back to the operator to open up the call to Q&A.
At this time, I'd like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile any questions. Again, if you'd like to ask a question, please press star one on your telephone keypad now. Our first question comes from the line of Pat McCann with Noble Capital Markets. Please go ahead.
Hey, guys. Congrats on the quarter. A couple of questions here. You know, first of all, just looking at the detailed figures you released for EBITDA, you know, it appears there was a bit of a drop-off in the distributed slash headquarters operating expenses, and, you know, that had an important impact on EBITDA being breakeven for the quarter. So I was wondering if you could just help me understand the components of that, and why that the loss associated with that line item was down so significantly in Q3?
Hi, Pat. Are you referring specifically to the quarter, the EUR 600,000 below the prior year period? Or some other figure? I imagine you're on slide 9, the segment reporting distributed B2B and HQ OpEx, or are you referring to something else?
Yes, that's correct.
Yeah, look, I think that increasing over time where we can, and I think this is something that since we lease back, we've been looking at any undistributed expenses that over time we have the ability to identify specifically to what B2C units they relate to. We seek to push that into the business units themselves. So I can't give you a specific answer on that EUR 500,000 improvement versus the prior year quarter, but generally, that's what would be the case, is that we are increasingly able to have that reflected otherwise in the B2C, in the segment-level Adjusted EBITDA figures.
Gotcha. Okay. And then with Spain, you know, you mentioned that, you know, the increase in spend per active as well as active users, contributing to the strong performance. I'm just wondering if... Do you have a sense on the factors driving that strong performance in Spain? And has it changed your expectations for Spain, given the restrictions? I'm just trying to understand.
Mm-hmm
The situation there with how Spain seems to continue to grow and contribute meaningfully to the overall business.
Aviv, do you wanna jump in?
Yeah, I will take it. So a few things around this question. First of all, we saw, 'cause the regulator is publishing the numbers, that organically the market is growing double figures quarter-on-quarter and year-on-year. So organically, there is a growth in the online betting business, and we are enjoying this organic growth as well, because I think we are strongly positioned with our brand, whether it's in the street or that we are operating with for the last few years. Plus, we are all the time improving our platform, the stability and the offering, mainly on the casino part where we see the growth. So I think those two things are the ones that are driving a higher spend per customer.
Maybe the third thing that's worth mentioning is because of the regulation and the harsh conditions on the market, maybe, it's just an assumption, some of the small to medium level companies are pulling out, and we are enjoying more activity with our current players 'cause they, they are not playing in other places. But this is just an assumption. The first two parts that I mentioned, whether it's organic growth or improvement to the products, I think those for sure are driving the highest interactive.
Great. Thank you. I'll, I'll pass it on to others.
Great. Thanks, Pat.
Our next question comes from the line of Jeff Stantial with Stifel. Please go ahead.
Hey, good morning, Aviv, Oscar. Thanks for taking our questions. Maybe starting off here on guidance revisions, looks like the midpoint implies about EUR 38 million for Q4 NGR, translating to about EUR 6 million in Adjusted EBITDA losses. That does imply some moderation quarter-on-quarter, whereas I believe the sports calendar tends to favor Q4.
Yeah.
So Oscar, could you just provide some color there? And then this might be included in your answer, but EBITDA margins for the Spanish business were well over 40% in the quarter. Were there any one-time benefits bolstering this, or is this just kind of purely a function of.
Yeah
Of mix? Thanks.
Yeah, on the let's say directional guidance for Q4, as you know, and not just last year because of the World Cup, I think Q4 is typically a quarter where we take advantage of opportunities to spend a little bit more than let's say the run rate throughout the year, in addition to it being a strong quarter from a sports standpoint. So I think that'll be the same this year. In the first nine months, I think we've been spending just shy of EUR 20 million per quarter. I think going into Q4, we'll probably spend a little bit more than that.
I think our overall objective this year, without giving kind of a specific guide for numbers, is to bring total marketing spend to something like 50% of total NGR. So I think we're on track to do that, but we will be spending a little bit more than usual in the Q4, which will be generating part of what you're seeing in the adjusted EBITDA guide, given the 7.6 that we have in the nine-month period. So I think that's principally the reason for the range that we're giving on the adjusted EBITDA front, and a little bit of conservatism, given that, yeah, we're 45 days in, but there's still 45 important trading days here to go in the quarter.
In terms of the EBITDA margin in Spain, Jeff, as you know, given that we have our business domiciled in Melilla, we benefit from some favorable tax rates, not just on the gaming tax front, but also in terms of VAT, corporate income, and the rest. So, what you're really seeing is the benefit of two things: one, that relatively low, I think on an effective basis, including some upfronts, we paid something like 12%-13% on NGR that we pay in gaming taxes. Plus some of the operating leverage that we have in different parts of the business platform and other parts of the business.
So when we went out to the market before, you know, before we actually listed, we had kind of a long-term blended objective, given the mix that we considered at that time of something like a 25%. But obviously, Spain, given the lower tax rate, is obviously at a higher kind of target EBITDA margin. So I think there's... There were no real non-recurring items in the quarter other than, you know, good trading results, good performance on both sides of the business, both sports and casino. Notwithstanding some of the weakness we had on sports margin, especially there in September.
So the business is performing well for all the reasons Aviv mentioned, and it's one that that we're focused on, which it's it's no longer our top market by by revenue, but by value, obviously, it is. So it's one that we're very focused on together with Mexico.
Great. That's helpful and encouraging. Thanks, Oscar. Then maybe sticking it with the Spanish business-
Mm-hmm.
for our follow-up. I believe there's a draft proposal for some potential incremental deposit limits for iCasino, as well as potentially some restrictions for operators who are not domiciled in Europe. Can you just update us on these latest changes being considered? Any thoughts on sort of probability, and if this comes to fruition, how you see potential impact to your business, whether, you know, positive or negative?
Aviv?
Of course, any more regulation, we see it as a mostly as negative influence. What we are aware of is some restrictions that will come to time sessions over the Roulette and the Blackjack, which didn't exist before. Other than that, the royal decree is still not published, and we are still waiting to see how they are going to manage or they are going to impose those new things that they are thinking about. They still have technological barriers that they need to pass, and creating some kind of a central platform and so on. We don't see it coming in the, I think, the next year, but for sure there are discussions that will make the environment more hostile for the regulated business.
Of course, we always say that over-regulation push the players to go to play in the black market, and eventually the country is losing tax over that and control over the players. So in terms of position, we think it might have some impact. So far, all the regulations and all the barriers that they put, we didn't see this impact. We are not sure that in the coming year we will see any impact based on that. We do have a lot of technological work around that, and being able to cater all those requirements takes a great effort, but I think we will be able to do so.
Okay, great. Thank you. Thanks for that, Aviv. And if I could just squeeze in a couple more here and shift gears over to Mexico. It appears your largest competitor there is currently in a legal dispute with their technology provider, who is also coincidentally your provider for that market. Just curious if you're seeing any sort of market share spillover as a result of this or if not, if there is potentially a medium-term opportunity here?
No, we are not dealing with this dispute. We saw on the newspaper what the dispute is about. We don't believe we are seeing our business growing, whether it's a spillover from our competitors or an organic growth of the market. It's hard for us to say, 'cause we see their results and they are also growing significantly. So for our position, I think we are increasing the market share, but I'm not sure that it's on the expense of our competitors. Regarding the dispute that they have with their platform provider, we have nothing to do with that, or we have no info more than what you have in the news. It doesn't affect any of our business or their business.
It's just, some kind of a dispute that they want to solve, in court for some reason.
Okay, great. Understood. That's, that's helpful. Thank you. Then, one more, if I may: Could you just provide an update on the planned Mendoza launch, as well as the path to a potential province-wide license for Buenos Aires?
Yeah. Yeah, look, on in terms of the province of Buenos Aires, consistent with what we said in the past, we're still actively pursuing a license to launch and operate in the province. Nothing to report today. In Mendoza, as you know, we've been awarded a license, are not yet up and running, but expect to be, I would say, operating in the front half of next year. So it's taking us a little bit more time than we would have initially expected, especially given some of the other priorities we have related to some of the things you mentioned in terms of regulation in Spain and other platform technology priorities that we've had in other parts of our business.
We have a deal, a team working on that and expect to be up and operating here relatively shortly.
Great. Thanks very much, Aviv, Oscar. Nice quarter, guys.
Thanks, Jeff.
Our next question comes from the line of Arthur Roulac with Three Court . Please go ahead.
Hi, guys. Thank you for taking my question. Can you maybe pull back a little bit from the details and look a little bit further out? You know, we're two years of being a public company, and it looks like the company should flip to Free Cash Flow positive next year, and probably somewhat meaningful relative to market cap. What are the uses of Free Cash Flow going forward? Or what are you guys thinking about at the board level in terms of what you may use that for?
Mm-hmm. Moshe, Aviv, do you guys want to tackle this, or do you want me to?
In terms of cash flow, given the good results we are achieving both in Spain and Mexico, I expect our plan to be continue to investing any excess cash that we generate next year in marketing spend in these markets. So basically, we continue our focus in those two markets. We see good ROI on the investment in marketing that we are doing there. We are able to maintain or even grow our market share there. So basically, we want to continue on that momentum and continue to grow our revenues and our market share in those markets. So any Free Cash Flow will be used for that. This is mainly the plan.
Well, if you use all your free cash flow to reinvest in the business, you'd have no free cash flow. So if you're EBITDA positive, that means you're producing cash flow, which is moving to the balance sheet, and that in turn, would start building on the balance sheet over time, unless you're gonna reinvest 100% of, in theory, what you make driving the business to EBITDA neutral, which I know is not the case. So I'll, I'll ask again, and really, it, it's around the fact that you have a stock price that's trading at $3. You know, you'll have, perhaps more cash than market cap on the company in the next 12 months.
Is there, I guess, a thought about the valuation, and have you guys at the board level looked at and said, "Hey, we have a, probably the least expensive online gaming business here that has a potential to be materially EBITDA positive and free cash flow positive. What are we gonna do with that free cash flow, and what are our views about where the public equity is, right? It's not a private business. There's a public equity outstanding.
Yeah, Art, just if I can chime in, I think... Look, I think we all agree that the share price at $3 a share is undervalued. But I think our view as a management team, the discussions we're having in at the board level, I think there's broad consensus that the best use of cash going forward is, given the opportunities, given the strength we're seeing in these two core markets, to continue investing into that strength and building on that momentum. So we think that directionally, next year, I think you'll see similar levels of marketing investment that we had this year. But obviously, as we continue growing top line, that is actually decreasing from a percentage of sales standpoint.
So if this year was something like 50% of NGR in terms of total marketing spend, that will continue. Our plan is to have that continue to tend down to a more normalized level, setting aside any expansion markets that may emerge in the future that may be of interest to us. So I think on a relative basis, the level of investment will decline. You'll see that, that you've seen that this year. We talked about this late last year, the decision we took to lift our foot, sustainable growth. I don't think anything has changed there, but I think we are finding that balance, given that at least versus internal expectations, the business is, is, is performing better.
We're in a better position than where we thought we would be at the beginning of the year here, 11, you know, almost 11 months in. And given the opportunities we're seeing, the unit economics, and especially the strength and the relative pocket of strength that we're seeing on the casino side of the business, we think the best use of cash right now, always being mindful that we're gonna maintain a prudent level of minimum cash on the balance sheet, in case things go wrong going forward. But the best use of cash right now is investing in Spain and Mexico.
Thank you.
Thanks, Art.
Again, the floor is now open for your questions. To ask a question at this time, please press star one on your telephone keypad. There are no further questions at this time. I would now like to turn the call over to Guillermo Lancha for closing remarks.
Thank you. So there are no further questions on the webcast either, so we can leave it here. As always, feel free to reach out to the team if you want to follow up on any questions or topics. If not, we will be speaking again at the end of February with our full year 2023 results. Thank you, everybody, for connecting.
I'd like to thank our speakers for today's presentation, and thank you all for joining us. This now concludes today's call, and you may now disconnect.