Better Collective A/S (BETCO) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2019 presentation. [Operator Instructions] I also must advise the conference is being recorded today. And I would now like to hand the conference over to your speaker today, Jesper Søgaard. Thank you. Please go ahead.

Thank you, and good morning. Welcome to Better Collective's webcast presentation in connection with Q4 and full year report covering the period January 1 to December 31, 2019, which we released today. My name is Jesper Søgaard, CEO and Co-Founder of the company. And with me today are CFO, Flemming Pedersen; and Head of IR, Christina Thomsen. I'm happy to share our Q4 report in 2019 with you. And in this presentation, we'll comment on the highlights from a very successful year. Please turn to Slide 2, where we display our disclaimer regarding any forward-looking statements in the presentation. I ask you to please pay attention to this. Please turn to Page 3. The agenda of the presentation is structured so that we we'll start with the presentation of the highlights for the full year. We'll walk you through the financials for both the quarter and full year 2019, including a recap of the framework of our financial targets, then we will continue with the business update. We will, as always, end the presentation with a Q&A session. Please turn to Page 4. In 2019, we have continued our focus on developing and maturing our branded websites with high-quality content and user experience. We want to bring value to our users and enhance the entertainment of betting, which is the driving factor for our product development and our strategy in general. We signed new media partnerships, hosted our first Bookmaker Awards show and expanded our business in the newly opened U.S. market. Through these initiatives, Better Collective has, in 2019, moved towards becoming a more broad-based sports media group working on a variety of platforms. Let me give a snapshot overview of the business performance and highlights of 2019, starting with the financial highlights for the full year. Please turn to Page 5. For the full year, we landed well in line with our financial targets with an annual growth of 67%, of which 26% was organic growth along with a high NDC growth of 66%. We even managed to absorb the newly acquired U.S. businesses and still meet our earnings target of more than 40% EBITDA margin. All this combined makes me very satisfied with this year's performance. Looking at the last 3 years' revenue development, Better Collective has grown with an annual average of 60%. We've managed to deliver high growth and maintaining a similar growth in operational earnings while still allowing room for investments in brands, products and new markets. Our business model allows for a high cash conversion with almost all of the operational earnings turning into cash. This was also the case in 2019. We added high value to our B2B customers by sending more than 431,000 new depositing customers, resulting in growth of 66%. Alongside sending new customers, Better Collective provides attractive and entertaining products that we know continues to be of inspiration to bettors, no matter when or where they have signed up with an online sports book, thereby creating long-term value for our customers. Please turn to Page 6. Other highlights from 2019 include our acquisitions in the U.S. and U.K. as well as our 2 media partnerships. We'll comment in more detail on the U.S. business and media partnerships later in this presentation. On the product side, we upgraded our flagship brand product, bettingexpert.com, and we made an investment in Mindway AI, who specializes in innovative and advanced software solutions for the identification of at-risk gambling and problem gambling behavior. We also cofounded RAiG, Responsible Affiliates in Gambling, in the U.K. We are happy to report that more affiliate companies have joined since, helping us promote social responsibility and a safer gambling environment for our users. In Q4 2019, we completed a directed share issue of 4 million new shares, raising cash proceeds to the company of EUR 30 million and restructured our bank financing. So all in all, a very satisfactory year where we took new big steps in building our business, while at the same time, delivering solid financial performance. Please turn to Page 7 and the word over to Flemming for more details on the financial performance.

Thanks, Jesper. Let's look at the financials for Q4 and the full year 2019. Please follow me to Page 4. Growth in Q4 was strong compared to the same quarter last year, which was expected as Q4 is normally a strong season quarter. However, we experienced some headwind due to very low average sports win margins. Still, we delivered the highest revenue and operational earnings in the company's history. Revenue grew by 61%, of which 24% was organic. Operational earnings grew by 32% with a reported 36% EBITA margin and a cash flow increase of 39%. We continue to deliver high numbers of NDCs, adding to our bank of players and laying the foundation for continued growth. In Q4, we sent more than 180,000 NDCs to our partners. This is a new company record and a 55% year-on-year growth. Please turn to Page 9. Zooming in on Q4 revenue, total revenue was EUR 19.6 million, which was 61% growth compared to the same period last year. The organic revenue growth was 24%. The total year-on-year growth in the quarter was affected upwards by the acquisitions in the U.S. and Sweden early in the year. Q4 saw a record high player activity in terms of gross wagering and value of deposits, i.e., on revenue share accounts, however, also with very low sports win margins reducing revenue and thereby also earnings by estimated EUR 2 million compared to a historic average margin. I'll come back with an overview of the sports wagering and the sports win margins in a few slides. Revenue share accounted for 60% of the revenue and 68% of player-related revenue with 18% coming from CPA; 11% from subscription sales in the U.S.; and 11% from other income. Revenue for the full year was EUR 67.5 million, with an implied growth of 67%, of which 26% was organic growth. We have decided to provide a trading update for the first month following the reporting quarter. January 2020, revenue ended with a total revenue of EUR 7.2 million with a total growth of 48%, of which 30% was organic growth. The sports win margin for the month was significantly above average. Please turn to Page 10. Looking at the earnings. Q4 EBITA was EUR 7.1 million before special items, resulting in an EBITDA margin of 36%, including an expected downwards impact of 4 percentage points from the newly acquired U.S. businesses. Excluding the impact from the U.S., the EBITA margin before special items was 40%. For the full year, EBITA before special items was EUR 27.2 million, a margin of 40%, equally with the downwards impact from the newly acquired U.S. businesses. Excluding the U.S. impact, the EBITA margin for the full year before special items was 43%. The cost base increased with the acquisitive growth and investments in new markets and technologies as well as new initiatives such as the new media partnerships. The effective tax rate for the full year is affected by certain costs not being tax deductible. And for Q4, the effective tax rate was 23.3%. Please turn to Page 11 and moving on to the cash flow and balance sheet. In Q4, operating cash flow before special items was EUR 7.5 million, resulting in a cash conversion of 96% and EUR 26.6 million for the full year with a conversion rate of 91%. Following several acquisitions since the IPO in 2018, the balance sheet was strengthened through a capital increase, providing cash proceeds of EUR 30 million. Cash and unused credit facilities stood at EUR 90 million by the end of the year. The strengthened balance sheet, combined with the higher cash flow from operations, provide significant room to further explore M&A opportunities. Please turn to Page 12. Coming back to revenue and growth, we again shared some our key -- internal key performance indicators, i.e. sports wagering here which is growth in the underlying betting volume on our revenue share accounts, where we also have added historical figures from the acquired companies and indexed them all to [ Index Handelsstaden ] in Q1 '13. The numbers are derived from accounts that were since more than 50% of the group revenue. As can be seen from the graph, the underlying betting volume in these revenue share-based accounts has increased significantly over time with a steep growth in recent quarters. That remain the attribute to the many indices that have been sent in 2018 and throughout 2019. Again, in Q4, we saw a continuation of the upgoing curve, which is very encouraging as this is a strong indicator for the increase of value in the player-related bases that have been built over the years. Please turn to Page #13. In addition to the betting volume, we are looking at the sport -- average sports win margin on revenue share accounts, i.e., what percentage is paid out on the volume. We have used the same indexing as in the graph shown before. And what can we see here is -- seen here is that the margins fluctuate over the quarters and that Q4 2019 was significantly below average at index 79, whereas the historical index number in the quarter shown is 93. Throughout 2019, there has been a significant increase in sports betting volume whereas sports win margins have been lower than average, especially in Q4 and -- Q1 and Q4. In January 2020, we saw sports win margin significantly above the average. In absolute terms, the revenue share income was negatively impacted by an estimated EUR 2 million due to the lower sports win margins in Q4 2019. And for the full year, the lower sports win margins has impacted revenue negatively by estimated EUR 3 million and thereby, also earnings. The volatility in sports win margin is something we knew has been transient, but it can, of course, affect short-term financial performance up and down -- up or downwards. Please turn to Page 14 and the word back to Jesper.

Thanks, Flemming. In connection with the IPO, the Board of Directors decided upon financial targets for the short/medium term as 2020 is the last year in the range of the financial targets which our average targets over the 3-year period, we have provided additional information for 2020 in isolation. For 2020, we expect double-digit organic growth and total growth of more than 30%. The operating margin, EBITA, for 2020 is expected to be more than 40% and net interest bearing debt to EBITA below 2.5. Please turn to Page 15. The business update, we've decided to provide focuses on some of the macro trends we are seeing in our industry and how we work with our business in this environment during 2019. Please turn to Page 16. Let's start with a look at what trends are driving our growth. The ongoing digitalization mean that users are moving from land-based to online betting. We have benefited from this trend for several years. Still in Europe, which is leading in the digitalization, only a little above half of sports betting is performed online. We expect more users in Europe and the rest of the world to grow online, continuing this trend for years to come. In line with increased digitalization and new products becoming available for betting, the use of mobile devices means that users can bet anytime and anywhere, and this also drives the in-game betting, which is currently on the rise. More markets are being regulated, and we welcome regulation as it adds visibility and a level playing field. Adapting regulation that allows online betting also limits black economies, provide national tax revenue and not least, provide the best possible environment for sound betting behavior. In general, we also see increased sports events and sports verticals become interesting for betting, which facilitates higher betting turnover. Please turn to Page 17. Connecting the trends to our strategy and product portfolio, we are developing products with focus on content and user experience, as we see this as providing both short-term value in search engine rankings and long-term sustainability in terms of brand value. We've also increased our focus on more and specific big sports events and have seen strong results in 2019 within sports like horseracing, M&A -- MMA and boxing. To meet user demands and in order to match new product development done by the online sports books, all our product development is done with mobile-first as premise. On the regulatory side, we took advantage of the changing regulation in the U.S., where we now have established a strong foothold through 2 acquisitions, namely the RotoGrinders Network and the Vegas Insider and Scores and Odds sites, respectively. We launched a new initiative to market our products first, establishing partnerships with classic media, currently counting The Daily Telegraph and the leading local sports media, NJ.com, in New Jersey. This provides us with additional channels to market, operate and manage customer contacts to the betting and casino operators. I'm very proud of Better Collective being the chosen partner of such prominent media brands. The ambition is to enter more of this type of agreements going forward. While still in the early stage, these partnerships may become an important part of our business in the future. However, we still need to establish proof-of-concept for this line of business. Please turn to Page 18. June 2019, we acquired 2 businesses in the U.S. It has been a firm goal of ours to establish a strong foothold in the U.S. market since the PASPA Act was repealed in May 2018. As you know, this was the most significant for us in 2019, I would like to give an update on how we see the development so far. By the end of the year, our U.S. operations increased in profitability after implementing new business models following the acquisitions. While we're still dependent on the state-by-state regulations, we believe we have strong brands and a solid platform for U.S. expansion as the market grows. The new U.S. business performed as expected, with an increasing operating profit in the second full quarter. I'm happy to report quarter-on-quarter revenue growth of 45%, partly explained by Q4 being high season. We expect all the U.S. assets to be fully transformed in the second half of 2020. Thus, we expect revenue growth and improved operational earnings margins in the U.S. business, while still at a lower level than the rest of the group until the market matures. Indiana and West Virginia, both in Q4 and after the end of Q4, we received license to operate in West Virginia. A number of states are currently subject to internal review and commercial analysis. As regulations, including tax licensing processes and player registration differs between the states, there are several factors impacting how Better Collective prioritizes its activities. The U.S. market for regulated online betting is still in its early start. However, we are excited of this new market opportunity. Please turn to Page 19. Recapping our growth story, we initiated the M&A strategy in 2017, resulting in 15 acquisitions this far. The IPO in 2018 was an important milestone in fueling the growth opportunities. And at the end of 2019, we raised additional capital to continue the growth track. We have several promising targets in our M&A pipeline for 2020 and beyond. And while I cannot share details with you on all of them, I would like to highlight that we are in advanced negotiations for the potential acquisition of 100% of the shares in an esport company for up to EUR 34 million. The target company's main business model is to promote and advertise sports betting operators, and we believe there will be strong synergistic effects between the 2 companies. The target company has demonstrated strong growth and has most recently disclosed annual revenue of approximately EUR 5 million and earnings before tax of more than EUR 3.5 million. During the coming periods, we'll negotiate the final purchase agreement and perform customary due diligence. Therefore, it cannot be guaranteed that the transaction will be completed. However, we assess that there's a likelihood that it can be completed in the first half of 2020. Please turn to Page 20. I'll finalize this presentation with a short summary of the development that Better Collective has gone through since we listed the company's shares on Nasdaq Stockholm mid-2018. We have expanded from all 13 local offices. We have almost doubled the number of employees, so we are now more than 400 employees. We've seen broad-based revenue growth, including significant organic growth. We have established significant presence in the U.S. through 2 acquisitions. We have started a media partnership division and signed 2 large partnerships. We have acquired companies and assets for more than EUR 125 million, bringing profitable growth and market expansion, plus a much more diversified customer base. We've met the financial targets we set at the IPO. And not least, we continue to see a very strong performance in bringing new business to our customers through strong NDC performance. In conclusion, I'm truly proud of the achievements, and I believe that 2020 will be yet a promising year, including the big soccer event, Euro 2020, the Olympics and many more exciting sports events. This concludes our webcast presentation for Q4 2019, and we will now open for questions from the audience. Thanks for listening in.

[Operator Instructions] Your first question comes from the line of Christian Hellman.

Guys, Just firstly, one very simple question. I just perhaps missed it. But you mentioned in the presentation that revenues were negative affected because of this positive margin in 2019, but was that EUR 3 million? Just so you could confirm that.

Yes. Yes, that's correct.

Okay. And EUR 2 million in Q4?

Exactly.

Okay. Then just on to the U.S. Could you elaborate a bit more about -- you mentioned in the report that U.S. operation increased its profitability. Or is it -- is the U.S. profitable on a stand-alone basis in Q4? Or where are we in terms of profitability?

Yes. We -- the U.S. operations as a whole, I can say, is profitable. If we sort of look back, we also disclosed part of that when we -- you can say, the framework when we acquired the businesses. The RotoGrinders Network is a profitable business. And we can say, when we took over the assets of Vegas Insider and Scores and Odds, we had to change part of the business model. So that change is now, you can say, ongoing and you can also -- that part is turning into profitability. The third leg we have is that we have strengthened the organization with, you can say, the whole backbone structure, governance structure. So -- but all in all, the business is profitable.

All right. And coming back to Vegas Insider, where are we? Are you still on track with that? You expect to sort of have fully transform that business during 2020 or at least the later half of 2020?

Yes, yes. So we expect that for the NFL to launch sort of the first part of the new version, and then ultimately, before the end of the year, to have the [indiscernible] up and running.

Great. And just to get an understanding of your U.S. exposure at the moment. Can you elaborate a bit on how much revenues you generated from the U.S. in Q4?

We are not disclosing that number isolated by geography. But today, we have earlier disclosed that it's around 15%-plus, the total revenue. But we don't give that information.

Okay. But most likely a bit more than given the strong growth in Q4, I guess. And then just, finally, if you could speak a little bit more about this potential deal that you have in the pipeline. Just to get an understanding of how you see it, the strategic rationale for it. It's an esports company, but they do sort of advertising for sports betting operators. Could you just -- could speak a little bit more about that?

Yes, indeed. So the way we view esports and I think also, if you talk to people within the esport community how they view it is that it is just another sport. Just like with football, tennis and the like. And it's growing rapidly at the moment and in recent years. And therefore, the natural thing is that people also bet on esports. So esports betting is growing very fast. And obviously, we would like to be exposed to that and taking part. And with this company, we feel that we found a very attractive company that is very strong in this sector. And I said, hopefully, we'll be able to close this. But of course, it's still pending final due diligence and negotiations.

And your next question over the phone comes from the line of Jonas Amnesten.

Jesper and Flemming, congratulations with the really strong report. Could you elaborate a bit more on the progress of the U.S. -- your assets in the U.S. market? For example, which states do you have rev share and CPA revenues from in the third -- in the fourth quarter?

Yes. So on the revenue share, it's still very limited revenue that we see from revenue share. So the U.S. is built for us predominantly a CPA market. But we are able to work on revenue share in both New Jersey and Pennsylvania. So the option is there. But as I said, it's still mostly a CPA market.

All right. And what additional states do you expect to add during 2020? Which states do you think is closest for you to enter into?

I think we've mentioned that before that what we're quite excited about or at least looking forward to see is how Tennessee will land because they have taken this approach of focusing on mobile only. So basically a framework which will be more similar to Europe. So apart from that, we will see Colorado on the move as well as Michigan is also a state. So we are preparing the business for that. But as we also just mentioned, for all states, we are sort of deciding which are the most attractive ones. So having an internal tier system in place for how accurate -- aggressive we'll go on the individual states.