Kambi Group plc (KAMBI) Earnings Call Transcript

Welcome to the Kambi Group Q2 Report 2020. [Operator Instructions] Just to remind you, this conference is being recorded. Today, I'm pleased to present to Kristian Nylen, CEO; and David Kenyon, CFO. Please begin your meeting.

Good morning, and welcome to Kambi's second quarter result presentation. I'm Kristian Nylen, Chief Executive; and joining me is our CFO, David Kenyon. Please turn to Slide 2. I'll begin with a brief overview of Q2, after which, David will take you through our financial performance. I will then speak about the quarter in a little bit more depth and also a few updates from Q3 so far. But first, on Slide 3, let me give you a brief introduction to Kambi. Kambi is the industry's trusted and independent sports betting supplier. Our multichannel service is managed through an in-house developed platform, which has been continuously developed over the last decade. The platform, together with more than 850 highly skilled staff, forms the foundation of our service. The Kambi Sportsbook consists of multiple elements from front-end user interface and open APIs through to odds compiling, customer intelligence and risk management, enabling our customers to offer their players the leading sportsbook experience on the market from day 1. On to Slide 4. Kambi's business is built upon a revenue share model with our growth linked to our partners' success. The foundation of our strategy is based on scalability. At no additional cost to our partners, Kambi continuously invests in product, people and technology to maintain market leadership. We operate an experienced in-house trading and risk management team to optimize operator-trading margin. And our business is underpinned by our corporate property and integrity. And we have successfully obtained all licenses we have applied for. All of this combined enable us to offer our partners the flexibility and scalability required to succeed in today's highly regulated and global market. Our technology has been structured in a way that enables Kambi and its partners to quickly and efficiently comply with regulatory requirements, removing a major barrier to market and allowing them to enter new markets as and when they require. Kambi is the trusted partner to more than 20 operators across 6 continents, including some of the most recognizable and successful brands in the industry. Together, we -- they create a powerful network of operators, which combine to generate powerful data insights that we use to inform and continuously iterate our product and service. Let's look at the Q2 highlights on Slide 5. Despite the absence of many sports and leagues during the quarter, Q2 betting volume remained resilient. We have previously announced cost reduction measures, helping us weather the major impact of the pandemic. The gradual return of sports, particularly during the latter half of the quarter, enable us to regain some momentum, with June operator turnover and revenue both ahead of a comparative month in 2019. The Q2 performance led to a marginal revenue gain for the first half of 2020, which, given a significantly reduced sporting calendar for much of a period, shows the resilience of our business when faced with adversity. The quarter also saw us sign a long-term extension to our agreement with Colombian market leader BetPlay, while we continued our excellent record of first market launches, enabling our partner, Rush Street Interactive, to take the first legal bet in Colorado, the first legal online bet in Illinois. For now, I will hand over to David, who will talk you through the financial highlights, turning to Slide 6.

Thank you, Kristian. Good morning, everyone. Before I talk through the numbers, I'd like to give some context to this quarter, which has, of course, been highly unusual from a business and financial perspective. Considering the outlook at the start of the quarter when there was a huge amount of uncertainty about when the sporting calendar would return, I'm extremely heartened by the Q2 performance. We reacted first to make significant savings across a wide range of costs, and we did this whilst keeping the firm intention not to harm the long-term prospects of the company and to be ready to go as soon as the sporting calendar returned. When sporting events started resuming later in the quarter, we were able to deliver on our plan. We can see how this translated into the results on Slide 7. In Q2, we had revenue of EUR 14.8 million, down 32% on last year. For the first half year, revenue was EUR 42.7 million, marginally up on last year. Operating costs for the quarter were EUR 18.1 million, giving an operating loss for the quarter of EUR 3.4 million. Whilst for the first half year, we made an operating profit of EUR 3.5 million. The cash flow for the quarter was plus EUR 0.2 million, and the net cash position at the end of June was EUR 39.1 million. Let's look at the income in more detail turning to Slide 8. This slide sets out the Kambi turnover index. The graph shows the aggregated results of Kambi's operators. The turnover is the total stakes placed to the operators by their end users. In Q2, operator turnover was down by 33% on Q2 last year. This was a direct result of the impact on the sporting calendar of the global pandemic. It's extremely positive to note that turnover picked up steeply through the quarter, with 47% of operator turnover for the quarter generated during the month of June compared to 33% in May and 20% in April. We saw an increase in the percentage contribution to turnover from the European market, attributable to the return of many European football leagues, the reduced U.S. sporting calendar and the closure of U.S. retail outlets as a result of COVID-19 preventative measures. The margin represents the combined trading margin made by the operators. In Q2, this margin was 8.2%. We can see the conversion from the movement in operator turnover to our revenue on Slide 9. Operator turnover was down by 33% compared to Q2 2019. This quarter, the effect of the significantly reduced level of operator NGR was to increase the effective commission rates charged to our operators due to the tiered structures in some contracts. The net effect of the revenue for Q2 2020 is down by 32% on Q2 last year to EUR 14.8 million. Let's turn to the full income statement on Slide 10. Operating expenses for the second quarter were EUR 18.1 million. They decreased by EUR 2.9 million compared to Q1, with over half of the cost reduction from savings in areas, including data supply, travel and marketing and the rest from government subsidy schemes. Looking ahead to Q3, we anticipate costs will increase by EUR 2.5 million to EUR 3.5 million to around the cost level we had in Q1. This increase is primarily driven by employee, network and data supplier costs, returning to pre-pandemic levels as the sporting calendar continues to return. The operating result was a loss for Q2 of EUR 3.4 million with a profit of EUR 3.5 million for the first half year. And the result after tax was a loss for Q2 of EUR 3 million with a profit of EUR 1.7 million for the first half year. Now let's look at the cash flow on Slide 11. Set out on this slide are the major components impacting our cash position during the quarter. Our opening cash balance was EUR 46.3 million. Capitalized development costs in the quarter were EUR 3.4 million whilst the amortization charge on previously capitalized costs of EUR 3 million. The cash outflow from our operating loss was offset by a positive cash movement in our working capital as we collected trade receivables relating to earlier months when revenues were higher. The net cash inflow for the quarter was EUR 0.2 million, and our closing cash balance was EUR 46.4 million. In summary, our financial performance has shown a high level of resilience during these difficult times. Now let me pass you back to Kristian, turning to Slide 12.

Thanks, David. The impact of a pandemic on the sporting calendar has been clear for all to see. Although things picked up later in Q2, we remained without a number of sports leagues and tournaments as a result of the pandemic. To illustrate the impact on this slide, we break it out on the year-on-year operator turnover comparisons for each month during Q2. As you can see, the operator turnover in April this year was 39% of last year's operator turnover. During this month, table tennis was a main turnover driver across the global Kambi network and remained the main turnover driver in the U.S. for the entire quarter, where the return on soccer had less of an impact. Meanwhile, in Europe, we saw e-sports emerge as a top 3 event category. In May, operator turnover was 64% of what we saw in May last year, with UFC driving numbers in the U.S. and the return of German Bundesliga mid-May having a greater impact elsewhere. We saw a significant increase in average turnover per game in Germany as it benefited from there initially being no competition from other major European soccer leagues. As you can see, momentum continued into June where we actually saw a slight increase in turnover compared to June 2019. While we benefited from a larger U.S. footprint than last year, we saw heightened interest in the return of PGA Tour Golf, with a free event held in June topping the turnover charts in the U.S. for the entire quarter. Meanwhile, the gradual return of soccer leagues, including those in England, Spain and Italy, also provided a welcome boost. In the English Premier League, we saw an average turnover per game increase by approximately 1/3 compared to the pre-lockdown, perhaps benefiting from increased number of televised game and staggered kickoff times. So in general, when looking at the quarter as a whole, we see -- can see the turnover increasing month-on-month, which bodes well for the future. Turning to Slide 13. Until yesterday, return on major sports had mainly taken place outside of the U.S. Thankfully, this is beginning to change. Last night, we saw the delayed MLB season get underway, which was great to see. In the coming weeks, we have the scheduled return of 3 more major U.S. sports leagues in the shape of NBA and NHL next week and the NFL in September. Of course, like a lot of things at the moment, things are subject to change, but we remain hopeful these leagues can begin and end as planned. The impact of return of these sports will undoubtedly be positive. However, it's unknown what the size of the impact will be considering we will have all 4 leagues playing simultaneously. In more normal times, the sports are spread across the year with some overlap, but not to the level we will see this year. But whatever the outcome, return on sports is a major plus, and we're excited to see how players engage over coming weeks and months. Turning to Slide 14. I've spoken previously about the tremendous record at being first out of the gate on multiple occasions in the United States, and it's a record I'm proud of and one which sets us apart from our competitors. In Q2, we were able to support the online launches of Rush Street and DraftKings on day 1 of a regulated marketing opening in Colorado. In the case of Rush Street, we were able to process the first legal bet in the state. To be able to get 2 partners to market simultaneously and ahead of the competition, speaks volumes about the expertise in this area from regulatory compliance and operational excellence. In addition, we were also able to assist Rush Street taking the first legal online sports bet in the state of Illinois, where rush Street already have taken the first legal bet when launching first in retail back in March. This was a significant launch, where Rush Street not only first to market, but to this day, they remain the only online operator live in what is one of the biggest states in the U.S. This is what partnering with a trusted supplier brings, the ability to get to market early, open first and thereby create valuable revenue-generating opportunity. Moving to Slide 15, I was also happy we could renew our partnership with a very successful partner in BetPlay. Kambi launched with BetPlay in 2017, and since then has quite quickly established itself as the #1 sportsbook in the regulated Colombian market. Not only that, but its performance has seen it grew to a level where it's now among the largest operators in Kambi network. Kambi also has a good partnership with Rush Street in Colombia. And this success leaves us well poised to enter our South American countries as they regulate. Turning to Slide 16. Now on to events after Q2, where it has been a busy few weeks. On July 1, we signed a new partner in the tribal-operated Four Winds Casinos. Four Winds owns 4 casinos in the U.S., 3 in Michigan and 1 in Indiana. Within the space of 2 weeks, we were live in all 3 Michigan properties, once again demonstrating our speed to market capability. The agreement also strengthens our relationship with tribal gaming operators in the U.S. This sector is of great importance to Kambi, and we believe we offer many of the qualities tribal casinos look for in a business partner. Already, we have signed with some of the largest tribes in the U.S. We have Four Winds adding to our partnerships with Seneca and Mohegan Sun. Of the near thousand casinos in the United States, more than half are owned by tribal groups. Therefore, it's crucial we built strong and early relationships in this sector, particularly when looking at future market such as California, which may give Sportsbook exclusivity to the tribal casinos. Turning to Slide 17. Already in Q3, we have performed 6 on property launches in the U.S. We have busy schedule ahead of us for the rest of the quarter. In preparation for this period, our delivery team spent some time refining their processes to enable us to hit partners' time line. Lots of work goes into providing the best service we can. And considering the testing conditions in the U.S., we have developed a remote launch process, which enable us to launch partners without having people on site. Not only does this navigate any travel issues, but it also frees up resource while giving the operator even greater flexibility on their launch date. In simple terms, enabling them to hit the go-live button when they choose. They don't require us to do it for them. This remote launch has been -- already been used successfully in recent weeks and will help us in the coming months as we work through more on property launches. As well as opening new sportsbooks, we have also been through a period of reopening those that had closed during the pandemic. We have, of course, been working closely with our partners on this and now found our Bring Your Own Device technology to be of particular use, given the social distancing measures casinos are operating under. Unique to the market, Bring Your Own Device enables betters to pre-load selections on their mobile, creating a QR code, which can be scanned at a counter or a kiosk for quick and simple bet placement. Not only does this play a crucial role in educating betters on the casino's digital product, but it significantly reduces the length of queues, reducing the time at counters and reduces contact with surfaces. Although Bring Your Own Device was popular pre-lockdown, we are achieving even greater interest from our partners and prospective partners in the product due to a positive contribution it makes to delivering a safe sports betting environment. Turning to Slide 18, as you may have seen in the report, we have updates regarding 2 of our partners, 888 and DraftKings, both of which secured Kambi with revenues for a period of time and put in place measures to ensure a smooth transition as they move to their own in-house technology. In the case of 888, as per terms of existing contract, they will migrate their players in U.K. and dot.com markets by the end of the year. While these markets make up a little more than the half of their total sports revenues, we have secured other markets which make up material part of the business for the medium term. As I said, 888 has previously stated, they plan to migrate all markets gradually over time. Meanwhile, we have also come to an agreement with DraftKings to harmonize the migration obligations as they consider their transition to their recently acquired technology. As stated in the press release, we have secured revenues until the end of Q3 2021, with all DraftKings sports betting revenue generated by Kambi or following a migration away from Kambi subject to a normal revenue share agreement. In the case of both 888 and DraftKings, we remain partners until the end of our contract, and therefore, we seek to remain on collaborative terms. These updates today should also bring to an end the uncertainty surrounding the future of these partnerships. And finally to Slide 19. Before summing up, I'm delighted to say that last night, Kambi won 2 prices at EGR B2B awards, the gambling industry's premier awards ceremony. Kambi led the way in the 2 key sports betting categories: Sports Betting Supplier of the Year and Sportsbook Platform Provider of the Year. This is a fantastic achievement and underlines our position as the industry's trusted sports betting supplier. But in summary, Q2 was no doubt a testing period for Kambi. However, we showed great resilience to weather the major impact that pandemic had on the sporting calendar and came out of H1 2020 in good shape. A return of some sport, including soccer and golf, enabled momentum to build throughout the quarter. In June, operator turnover and revenue posted year-on-year growth, which bodes well as we begin to see the resumption of U.S. sports following their enforced absence. And thanks to the hard work of our fantastic staff, we can look to a future with confidence. Having emerged from a testing quarter as a stronger business and ready to accelerate, we are a great network partners in Q3 and beyond. Now I'll pass over to the operator for questions.

[Operator Instructions] Our first question comes from the line of Viktor Högberg of Danske Bank.

So a couple of questions on the partner news you provided yesterday in the report. So starting with 888. No surprise that you're going to leave, they announced this already more than a year ago. But could you elaborate a bit about -- if this was in line with what you had expected in terms of the timing and the markets?

Yes. Viktor, yes, very much so. I think they have been quite clear to us that U.K. and dot.com was the first markets we planned to move out from after Sweden test. And positive news, I think, is that we are not planning to do anything very soon with the rest of the market.

Okay. And on DraftKings as well, we heard your comments back in May that they delayed their decision to migrate off from you. Would you say this is in line with your expectation, internal expectations as well with September next year? And also, just a double check, if they were to migrate over to your own [proprietary] technology before that, you would still receive the royalty revenues generated on their platform. Is that correct?

That's correct, yes. And I think we have had a good discussion over the last couple of weeks with DraftKings on how to be able to support them in a good way, but also making sure that, yes, during this period, we get secured revenues and being able to give some certainty to market around it as well.

Okay. Just 2 final questions. If we look at the sporting calendar as it looks now, if you compare what you thought and what you communicated in connection with the Q1 report back in April, would you say that it has improved more than you had expected it to? Or is it in line? Or where do you see the schedule compared with what you saw back in April?

I would probably say that this was as good as we could hope for. With the U.S. leagues also coming up now, hopefully, I think it looks as good as we could have hoped for. Of course, there is still a big issue with some international sports such as tennis, for instance. And I don't really see us coming out of that just yet. But as I said, I'm -- this was more or less the best case scenario for us up until now.

Okay. So given the momentum over the quarter, you stated the April-May and June developments, and then June actually growing year-over-year in terms of turnover. Would you expect that it's possible to grow year-over-year for the full quarter? Or would you expect some saving on that effect over the quarter with the events that we know will occur?

Still, we don't really know. I mean it is a little bit shaky with baseball and NBA, of course, and also NFL that is planned to start in September. But I would say, it's looking good. I would be surprised if we couldn't come back to quite nice figures compared to last year, if this holds up.

Okay. And the final question, you could provide some comments on cost development in Q3. Could you elaborate what you're seeing for Q4 and for next year? And also for 2022, if you could provide some comments on that, given that 2 of your largest customers are rolling off. It's no surprise that -- I guess, that you planned for it. So what do you expect in terms of OpEx from those clients leaving?

Viktor, David here. Yes. I mean, so we haven't kind of forecast that far out externally at this stage. I mean, what I'd says, the -- those clients leaving doesn't per se reduce OpEx, but our plans are ready to, at this stage, assuming all goes well with the return to sporting calendar, we continue with our originally planned cost development, which was to keep investing to improve the products. Yes, that still remains the plan going forward, all things being equal. And I think there's many kind of commercial tailwinds to really support that. And if you look at kind of future states coming on board, the growth operators and the return of the sporting calendar, they will kind of, from a top line perspective, supportive of us continuing this cost growth.