Kambi Group plc (KAMBI) Earnings Call Transcript

Welcome to the Kambi Group Q4 Report 2020. [Operator Instructions] Just to remind you, this conference call is being recorded. Today, I'm pleased to present Kristian Nylen, CEO; and David Kenyon, CFO. Please begin your meeting.

Good morning, and welcome to Kambi's Fourth Quarter Results Presentation. I am Kristian Nylen, Chief Executive; and joining me is our CFO, David Kenyon. Please turn to Slide 2. I will begin with a brief overview of what was another record quarter, after which David will take you through our financial performance. I will then speak about the quarter in a little bit more depth and give you a few updates from the year so far. But first, on Slide 3, let me give you a brief introduction to Kambi. Kambi is industry's trusted and independent sports betting supplier. Our multi-channel service is managed through an in-house developed platform, which has been continually developed over a decade. The platform, together with more than 850 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 a tailored and leading sportsbook experience 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 probity 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 a 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 a trusted partner to more than 30 operators across 6 continents, including some of the most recognizable and successful brands in the industry. Together, 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 services. Let's look at the Q4 highlights on Slide 5. Q4 was another record quarter for Kambi, which when you think of the challenging year it has been and the situation we found ourselves in during Q1 and Q2, it's been an amazing turnaround. Q4 operator turnover is up 77% and revenues up 66 -- 76% year-on-year, helping us to finish the year on a high. Our operating margin of 47% illustrates the scalability of our business model. We strengthened the partner network with 2 new partnerships: firstly, the Belgian National Lottery; followed by JVH Gaming and Entertainment, a leading operator in the regulating Dutch market. We also continued our U.S. expansion, highlighted by the launch in Tennessee on day 1 of the market going live. For now, I hand over to David, who will talk you through the financial highlights. Turning to Slide 6.

Thank you, Kristian. Good morning, everyone. In Q4, we had revenue of EUR 46.9 million, up 76% from last year. For the full year, revenue was EUR 117.7 million, up 28% from last year. Operating costs for the quarter were EUR 24.7 million, giving an operating profit of EUR 22.2 million at a margin of 47%. As for the full year, we made an operating profit of EUR 32.2 million at 27%. Let's look at the income in more detail. Turning to Slide 7. 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 with the operators by their end users. In Q4, operator turnover was up by 77% on Q4 last year, reflecting the growth of the markets in various U.S. states such as Pennsylvania, New Jersey and Indiana; the opening up of new states in the last year such as Illinois, Colorado and Tennessee; and the busy sporting calendar. This included a full quarter of activity in the NFL, all the main European soccer leagues and the Champions League. The margin represents the combined trading margin made by the operators. In Q4, this margin was 9.4%. This was significantly higher than normal and was driven by double-digit margins in both American football and soccer. We can see the split of operator GGR by region on Slide 8. Q4 saw rapid growth in operator GGR in the Americas region, up 265% from last year to now represent 58% of the total. We also saw major growth in the European part of the business, with operator GGR up 51% on the same quarter last year. We can see the conversion from the movement in operator turnover to our revenue on Slide 9. Operator turnover post foreign exchange impact was up by 77% compared to Q4 2019. The high operator trading margin of 9.4% compared to 7.4% last year. So the increase in operator GGR was 126%. In the other column, we see the marked effect from the rapid growth in operator GGR in terms of decreasing the effective commission rates charged to our operators due to the tiered structures in many contracts. The net effect is that revenue for Q4 2020 is up by 76% on Q4 last year to EUR 46.9 million. Let's turn to the full income statement on Slide 10. Operating expenses for the fourth quarter were EUR 24.7 million, up from EUR 20.5 million in Q4 last year. This was higher than the guidance previously provided due to additional social security costs in relation to the share options programs as these are directly driven by movements in the share price. Looking ahead to Q1, we anticipate costs will decrease to EUR 23.5 million to EUR 24.5 million. For the full year 2021, we expect costs to be in the range of EUR 100 million to EUR 105 million. The operating profit for Q4 was EUR 22.2 million, up from EUR 6.2 million in Q4 last year; and EUR 32.2 million for the full year, up from EUR 14.7 million. The results this quarter truly demonstrate the scalability in the business model, where costs grow in a controlled manner as we continue to build out the company's product capabilities and commercial reach. The large majority of the cost base is not directly impacted by an increase in revenue. So when revenues go up as we saw to such a great extent here in Q4, the inherent operating leverage results in increased profitability. Profit after tax for Q4 was EUR 17.3 million, up from EUR 4.6 million; and EUR 24.1 million for the full year, up from EUR 10.4 million. Now let's look at the cash flow on Slide 11. On this slide are the major components which impacted our cash position during the quarter. Our opening cash balance was EUR 45.9 million. The significant cash inflow from our operating profit was partially offset by a negative cash movement in our working capital. Trade receivables increased in the quarter, predominantly due to a much higher level of invoiced amounts in the months preceding the quarter end compared to in Q3. Capitalized development costs during the quarter were EUR 4.7 million, whilst the amortization charge on previously capitalized costs was EUR 3.3 million. The net cash inflow for the quarter was EUR 15 million, and the closing cash balance, EUR 60.8 million. In summary, our financial performance reached record levels of revenue in Q4, and the company's operating leverage delivered a significant increase in profitability. So now let me pass you back to Kristian. Turning to Slide 12.

Thanks, David. Before we look at Q4, I wanted to begin with an overview of 2020, which was, of course, a unique year for many reasons. The pandemic had a major impact on our business and the industry as a whole. For a period, the sporting calendar was very light, and we had to quickly adapt. I am proud not only for how we handled the situation when it was at its worst, but also how well we -- prepared we were for the return of sports, often at short notice. Our strong financial position enabled us to take a long-term view of the situation, enabling us to have the skills and resources in place to ramp up when necessary. We were also able to demonstrate the scalability we preserve within our business model. Not only did we post a record financial performance despite major disruption in Q1 and Q2, we also did it with a fantastic operating margin during the second half of the year. We continue to expand across the globe, signing 4 new partners, including Churchill Downs; and entering 6 new regulated jurisdictions, with market first launches in the U.S. state of Michigan, Colorado, Illinois and Tennessee, underlying our compliance capability and speed to market. With the partners we have added this quarter, we have successfully signed partners in 4 different continents in the space of 3 quarters despite the travel restrictions caused by the pandemic. In total, throughout the year, we completed more than 50 partner launches across online and retail, a monumental effort which highlights our operational excellence. All in all, while it was at times a difficult year, we continued to deliver for our partners and finished the year in a much stronger position than we have started. Turning to Slide 13. Now to the Q4 highlights, which included 2 new partner wins. While we touched on the win of Belgian National Lottery in our Q3 report, in December, we also added a partnership with JVH Gaming and Entertainment, which is the largest private casino operator in The Netherlands, a market which is on track to regulate later this year. When taken together with Belgian National Lottery, it shows there remains good opportunities available in Europe. We look forward to launching with both partners later in the year. Turning to Slide 14. Q4 saw us continue our U.S. expansion. Tennessee became the 12th U.S. state we entered, launching on the first day of our online market, once again, illustrating our ability to get partners to market ahead of competition. We also supported the launch of RSI's BetRivers brand into the online Iowa market. Recently, the regulator in Iowa changed regulation regarding new account sign-ups, enabling bettors to sign up remotely rather than having to open an account in person as what's previously the case. Early reports show this change will assist the growth of this market. In terms of retail launches, we launched 3 new properties, 1 with Parx in Michigan and 2 with Churchill Downs, both in Mississippi. Moving to Slide 15. Following the turn of the year, we added another 2 partners to our network. The first was Racing and Wagering Western Australia. It's a state-run racing authority in Western Australia. It currently offers a sportsbook through its TABtouch brand and will be changing its technology partner to Kambi. As we have seen with the success of ATG, there is great cross-sell opportunity with horseracing bettors and a high-quality sportsbook product. Elsewhere, we signed a partnership with Casino Magic, an Argentinian casino operator with a strong position in the province of Neuquén. Argentina is currently regulating sports betting on a province-by-province basis. With Neuquén already regulated, we hope to launch the Casino Magic sportsbook later this quarter. The partnership with Casino Magic builds on the early success in the promising Latam region, and we look forward to further regulation, providing us with opportunities to expand. Turning to Slide 16. In January, we completed a number of partner launches. In Michigan, we supported the simultaneous launches of 4 partners in the online Michigan market. Having already taken the first retail bet in the state in 2020, we were delighted to also process the first legal online bet in the state. The early signs for the Michigan market have been promising, and we look forward to seeing, however, this market grows in time. Meanwhile, we also added the 13th U.S. state when launching online in Virginia with 2 partners. The timing of the market going live came as a surprise to most, being earlier than anticipated. However, our regulatory and compliance teams were able to quickly complete the necessary compliance checks to enable us to launch within 48 hours. In terms of retail launches, so far in Q1, we have supported Churchill Downs with 2 sportsbook launches, one in Indiana and the other in Pennsylvania. I should also highlight 888, who, in January, completed the migration of its U.K. and dot.com players to its in-house platform. As previously communicated, these spaces historically contribute more than half of 888's revenues. Turning to Slide 17. The most recent update from Q1 is the Super Bowl, which took place last Sunday. Although we set new records for bets placed and volume seat on any single game, we unfortunately experienced some intermittent bet placement issues across approximately 85 minutes shortly before the game, which we are very disappointed by. The problem was not the result of high volumes or any systematic issues. As you can see from the graph, which details peak bets per minute for Super Bowl Sunday this year and last, we successfully handled high volumes throughout the day and volumes well in excess of a 2020 low. Furthermore, our in-play volumes were consistently and comfortably ahead of a peak in 2020 with no issues whatsoever. The issue we experienced prior to kickoff was related to one particular bet offer, for which we increased the number of possible outcomes, especially for the Super Bowl. This bet offer was the third most popular offer on the day, and due to the extended number of outcomes, required extra technical capacity as part of our best validation process. Unfortunately, this additional capacity caused a backlog [indiscernible] stop to bet validation process for all bet. With the impact first felt just after 5 p.m. Eastern Time, we were able to apply a short-term fix to alleviate the situation temporarily, with a permanent fixed apply roughly 7 to 8 minutes before kickoff. During this 85-minute period, we were unable to process bet for a total of 30 minutes, with 22 minutes being the longest continued period where new bets could be placed. In between this moment of disruption, we were able to process a high volume of bets. And in the time frame just before kickoff, we were able to process the highest volumes of all time. I can assure you, the issue was not related to overall bet volume. And having quickly identified the root cause, we are certain we would not suffer the same issue if Super Bowl was played again today. We are taking pride in providing high technical stability, and suffering such an issue just before Super Bowl is very disappointing. We have very high standards, and this is something we will and have learned from. Moving to Slide 18. In recent years, Kambi has grew at a rapid pace. So much so, in Q4, more than 3 million unique accounts were active on Kambi Sportsbook. These large numbers being create value for the Kambi Network, which now consists of more than 30 partners worldwide. The Kambi network aggregates processes and analysis, an extraordinary amount of data produced by our large global player base from which we derive powerful insights. As the network grows, either organically or through the addition of new partners, the value of data increases from which every partner benefits. As an example, the bets tracked in one part of the world could provide valuable information, which then causes us to move the price, thereby benefiting all partners throughout the world who benefit from that price change, protecting margin. Sports betting is data-driven enterprise. The more data you have, the better you are able to analyze and optimize your product. In simple terms, the Kambi network is greater than the sum of its parts. And finally to Slide 19. To summarize, Q4 was a fantastic quarter for Kambi as we ended the year on a high. We posted record operator turnover and revenue while also demonstrating the scalability of our business model with strong operating margins. Although we are not halfway through Q1, momentum has continued into the new year and we feel well positioned to make the most of a position of strength we find ourselves in. I will now pass over to the operator for questions. Thank you.

[Operator Instructions] The first question comes from Viktor Högberg from Danske Bank.

So I had some connection issues, maybe you talked about it. But could you talk a bit about the turnover -- the composition of the turnover index in Q4 between the months? Do you see an increase every month? Or what did you see there?

So the turnover is quite similar between the different months. I guess the highest was in November, I think. And that's very normal, I would say. In December, you have a little bit less activity due to the Christmas period. So it's very common for Q4 to be very similar month-by-month, I would say.

Okay. And in connection with the trading asset in the beginning of January, in Swedish media, you were quoted to saying that Q1 should end up at Q4 levels or something like that. I would assume that it's regarding the turnover of revenues because of the Q4 margin. But was that comment including or excluding the effect of 888 rolling off now in January? And so what's the comment on the underlying performance or the total reported as so we not misinterpret your comments?

I mean it's a little bit hard to know exactly because you it depends a little bit on the activity of the events. But what we have seen so far, it's very likely that we will end up in similar numbers to Q4. You're correct, what I commented earlier in the year was definitely on turnover.

Okay. And if we would end up at similar levels, that is the total level, not the underlying revenue, you're pointing to now.

The total level, yes.

Okay. And on Super Bowl, I might have missed it, but your expectations with the e-tech issues included. So the volumes in relation to your expectations, were they in line or above or below or -- in terms of turnover?

Slightly below, and that is very much dependent on the disruption we had 85 minutes before kickoff. But it's quite a marginal difference to our expectations, actually.

Okay. And speaking of expectations, we're getting closer now to this summer. I haven't seen any comments or things pointing either way or the other. But what would you say the chances of the euros this year or the risk of it not happening? Do you see that as a risk? Or how would you think about this summer's activities with the Olympics, especially the soccer tournaments?

As you said, it has been very little said about this, especially the euros. Actually, I think Olympics, there has been some rumors that they are going to canceling it. But the latest theme that we will try to do, go through the Olympics, but it's obviously -- yes. Touching to the euro, I haven't heard anything, which makes me believe that it will happen. But the construction of a tournament, I mean, that is an issue in itself. If it had been in Europe, played in one country as it has been historically, I would not be worried at all. But the fact that we are planning to play in, I think, 12 different countries makes me a little bit more nervous for it to happen.

Okay. And you haven't seen anything that will point to then consolidating to a smaller number of countries?

No. It was more talk about it, yes -- no, 9 months ago. But I haven't heard anything really about it for a long time now. No sign.

And in terms of '21, you're guiding for OpEx EUR 100 million to EUR 105 million. How should we think about it throughout the year? Do you expect the OpEx to decrease somewhat in Q4 when DraftKings drops off? Or should we expect a slight increase quarter-over-quarter throughout the quarters in Q 2021? Or how would it look over the year?

I think you can more count on a kind of a fairly steady increase as we build out the product capabilities, and the geographical reach is rather -- what we always say, it's not really linked to the amount of revenue. So losing one customer won't directly impact the cost base as such. So more counts on a fairly steady growth of OpEx during the year.

Okay. And in terms of New York, I know you had some texts on it in the report. But what is your best guess now with everything happening, with the governor leaning towards -- or favoring our monopoly model and then some lawmakers wanting to have a multi-operator model? What is your best guess? What is happening? What's your take on New York and the prospects of you being in that as well?

It's really hard to have a guess. If I were gambling then, I would say that I would bet on it being a -- several operators. And I would guess that they will push the license fee and tax rates up.

Okay. Makes sense. And in terms of Germany, how large is that market for you? I think it's single digits, but how many? Or is it high single digits or mid-single digits? And do you see some kind of headwinds there? Or what do you see in terms of the German market the past couple of weeks?

Yes. It's not a very big market at all for us at the moment. So I would say that for us, regulation would probably be very positive because I think you will see some new entrants to the market. And some of the customers we are having probably being more active in Germany.