Better Collective A/S (BETCO) Earnings Call Transcript & Summary

Welcome to Better Collective's webcast presentation in connection with the Q1 report covering the period January 1 to March 31, 2020, 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 Q1 report this year with you and in this presentation, we will comment on the highlights from a successful first quarter despite the COVID-19 outbreak, which impacted the month of March and, of course, the following period. We will revert to these special business circumstances during the presentation, but on a general note, I'm very pleased to see how adaptive and resistant our digital business model is in such extreme situations. 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 will start with a presentation of the business highlights for Q1. We'll walk you through the financials for the quarter, including a recap of the framework of our financial targets, which we have confirmed in the Q1 report. Then we will continue with the business update and shed some light on the COVID-19 impact and the business prospects moving forward. We will, as always, end the presentation with a Q&A session. Please turn to Page 4. 2020 got off to a strong start with significant growth throughout the business and key performance indicators. During mid-March, an unprecedented hold on major sports events was seen as a result of the COVID-19 pandemic, postponing events and thus revenue. However, our digital business model has proven strong under these circumstances. And we have, as a company, demonstrated the flexibility to withstand a period with low sports activity. Let me give a snapshot overview of the business performance and highlights of Q1. Please turn to Page 5. Growth in Q1 was strong compared to the same quarter last year. Until mid-March, the business performed at record levels despite the lack of major sports events. During the second half of March, the quarterly performance was highly satisfactory. Revenue grew by 40%, of which 21% was organic. Operational earnings grew by 32%, with a reported 41% EBITA margin. And a cash flow increase of 25%. We continue to deliver high numbers of new depositing customers or NDCs, adding to our bank of players and laying the foundation for continued growth. In Q1, we sent around 116,000 NDCs to our partners, which is at the same level as Q1 last year. The flat growth is due to a decline in NDCs from mid-March as the sports halted. Please turn to Page 6. Other highlights in Q1 include the acquisition of HLTV.org, securing a strong position within the esports betting market. We will comment on this acquisition in more detail in our business update. And [ inevitable ] theme in this quarter is, of course, the COVID-19 impact, and the measures taken to make it through a period of significantly less sports activities. This, too, is something we'll devote time to elaborate on in this presentation. In Q1, we initiated a share buyback program for up to EUR 5 million to cover earn-outs and deferred payments from prior acquisitions. After Q1, on April 22, we held our AGM at which a new Board member, Todd Dunlap, was elected, joining with the current Board, who were all reelected. Todd Dunlap is CEO of Booking.com, North America. And he will be a valuable addition to our organization and our work to realize our ambitions for the U.S. market. Finally, we topped the EGR Power Affiliates list for the third year in a row. To me, this is a true testament to the fantastic team at Better Collective, who each day continues to deliver on our vision, to empower iGamers through transparency and technology. Please turn to Page 7, and the word over to Flemming for more details on the financial performance.

Thanks, Jesper. Let's look into the financials for Q1, and please turn to Page 8. Zooming in on Q1. Revenue -- total revenue was EUR 20.9 million, which was 40% growth compared to the same period last year. The organic revenue growth was 21%. The total year-on-year growth in the quarter was affected upwards by higher play activity and strong sports win margins. I'll come back to the details of this in a few slides. Revenue share accounted for 68% of the revenue and 75% of player-related revenue with 17% coming from CPA, 6% from subscription sales in the U.S., and 9% from other income. Last quarter, we implemented a trading update for the first month following the reporting quarter. April 2020 revenue ended with a total revenue of EUR 4.6 million with a total negative growth of 17%, of which 41% was negative organic growth. The monthly performance was, as expected, impacted significantly by the fact that all major sports events were canceled or postponed. And we have seen betting activity reduced to approximately half of normal levels in this period. In addition, this year's April saw low sports betting margins, whereas the comparative month of April last year was high. As a significant part of the sports events were halted throughout April, this was a highly atypical month, and we expect this to be the low point of this year's revenue performance. Please turn to Page 10. Looking at the operational earnings, Q1 EBITA was EUR 8.6 million before special items, resulting in an EBITA margin of 41%. The cost base stayed flat compared to the recent quarter, Q4 2019, but increased year-on-year with the acquisitive growth and investments in new markets and technologies as well as new business initiatives such as our new media partnerships. However, late Q1, following the COVID-19 situation, we initiated a cost-saving program, and we will go more in detail with that in a few slides. Please turn to Page 10. Moving on to the cash flow and balance sheet. In Q1, operating cash flow before special items was EUR 9.5 million, resulting in a cash conversion of 103%. Cash and unused credit facilities stood at EUR 70.4 million at the end of the quarter with a net debt/EBITDA ratio of only 1.37. Please turn to Page 11. Coming back to the revenue growth, we again share some of our internal key performance indicators, i.e. here, the sports wagering, which is the development in the underlying betting volume on revenue share accounts. But we also have added historical numbers from the acquired companies and indexed them all back to 100 starting in Q1 2013. So it's like-for-like. The numbers are derived from accounts that represent 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. This, we mainly attribute to the many NDCs that we have sent in 2018 and '19. In Q1, we saw, as expected, a decline compared to Q4 due to the COVID-19. Please turn to Page 12. In addition to the betting volume, we share -- we are looking at the average sports win margin on revenue share counts. i.e., what percentage is paid on the betting volume. We have used the same indexing in the graph shown before. And what can be seen is that the margins fluctuates over the quarters and that Q1 2020 was above-average at index 106. The average index number in the quarter shown here is 94. The volatility in sports win margin is something we view as being transient. But it can, of course, affect short-term financial performance, up or downwards. Please turn to Page 13, and the word back to Jesper.

Thanks, Flemming. In connection with the IPO, the Board of Directors decided upon financial targets for the short to medium term. As 2020 is the last year in the range of the financial targets, which are 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 EBITDA, below 2.5. In our trading update dated March 17, and again today in our Q1 report, we reiterate these financial targets. In this unprecedented situation, visibility is limited. Why we share the assumptions behind it, as I will go over in the next slides. Please turn to Page 14. The business update, we have decided to provide is centered around the COVID-19 impact and HLTV acquisition. And just as many other companies, Better Collective is currently affected by COVID-19, especially following the postponement of all major sports events. During the second half of March, sports betting activity was reduced to approximately half of normal levels, while esports and casino activities performed stronger than usual. As Flemming mentioned, April revenue was approximately EUR 4.6 million, which is a decline of 17% compared to last year. The situation has called for flexibility, and we have redistributed resources internally to focus on business areas that have remained active. We implemented a cost-saving program comprising of more than 50 single initiatives, including founders, that is the COO and me, as CEO, and the Board of Directors, have waived their remuneration and fees in Q2 2020. All employees in the company have contributed by a temporary salary reduction depending on whether national support programs have been available. In total, we assess a cost reduction of around EUR 2 million for Q2 2020 compared to Q1 2020. We initiated this cost-saving program in order to protect our earnings and cash flow and prepare for the uncertainty that comes with the current situation. Please turn to Page 15. As mentioned, our financial targets remain based on the following assumptions in light of the limited visibility. As previously stated in the trading update on March 17, 2020, we estimate a negative revenue effect from the reduced sports betting of EUR 6 million to EUR 10 million based on the assumption that all major sports events, other than Euro 2020, will be back to normal in the second half of 2020. Our financial targets for the full year 2020 remain, as also stated in the trading update on March 17. This relies on the robustness of our business model. [indiscernible] business on digital platforms, we have very low to none capital expenditure and a high degree of variable costs. Also, the esports acquisitions [indiscernible] a business in acceleration in the absence of regular sports betting. We expect low sports activity throughout most of Q2 based on official and unofficial messages from the sports world. Our Q2 performance is likely to be the exception in an otherwise strong growth story where we expect flat to negative revenue growth, partly offset by cost savings measures I just discussed. However, we expect high activity returning in the second half of 2020. Please turn to Page 16. The business update we've decided to provide is centered around the COVID-19 impact and the HLTV.org acquisition. Please turn to Page 17. In Q1, we established a strong position within esports. For some time, we have carefully analyzed and monitored esports and related betting activity as an area of high interest. It is a rapidly growing industry, and we consider esports an ideal extension to our focus on classical sports. [indiscernible] potential to find the right partner, having deep know-how and esports industry knowledge than Better Collective. Through the acquisition of HLTV.org, which is the world's largest community site within Counter-Strike: Global Offensive, CS:GO, we believe we have found the best positioned organization and brand within this field. For years, the site has been the most popular site for CS:GO enthusiasts across the world. It is the brand behind the official CS:GO World Ranking as well as the CS:GO Player of the Year Award. On average, the website has more than 26.5 million visits per month. The acquisition price was EUR 34.5 million on a cash and debt-free basis. Out of the total price, EUR 26.4 million was paid upfront in cash and shares of Better Collective. We have consolidated HLTV into the Better Collective Group accounts as from March 1, 2020. The founders of HLTV will continue as daily management for at least 3 years to ensure the continued strong development of the platforms and communities. We expect strong synergies as many of the betting operators we collaborate with today also are betting to esports. As it turns out, the timing of this acquisition was just right, and we are off to a great start. Please turn to Page 18. While we expect high sports activity in the second half of 2020, we are closely monitoring Europe's top football leagues to start as early as May. The German Bundesliga season will resume on 16th of May, becoming the first major league in Europe to return to competition. In Italy, Serie A players have been allowed back to individual training, there are hopes that Serie A could resume late May, early June. In Spain, La Liga organizers are aiming for a June restart to the season. The English Premier League is aiming to resume in June as the U.K. government has announced no professional sports before June 1. Please turn to Page 19. By the end of the year, our U.S. operations increased its profitability after implementing new business models following the acquisitions. While we're still dependent on the state-by-state regulation, we believe we have strong brands and a solid platform for U.S. expansion as the market grows. The U.S. business is clearly impacted by COVID-19 and as of now, most sports events are paused. On the regulatory front, a number of states are currently subject to internal review and commercial analysis. As regulation, including tax, licensing processes and player registration differs between the states. There are several factors impacting how Better Collective prioritizes its activities. Recent regulatory progress means that we are currently in-licensing processes in Colorado and Tennessee. Please turn to Page 20. I will finalize this presentation with a snapshot of Better Collective. I would like to express my sincere thanks to all Better Collective's stakeholders, our employees and management team, our Board of Directors, and all our business partners for their extraordinary performance and flexibility during the difficult times that the entire global society is currently facing. At Better Collective, we love sports and betting, and we hope that major sports events will be back in the arena soon. This concludes our webcast presentation for Q1 2020, and we'll now open for questions from the audience. Thanks for listening in. Please turn to Page 21.

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

Just a question on Q2 and your guidance for the current quarter. You're stating April revenues of EUR 4.6 million. But you're also -- and this is my question, you're saying that revenues for Q2 will not be positive compared to Q2 last year. So it will be less than EUR 14.9 million. Is that correct?

I think the number is EUR 15.9 million. But yes, that's the correct guidance that we have given that we expect it to be flat to negative as we have expressed it. So yes, ballpark as Q2 last year.

Yes. Sorry, sorry. EUR 15.9 million. I was looking at the -- in the wrong column here. Yes, okay. So yes, somewhere between EUR 5 million and EUR 6 million per month then in May and June, I guess, in revenues? And that's -- is that assuming that a lot of leagues will open up apart from the Bundesliga? Or what sort of assumptions are in that, just to understand?

Well, we are coming out of the month of April, where we actually saw no -- absolutely no major sports ongoing. And that's also why we expect that will be the low point. Now we see some leagues coming back and the first of the major football leagues in Europe, of course, the Bundesliga will resume on Saturday. Of course, we expect that betting will be impacted positively as sports comes back. So that's the basic assumption behind this.

Yes, it sounds reasonable. And then just a question on M&A in general, looking forward. I mean, obviously, this acquisition in esports was very timely, as Jesper pointed out. But what else do you have on the horizon? Can you elaborate a bit on what you're seeing in the market, if you're still actively looking or if you're sort of taking a bit easy, perhaps giving all of the uncertainty that is at the moment? Or where are you in terms of M&A?

I think not much has happened in that regard. We are still receiving offering from potential sellers. We are evaluating that. And yes, it's basically similar processes to us before. And so we will actively be looking for targets. But again, timing is very important in this regard for a deal to happen and obviously, due to the uncertainty right now, I sort of think that time will or we'll be having a harder time than normally. But from our side, it's pretty much business as usual, assessing potential targets.

And then just my final question on the U.S. You acquired some sites there last year in the summer, late summer. And there were some sites that you were going to sort of -- yes, you had -- there was some work in progress, and you were going to change the business model, et cetera. How is that work progressing? Because you were talking about everything being sort of up and running towards the end of -- or second half of 2020.

Yes. And that is specifically related to biggest insider.com. But we are rebuilding the site. And that is progressing according to plan in terms of development. So really no changes there in terms of the development of the site.

Okay. But that's a sports betting side, primarily, correct?

Yes. Correct.

Our next question comes from the line of Jonas Amnesten from Redeye.

Quite good report, I must say. Could you share some more details on how the esport acquisition of HLTV has developed since the corona crisis? Is it like -- is the revenues for that increasing substantially? Are we talking like 50% up? Or how do you look on the development for the esport?

So if we look at the traffic side, there's, of course, more traffic to the site due to the situation. And when we acquired HLTV, what we really like was this incredibly strong brand within CS:GO and a very strong team on the product side with the site, meaning the sellers that are now on board with Better Collective. What we believe we could then add was on the marketing front as well as commercialization. And that is what we are then working on now and creating initiatives, and that's going according to plan. So we are not going to come concretely on growth in terms of revenue, but sort of the synergies we believe will be there is also what we're now seeing happening. So all in all, we are very, very pleased with this acquisition.

All right. And regarding potential further acquisitions, are you continually looking for acquisition with the esports towards other games like League of Legends or Dota or whatever?

That's definitely a possibility. Again, we treat esports like really any other sports because there's a clear tendency to a similar betting behavior within esports. So yes, all options are on the table for us there, just like traditional sports where we believe it will make sense to acquire an asset that would fit in with us being a sports betting media group.

All right. And the market-wise, which markets are you currently? Or would you say that our most interesting look at the acquisition right now? I guess you are quite much order in the U.S. now. Is it South America? Or will it continue to Europe or what are most interesting at this point?

And I think we have mentioned before that South America is indeed very, very interesting to us and still is. So that has a focus from our side. But I can say that the ambitions of Better Collective is really globally. So any market that's developed and has a decent size is of interest to us. But what I would highlight now would -- that be South America is a very interesting area. And obviously, still, the U.S. also developing.

Okay. Cool. And looking at the other types of sports here during the COVID-19 outbreak. If we're excluding esports, is it like horseracing and what sports are the popular ones? Because I guess that's one sport that is quite still unaffected. But what are the sports that are able to maintain your revenue levels at this level?

There's not that much left, to be honest. But we also see table tennis have been -- having definitely more interest than normally during this time. But esports is playing a very important part also with the eFIFA leagues coming in, where you sort of, as user, can recognize the names of the teams. But esports is definitely playing a very important role these days.

All right. And what about horseracing then? Is that something because, I guess, you have managed to have there -- yes.

Yes. Actually, horseracing in the, I think U.K., horseracing has come to a complete hold. The same goes for greyhounds. So it's actually -- there are a few countries where horseracing is still active. And yes, betting is taking place there. But the biggest horseracing markets, at least in terms of our business, they are currently paused.

All right. Perfect. And regarding the NDC development because now you are like on flat level compared to last year. Has the NDC declined substantially? Like, they declined larger than for or the revenue overall?

We gave the statement with activity levels of 50%, like 50% down. And for indices, that is a similar picture that, obviously, when you don't have much sports activity, no event at all, you see much fewer indices. And it's simply because the events are typically the trigger for a user to register and make a deposit, so you can place a bet on the specific event. I can give you an example of event, which is normally very significant to us. It's the Grand National, which unfortunately didn't happen this year.

All right. And you have also initiated some cost savings or cost-saving program, reducing cost base in Q2. And when I look at your extraordinary business update in March, you mentioned that the costs were supposed to maintain at the current level, but lower than the budgets on. Is this just -- do you think the opportunity to lower the cost? Or are you seeing some more negative impact from the COVID-19 pandemic now than what you did see in March? Or what's your view on that?

Well, we basically gave the trading update, and we stick to that, that on average, the cost level is expected to be at the Q1 throughout the whole of 2020. Now we took these measures in a very short and unpredictable period to give us maximum flexibility also to reinvest in new things when sports are coming back. So I think we should still stick to the statement -- we will stick to the statement that the Q1 level is what we will see on 2020 on average. So basically, we spending the savings if we see that activities are coming back to normal levels as we have seen before. Yes. And of course, we are in an unprecedented situation, and that's why we took the safe way and hold to some expenses and initiated this program short term.

All right. Perfect. And so I guess we are seeing some positive developments with the major leagues and so on. Is your view that the most leagues are going to be up and running by Q3? Or what's your view on that point?

Well, at least that's what we have in our assumptions. To be honest, I think you are just as good as we are [ and in ] the news about when leagues will resume. What we can say is that obviously, the Premier League is the main league. That's where you'll see most betting activity happening. So that's a very crucial league for the activity level then. And we don't know when that will happen exactly.

I think we do have a few written questions on the web from [ Matthias Ackermann ], also relating to cost-saving issue, and I will read the question. Is the cost saving of EUR 2 million in Q2 permanent or only for that quarter? And I think we just touched upon that in the previous answering, that we basically see a cost level comparable to Q1 throughout 2020 on average. So basically assuming that the sports are coming back full speed, then we will also have to increase the cost base gradually. So I hope that answers that. Then we have a second question from [indiscernible] I'll read the question now Congratulations on yet another great result despite very difficult conditions. That we've been seeing casino revenues turn very strong in the last few months at other markets or operators. To what extent did it have so that players in the absence of sport betting events, turn to casino and other venues? I think we can answer that. Also, we stated that in the report that we have seen stronger performance in the online casino. And also, if you take other venues as esports, definitely an increase in that area as well. So I hope that answers the question. Third written question is from [ Anders Nussen ]. Thanks for the impressive performance. Can you elaborate on which activities state has remained open in April, please?

Yes. And it's actually what I touched upon before that we are talking really minor sports, like table tennis and then, of course, esports. So to me, we haven't had any sports at all, sort of when we talk about sports that normally have attention from the public. So again, esports has played an important role.

Then there's yet another question from [indiscernible] I'll read the question. Also very good timing on your acquisition of HLTV and the move to esports. You mentioned that it is off to a good start. Can you elaborate on this? And perhaps the COVID impact, since it could be expected to have been positive given more time at home. I hope we have addressed this question also in the previous Q&A. But just to repeat, yes, we have seen a huge traffic increase to HLTV.org during this time. The way we monetize currently is mostly on advertising, you can say, selling positions on the website. So for now, it's more traffic, and that is very positive, of course, and will likely also result in that we will see increased revenue over time from the new, let's say, monetization models that we are applying after we have taken over HLTV. The last written question is coming from [ Hamal Massee ]. I'll read the question. Will the [indiscernible] affect small affiliates negatively? I think I leave this to Jesper.

Yes.I actually think it shouldn't have a big impact on small, but obviously, there will be a short-term effect of reduced revenue. But typically, these businesses are high-margin businesses. So I would expect them to be able to cope with this and then sort of continue when we are [indiscernible] COVID-19. So in my opinion, it's not going to have a big impact on the smaller fleets. All right. Thank you very much for the questions and listening in.

I think we may have one more question. On the phone line. Operator, could you please transfer through?

The next question comes from the line of Erik Moberg from ABG.

Could you perhaps elaborate a bit on the casino verticals performance in April? In ballpark numbers, how much was it up on a year-over-year basis?

I think what we can say is that the casino activity that we monitor in terms of activity levels with sessions is up roughly index 110 to 115. That sort of -- [indiscernible] we're monitoring all accounts on that, but it's a significant part of the casino, which we monitor in this way.

Got you. And in relation to the full Q1, if we look at the daily average revenues, how much was it up in April for the casino vertical?

Erik, I think you have to repeat that question. We don't understand completely. Average on revenue in April on Casino?

Yes, versus the daily average revenue in -- for the full quarter -- for the full Q1?

I think we will have to say come back to Jesper on that. It's sort of in the 10% to 15% range that it is up. Yes.

Yes, that concludes. Thank you for dialing in, everybody, and have a nice day and weekend.