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

Ladies and gentlemen, thank you for standing by, and welcome to the Better Collective Second Quarter 2020 Presentation. [Operator Instructions] I must advise you that this conference is being recorded today on 25th of August 2020. I would now like to hand the conference over to your first speaker today, Jesper Søgaard. Please go ahead, sir.

Thank you very much, and welcome to Better Collective's webcast presentation in connection with the Q2 report covering the period January 1 to June 30, 2020, which we released today. My name is Jesper Søgaard, Co-Founder and CEO of the company. And with me today are CFO, Flemming Pedersen; and Head of IR, Christina Thomsen. I'm happy to share our Q2 report 2020 with you. Although this has, in many ways, been an unusual quarter. As expected, online sports betting has been challenged as the pandemic set a halt on all major sports events. As a company, we have demonstrated the resilience of our business model and our ability to withstand a period of low sports activity. We will revert to these special business circumstances during the presentation. Please turn to Page 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 we will start with the presentation of the business highlights for Q2 and a walk-through of the financials for the quarter. We will recap of the framework of our financial targets which we have confirmed in the Q2 report and shed some light on the COVID-19 impact and the business prospects moving forward. Then we will continue with the business update. And as always, in the presentation with the Q&A session. Please turn to Page 4. Put shortly, Q2 performance became the exception in an otherwise strong Better Collective's growth story, but it has also proven the resilience of our business model and the strong team spirit in Better Collective in difficult times. Let me give a snapshot overview of the business performance and highlights of Q2. Please turn to Page 5. As expected, Q2 was a challenging quarter for online sports betting, coming off a strong Q1 which was only affected by the pandemic from mid-March, Q2 was significantly impacted. April was the low point, impact continuing during the most of May and in June, some of the major sports in Europe resumed with accelerated playoffs. Given these circumstances, a quarterly revenue decline of 4% compared to last year is satisfactory and in line with our expectations. Operational earnings declined by 7% and the EBITDA margin at 41% remained in line with the financial target as the cost base was lowered significantly. Operational cash flow increased by 55%. New depositing customers naturally declined in the quarter, correlated with the lower level of sports activities. We delivered 71,000 new depositing customers this quarter, which, in our estimate, is a loss of approximately 90,000 NDCs. Please turn to Page 6. Even though the pandemic impacted Q2 in every way and will perhaps continue to do so for some time to come, our digital business model has proven strong under these difficult circumstances. As a business, we have demonstrated the flexibility to withstand a period of low sports activity. Various measures have been implemented at our offices in alignment with local guidelines to keep employees safe. We have seamlessly transitioned to remote work to the extent necessary, and we experienced no loss of efficiency. Our resources have been redistributed internally to focus on the business areas that have remained active throughout and to prepare for sports returning to their arenas. In the absence of major sports events, bettors turned to other sports that are not usually large betting events. We saw growth in online casino games and more predominantly we noted a strong and continuous growth in esports that benefited our recently acquired business HLTV.org. Whereas casino growth is most likely momentary, esports seems to be more sticky. Esports was already in a growing trend before the pandemic, and judging by the numbers, this growth has accelerated during lockdown. In the U.S., we have made progress in regulatory matters, meaning that we are now live in 8 states. And here, I'm excited about the recent news that the first of 5 states, Illinois, has decided on an online regulation that initially required a physical registration of online registrations, which now have been waived and expectedly will be the permanent framework. We will comment on the U.S. in more detail in this presentation. By the end of June, we completed the share buyback program initiated on March 19, 2020. Please turn to Page 7, and the word over to Flemming for more details on the financial performance.

Thank you, Jesper. Let's look at the financials for Q2, and please follow me to Page 8. Zooming in on Q2 revenue, we saw total revenue was EUR 15.3 million, which was a decline of 4% compared to the same period last year. The organic revenue decline was 24% The total year-on-year decline in the quarter was significantly affected by the major sports events being canceled or postponed, as Jesper mentioned. The revenue drivers this quarter were some of this sports still ongoing, a momentary increase in casino and significant growth in esports. Revenue share accounted for 66% of total revenue and EUR 76 million of player-related revenue, with 16% coming from CPA; 5% from subscription sales in the U.S.; and 13% from other income. We decided to pause subscriptions in the U.S. during the lockdown, but after sports coming back, they have gradually been reinstalled again. July 2020 revenue ended with a total of EUR 6.1 million with a total growth of 16%, of which 4% was organic growth. Additionally, NDC growth was 25% in July compared to last year. Based on the betting activity in our major European revenue share count, European sports wagering showed the second highest month ever recorded. Please turn to Page 9. Looking at the operational earnings, Q2 EBITDA was EUR 6.3 million before special items, resulting in an EBITDA margin of 41%. The EBITDA margin remained in line with our financial targets, aided by the cost-saving program that we implemented in Q2 to counteract the effect of the lost revenue. The program included both a reduction of the organization, no salary to founders and Board of Directors and a temporary salary reduction for the remaining organization in Q2 as well as a reduction of both variable and fixed cost. The total cost for Q2 2020, excluding depreciation and amortization, decreased by EUR 3.3 million or 28% when compared to Q1 2020. The cost base will expectedly increase somewhat from July 1st, with the lapse of intermediate measures and with the return to more normal activity level. Moving on -- sorry, please follow me to Page 10. Moving on to cash flow and balance sheet. In Q2, operating cash flow before special items was EUR 10.4 million, resulting in a cash conversion of 154%. The high cash conversion was a result of lower revenue in the quarter compared to Q1, affecting working capital positively, and changed payment terms for certain payments of employee taxes, et cetera, during the COVID-19 lockdown. Cash and unused credit facilities stood at EUR 65 million at the end of Q2 with a net debt-to-EBITDA ratio of 1.2. Please turn to Page 11. Coming back to the revenue growth. Let's take a look at some of our internal key performance indicators, starting with the sports wagering, which is the growth in the underlying betting volume in our revenue share counts. In this graph, we have also added historical numbers from the acquired companies and indexed them all back to index 100 starting Q1 2013. 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. At separate to the many NDCs that we have been sending in 2018 throughout 2019. In Q1, we saw a decline compared to Q4 due to the COVID impact, which was further enhanced in Q2. The month of April and May were severely affected, whereas June picked back up. July, which is not included in this graph, turned out to be the second-highest month ever in terms of sports wagering in our revenue share count in Europe. Please turn to Page 12. In addition to the betting volume, we are looking at the average sports win margin on revenue share counts, i.e., the percentage that is paid out on the volume. We have used the same indexing in the graph shown before. And what can be seen is that the margins fluctuate over the quarters and that Q2 2020 was below average at index 83. The average index number in the quarter shown as 93. The volatility in sports win margin is something we view as being transient, but it can, of course, affect short-term performance of the downwards. Now please turn to Page 13 and then 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 are average targets for 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, EBITDA 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 Q2 report, we reiterate these financial targets. In this unprecedented situation, visibility is limited as I'll go over in the next slide. Please turn to Page 14. The cancellation and postponement of major sports events have created less visibility and thereby, greater uncertainty than before the COVID-19 pandemic. Therefore, and as mentioned in the Q1 report, there's increased uncertainty regarding the revenue growth for the full year 2020 compared to previous periods. The revenue growth for the full year of 2020 is expected to be 15% to 25% without any additional revenue contribution from new acquisitions. The M&A pipeline is progressing well, and we expect to complete one or more acquisitions before year-end, which expectedly bring the total revenue growth, including M&A, above the financial target more than 30% for the full year. Earnings margin for the full year maintained more than 40%, independent of any new M&As, meaning that we are still running a tight cost control until we are certain that things have normalized. For 2021, we expect a normalized situation for major sports. In addition, several major events that have been postponed from 2020, including the EURO 2020, now EURO 2021, are planned to take place. Financial targets for 2021 will be provided in connection with the full year report for 2020. Please turn to Page 15. Let's look at the business update other than the COVID-related issues. Please turn to Page 16. [Technical Difficulty]

Dear participants, please accept our apologies for the technical issue. Please stay -- please standby, and we will resume our conference shortly.

All right. I think we are back on, and apologies for the technical issues. I hope you all can hear me, and I'll continue from Page 14. The cancellation and postponement of major sports events have created less visibility and thereby, greater uncertainty than before the COVID-19 pandemic. Therefore, and as mentioned in the Q1 report, there's increased uncertainty regarding revenue growth for the full year 2020 compared to previous periods. The revenue growth for the full year of 2020 is expected to be 15% to 25% without any additional revenue contribution from new acquisitions. The M&A pipeline is progressing well, and we expect to complete one or more acquisitions before year-end, which expectedly bring the total growth, including M&A, above the financial target of more than 30% for the full year. Earning margins for the full year is maintained at more than 40%, independent of any new M&As, meaning that we are still running a tight cost control until we are certain that things have normalized. For 2021, we expect a normalized situation for major sports. In addition, several major events that have been postponed from 2020, including the EURO 2020, now EURO 2021, are planned to take place. Financial targets for 2021 will be provided in connection with the full year report for 2020. Please turn to Page 15. Let's look at the business update other than the COVID-related issues. Please turn to Page 16. While European sports picked up before the summer, the U.S. is just beginning to start, which is partly due to normal seasonality. Meanwhile, Better Collective has been making progress in regulatory processes, meaning that we are currently live in 8 states. The type of licensing agreement and legislations differ between states and correspondingly, so do our activities. One example is Illinois, where, for a short while, online registration with bookmakers was allowed earlier this year. It was then shut down to offline registration only. And just last week, online registration was back on. Being the top 5 states based on GDP, we see great potential in Illinois. Our overall reach is increasing, and more states are in the pipeline, including Michigan and Tennessee. In Tennessee, our licensing is already in place as we await sports betting to go live. In parallel, we are completing the transformation of a portfolio of leading U.S. sports betting brand acquired last year. This includes the rebuilding of VegasInsider.com, which we now are in the process of relaunching in time for the NFL kick off in September. We are excited to bring new design and features to our users. Please turn to Page 17. Before I sum up, I just want to speak to the fact that we have signed a Letter of Intent for a new acquisition that expectedly will come to final closing in the second half of 2020. The Letter of Intent concerns the acquisition of an iGaming company for up to approximately EUR 45 million. The target company has a global presence and is specialized within lead generation towards online gambling. The target company has disclosed its current expectations for financial performance for 2020 with revenue of more than EUR 40 million and operational earnings of more than EUR 8 million. The acquisition is pending due diligence and final contract negotiations and will, if complete, be an important strategic move for Better Collective. In general, our ambition is still to seek more value-adding acquisitions to the Better Collective group, and we continue to see a very interesting M&A pipeline. Please turn to Page 18. I'll finalize this presentation with a snapshot of Better Collective. I would like to express my sincere thanks to all Better Collective stakeholders, our employees and management team, our Board of Directors and all our business partners for the continued establishing performance and flexibility in this extraordinary environment. The past quarter has really demonstrated a strong team spirit in Better Collective. We expect 2021 to be a year packed with major sports events, hopefully, with the participation of spectators, so everybody can enjoy the maximum entertainment of sports and that our business can continue the strong growth we've seen in the past. This concludes our webcast presentation for Q2 2020, and we will now open for questions from the audience. Thanks for listening in. Please turn to Page 2020 -- 22.

[Operator Instructions] The first question comes from the line of Erik Moberg from ABG.

So first question, could you please help us understand the dynamics of the start of Q3 better? Organic growth was much weaker than I would have expected, especially given that, in theory, should have easy comparables. Does this solely pertain to weak NDCs in Q2? So you had less customers at the start of Q3, and hence, we should expect a slower recovery? Or is there anything else that I'm missing?

There are a few factors to that, Erik. So one, which we also mentioned is sort of the NDC momentum, which obviously, has been affected by the numbers during the lockdown, meaning that we've been sending fewer NDCs, which is dampening activity levels. And then when we talk about what we see in the accounts with sports activity, that relates mainly to the core European market. Whereas we do see globally, that we are still affected to some degree by lower activity levels, also with sports that are not still active. So they would be the main reason for that.

Got it. And also on your recent acquisition, could you give -- perhaps give us some more color? You mentioned it has a global reach. Could you perhaps elaborate a bit more on the geographic exposure? And also a bit on the margin, it appears to be on the lower side. There should be some room to expand this quite materially or what is your take on that?

Unfortunately, we can't comment more than what you've seen in the report yet. It is just an LOI and still is pending due diligence and final contract negotiations. So hopefully, we'll be able to close this target, and then we would, of course, tell much more.

Got it. But is it fair to assume that you could, in theory, boost this margin quite substantially over time?

Again, sorry, we cannot comment on that for now. We'll come back to that, hopefully.

Okay. Fair enough. And in terms of Latin America, and specifically Brazil, could you give us some more color on how your position for that market once it regulates? And what sort of your expectations are there?

We are in a good position. We have some strong assets there. It's a market that we monitor closely and have been working with for quite a while. Coming back to sort of the effect of sports, Brazil is actually a country where we have seen games being postponed and canceled just prior to kick off. So it's a market which is affected by the COVID-19. But long term, it's a very exciting market and we are close and we'll stay close to that market.

Got it. And if we turn our attention to the European side of things. Could you perhaps just elaborate on the outlook of demand for the second half versus 1 year ago?

Sorry, did you say the demand of -- for the...

Yes, overall demand for affiliates in the -- in your European business.

I think the talks and reactions we have from our business partners is pretty much in line with what we have experienced in the past. There is no doubt that during the lockdown, we did see sort of -- Better Collective wasn't the only company that made cost initiatives. We saw that across. But I would say, in terms of the relationships, it's now coming back to a normal level and have been so since sports have picked up again.

Got it. And if we look into 2021 and 2022 for Europe, you will have tailwinds from the Dutch regulation, but you will also have some headwinds from Germany, I suppose. Could you perhaps elaborate a bit on the net effect from this?

It is very hard to say right now. As you rightly point out, currently, we have no exposure towards the Dutch market. So when that hopefully goes live at some point in time, that would be a growth opportunity to us. And where the German regulation will land, we will have to see. It's a big market for us. So it's, of course, important where this lands.

Got it. And in terms of the U.S., you previously mentioned that we should see sort of a gradual ramp-up over time. Is there anything that has changed there? Or -- yes, for the outlook for the second half here?

No, I would restate that comment. That is what we expect. Again, we, of course, watching the development of COVID-19 and the effect that may have on sports in the U.S., which is, as all know, a country that has been heavily affected by the COVID-19 situation. But for now, a gradual ramp-up is what we expect.

Okay. And just -- it would also be helpful just to get an update on your expectations for Illinois as a market. Do you expect to see a similar ramp up for sports betting there as in New Jersey?

We have limited data. But while there was the online registration available, we saw pretty good traction. So that's what we expect to see again. But yes, guessing more is difficult. But we saw a good effect and decent traction when it was open, and that is obviously what we hope to be able to achieve there.

Yes. Fair enough. And just lastly, on the U.S., could you perhaps just give us also a general update in regards of where you see overall demand versus 1 year ago, both in terms of -- yes, in terms of CPA levels, et cetera, and also in regards of how the competitive landscape currently is looking. Is there anything that you've seen that has changed versus 1 year ago? If you look at the outlook for the second half?

Yes. I would say that compared to a year ago, when the U.S. was pretty new to us, our overall relationships with the different operators have improved. We now have more product on the shelf and dialogue develops. So developing according to plan and positively. The entire landscape, I would say, is also it has developed as we expected, and there's competition, that's no surprise. But all in all, no surprise at all, I would really say.

The next question comes from line of Erik Lindholm from Nordea.

Yes. Just comment or a question on how we should look at the comments of higher uncertainty to your revenue target? And how we should couple this with strong sports wagering in July in Europe? Is the uncertainty mainly on the U.S. coming back? Or how should we think about this?

Flemming here. Erik, thanks for the question. I think in general, what we see and what we try to reflect in our report is that what we see in our European revenue share count is that when the sports are returning, the European bettors are returning with normal behavior or even higher than before. But I think we all have to recognize that, of course, the sports calendars have been shifted, and we have playoffs in the middle of June, July. So it is not a normal situation, and that's also why we take a cautious approach to the second half of 2020. As Jesper mentioned and what we also have in our report, one thing is Europe, where we have seen the major football leagues coming to playoffs and thereby, also the betting activity. But countries like U.S., LatAm and other places are still in -- or have been in a lockdown period and now gradually reopening. So that's why we basically have not just a European situation, but also a quite different global situation, at least right now. We have seen that sports are coming back, and these sort of football leagues in Brazil is starting up. We see U.S. sports starting up. But it is, of course, with a bit of difference to what we normally see. And that's what we're trying to reflect in the -- a bit higher uncertainty than normal.

All right. Yes. That's clear. And just on the launch of the Vegas Insider, which is very exciting. How rapidly do you see this start contributing in a meaningful way to revenues? Is it already in September? Or when should we expect meaningful revenues from Vegas Insider?

We have now rolled out sort of the first new design, and there will be a constant test and improvements done to the site. The overall idea with that relaunch is to bring Vegas Insider up to modern day. It looked like something it was built in the end of the 90s, and thereby, we believe we can grow over time, traffic. We can make the site more sticky, and we'll be able to convert better. But that is a process, meaning that we are not going to get that right from day 1. I do expect that, that Vegas Insider should perform better this year compared to last year. But how much better, and so how fast we will be able to get this right and grow revenues is also something with uncertainty and what we'll have to wait and see because it's simply based on us improving site, testing the site. But I'm very, very happy with what we have launched now. I think it's a very good starting point for the site. And the focus will now be to both grow the monetization on the site by being able to charge users and growing revenue by that. But also, obviously, by affiliation, where still we must remember that on Vegas Insider, we have traffic pro rata by states. So most of the traffic on that side, we can't monetize yet through affiliate marketing. So it's -- it would be also -- monetization being done by CPM sales. So it will take time. But again, the long-term of this, when we have more state-regulated and sort of see the full potential of the U.S., Vegas Insider will just be a prime position to be a leading site in such a market.

Right. And so you're currently live in 8 U.S. states. By the end of 2020 or perhaps even 2021, how -- what is this number? Is it 10, 20, or what is it?

We mentioned just 2 other states. We mentioned Tennessee and Michigan. And again, we would like to be a bit cautious about this because we simply can't predict when sites -- the states will go live. One thing is that they may adopt some legislation, but for them to actually go live and us being enable to target the market is a bit different in terms of timing. So, yes, we'll be cautious there. But again, for the long term, we're very optimistic on this.

Right. And just a final one from me here. You mentioned that HLTV grew really quickly in the quarter and a strong uptick in esports. Is it possible to say approximately what percentage of total revenues came from esports in the quarter? And what do you see going forward here?

We are not disclosing that. For what we've said just as we acquired the company was that we would start working with the affiliate model and try to drive more depositors from the traffic, and that is going well. And overall, we believe that we'll be able to increase monetization and thereby, total revenue from the site going forward. Again, it will happen gradually, but things have gone well, and we expect them to continue to go well. But we're not disclosing the revenue of this site.

[Operator Instructions] Please go ahead with the questions on the webcast.

Yes. I think we have one question from the webcast, and I will just read the question. Do you have any new information on legislation in Germany, and how it can affect your business there? And I'll try to answer as best as I can. There is a regulatory process going on in Germany for a different framework. And it is now, as we understand it, with the European Union for review and for commenting from other member states, so that's where the process is right now. And from what we can understand, there are significant comments and debate about this. So it's something that we'll have to monitor and see where it goes. But most of our revenue is for sports betting, where, we believe, that there will be a framework going forward. And we also believe that we can find our ways in that market also on the new framework. So we'll have to see what comes out of it, but we don't have any material news from the process. All right.

I think that was it -- questions. So thanks a lot for dialing in. And again, we apologize for the technical issues. Have a great day, everybody. Bye.

That does conclude our conference for today. Thank you for participating. You may all disconnect. Have a nice day.