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

Ladies and gentlemen, thank you for standing by. Welcome to today's Better Collective Q3 2020 Presentation. [Operator Instructions] I must advise you that this conference is being recorded today. I would now like to hand the conference over to your speaker, Jesper Søgaard. Please go ahead.

Thank you very much, and welcome to Better Collective's webcast presentation in connection with the Q3 report covering the period January 1 to September 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 Q3 report with you as we have seen sports returning over this summer, laying the foundation for a solid comeback. In general, the market development has so far been in line with the assumptions we made mid-March when we decided to provide an extraordinary business update based on this unprecedented COVID-19 situation. I'm very proud of the way we are steering the business during these difficult times and that we can maintain our full year financial guidance considering these unusual circumstances. The front page of today's presentation illustrates our most recent acquisition of the Atemi Group that has its main operations in London, a very important acquisition that we completed just after the end of the quarter and the transaction that I've been looking forward to discuss and present at this presentation. Let's get going, and 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 that we will start with a presentation of the business highlights for Q3 and a walk-through of the financials for the quarter. We'll recap the framework of our financial targets which we have confirmed in the Q3 report. Then we will continue with the business update, and as always, end the presentation with a Q&A session. Please turn to Page 4. Shortly, Q3 showed strong underlying business performance, which was affected by headwinds in terms of low sports win margin. We have also disclosed the October revenue that ended at all-time high, both with and without the acquisitions we have completed this year. So all in all, we see our business coming back strongly after some months with cancellations of sports and increased uncertainty. Let me give a snapshot overview of the business performance and highlights of Q3. Please turn to Page 5. Our Q3 is characterized by significant opposite effects. On the one hand, we have seen record high sports wagering. And on the other hand, the sports win margin was lower than historical average. Given these circumstances, a quarterly revenue growth of 7% compared to last year is satisfactory. As a result of the cost control measures implemented in the spring, our operational earnings increased by 18% and the EBITA margin at 44% is well above the financial target. Operational cash flow increased by 71%, landing at EUR 8.4 million. New depositing customers are growing again this quarter at 13%, which is at a level comparable to the time before major sports were halted in Q1. Please turn to Page 6. Following the return of major sports as seen over the summer, Q3 turned out to be a quarter marked by high sports betting activity, recognizing that the COVID pandemic is far from over, sports are still ongoing with different precautions. The general expectation is that the remainder of 2020 and 2021 will be filled with sports activities. In Q3, we have upgraded the key U.S. sites VegasInsider.com and Scoresandodds.com, as we'll come back to later in the presentation. And here into the media partnerships with the Daily Telegraph and NJ.com, we have concluded proof-of-concept for the first stage and gathered learnings for building future partnerships. Just after the quarter, we acquired Atemi on October 1. Atemi Group is one of the world's largest company specialized within lead generation for iGaming through paid media, PPC, and social media advertising. As we'll come back to in more detail, this acquisition is a very important step for us to reach our strategic target of becoming the leading sports betting aggregator in the world. Also after the end of the quarter, we acquired the platform's zagranie.com, which is a Polish sports betting media brand and irishracing.com, which is a leading horseracing platform in Ireland in 2 separate transactions. Lastly, we were very pleased to be awarded affiliate of the year at the EGR North America awards 2020. And likewise, to receive the award for Commitment to Compliance by an affiliate company at the VIXIO GamblingCompliance, Global Regulatory Awards 2020 for the second year in a row. Please turn to Page 7 and the word over to Flemming for more details on the financial performance.

Thanks, Jesper. Let's dive into the financials for Q3, and please follow me to Page 8 in the presentation. So zooming in on Q3 revenue, total revenue ended at EUR 18.3 million, which was an increase of 7% compared to the same period last year. The organic growth declined by 3%. Q3 showed strong underlying performance on most KPIs measured in our revenue share counts. Sports wagering was at a record high as were the number of bets placed and active sport users in these accounts. However, the revenue overall was negatively impacted by approximately EUR 2 million in the quarter due to the low sports win margin in our rev share accounts. Revenue share accounted for 65% of total revenue and 74% of player-related revenue, with 13% coming from CPA, i.e., upfront payments, 9% from subscription sales in the U.S. and 13% from other income. We decided to pause subscriptions in the U.S. during the COVID lockdown, but after sports coming back, we have gradually been reinstalling the subscriptions again in Q3 and now are back at regular levels. October 2020 revenue resulted in a total revenue of EUR 12.4 million with a total growth of 87%, of which 33% was organic growth. Atemi Group is included in the group accounts from October 1. If we exclude Atemi, the revenue growth for October was 20% over the same month last year. But both with and without this year's acquisition, October ended with an all-time high revenue. As from Q4, we will be reporting the newly acquired Atemi Group business as a separate segment. However, at this point, I would just want to remind you that Atemi is operating at lower operating margins than the rest of our business. Please turn to Page 9. Looking at the earnings, the operational earnings, Q3 EBITA was EUR 8 million before special items, increasing the EBITA margin to 44%. The EBITA margin remained well above our financial targets, aided by the cost-saving program that we implemented in Q2 to counteract the effect from the lost revenue as sports were halted. While the temporary measures are now rolled back, we have continued with strict cost control, and the total cost base was kept at the same level as Q3 last year. In the coming quarters, we expect continued revenue growth and are cautiously increasing the cost base again to ensure that we support our long-term strategy. Please turn to Page 10. Moving on to the cash flow and the balance sheet. In Q3, operating cash flow before special items was EUR 8.4 million, resulting in a cash conversion of 100%. The high cash conversion is partly a result of changed payment terms for certain payments of employee taxes, et cetera, that are still in place following the COVID-19 situations. Cash and unused credit facilities stood at EUR 70.9 million at the end of Q3, with a net debt-to-EBITDA ratio of 0.89, and that is before the acquisition of Atemi, I should add. Please turn to Page 11. Coming back to revenue and growth. Let's take a look at some of our internal key performance indicators that we usually share at our quarterly reporting i.e., here, we take a look at the sports wagering, which is a growth in the underlying betting volume in our revenue share accounts. We also have added historical numbers from the acquired companies over time and indexed them all back to under starting in 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 accounts has increased significantly over time. That's attributable to the many NDCs that we have sent especially in 2018 and throughout 2019. The COVID effect is notable in Q2. In Q3, we saw record high performance, as illustrated in the green bar to the right in terms of sport wagering in these European rev share accounts. Please turn to Page 12. In addition to the betting volume, we are looking at the average sports win margin in the same revenue share accounts, i.e., what percentage is paid out on the volume. We have used the same indexing in -- as the graph before. And what can be seen is that the margin fluctuates over the quarters. And that Q3 is close to a record low for the period, indexed at 75, whereas the average index number over this period is 93. The volatility in sports win margin is something we view as being transient, but it can affect the short-term financial performance up or downwards. Please turn to Page 13, and now the word back to Jesper again.

Thanks, Flemming. In connection with the IPO, the Board of Directors decided upon financial targets for the short and medium term. As 2020 is the last year in the range of the financial targets, which our average targets over the 3-year period, we have provided additional information for 2020 in isolation. For 2020, we expect double-digit organic growth and total growth of more than 30%. The operating margin, EBITA for 2020 is expected to be above 40%, and net interest-bearing debt to EBITDA below 2.5. In our trading update, dated March 17, and again, today, in our Q3 report, we reiterate these financial targets. The general expectation for 2021 is a normalized situation for major sports. In this unprecedented situation, visibility remains limited. Please turn to Page 14. Let's look at the business update. Please turn to Page 15. On October 1, we completed the acquisition of Atemi Group for EUR 44 million. Atemi Group is one of the world's largest companies specialized within lead generation for iGaming through paid media, PPC, and social media advertising. Atemi Group has been on an impressive growth journey since the company was founded in 2015 and has reached the large-scale it takes to be competitive and profitable within paid media. The acquisition will immediately bring us in the absolute leading position when it comes to customer acquisition for the online operators, delivering premium traffic and high-intent players. The main strategic objectives of the acquisitions are, access to key acquisition channels and common census within paid media as well as access to key social media marketing platforms as an approved advertiser. We have the opportunity to swiftly expand into new markets, including the U.S. Overall, we see a lot of potential synergies from organic traffic, sports betting and paid media. Historically, Atemi has been most active in the online casino segment, with the introduction of the products that compare, Atemi is growing within sports betting and as of June 2020, been investing in a gradual buildup of revenue share databases. This is a strategy that we expect to continue and expand to other markets. Please turn to Page 16.. The purchase price of the Atemi Group was EUR 44 million. From a financial perspective, we will take a leap towards having pro forma annual revenue of an estimate of more than EUR 120 million with high operational earnings and cash flow. The earnings margin within paid media is lower than within organic traffic. The Atemi business will be reported as a separate segment. Through the acquisition, we have added a team of highly skilled employees with in-depth media know-how, superior tech and comparison ecosystems. We see many opportunities for expansion into new markets and for harvesting synergistic effects between our assets and competencies. In the first month of ownership, Atemi generated revenue of EUR 4.4 million, and we have already seen the first promising synergistic effects from combining the businesses. So far, most of the revenue stems from the U.K. market. Atemi's main operation is in London. Please turn to Page 17. This leads me to an overview of our global reach. As you can tell from the map, our flagship brands, bettingexpert and the HLTV are aimed at a worldwide audience. The recently acquired Bet Compare currently has a strong U.K. presence, but over time, the site will be rolled out to a wider international audience. Note that traffic numbers from Bet Compare are not yet included. Our U.S. sites include VegasInsider, Scoresandodds and RotoGrinders. We have released new products and upgraded versions of both VegasInsider.com and Scoresandodds.com. We believe that VegasInsider has long-term potential to become the home of U.S. sports betters. And in the coming years, we'll continue to invest in quality content for our users. In Q3, we saw the return of most major sports in the U.S. and on the regulatory front, the fifth largest state, Illinois, has extended its temporary online registration permission until November 14. We expect this regime to remain open, and we have already seen more and more operators opening in this state. Our local brands include stronghold names primarily in Europe. We remain focused on building strong brands, mainly within sports betting that are informative and entertaining for our users. We want to be the go-to place when it comes to finding and sharing information related to sports and betting. 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 best partners for their continued performance and flexibility in this extraordinary environment. The recent quarters have really demonstrated the strong team spirit at Better Collective. Cautiously expecting that the remainder of 2020 and 2021 will be filled with sports activities and high levels of betting activity, we believe that we are well positioned to take our part of a global market that is getting back on the growth track. This concludes our webcast presentation for Q3 2020, and we'll now open for questions from the audience. Thanks for listening in. Please turn to Page 19.

[Operator Instructions] Your first question today comes from Erik Moberg from ABG.

So the first one. You guided that on a stand-alone basis, when we exclude Atemi Group, revenue was up 20% year-over-year in October, but sports book margins have also been on the higher side. If we would sort of normalize sports book margins organically on a stand-alone basis, how much was your core business up then ballpark number?

Well, we haven't sort of normalized that figure. But what we can say is that basically, the existing business achieved double-digit organic growth in October. But we can't -- I can't give you a normalized figure.

Fair enough. Could you perhaps elaborate a bit on the drivers in terms of geographic regions? Was it any particular region that sticks out? Or is it just improvements across the board?

That will be across the board. We simply see high activity across all regions, really.

Any specific region that sticks out? Would you say that the underlying affiliate market in New Jersey is still -- is even growth year-over-year?

Yes, I would say that. But sort of more in detail, we can't really comment on New Jersey. And coming back to the question with a specific region, I -- it is really related to overall good performance from all geographies that we operate in.

Fair enough. And just -- and a question then on M&A. You have completed numerous transactions the past couple of years. If you could perhaps elaborate a bit on how the M&A process typically looks like? For instance, in times when you have to raise your bid, is it typically a matter of the target board rejecting your offer or a matter of another industrial player that makes a competing bid?

Well, we've been in so many different processes. So I think there's not 1 single answer to that. But we do, in most cases, experience that it's either an exclusive process or it's a process with few participators. So we think that climate in general is quite positive for us to get a good price and strike a good deal. We differentiate a bit in sort of the types of targets. So actually, we have a few good examples recently with Atemi Group being a very large acquisition for us, where we have spend -- it has been ongoing for a very long time and also really in-depth due diligence. And then most recently, 2 smaller asset deals where we just see a good fit with different parts of our business, which obviously are processes that are dealt with quite faster and also easier to integrate.

Fair enough. And hypothetically speaking, if you had to raise your bid 3x, is it fair to assume that it would most likely be a combination of the board rejecting the offer as well as another industrial player making a competing offer as well?

I can't really say anything to that, Erik. Sorry.

Got you. Fair enough. And just in general, on the consolidation of the U.S. markets, your general view on it. What would be the benefits of adding another major player to your offering, both in terms of cost synergies as well as pricing power? If you could elaborate a bit on this, it would be much appreciated.

Yes. I think what we actually see in most markets that buy size and traffic and valuable traffic, you get more leverage towards the operators. And that is definitely also the case in the U.S., which is a less developed and definitely much less mature affiliate market. So there's no doubt that as times goes and our business grows there, we get more valuable traffic, that will give us more leverage towards the operators. So that's surely the ambition. And again, it's still early days in the U.S. market when it comes to the affiliate market due to it be -- it having fewer market participants and also sort of not as fragmented market ownership among the operators.

Got you. And in terms of general cost synergies there. Could you perhaps elaborate a bit on that?

Obviously, like -- on a general note, we -- when we acquire, we don't acquire for cost synergies, we acquire due to revenue growth opportunities. That said, occasionally, we do see cost synergies as part of a transaction. And specifically for the U.S., maybe, but it wouldn't be the driver of an acquisition for us in the U.S. that's a sure thing.

Got it. But just on average, historically looking, when you have made a -- when you complete an acquisition percentage-wise, how much of the typical OpEx base can you in general, realizing the cost synergies?

It's a -- I can't give you a good answer there, Erik, because that is not the focus of our acquisitions. It is more about the growth of revenue. So we are not factoring sort of large cost synergies when we acquire. Basically, we would, in most -- almost all cases, operate with a fixed cost level because what we care about is to continue to grow revenue.

Fair enough. But could you perhaps just elaborate a bit on -- in terms of margin, how much of the margin improvement you typically gain from the acquired assets from the revenue synergies?

I think, Erik, and on a general note, many of the acquisitions we have done of, you can say, historically, have been businesses that have been operating at very high margins in a local area, not investing a lot in brand building and so forth. So often, we actually see that we are adding cost to maintain and even improve brand building in order to secure the growth that Jesper is referring to. So for us, this is really to find the good brands, whether being the global or national brands that we can develop further on and grow also for a long time. But clearly, adding profitable businesses helps over time, also allowed us to do exactly that while staying, you can say, with a strict focus on our financial target of staying above the 40%. So it is also allowing us to invest in growth.

Got you. And just in terms of Atemi Group there. Is it fair to assume that the cost base, if we exclude for PPC, will remain relatively fixed going forward?

Sorry, what was the last part relatively fixed or?

Yes, sorry. Yes, we exclude for PPC, would the cost -- do you assess that the cost base for Atemi Group will be relatively flat going forward?

Yes. That is what we expect. In that business, there's no doubt that the PPC costs are sort of the vast majority of cost.

Thank you. I'll now hand the call back over to you, Jesper. Please go ahead.