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

Good day, and thank you for standing by. Welcome to Better Collective Third Quarter 2022 Presentation. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Better Collective CEO, Jesper Sogaard. Please go ahead.

Thank you and Good morning, everyone, and welcome to Better Collective's quarterly webcast, which we host in connection with the release of our Q3 report. My name is Jesper Sogaard and for those of you who do not know me, I'm the Co-Founder and CEO of Better Collective. As always, I'm joined by our CFO, Flemming Pedersen, who will guide you through the financials for the quarter. Thank you for tuning in and for showing an interest in Better Collective. Please follow me to the next page. We ask you to pay attention to this slide where we display our disclaimer regarding any forward-looking statements in today's webcast. Please turn to Page 3. Please see the agenda for today's presentation as displayed on this page. Let's get going. Please turn to the next page. Yet again, we delivered a quarter of great performance where Better Collective grew 32%. Generally speaking, Q3 is a quarter impacted by seasonality with July and August being 2 slow months followed by a high activity month with the NFL kick off. As a result, 45% of the group revenue also came during a strong September. Overall, the growth was mainly generated by Europe and Rest of World business, which in turn was driven by LATAM and our media partnerships. Turning to the U.S., the business grew 17% year-on-year, which is satisfactory. The U.S. performance was impacted by the NBA and NHL seasons being pushed into Q3 during 2021, but not in 2022. Moreover, in the U.S., the interest for revenue share agreements increased during Q3 as a result of the decreasing spend from U.S. sportsbooks in their aim of reaching profitability, which also impacted us during the quarter. In Q3, we delivered many new depositing customers, and 80% of those were sent on revenue share agreements. In the quarter, we also had an all-time high revenue share income. Year-to-date, we reached more than 1.1 million new depositing customers, which is a significant record and milestone for Better Collective. Upon closing Q3, we still haven't been visibly impacted by the decline in the macro economy, and we expect Better Collective to remain resilient, but not immune during this period. October revenue reached EUR 26 million, which is more than 50% growth year-on-year. We have intensely been preparing for the FIFA World Cup, which will take place during November and December, and we expect to see high activity across our brands as we are looking into an action pack Q4. Lastly, we also maintain our financial targets for 2022. Please turn to the next page. Here is a quick overview of our financial performance. Q3 delivered growth of 32% to revenue of EUR 59.7 million. EBITDA increased by 7% from Q3 2021. And given our record high revenue share income, the quality of the EBITDA was higher year-on-year. Revenue share income was an all-time high at EUR 25 million, which equates a 73% growth year-on-year. Seeing that our revenue share income is increasing, is a development I remain extremely excited about. During Q3, more than 354,000 new depositing customers were delivered, while 80% were sent on revenue share agreements, which bodes well for our future stream of recurring revenue. The operational cash flow was EUR 13.1 million, which is an increase of 25%. Please turn to the next page as I pass on the word to Flemming.

Thank you, Jesper. It's my pleasure to do a thorough walk-through of the numbers and the Q3 financials. So please follow me to the next page. As mentioned, the revenue for the quarter ended at EUR 59.7 million, which is a 30% growth compared to the same period last year. And I'm really proud to see us deliver such growth in an unstable and macro environment. Yes, organic revenue growth landed at 23%, and the revenue split was 69% from publishing and 31% from the Paid Media segment, with 72% of revenue coming from Europe and Rest of World and 28% coming from the U.S. business. Please turn to the next page. Moving on to operational earnings. The EBITDA came in at EUR 14.6 million, which is flat compared to last year, and the EBITDA margin was 24%. Allow me to explain the development in the earnings and how it's bridging to our full year financial guidance that we are maintaining, as Jesper mentioned. Starting from the left, the first marking shows our full year 2021 EBITDA. In the beginning of 2022, we guided for EUR 75 million with an assumption of the U.S. business being solely CPA-based onetime payments. This year we have already spent much time going through Q1 and Q2 developments. So I will not dive further into these. But moving into the moving parts in Q3, we saw good underlying performance, combined with the sports win margin that positively impacted the quarter slightly with EUR 1 million on a year-on-year basis. This stands in contrast to Q1 and Q2, where the sports win margin had a significant negative impact compared to previous periods. The last impact on EBITDA shown on this slide during Q3 was the move in the U.S. business to revenue share contracts, which we now estimate to impact our full year 2022 EBITDA with more than EUR 10 million. Let me elaborate a bit on that on the next slide. As mentioned, the move to revenue share in the U.S. is now estimated to impact our EBITDA by more than EUR 10 million for the full year. During Q2, the estimate was more than EUR 5 million, as we, at the time, had signed new contracts on the revenue share with 2 sportsbooks. However, we have made more contract closings during Q3, which means that we now have gone from 2 to 4 U.S. sportsbooks that are working on -- that we are working with on revenue share terms. So let me give you an example to illustrate the effect of this undertaking. In September alone, we had 1 sportsbook that could have generated an additional $2 million in CPA revenues. This is no doubt that the easy choice would have been to take the offer from CPA. However, following careful assessment, we are confident that this undertaking will be transformational in the long term by generating a consistent flow of recurring revenue. Based on our longstanding operations with revenue share in Europe and Rest of World, we are drawing on our experiences here and are therefore confident that this move really is going to pay off and furthermore strengthens our relationships to the sportsbooks. We remain very excited about the move to revenue share in the U.S. as it will make our revenue share less seasonal as well as enable us to take part in the overall growth in the market rather than only relying on specific sports events and state launches. Please turn to the next page. New depositing customers landed at more than 354,000 NDCs, whereof more than 282,000 or 80% of that were sent on revenue share contracts. It goes without saying that we are pleased to see the strong development in our revenue share counts. In particular, as this development builds Better Collective's future recurring revenue streams. I would also like to mention that year-to-date we have reached more than 1.1 million NDCs, which is a significant record and milestone for Better Collective. As depicted on this slide, for 2021, we delivered a total of 857,000 NDCs, and we are therefore excited to have passed the 1 million milestone already in Q3 this year. Please turn to the next slide. On this slide, you see the revenue share income as a percentage of the group and the absolute revenue share income. The main conclusion to be drawn from this slide is that we have managed to diversify our revenue streams while still increasing the absolute revenue share income. As can be seen on the slide, we have acquired businesses with subscription-based content as well as businesses that are mainly monetized through advertising. This has brought down the revenue share part relatively. Further, we have acquired our paid media business in Atemi, which at the time of acquisition in Q4 2020 was solely CPA based. We have now invested a lot in moving this toward revenue share-based contracts, which can be seen in our recent revenue share income numbers. Significant growth we have seen in the U.S. initiative pushed revenues towards CPA. However, as you know by now, we have started to move this revenue to these 2 revenue share agreements. And we, therefore, expect the recurring revenue stream to steadily increase from here. I'm satisfied to see the main growth going forward will come from both revenue share income, subscriptions and advertising as these combined make up a steady stream of recurring revenue. Please turn to the next page. To illustrate the development in our revenue share counts. We, as usual, share the index development in our 2 important KPIs, sports wagering and sports win margin. We have seen an increase during the past quarters in sports wagering, also referred to as the total betting volume. The spike reflects high activity with sports fans as well as the strong NDC development. The general business cycle has had no visible impact on our business and the sports wagering is a key indicator for this. On the right side, you see the sports win margin, which in Q3 continued to bounce back towards the historical average, which is a trend we expected to see as the decline in margin was due to short-term factors, of which we also elaborated on during the last -- or the previous quarters. Please turn to the next page. Q3 cash flow was EUR 13.1 million, which is an increase of 25% year-on-year. The cash conversion was 86%. By the end of Q3, capital reserves stood at EUR 41 million, of which cash was EUR 33 million and unused bank credit facilities of EUR 8 million. Net debt to EBITDA ended the quarter at 3.38, which is slightly above our financial targets, but will be expectedly be well below 3 after Q4. I would like to highlight that following the closure of Q3, we landed a new club financing agreement with 3 banks, replacing the one bank arrangement that we established back in 2018. We are pleased to have diversified the financing among 3 banks at very attractive terms. The deal leaves the group with EUR 240 million in committed funding with an accordion option on top. Even though current times do not suggest for large M&As, especially in the private market, funding is now in place should this situation change. Being able to land such an attractive deal under the current macroeconomic uncertainties is truly impressive and a proud testament to the quality of our business and not least our ESG profile. Please turn to the next page, and then I'll hand the word back to you, Jesper.

Thank you, Flemming. I would like to spend the last few minutes reviewing our Q3 business performance. Please follow me to the next page. Despite Q3 being a seasonally low quarter, we are very satisfied with the performance and positive results the group achieved. In an otherwise uncertain environment, Better Collective is seeing good momentum. We managed to land no less than 3 new media partnerships during Q3, and we can now count Chicago Tribune, Bostom.com and Sport1 to a strong portfolio of media partnerships. During Q3, we saw good U.S. development despite it being a seasonally low quarter, which was impacted by a decreasing ad spend from sportsbooks. Furthermore 2021 was fueled by pandemic-delayed NBA and NHL seasons that we're running in Q3, which naturally was not the case this year. As we've been particularly successful at moving more of our U.S.-based partners from CPA to revenue share agreements, we see a short-term impact on our U.S. performance. Both Flemming and I have already addressed the ongoing move from CPA to revenue share in the U.S., is looking highly promising. And at Better Collective, we have always favored revenue share agreements as we invest for the long term. Another testament to this is our paid media business where we have invested a lot in moving this from CPA to revenue share over the past 2 years. This is paying off nicely now. Recently we hosted our annual strategy meeting where management set the goal for Better Collective to become the world's leading digital sports media group. What that journey will entail will be further elaborated at our first ever Capital Markets Day on March 23, 2023. Please turn to the next page. Hardly surprising, we look forward to an action pack Q4 with an extremely condensed football schedule heading into the upcoming FIFA World Cup. We have been basically preparing for the World Cup, and we expect to see high activity during the coming weeks. Additionally, other major sports are also in peak season during the remainder of 2022. So as you can hear, we have a really busy time ahead of us. We remain satisfied with the development of our esports community FUTBIN, which is heavily skewed towards Q4 as the new FIFA game launched in late September. The busy Q4 is reflected in the month of October, delivering revenues of EUR 26 million, which is a year-on-year growth of more than 50%. Please turn to the next page. Before rounding off our Q3 webcast, allow me to do a quick recap. We delivered solid top line growth of 32% in uncertain times. Our revenue share income continued its all-time highs, growing 73% year-on-year. We remain unaffected by the macroeconomic environment, and we expect to remain resilient, but not immune. October is off to a good start in an action-packed Q4. This concludes our webcast presentation. I'll now pass the word back to the operator and open for questions from the audience. Thank you for listening in.

[Operator Instructions] And the first question comes from the line of Oscar Ronnkvist from ABG.

So first of all, I have a question for Flemming. So just if you want to elaborate on the increasing amortizations we saw between Q2 and Q3.

Yes. Thank you, Oscar. The delta in amortization is what we have under amortization is stemming from our M&A and partly also from media partnerships. So if we compare to last year, we have acquired 2 businesses, Canada Sports Betting and FUTBIN, where there is some amortizations, but also some of the media partnerships where we have fixed upfront payments. We have to capitalize those and depreciate over the period of the contract. And if you recall, during this period, we have signed a lot of new media partnerships, i.e., the New York Post, Chicago Tribune and Philadelphia acquired bostom.com. So it's a combination of M&A and media partnerships.

Next one, just a question on staff costs. So staff cost, I think, came down slightly between Q2 and Q3. So also, we seen an article in the U.S. where we've seen some layoffs maybe. So maybe you can elaborate on that and what we should think about staff costs going forward?

Yes. As we also elaborate a bit on, you can say, in our Q3 report, we have grown a lot. We have also invested a lot in not least in the U.S. as the market is emerging and growing. You can say we also now we can say, really focused on scaling the business. And of course, part of that is to basically look at the cost base we have in the U.S., in particular, what you mentioned, we have acquired 3 businesses and some of the functions there have been combined and consolidated and also even say some of the group functions that we have in Europe are being utilized also for the U.S. business now. So it's -- yes, I think 2 headlines, of course, consolidation of business in the U.S. So we operate as one entity. And then also, I would say, a focus on scalability and focus on profit.

So just to make it clear, you don't really expect headcount to increase rapidly going forward. But you're rather happy with the development or the level at the moment?

It depends on the time line, but on the short, medium term, you're right.

And the final question I have, it's regarding the U.S. expectations. So I noticed just a change in wording where you previously said that you were expecting U.S. revenues to exceed $100 million in 2022. Of course, some of that has changed because you sent more NDCs on revenue share contracts. But now you changed that reach SEK 100 million to -- or if you change it to reach instead of exceeding. So if you just could elaborate on the U.S. expectations for Q4 and onwards.

I think that's the same wording in our capital are. So no -- it should not be any translation to into that.

Now we're going to take our next question. And the next question comes from the line of Hjalmar Ahlberg for Redeye.

Maybe first on the trading update for October. Would you say that there's -- I mean a lot of CPA boost or NFL season start boosting that number or any boost maybe from footprint and the release of the FIFA Game. And I mean if you compare that looking into November, December, any big difference in those months, so to say. I know we have the FIFA World Cup, of course, in December, but except from that.

Yes. Now we gave the October number as we usually give the number following the quarterly closing, and this is in line with our expectations. And clearly, Q4, as we have said many times, this year, will be very action-packed with the World Cup in football. You're right on the launch of the FIFA game is also, you can say, specifically related to FUTBIN. We have basically all major U.S. sports ongoing as we speak. So with the caveat that the World Cup is in a different season than home. It's, of course, should vote for high activity, and that's also what we have planned for.

And a question on FUTBIN. You have the subscription model there partly. And I mean, if that grows now in Q3 with the new game, would you expect -- or Q4 is a new game, would you expect that to kind of hit a higher level on recurring revenue per FUTBIN? Or will it be more very much seasonally focused on Q4 and Q1 still?

I think you can say, in general, it is very much reflecting the seasonality of the game. Also the traffic follows the, you can say, the -- exactly that. Most of the revenue on FUTBIN is non-endemic advertising. So advertising outside of betting and then you can say we have the smaller subscription part on top. But the main monetizing on FUTBIN is plain advertising. And that is basically correlated with traffic that spikes on, you can say, related to the game and also football events.

And if I can just chime in. It's also obviously affected by the general prices in the ad spend. So what we have seen is high traffic growth. But as seen, I think in the general ad spend market is that CPM rates are slightly lower than compared to last year.

And I don't know if you can comment that much, but maybe you can elaborate a bit on the U.S. rev share mix, I mean, compared to the total, what is today? And I mean I know we got the kind of numbers that you expect, but you can just give some expectations on how big this effect is. I mean, is rev share basically, I mean, a very small single-digit share now and will be like 50% in a couple of years or if you can have any flavor on that.

Yes. So obviously, it's still early days and the effect we have mostly right now is the dampening part where, as Flemming explained, we have one operator in 1 month actually due to the tune of $2 million, which we are not recognizing because it's on revenue share. But that said, we are seeing now some operators where we are turning profitable with the revenue share. So it's picking up. And it's very much as we have seen historically with our European business that there is a dampening effect. And as long as we grow the NDC numbers, it can last quite a while, but eventually it's turning profitable and growing then the revenue share contribution. And we were in the early phase of that, but very pleased to see that traction in the business that we are now making the move with several sportsbooks in the U.S., and we can expect that future return revenue in the U.S. business as well.

And maybe also a follow-up. Are the majority of the operators in U.S. open to the rev share now or still some that are reluctant to do that.

I think in general, the climate is good for such conversations. Obviously, it's also a basic negotiation and coming to agreement. But there's no doubt that we sense a different climate for having such discussions now.

And maybe a final question, just maybe difficult to comment, but in 2023, you, of course, have the impact from the transition to revenue share. Can you give any flavor on how much that could potentially impact in that year?

No, I think we will have to see how it develops and also how we build that into our forecast and guidance for next year. But of course, now we have started this and as we have been in Europe, it's really something we believe in is value creative. And of course, it's up for negotiation with -- as you also allude to with the books, what they prefer and how we can then a win-win contract for both parties. So we'll have to see until we give the guidance next year.

Dear speakers, at this moment there are no further questions over the phone. Please continue.

Yes. This is Mikkel from Investor Relations. We have a question online, which is regarding revenue share agreements versus CPA. You're right in the report that the product is built to cater to these agreements. Can you elaborate on that and especially explain how you add value long term for your direct customers so that CPA isn't the most beneficial for you and the customer.

It's Jesper here. We think that is a very important distinction with better collective in this market that the products we build, the brands we own, they have a very big audience that is recurring, coming back to our site to get inspired as what to bet on. We have the action app, where you track your bets. So we're constantly in the mind of the users and ultimately, the customers of the sportsbooks. And therefore, for us, it's -- we add value for the lifetime of the users, and we believe it's great to be aligned with the sportsbooks. So we tap into that lifetime value that we're actually adding to the sportsbooks. So it's absolutely right that our products are built for lifetime value rather than just a onetime engagement with the users.

And Flemming here, if I can add, why not just take the CPA. I think that's more, you can say, financial calculation where we estimate the lifetime value of a player. And why is it then attractive for the sportsbook to do that if the long-term value is higher. They basically relieve some risk by paying up front as they also spend a lot of marketing on our other channels and customer acquisitions. We share the risk, of course, with the anticipation of getting a higher gain long term.

Yes. Then we take the next question on M&A and whether we can elaborate a bit on our thoughts here.

As I think Flemming alluded to, the current market may not be the most ideal for this. As we -- in our industry, especially with the private businesses, most of them are cash flow positives. And when prices are dampened, they are not that interested in selling. If we all of a sudden see an exciting opportunity in sort of a distressed sale, we have the capacity to execute it, and we always entertain and engage with our pipeline of M&As. But time-wise, I think it's just hard to predict right now what will happen. But it's not like things significantly changed from our usual commentary related to M&A. We have a strong pipeline. We engage with a lot of conversations, whether or not it's possible to come to price agreements right now. It's just very hard to predict and say.

Yes. And then we have a question in terms of our revenue in October, which was EUR 26 million. How much of this was U.S. based. And I think Flemming, do you want to…

Yes. We sort of lean forward and give the additional ones, but we are not going into further details until we close the quarter. So we are undisclosed.

Yes. We do not have further questions online. So we'll send it back to the operator.

[Operator Instructions] Dear speakers, there are no further questions on the audio line. Please proceed.

Well, that concludes our Q3 webcast. So thank you very much for listening in, and have a great day.

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