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

Good day, and thank you for standing by. Welcome to the Better Collective Q4 2022 Presentation. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to Better Collective Director of IR, Mikkel Munch Jacobsgaard. Please go ahead.

Good morning, everyone, and thank you for joining us today for our Q4 and full year 2022 numbers. My name is Mikkel Munch Jacobsgaard, and I'm joined today by our Co-Founder and CEO, Jesper Sogaard; and CFO, Flemming Pedersen. Thank you for showing an interest in Better Collective. Please follow me to the next page. As usual, 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. Here, we have the agenda of today. We start out by Jesper taking us through our highlights for the quarter and full year. Then Flemming will take you through our financial performance before handing the word back to Jesper for business review. We end the call with a Q&A session. Let's get going. Please turn to the next page as I hand over the word to you, Jesper.

Thank you, Mikkel, and hello, everyone. I would like to start out the call by thanking all of our employees and partners for another amazing year. Without you, we will not be where we are today. Q4 was a very strong quarter for Better Collective, during which we delivered record numbers across the group. Revenue grew 63%, of which 44% was organic growth. Further, our recurring revenue also grew strongly. EBITDA was up 115% year-on-year, which shows the operational leverage in our business. The fact that we delivered such a strong EBITDA, despite moving even more new depositing customers to revenue share contracts in the U.S. is quite impressive. We sent another record numbers of NDCs to our partners with more than 580,000 during the quarter and around 1.7 million during all of 2022. Around 80% of those were sent on revenue share contracts. This is a truly amazing number of building for the future. The quarter was driven by a strong group performance topped with exceptional deliveries during the men's World Cup and a strong performance in our U.S. business across all our brands. All of this led to the upgrade of our organic revenue guidance for 2022, up from 20% to 30% and ended at 34%. The strong momentum during Q4 continued into January, where the launch of sports betting and online casino in Ohio led to another record with all-time high monthly revenues of more than EUR 37 million equaling growth of more than 40%. This growth comes on top of a very strong January last year, where the state of New York launched. It is worth mentioning here that we do not expect the extraordinary January momentum to continue, given it was largely due to a one-off effect from the Ohio launch. In summary, the performance we have seen in Q4 and the start to the new year is a major lead for Better Collective as a business, and the foundation for all this has been tax sports calendars with so many great shows across the globe that, for me being a sports fan, has been just outstanding. Please turn to the next page where I hand over the word to Flemming.

Thank you, Jesper, and good morning to you all. It's my pleasure to walk you through our numbers and our Q4 financials. So please follow me to the next page. Firstly, I would like to mention that Better Collective overall remains unaffected by the macroeconomic environment we are in right now as we have seen record high activity in almost all our business areas and we delivered Q4 revenue of EUR 86.1 million, which equals growth of 63% of which 44% was organic growth. With operational earnings, EBITDA of EUR 35.3 million and growth of 115%, our business proved its operational leverage. Q4 was, as expected, a seasonal strong quarter where we delivered approximately 40% of the full year earnings. Q2 and Q3 are normally low seasons as most sports are off during the summer period, whereas Q1 and Q4 are our peak quarters as the majority of sports leagues are in the high season at this time. And not to mention, the Men's Soccer World Cup also took place in November, December last year. As Jesper mentioned, we also report revenues for the month of January, landing at more than EUR 37 million with growth of more than 40% compared to last year's strong January where the state of New York open for online sports betting. This year, it was the state of Ohio that went live with both online sports betting and online casino, seeing the most successful U.S. state launch for us so far. Indeed, a very strong start to the new year but, of course, not something that should just be extrapolated into the rest of the year. Please turn to the next page. Total revenue for the full year of 2022 ended at EUR 269.3 million, which is a growth of 52%, thereof, 34% was organic growth. As Jesper also briefly addressed, we published pre-released numbers earlier this month as the organic revenue growth was above our guidance of 20% to 30% revenue growth. Also on full year numbers, our earnings EBITDA grew a lot to EUR 85.1 million or 53%. We are very satisfied with this performance and find it very impressive as it also absorbed EUR 15 million when shifting to revenue share contracts in the U.S. Implicitly, this means that our full year EBITDA actually could have been EUR 100 million if we have stayed with working only on CPA contracts in the U.S. Earnings per share growth, EPS, remains an important KPI for us, especially as M&A is an integral part of our strategy. Hence, it is great to see the full year growth of more than 150%, especially encouraging following our large acquisition in 2021 of the Action Network, where we increased our share capital on the back of that. We remain very determined on our M&A strategy, but at the same time, we want to stay focused on the capital allocation and focus on that, what we do create shareholder value. Please turn to the next page. On this slide, you see the EBITDA bridge for 2022, which we presented for the first time in our Q2 webcast. In the beginning of 2022, we disclosed our EBITDA guidance of EUR 75 million, which was based solely on CPA revenues from the U.S. During the first quarter, we acquired Canada Sports Betting and FUTBIN, increasing our earnings together with a strong performance during the launch of the New York State. During Q1, we also saw some headwinds in the sports win margin. As we have elaborated on many times, this has now normalized as expected. From Q2 to Q4, we saw solid business performance, which absorbed the EUR 15 million moved from upfront payments to revenues share in the U.S. Despite the short-term headwinds in the sports win margin as well as the move to revenue share in the U.S., our EBITDA landed for the full year at EUR 85.1 million, which is in line with our financial targets. Please move to the next slide. During 2022, we have elaborated a lot on the move from upfront payments to revenue share in the U.S., our preferred business model. In Q4, we closed the quarter having 6 sports books in the U.S. on revenue share contracts and a full year EBITDA impact of around EUR 15 million. There is no doubt that the easy choice would have been just to take the upfront payments. However, we are confident that this undertaking will be transformational in the long run because it will be generating a consistent flow of recurring revenue. Based on our long-standing operations with revenue share in Europe and Rest of World, we can draw on these experiences and are therefore confident that the move really is going to pay off. Further, we remain very excited about the move in the U.S., and it will make revenue less seasonal while enabling us to take part in the overall growth in the market rather than relying on specific sports events and state launches. Lastly, I would like to mention that we are seeing a steadily growing subscription business, not least in the U.S. Our annual revenue from these user subscriptions exceeded EUR 18 million for the year, and it is something we see as a true quality stand to our products and offerings and a future important part of our recurring revenue streams. Please turn to the next page. Let's take a closer look on the new depositing customers, or NDCs, which ended at a record high of more than 580,000 where 78% was sent on revenue share contracts. It goes without saying that we are very pleased to see the strong growth in our revenue share count, in particular, as this development builds for the future recurring revenue. I would also like to mention that we reached 1.7 million NDCs for the full year 2022, which is a significant record and milestone for Better Collective. As depicted on this slide, it's quite a jump from 2021, where we delivered a total of 857,000 NDCs. Please turn to the next slide. We have started reporting on recurring revenue, which consists of revenue share income, subscription revenue and CPM advertising revenue. Going forward, this will be the metric we will focus on instead of only revenue share income. Our recurring revenue generated EUR 41.3 million, showing a 94% growth, which we are incredibly proud about. On this slide, you can see the solid growth development in our recurring revenue as well as the revenue share income over the past quarters and years. It is satisfying to see the development despite us having further diversified our revenue streams with partnerships and license sales as well as having received CPAs. During the full year of 2022, the recurring revenue grew 54% to EUR 123.3 million. These revenue streams remain a key priority as both revenue share income, subscriptions and advertising make up a stream of recurring revenue that provide a more stable and predictable future. Please turn to the next page. To illustrate the development in our revenue share count, we share the index development on the 2 important KPIs, sports wagering and sports win margin. We have seen an increase during the past quarters in the sports wagering also referred to as the total betting volume. The spike reflects high activity with sports fans as well as a 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 Q4, 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 as we have elaborated on previously. Please turn to the next page. Q4 cash flow was EUR 20.6 million, which is an increase of 52% year-over-year. Cash conversion was 58%, which is usual -- is low when we see monthly and quarterly accelerating revenue and thereby increase in our accounts receivables. At the end of Q4, capital reserve stood at EUR 76 million, of which EUR 31.5 million was cash, cash and unused bank credit facilities of EUR 44 million. Net debt to EBITDA ended the year at 2.67, which is in line with our target for the full year, which should land below 3. Please turn to the next page, and the word back to Jesper.

Thank you, Flemming. I would like to spend the last few minutes reviewing our Q4 business performance. Please follow me to the next page. The Men's Soccer World Cup was a strong driver for Better Collective, during which we saw extremely high activity that far exceeded our expectations. We started preparing for the World Cup month in advance, which we benefited from across geographies. Of the approximately 1.7 million NDCs we sent during 2022, 76% was sent on revenue share contracts. And out of Q4's 581,000 NDCs, more than 300,000 were delivered during the World Cup. To put this number into perspective, the roughly 300,000 NDCs are more than the last 4 Men's Soccer World Cups and 4 Men's European championships combined, which is what we have tried to depict on the chart on this slide. When comparing to the Men's World Cup in 2018, our key figures have increased tenfold, a true testament to how far we have come in just 4 years. It is worth noting that sending 300,000 NDCs during the World Cup has had a short-term dampening effect on our performance because many of the indices were sent on revenue share contracts. However, as stated many times over, this move brings a long-term benefit and build for the future. Given this effect, it is even more outstanding that we still managed to surpass our organic revenue target. During the tournament and for Q4, we broke records on all major KPIs like revenue, revenue share income, EBITDA, sports wagering and NDCs. Please turn to the next page. In connection with the 2021 acquisition of Action Network, Better Collective estimated that we could exceed USD 100 million in U.S. revenue by the end of 2022. At the time of acquisition, it was a high estimate as Action Network was a newer established business with many market uncertainties ahead. During Q4, our U.S. business grew revenue 71% year-on-year to a record high of EUR 34 million. This brings our total 2022 U.S. revenues just above the USD 100 million mark, estimated EUR 94.9 million in our reporting currency. If I must say so myself, it's quite impressive that the estimate was reached even though we also moved $15 million up from the estimated more than $10 million in Q3 from upfront payments CPA to revenue share contracts. 2022 U.S. revenue was 102% year-on-year. And it's worth mentioning that this growth comes on top of the 370% growth from 2020 to 2021. I'm proud to see that great results have been delivered in the U.S. despite us navigating through the change in climate where sportsbook shifted focus from growth to profitability. All this has been achieved in the short term since the PASPA Act was repealed in May 2018, allowing the U.S. market to open state by state, now counting 21 jurisdictions with different types of regulated betting markets. The performance was driven by all our U.S.-based sports media, while the launch of the New York State and Maryland also had positive impacts, combined with a very strong performance by our paid media team. Let me comment further on our paid media business as it really has taken off. Let us turn to the next page. In 2020, we made a strategic investment into paid media by acquiring the Atemi Group, which specialized within the paid advertising space of the major search engines and social media platforms. This has turned out to be a great financial investment for Better Collective. And on top of that, it brings many synergies to the group. All of the benefits and synergies are listed in my CEO letter in our Q4 report. And one of the factors is the strength during big sports events and when entering new markets. During Q4, paid media delivered strong growth of 94% due to great performance in general, but was also fueled by the Men's World Cup Soccer and a packed U.S. sports calendar. Due to the massive top line growth, the Q4 paid media margin ended at all-time high of 23%. This performance is another reminder of the strength of having a large revenue share snowball rolling. Despite having an extremely successful World Cup in terms of securing many NDCs, the tournament had a short-term dampening effect on the group as well as paid margin due to extraordinary high numbers of NDCs sent on revenue share contracts. First, this is even more astonishing that we managed to deliver a 23% paid media margin as well as reaching our EUR 85 million group EBITDA target. When Better Collective acquired Atemi Group, the paid media division was in its infancy. And now we have raised it into its youth. We still have plenty of schooling to do to bring it to maturity, but we are ready for that journey. Please turn to the next page. On this slide, you see our financial targets for 2023. We guide for revenue in the range of EUR 290 million to EUR 300 million. EBITDA before special items of EUR 90 million to EUR 100 million, and net debt to EBITDA before special items below 2. We will continuously invest in growing organically and will take one-off costs for 2023 investments to establish a stronger presence in LatAm and other emerging markets, where local regulation is or expected to facilitate business operations. Further, an investment in the buildup of a proprietary technology platform for display advertising, i.e., an Adtech platform, will be made. These initiatives imply estimated EUR 10 million in added costs during 2023 in addition to the existing cost base. On top of this, the group will continue to push for revenue share in the U.S. Lastly, we note that the 2023 calendar is not as condensed as '22s with more state launches and Men's soccer World Cup. All the above considerations have been built into the 2023 targets. Lastly, this year's financial targets do not include impact from M&A activities. Please turn to the next page. Before moving to the Q&A session, allow me to do a quick recap of today's takeaways. During Q4 and the full year of 2022, we delivered strong top line and EBITDA growth. Recurring revenue ended at all-time highs, growing 95%. The strong performance made us upgrade our organic revenue guidance for 2022 from 20% to 30% to 34%. The strong momentum from Q4 continued into January, where we delivered our strongest month ever. Let's move to the next slide. Lastly, we hope to see as many of you as possible for our first ever Capital Markets Day here in Copenhagen or virtually on the 23rd of March 2023. During the Capital Markets Day, we will dive into what it means to become the leading digital sports media group, a deep dive of our operations, markets as well as potentially announcing some long-term strategic ambitions. 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 from Hjalmar Ahlberg from Redeye.

Congratulations a really strong quarter. Maybe first a question on the LatAm investments and also maybe the Adtech platform. If those for the same -- I mean, market. Is the investment only for LatAm market? Or is that a platform for all markets?

Yes. It's basically 2 different things that we are mentioning in our guidance, and thanks for the questions. I'll try to clarify. I can say our investment in the Latin American markets is geographical expansion with establishing organization, et cetera, and establishing our presence there more permanently, you can say, the investment in the Adtech platform is an internal, you can say, software project that we are building. So it's 2 different things.

And just to add on the Adtech platform. It relates to our move to becoming the leading digital sports media group where it's essential that we are able to deliver relevant ads across our network of brands. And that is what we are investing in, in developing a platform for that.

Okay. Got it. And maybe also a question on the general seasonality during 2023. I mean you've elaborated a bit on this in the report. As you say, you have the championships in soccer during 2022, having now a very strong Q1, it looks like in U.S. But could you give any sense on how you think the seasonality will work out this year? I mean you did mention Q2 and Q3 slower especially with anything else to other maybe.

I think basically, the year is -- compared to '22, just less eventful. But we still have all the big sports leagues that will be ongoing. So it's just a "normal year" where we did see -- or which is also part of the very high growth we delivered in '22, a very eventful year last year. So that's sort of how we view the seasonality. We still expect Q2, Q3 to be affected by U.S. sports being very much off and part of Q2 and part of Q3 also with European sports being also. So the seasonality will resemble the seasonality we saw in '22.

Right. And regarding revenue share in the U.S., you've shared something that you are now 6 sportsbook operating revenue share. I would say that, I mean, in general, are more operators opening up to do revenue share? And what are the kind of terms of the revenue share contract? Are they the same or more improving or becoming tougher, if you can add anything on that?

I think what you probably also noticed in our Q4 report that we now have 6 partners in the U.S. we're working on the revenue share agreements, up from 4, I mentioned in Q3. So we do see a progress with more partners where we are working very aligned and also in more of a strategic partnership way, simply also with the aim of us being closer to the partner and ultimately to integrate better with them. So I think it's a good development we see and we sense. It's also an acknowledgment of the position we have in the American market with the brands we own that are must-have brands for these partners to be featured. We have even seen the Action brand being highlighted in one of the big sportsbook reporting in their webcast. So it's really a testament to the quality of the brands we own.

And the next question is from Oscar Ronnkvist from ABG SC.

Just the first question, if you can, is it possible to share any details on your strategic investment in Catena Media. So I know that you've been not seeing too much about that before, but is it anything that can you say again about that?

Oscar, this is Mikkel here. This is also a question we've received a couple of times here online written. And I'll refer all of these questions to our stock release where we mentioned that we don't have any comments.

All right. All right. I see. Then just on the 2023 guidance. So you elaborated a little bit on the assumptions there, a more condensed year, obviously, with no World Cup and less state launches, but just to get a sense of the assumptions. So after Massachusetts, is it built into your guidance that you won't see any more U.S. state launches after Massachusetts in Q1, Q2? Or are you -- I mean, if we were to see any more state launches within 2023, would that be sort of upside to your financial targets in 2023?

Yes. Flemming here. Right now, we are not seeing any prospects ahead of the already launched Ohio State and then, as you rightly say, Massachusetts, which are planned to launch in March. So no, we don't have any further. So yes, you can say, if there are other state launches, it could be a potential upside, but it's not in the prospects.

And of course, depending on how the regulation for that particular state will pan out as we have seen quite some differences historically.

Understood. Just on the Adtech platform, do you see like any long-term implications on top line contribution here? Or is it more sort of an internal thing?

Yes. As I also alluded to in a reply earlier on, this relates very much to our strategic move towards becoming the leading digital sports media group, where we find it essential with a very, very big audience that we are now catering to and an audience. So we, in the coming years, expect to grow significantly. We need to be able to deliver relevant apps to our users across the platforms. And obviously, we pursuit that both to be relevant to our users, but obviously also to grow the revenue and the CPM rates that we are able to charge.

Yes. So the project there, Oscar, is, of course, to drive further top line and utilize our inventory the best possible way long term.

All right, I see. Just the final one on the paid media. Paid media margin was -- looked incredibly strong in Q4, and you elaborate on it a little bit or now in the conference call as well. But I mean, 23%, what should be sort of the normalized paid media margin over time, if you can say anything about that? Because obviously, it seems to be kind of boosted in Q4 due to the strong demand, I guess.

Yes. The paid media advertising, if you recall back and as Jesper also alluded to, when we acquired Atemi back in 2020, it was a pure CPA business. We started transferring a lot of the business to revenue share and that we are beginning to see the benefit of now. So we are creating this -- I think we have used the word snowball effect that we are carrying forward. So that's one thing. And then I can say the team has been incredibly good at hitting right campaigns around big sport events, World Cup being one, but certainly also in the U.S. in this high season. So they have been very successful there. So these 2 things -- and it is a business area that we really have also integrated across our publishing assets. So it's working well for us. Long term, I think we have communicated, and we would be aiming for between 10% to 20% margin. And of course, that also, you can say, includes us continuing to invest in campaigns in new TUs and new events. So yes.

We don't have any other question on the phone line. I will hand back to Mikkel Munch for questions from the web. Please go ahead, sir.

Thank you. Yes, we start with -- we have a question on the Adtech platform, but I think we've actually come around that for now. Then we have a question, I think, for you, Flemming, here. Considering that financing terms have changed dramatically for most companies, how has this impacted the M&A landscape for you when it comes to competition and prices? How active are you in pursuing possible deals?

Yes, we -- as we also stated in the speech, we are -- we remain very active and focused. But of course, you can say, many of the companies we're looking at are privately owned companies, and they are profitable and cash flow generating. And right now, there is -- and I think that goes across many industries, there is a mismatch between public valuation and private price expectations, to be honest. So until that sort of get into sync again, I think, in general, there will be a more muted activity. So it's not the interest rates as such, it's more the public valuations that are -- that the multiples that we are trading at, we say, are basically below the expectations of the targets we are looking at.

Thank you. And then we have a question, I think, again for you, Flemming. On inflation and whether inflation has a neutral positive or negative impact on our revenue share contracts.

Yes. I think in more broad terms, I think it should have a neutral effect on inflation. We are not seeing any impacts from inflation. Revenues long term will go up with, say, higher prices and also higher, you can say, cost in society in general. And of course, our cost base also will see that effect, but I would deem it to be neutral.

Okay. And we have a question here on shareholders. You have only 4.3% American shareholders, and among them is teachers in Texas. Is there a growing interest from American investors?

I guess I can also take that one. Yes, of course, given our -- both the legalization of sports betting in many, many jurisdictions over the past years, this has kind of increased the interest from shareholders in the U.S. Also given our foothold there that we have an office there now in Manhattan that we own some very big brands, as we've alluded to earlier, in terms of Action Network and so on, then it kind of puts us on the map. We're very happy to see, obviously, when shareholders increase their positions and believe in us like we do ourselves. And going forward, we will welcome even more American investors if they are interested.

Then we have a question on when you mentioned revenue share percentages. I think that the person here means the growth, is this pure revenue share or hybrid deals included?

Yes. So the part of a hybrid that is the revenue share, we will include. And the CPA component of the hybrid will be then in the bucket of CPAs So it's pure CPA plus the revenue share that is part of the hybrid.

Okay. Then we have a question for Flemming here on -- is the EUR 10 million extra OpEx to build the Adtech platform a one-off OpEx for '23? Or will this continue also for '24 and onwards? It seems like an investment, so why is this not capitalized?

Just to clarify, the EUR 10 million covers 2 larger moves. So one is the -- set the expansion into LatAm and then the establishment of the Adtech platform. Yes, one could consider to capitalize such things. We have a more conservative approach in general when we look at CapEx. So we consider this as an OpEx. And basically, this year, we don't expect any incremental revenue from that. It will come later on. And then there will be a match between income and running costs.

Then I think we have the last question here, at least for now. Congrats on the strong results. Can you provide some more details into the successful January start? Does the Ohio State launch gives some initial benefits that only shows in the January figures? Or should it be considered such that it provides the base for future revenues?

I think we already alluded to that, Jesper did earlier, that this is a one-off to be seen to a large extent by the launch in Ohio and not something that should be extrapolated out for the full year.

Okay. I don't see more written questions here, and I don't think there are more in the queue. So I think we end the call here. Over to you, operator.

That does conclude the conference for today. Thank you for participating. You may all disconnect.