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

Good day, and thank you for standing by. Welcome to Better Collective's Q2 2023 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, Mikkel Munch Jacobsgaard. Please go ahead.

Thank you, and good morning, everyone, and thank you for joining us today for our Q2 webcast here. My name is Mikkel Munch Jacobsgaard, I'm a Senior Director of Group Strategy, IR and Corporate Communications. Today, as always, I'm joined by our Co-Founder and CEO, Jesper Sogaard; and CFO, Flemming Pedersen, who will be walking you through the Q2 performance. Please follow me to the next slide. As always, 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 the next slide. The agenda for today's presentation is as displayed on this slide. Jesper will start by taking you through the highlights of Q2, thereafter Flemming will take you through the 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 good morning, everyone. Q2 was an excellent quarter for our group where we saw stellar development across the full business. Let me take you through the key highlights on the next slide. Better Collective continued its global expansion throughout the quarter, which resulted in another exceptional quarter, building on the momentum generated in Q4 and Q1, the main drivers for the good Q2 were a solid momentum across the Americas, continued success of our media partnerships and a sports win margin above expectations. During the quarter, we grew revenues 39% to EUR 78 million. We continued our strong focus on recurring revenue, and I'm proud to report a 67% growth year-on-year as we have continued to see encouraging development in the U.S. after changing parts of our business from upfront payments to recurring revenue share. Our scalability and operational leverage proved its worth as our EBITDA grew by a staggering 135% year-on-year. In South America, we have laid out a clear strategy for how to become the market leader, just like we've done in Europe and North America. And we continue to be excited about the best potential and opportunities in South America. We acquired Skycon Limited, and in doing so, we expanded our efforts within digital display advertising. Skycon has already delivered strong performance after a swift onboarding. Lastly, we announced an upgrade of our 2023 financial targets due to a very strong performance during the first month of Q2, which really shows the strong growth trajectory we are on. I'll come back to this update by the end of the presentation. Please go to the next slide where I hand over the words to Flemming.

Thank you, Jesper, and good morning to you all. It's my pleasure to walk you through our numbers and financial highlights for the second quarter. So, please follow me to the next slide. Q2 group revenue grew by 35% to EUR 78 million, which is a record for the second quarter. I'm very happy and proud also to share that our organic revenue growth was 29%. We delivered impressive operational leverage as EBITDA grew 135% to EUR 29 million. This implies a margin of 37%. The uptick in margin was driven by operational leverage in our Publishing business, combined with what seems to be a structural higher paid media margin following the transition to recurring revenue share income as well as the incorporation of Skycon Limited. Cash flow from operations before special items was EUR 34 million, up 52%. Lastly, earnings per share was up 15% year-on-year and was affected by our financial investments, which had a negative impact of EUR 4.7 million during the quarter after having a positive impact in the first quarter. Earnings per share excluding financial deviations would have been up 82% year-on-year. Please follow me to the next slide. At Better Collective, we have always focused on our recurring revenue streams, which stems from revenue share income, subscription revenue and advertising sales. During the past 20 years, we have built a large database of recurring revenue streams stemming from revenue share agreements. And in this quarter, we have been able to really reap the benefits of this operational decision. As you can see on the chart, we have managed to grow the recurring revenues streams steadily year-over-year. And during Q2, we saw very strong performance with recurring revenues growing 67% to EUR 46 million, while making up 59% of the total group revenue. Please turn to the next page. An important pillar in our strategy is M&A, which to a large extent the self-funded through the strong cash conversion in our business. During Q2, we saw a very strong cash conversion of 112%. We expect net debt to EBITDA to be below 2 by the end of the year, excluding potential new acquisitions. I'm able to share that Better Collective in August extended the bank [indiscernible] financing by 3 years to October 2026 as well as executing an according option and thereby increasing the available facilities with EUR 72 million. On sort of bringing down the debt, we have also been buying back shares during the quarter. We now own approximately 2.5% of the company's share capital in our own shares. Combining cash value of listed shares, unused credit facilities and the market value of own shares, our total financial capacity exceeds EUR 150 million now. Hence, we have plenty of firepower for expanding our activities. Please turn to the next slide, where I hand the word back to Jesper for a short business revenue.

Thank you, Flemming. Please follow me to the next slide, where I'll do a brief business review for Q2. In order to realize our vision of becoming the leading digital sports media group, we expanded our efforts within digital display advertising by acquiring Skycon during Q2. Skycon is a global display advertising company that perfectly complements our Paid Media position. The acquisition is already off to a great start and has demonstrated good performance. By incorporating Skycon into our Paid Media division, we have unlocked new avenues for growth and expanded our offering to advertising partners. The integration of Skycon was swift and seamless and our team worked closely together to ensure a smooth transition. Undoubtedly, Skycon will continue to deliver further growth opportunities and I'm very excited about the prospects that lie ahead. The gross margin in display media is executed right is higher than search engine-based paid media, meaning that after including Skycon in our business and combining it with the past year's investment in moving our revenues from upfront payments to recurring revenue, we expect the Paid Media margin to be higher than previously expected. Moving forward, we see a unique opportunity in growing our business within Paid Media. Since acquiring the Atemi Group in 2020, we've built significant scale making it possible for us to outbid competition while optimizing our yield through a very strong cash flow. As we continue to expand our competitive moat will continue to grow deeper. Please move to the next slide. I'm proud to see how our commercial team in North America has demonstrated strategic vision and execution in working closely with our partners. We constantly seek to become even more relevant to our partners through brand awareness, customer acquisition, reactivation and retention, which is an exercise we're fine tuning in North America. In Q2 last year, we confidently continued our investments despite tougher market conditions in North America and posted a negative result during that quarter in this region. I'm proud to see that we can now reap the benefits with our operational earnings moving from negative to a 33% margin during an otherwise low season quarter. This exercise is best fulfilled through a constant user focus, ensuring the best innovative content for our many returning sports fans and close strategic partnerships. We continue to be excited about the vast potential and opportunities in South America as we have started to leverage our BC Growth Formula throughout the region. During the first half of this year, focus was on establishing a strong local presence. We're now working to put together a local team that can manage to excite sports fans through premium content and engaging communities. Recently, I had the pleasure visiting Rio de Janeiro as we opened our -- as we opened our South American headquarters. And I was impressed to experience the region's strong sports culture. I'm certain that Better Collective will have a long growth trajectory in this region as we continue to expand our efforts. South America continues to be a very important growth pillar for us. And with the anticipated upcoming regulation of sports betting in Brazil, we expect a lot more from this region. Please turn to the next page. Mounted by a strong start to Q2, we upgraded our full year financial targets as seen on the slide by around 10% on the operational earnings level. Considering this upgrade, I'm happy with the operational leverage we have seen in our business as we continuously invest in the future. We're still committed to our long-term targets of growing revenues with a compounded annual growth rate greater than 20%, while delivering strong profitability of 30% to 40%. This will be done with the debt level below 3 and assuming M&A is solely financed by own cash flow and debt. Our commitment to deliver a long-term success over here and now gratification has resulted in yet another, being able to fuel an all very strong momentum while delivering good performances is truly a reflection of all my colleagues' dedication, laser focus and hard work. Please turn to the next page for a summary of the quarter. As mentioned, we are proud to present our shareholders with yet another great quarter where group revenue grew 39%, where 29% was organic growth. We saw 67% growth in our recurring revenues, intrinsically meaning our earnings was of higher quality. The business proved its scalability and operational leverage as our EBITDA grew 135%. The Americas continues to be a very strong growth region and our teams are doing a tremendous job. July saw strong trading with growth of 39%, keying off a busy and exciting second half of the year. We have financial capacity of more than EUR 150 million to execute more M&A. With that, I'm confident that we'll be able to continue growing the business and become the leading digital sports media group. This concludes our webcast presentation. I'll now pass the word back to the operator and open for questions from the audience. Thank you very much for listening in.

[Operator Instructions] First question is from the line of Oscar Ronnkvist at ABG.

Congrats on a fantastically strong quarter, I just need to say, but just my first question on the targets then. So I mean, given that the very, very strong Q2 results we saw, you did not revise the 2023 targets again, and I appreciate that it may be driven by the -- you saw this already coming in, in June. But I mean, the targets now imply a pretty sharp slowdown in H2 just looking at the midpoint. So I was just wondering if you could explain what you're seeing? I mean digital trading update seems solid to me. And while I acknowledge the tougher comps from some U.S. operators exiting online sports betting, for instance, we also have some tailwind. So any thoughts would be very helpful here.

Yes. Thank you, Oscar, for the questions. Flemming here, I'll try to start at least. Yes, you're right. We are just into the second half. And one of the more volatile things is, of course, as you mentioned, the North American markets where we are just approaching the high season for sports that kicks off in September. As you rightly say, there are some of the operators that have -- that are leaving the market but also newcomers. So we are actually in the middle of, you can say, making arrangements with the new ones for the whole market in general. So that is -- as in previous seasons, that is a moving target right now. We are confident that we will continue good momentum. But of course, there is more uncertainty there than in the rest of the business, given the dynamics of the market. We also continue to push for revenue share in the U.S., and that is part of what I just mentioned. To mention a few other things that we are looking for in, in Q4, where we do have a bit of uncertainty is the upcoming Brazilian regulation. We don't expect that to have any effect before next year, but of course, it's unknown how our partners and customers will position themselves ahead of that. So I think that these are the main themes why we are, let's say, wanting to maintain our full year guidance for now.

Yes. And Oscar, Jesper chipping in here. Obviously, that's also the World Cup in Q4, which we had last year, where we saw a lot of good performance and we sold that. Obviously, it was the first time ever, we experienced the World Cup in the fourth quarter. So we also see a bit more uncertainty there how it will pan out, we'll simply have to wait and see. But that is the difference compared to last year, also getting some fairly tough comps, including a strong sports print margin for Q4 last year. So essentially, these different points have a bit more uncertainty. So we'll have to wait and see.

Right. Perfect. So I mean, just to clarify, I mean, it doesn't really seem to be the case that you're seeing any trends of slowing down rather than you are, I mean, taking a bit of a cautious view on H2 because of some uncertainty and then maybe that we are not supposed to experience like this similar extreme seasonality in Q4 that we did last year. Those are by sportsmen Martin, World Cup and Maryland launch, I suppose. So we will not see the extreme, I mean, ramp up quarter-over-quarter between Q2 and Q4 and this year, I suppose?

Yes. I think you put it well there. That is what we are expecting right now.

Perfect. Then just on -- I mean, last year, you quantified the weak sports week margins impact on earnings. And I know that, I mean, it was a very, very strong quarter underlying with NDCs and so on. So I just wanted to get a sense of -- I mean, is it anything that you could say or quantify the sports win margin's positive boost in this quarter?

I think that for this quarter, the beat was mainly performance-driven. But we did have some tailwind from the sports win margin, whereas if you go a year back, there may be -- there was probably a bit of a headwind. So obviously, that has an effect. But the net of this still is that we did see strong performance across the group.

Okay. Perfect. Then just one to Flemming maybe. I just wondered, I mean, the renewed cloud financing deal that you have and you're expanding your possibilities to pursue a bit more M&A. And just wondered if there's like any change in terms now that you've renewed the deal? I mean you currently are experiencing pretty low interest rates, to say the least, just with I mean, higher IBOR rates. So could we expect like a sharp pickup in interest rates for your current financing deals?

Yes, we basically renewed the -- and expanded the bank arrangement. And we are working closely with three banks that have to forward our growth. So we are basically upping the facilities with our increased earnings and leverage. So that's -- we're very satisfied with that. Clearly, we see some increased interest rates as the rest of society. So we are basically also, I would say, exposed to that, but coming from a, I would say, compared to industry. I think from a very low base. So still whatever we consider we'll keep funding.

Right. So no real change in the spread, so to say, its just that it should follow the IBOR rates going forward?

Correct.

Perfect. Then just the last question I have on Paid Media. You mentioned the structure of higher margin. So obviously a bit supported by Skycon as you mentioned and also a bit from sports win margin that should affect the Paid Media margin, if I'm not mistaken. But -- then just on -- I mean, sort of the underlying margin here, can we assume that you're accelerating the Paid Media investments in H2 now? And what would that imply in terms of Paid Media margin sort of run rate, if you could add anything to that.

Yes, it's a very relevant question, Oscar, because there is seasonality related to the margin that we see in Paid based on the activity levels. So when there's a lot of sports on there, there's simply more investment to be made. And as you know, what we have said before is that, we actually view sort of a lower margin as a result of us finding good investment opportunities. So the margin we saw for Q2 is affected by this low season where we have not been able to find as much investment opportunities as we may have liked. So as you say, we expect we're going to invest more with all sports now on, which will lead to a lower margin for the Paid Media. But we have this structural difference because of Skycon. So we are not saying 10% anymore, we do expect it to be above 10%.

We'll now take our next question, this is from the line of Hjalmar Ahlberg from Redeye.

First question on the NDC intake, which was very good. And you also saw 87% on traffic I think. Was this kind of an exceptional quarter with very high share of revenue contracts -- rental contracts or this is kind of sustainable level going forward? If you can give some input on that.

Thanks for the question. It's maybe to the high side, but it's -- I think it's not very different from what we've seen in previous quarters. I do believe it has been to the tune of 70%, 75% and maybe even a bit higher. So it may fluctuate a bit, but it's in that region. We would expect the share of revenue share deposits to be delivered. So maybe slightly to the high side, but nothing materially different from what we expect in the future.

All right. And maybe coming back a bit to the outlook for U.S. if you look into Q3, Q4, you did mentioned some uncertain debt. But I guess if you look at new states, you have Kentucky maybe and Ohio, Massachusetts, which are new into NFL season at least. Do you think that it should be kind of typical state start for those many small impact than historically maybe given that you also have more revenue share maybe than historically.

I think as Flemming said in a previous reply that we have seen a few sort of even and some others in others into. So relating that to the new states, obviously, it's good to see a broader market, but the seasonality was as they launch, that's where we see a very big increase and then we do expect sort of a more normal trading for the start now. But it's also coming with a bit of uncertainty and really not known for how it will impact. So -- and it's the same every year basically that when we are in August, we are both excited and looking forward to the start of the NFL because we simply don't know exactly what to expect, but we are prepared as much as we can for the NFL start.

And your peer Catena Media mentioned yesterday in their report that they saw competition in North America from nontraditional fillets and traditional media. Is that something you see as well?

I don't think we've seen a big change to the landscape. It has always been very competitive, and I definitely expect it to continue to be very competitive to operate in, in North America. But we also feel that we have some very strong brands that are very relevant, and therefore, we'll have a position in this market. And also ideally and likely a leading position.

Right. And just curious also ahead of the launch of EA FC '24 and do you have any insight or outlook for footprint and for the [indiscernible] or would it be as normal would you guess?

Well, so far, we have not seen any significant change to the behavior on our big esports brands. So it's business as usual. We expect the launch to be similar to what we have seen in the past with FIFA, but obviously, we don't know. So we will have to wait and see. But so far, there's not been any material difference in what we have experienced. What is very interesting is the launch of CS2 that we have the new version of Counter-Strike come in. We hope and believe that's going to create even more interest for Counter-Strike. So we expect and hope that, that should be sort of reflected in the performance of HLTV.

Right. And then just a question on amortization costs, which were updated in the quarter. Was there some specific this quarter that, that were higher just this quarter? Or is this a new kind of normal level going forward relating to the acquisitions maybe?

Yes, we have seen high numbers there and stemmed from the acquisition of Skycon that has been included, but we started the time. And then also the big media partnerships we have signed with Gold.com.

No further questions on the phone lines. [Operator Instructions] No further questions coming through on the phone lines. I believe there are some questions on the web.

Yes. I will just start. There's actually quite a few. So we start out with the Adtech platform that we announced in the beginning of the year. There's a question here on how much of the one-off cost related to this building of the Adtech platform has been taken so far? And how much of it that we have capitalized?

Yes, I can take that. The Adtech platform is included in our cost base in the P&L. We are not capitalizing any of it, and we are approximately halfway into the project and it's running as planned.

Thank you. Then we have a question here on state openings in the U.S. and what's to come.

We don't expect sort of significant tailwind from that, and which is also why we have more since the beginning of our presence in the U.S. focused on brands that are relevant from a retention perspective. So we are not solely dependent on state launches and the delivery of [indiscernible] costing customers, but also play a role in the overall branding for the sports books. So that is more or less sort of baked in to what we expect for the performance in North America for the rest of the year.

Then we move a bit to South America here. There's a question on what makes the BC Growth Formula applicable to multiple markets across three continents?

Well, it originates in our legs in Europe where we have operated our business for more than a decade and close to 2 decades. And it's simply the expertise build up in the organization, which we have utilized when we went to, in the first case, the U.S. by finding these strong brands, which we can grow and at the same time, monetize in a great way. And we do believe we're very good at that. And that model is now being applied in South America, and we have then sort of done business development with the media partnerships that we launched about 4 years ago, as I recall, adding another leg to the business. So it's simply following the model that have now proved itself for many years in Europe and some years in U.S., which already now see good traction in South America as well.

And then a follow-up here is outside of Brazil, the any South American markets that stand out in particular as posting strong opportunities too?

I think if we are compared with Brazil, it's, of course, at a different scale because Brazil in terms of GDP and size is almost half of South America. So nothing that is directly comparable to Brazil. But there are definitely markets that are significant and worth pursuing. Our perspective there is that we are going to go for all of South America where the regulation is available and will be available. So it's the full region.

Then we -- as mentioned in earlier on the call that we have seen tougher market conditions in North America last year. So that's a question to that. And if we could elaborate a bit on the details of these market conditions and then how we overcame them.

Yes. I think it related to we had a very big launch of the State of New York. And with a big spend by Sportsbook, which probably caused them to reduce the spend a bit on the back of that. But we -- as we have believed since the start of the American market, we invest for the long term. And last year, we still saw a lot of opportunity and wanted to improve our position from a brand and content perspective. So we just kept the investment levels in podcast and the content we produced, which has then been beneficial as we saw U.S. sports picking up and still and what we have and expect for the future, a continued interest in spending from the Sportsbook retention perspective, but also from a customer acquisition point of view. So it was, for us, sort of keeping the foot on the pedal even though there was maybe a slight pullback in spend. But fundamentally and long term, we believe in this market. So we'll continue to invest to secure our position.

Yes. Then when we look ahead to the second half of the year, what are the major sport events that you see upcoming.

For the rest of the year, it's similar to what we are used to. So NFL is a big one for North America, but in general, a lot of sports ongoing in North America. And then for European football, it's business as usual, all leagues on from now until to the rest of the year. So in that sense, it should be similar to most other years where last year was probably the one that was unusual due to the World Cup.

Yes. And then if whether you could elaborate a bit on the current status of the Brazilian market, and what do you expect for it midterm? And then the final question there is whether Brazil could be a EUR 100 million margin in 2027?

Yes. The last one, we're not going to put a number on that market. But it is, of course, a very big country, with a culture, which is very passionate about sports. So it's ideal from that perspective, from a GDP perspective. It's also one of the very big countries in the world. So all angles is attractive in my opinion. And if you compare to, say, the U.S., we don't see state-level regulation, it's going to be a regulation for all of Brazil, which is also good for us. And as I alluded to, we have now a physical presence and also in Rio de Janeiro, we are really focused on this market. We have a significant presence, and we're going to build upon that.

Thank you. And then we have a question here on our July trading update and what drove the 39% growth that we posted.

It's quite similar to the performance we had in Q2. So it's good Group performance, the Americas and media partnerships. So nothing unusual. It's I would say, the business as normal.

Perfect, I believe there are no further questions on written at least. So I will hand the word back to the operator, and thank you for your interest in Better Collective.

Thank you. And there are no further questions on the phone lines. In that case, this does conclude the conference for today. Thank you for participating. You may now disconnect. Thank you.