Evoke plc (EVOK) Earnings Call Transcript & Summary

Good day, and welcome to the 888 Holdings plc Interim Results 2021 Conference Call. At this time, I would like to turn the conference over to Itai Pazner. Please go ahead.

Good morning, everyone, and thanks for joining us this morning for 888's 2021 Interim Results Call. I'm joined here by Yariv Dafna, our CFO; and Vaughan Lewis; our CSO, who are in our London office. Starting with the agenda on Slide 3. I'll run through some of the highlights and then hand over to Yariv to discuss the financials. I will then provide an outline on our progress against our strategic priorities in the first half of this year as well as our growth plans in the coming years. We will then open up for some questions. Turning to Slide 4. It's a really positive picture of a business that is in very good shape. It's great to be able to report another set of record results with revenues in the first half of the year up 39% to $528 million. To put this into context, this is pretty much the same revenue that we reported in the full year of 2018. Over the last 3 years, we have truly transformed the scale of this business. This step change scale has come from regulated markets, which now make up 3/4 of our revenue and where we are seeing really positive market share trends. This continues to be driven by our product leadership strategy and our data-driven marketing investments. In the U.S., we signed a landmark partnership with Sports Illustrated and launching SI Sportsbook will give us a differentiated route to the market with a large and low-cost customer acquisition channel, enabling us to compete much more effectively. With that, I'll hand over to Yariv to walk through the financials.

Thanks, Itai. Good morning, everyone, and thank you for joining us on this virtual presentation. I'm delighted to be presenting another positive set of results. Starting with Slide 6, you can see the financial highlights for the first half of 2021. Revenue were up 39% to $528 million with strong growth in our B2C business. Adjusted EBITDA also increased 39% to $97 million with a margin stable at 18.4% as scale benefits and operating efficiency offset the impact of a higher gaming duty and marketing investment. Cash generation was solid. Cash generated from operating activity before working capital movement was $94 million, almost equal to the EBITDA. Free cash flow was $52 million, lower than last year due to the timing of working capital movement. This leaves us with a net cash position of $114 million, excluding the player balances. The interim dividend per share is $0.045 comprised of regular dividend as per our policy. I will expand on the driver behind the sole performance over the next few slides. Moving to Slide 7. You can see our quarterly revenue buildup over the last few years. Since 2019, we have transformed the scale of this business with a focus on achieving growth in key regulated markets, through differentiated product, AR-driven optimization and our increasing brand awareness. As you can see here, the growth brand accelerated during 2020, and we have continued to see positive momentum in the first half of this year with both Q1 and Q2 delivering record performance. On the right-hand side, we can see that this growth have been now driven by significantly higher customer activity. Active customer in first half 2021 was over 40% higher than H1 2019, reflecting the success of our efficient customer acquisition over the last 2 years. Turning to Slide 8. We show how the revenue growth breakdown by product. B2C revenue were up 41% with 82% growth in betting and 35% growth in gaming. Within gaming, we saw continued strong growth in Casino, reflecting our continued investment in product and content. Bingo revenue was slightly higher despite challenging comps. Poker revenue as a product were lower as the prior year period benefited from exceptionally strong performance during the first lockdown period, mainly it was Q2 last year. But if we look at the Poker, including cross-sell, then we still see approximately 7% revenue growth from our poker player. Moving to betting. Sport throughout is our second-highest revenue contributing product, now representing almost 16% of the B2C revenue. The strong year-on-year growth benefited from Sport event cancellation in the prior year period, but we are delighted with the underlying performance, which reflect a step change in capability as we brought the sportsbook platform in-house. Moving to B2B. B2B revenue were up 8% to $19 million, driven by a strong performance in Bingo. We are excited about the prospect of our U.S. B2B business, having recently launched in Pennsylvania and the plan to launch in Michigan soon. So overall revenue were up 39% to $528 million. As Itai mentioned, this was almost the same revenue in the full year 2018. So in just 3 years, we have executed a plan to scale the business into a leading product-led brand in key regulated market. Slide 9. One of our goals is to build the business into one of the leading regulated online betting and gaming businesses. We made further progress in the first half of 2021 with more than 50% growth in our regulated revenues. Regulated and taxed revenue were 75% of the total in the first half of the year, continuing the increasing trend of the last few years. On the right-hand side, you can see how diversified the business is from the geographic perspective. The U.K. remains the biggest market with 42% of revenues. Italy revenues were up 82% and represented 13% of our revenue and Americas grew to 12% of our total revenues. Slide 10. We will walk you through how we convert the revenue into adjusted EBITDA. Our gross profit represents the revenue less variable costs, such as gaming duty, royalty and rev share for third parties. This will be mainly content provider and payment costs. In first half, we paid more than $100 million in gaming duty for the first time, reflecting our growth in the regulated market, but we were able to offset some of these gaming duty with efficiency in our other direct costs. As a result, our gross margin increased slightly to 66.7%. Marketing is the biggest investment we make as a company. We invested $171 million in marketing in the first half using our big data and marketing expertise to drive efficient and effective customer acquisition across our brands and markets. As you can see, our marketing ratio increased by approximately 6 percentage points as we invested in future growth and brand building. Our operating costs increased by only 4%, reflecting our embedded operational leverage. We maintained a stable EBITDA margin with the scaled benefits compensating our increased investment in marketing. A few words on Slide 11 about the cash generation. During the period, we converted over half of our adjusted EBITDA into free cash flow despite working capital outflow of $21 million. The working capital outflow reflects the timing of certain payment and particularly related to our increased investment in the U.S. CapEx was $18 million, reflecting our capital-light model. And after reflecting taxed payment, we generated free cash flow of $52 million. Moving to Slide 12 to discuss current trading and outlook for the full year. I will start with the revenue. Given the strong performance we have seen in the first half and our general momentum, we now expect, despite the high seasonality we see in July and August, mid-teens percentage revenue growth in 2021. This is an increase from the low percentage growth that we guided to earlier this year. The adjusted EBITDA margin was higher than expected in the first half of the year, but we continue to expect it to be broadly in line with last year for the full year on an underlying basis. This basically means that we anticipate slightly lower EBITDA margin for the full year on a reported basis, reflecting the cost of our SI Sportsbook launch and other investment in growth. In terms of CapEx, we expect CapEx to also be broadly similar to last year, reflecting our efficient capital-light business model. As for tax, we expect the effective tax rate to be around 15%. So overall, we are really pleased with the performance so far this year, and we have increased both our revenue and adjusted EBITDA expectation to reflect the strength of the business. I will now hand over back to Itai to tell you a bit more about our strategic priority and growth plans.

Thank you, Yariv. And turning to Slide 14. I thought it would be useful to give a quick snapshot of 888's business today, given the significant growth and scale over the last few years that we have mentioned. I'm delighted with the performance of the business and the plans we have to support sustained strong growth based on the following 4 pillars. First of all, our proprietary technology and our product leadership strategy. We are focused on building the best differentiated products in the market. Second, our regulated market leadership plan where we're focused on building a stronger, more diversified business supporting our market share gains in the most attractive markets globally. Third, our data-driven investments supporting superior ROI and helping us to direct our resources as effectively as possible to create value. And all of this is underpinned by our safer gambling strategy, investing heavily to drive continuous improvements and to create an environment that is as safe as we can make it. So people can enjoy our products in a safe manner. Moving to Slide 15. I'm delighted to report on a really strong period of strategic progress against our 2021 priorities. We continue to make progress with our safer gambling plants, included the continued rollout of our control center product as we have seen really encouraging user matrix and responses here. We continue to build our M&A capabilities and plans, which presents exciting opportunities to expand and enhance our growth profile. And our data-driven investments continue to build really strong position in our key markets, enabling us to generate superior returns on our marketing and product investments, both from returning players as well as more effective new player acquisition. Over the coming slides, I'll expand on our progress with our product leadership plans, our regulated market growth and our growing U.S. footprint. Turning to Slide 16. One of our strategic priorities for 2021 is to accelerate our growth in the U.S.A. and I was absolutely delighted to announce a partnership in June with Sports Illustrated to transform our U.S. business. Sports Illustrated is an American icon with unique heritage. It has been one of the most impactful names in sports media for nearly 70 years. And it's very much a household name brand in the U.S.A. This partnership gives us an incredibly powerful platform to build our U.S. position without incurring all the costs and building a brand in the U.S.A. This strategy allows us to invest much more selectively and effectively in the U.S. with a clear focus on using SI's brand footprint and positioning to acquire customers more effectively and to build a profitable business over time. SI has a huge audience with over 30 million monthly unique users on its digital platforms, and it continues to invest heavily in its brand, expanding into online ticketing services, hospitality, fitness and other verticals. This investment is clearly paying off as the publisher of SI recently announced its fastest-growing sports -- it is the fastest-growing sports media property in the U.S. with monthly users growing by nearly 300% year-over-year. We're working with SI team to support this expansion and create a unique betting and gaming experience that are really part of the SI brand. 888 will provide si.com with new tools such as a multisport Pickem game, betting widgets, betting education tools and intelligent hyperlinking designed to educate, engage and convert si.com users. You can see on the right-hand side, our newly designed product is a really good-looking and modern app that brings a cutting-edge proprietary sportsbook into the market for the first time. We're excited to be launching SI Sportsbook in Colorado later this month and bring this experience to life. We thought we'd show you a sneak peek preview of one of our new adverts. [Presentation]

Turning to Slide 17. One of our key priorities is to drive market share gains in regulated markets, and we made really strong progress with our regulated markets' leadership plans. At the end of June, we were delighted to be awarded a German online betting license, and we have just launched the 888sport.de brand. We plan to use our disruptive products, data-driven marketing to carve out a strong position in the regulated German market. In our 5 biggest regulated markets, the combined revenues were up more than 50%, and these now make up 68% of our revenues. We are building really strong positions in these markets and continue to see strong long-term growth prospects in regulated markets. In Canada, we're closely monitoring regulatory developments and are excited about the potential opportunities for 888 there. And we also made further progress in the U.S. and are now 5 states for B2B and 2 states for B2C with more on the way very soon. One of our key factors supporting our market share gains in these regulated markets is our product leadership strategy. Our in-house sports platform has transformed 888sport and gives us the ability to support our excellent and differentiated products with really powerful customer offers and campaigns. You can see here on the page some examples of our truly differentiated products. The Betfinder, a really slick and intuitive way to narrow the field in horse races to quickly enable players to find horses they want to back. The Betfeed, a real-time stream of the most popular bets, allowing 888sport's customer to be part of the action and find more betting opportunities. BetBuilder, this is a key product, and I believe we have one of the best-in-class products in the market now allowing customers to quickly build same-game accumulators and then track these in real time. Personalization, these really cool features mean our customers can find more of the bets that are relevant to them and they want to take. Turning to Slide 19. These charts demonstrate how successful and effective our in-house strategy for sportsbook is. By bringing the sportsbook in-house, it has enabled us to create great products, differentiated our marketing and promotional capabilities and deliver superior customer experience, all of which translates into better financial performance for us. As I've mentioned, one of the real benefits of our in-house platform is that it gives us the flexibility to offer really attractive promotions for our customers across our differentiated products like BetBuilder that simply wasn't possible before. For example, on the bottom right, you can see that stakes on the BetBuilder grew into new highs, which was partly driven by a really strong customer promotion we had running for the Euro Football tournament of bet GBP 10 on the BetBuilder and get 5 free bets. This promotion was a great hit with our customers, and we saw over 10% of all the tournament stakes on BetBuilder as a result. Improved product and promotional capability like this has a double benefit. It drives customers' loyalty as customers engage with this quick and simple product. And secondly, it helps us to drive higher margins through these combination bets. The Euro was a great -- was a big test for our in-house sporstbook, and I'm delighted to say that it was a huge success. In the semifinals and then in the final itself, we saw consecutive records broken for the highest volume of customers and turnover. Turning on to Slide 20. We also continue to make huge leaps in our Casino product. We launched over 435 games in H1 2021. As we continue to broaden the depth of our casino product suite, building on the momentum we have seen since the launch of the Orbit platform. As well as our product leadership strategy, we're focused on content leadership, and a big part of this is developing and promoting differentiated and unique content from our in-house studio Section8. Our exclusive in-house content gives us real competitive advantage. With smash hit games like Mad Max Fury Road and Ramesses Rumble building loyalty, we are really excited about the future here with a deep pipeline of high production value games. Within live gaming, we rolled out the capital of live gaming campaign for the first half, and we believe we have the best product and content in the market today. We now have over 300 live gaming tables from 4 top quality suppliers, helping to deliver the best content to our players. Adding new games isn't enough, we need to ensure that the customers are getting the content that they want and our AI continues to get better and better at personalizing the experience of our players. This makes it a better product for our customers and helps us capture share of wallet, driving increased ARPU. Turning to Slide 21. As well as strong progress with our Casino, we continue to innovate and invest in Poker and in Bingo. Combined, these 2 make up less than 10% of our revenues, but they are really important products for our business, from a customer acquisition and cross-sell perspective as Yariv outlined earlier. And we have really innovative and differentiated products that drive customer traffic and build loyalty. With our Poker 8 product, we ramped up our made-to-play marketing campaign, and this won the 2021 Poker Marketing Campaign of The Year from EGR. Within Bingo, we continued to improve our user experience with simpler and quicker interfaces and cool new innovations, such as our personalized rooms that we launched earlier this year. Slide 22 and to wrap up, H1 2021 was a record half for 888 as we continue to execute against our growth plans. I'm delighted with the progress in the business. As we look forward, we're really confident about the growing strength of our business in regulated markets, supported by our leadership product plans and our data-driven investments and safer gaming focus. The financials are progressing well and ahead of our original plan for this year. We have a really strong balance sheet and we plan to enhance our growth with strategically and financially attractive M&A. The business momentum is strong as we enter the second half of the year, and we remain positive about the outlook. With that, we'll be very happy to take some questions now.

[Operator Instructions] Our first question today comes from Simon Davies from Deutsche Bank.

Three from me, if I may. Firstly, back in March, you were talking about $70 million to $100 million of regulatory headwinds to the revenue line in the year. Where do you now think we are in that range? And can you talk a bit about the weighting between H1 and H2? And have there been any surprises in the makeup of those costs? Secondly, can you talk a bit about U.S. start-up losses? I think you've indicated that this year, they'll be in line with previous guidance. But now that you've got the sort of SI business plan up and running, do you have a clearer view for how those start-up losses are likely to increase and moderate over the next couple of years? And lastly, can you talk a bit about your gross win margin in betting and the trends year-on-year?

Okay. So I will start on -- about the $70 million to $100 million, this is definitely still in place. I don't want to go to an exact number, but we said all the time that this is more weighted toward the second half of the year. The part related to Germany was almost from the beginning of the year, the part related to other markets, including the U.K., were more weighted towards the second half. I think really on a very, very high level, I would say, assuming of 1/3 and 2/3 between H1 and H2 will not be that far from reality. As for the U.S. losses, so we were guiding about 18 million losses this year in the B2C. We are in the same ballpark, and there is no change right now in terms of our forecast for the U.S. losses this year. We are expecting these months to go live in Colorado with SI. And in a few months, we will be coming back with -- coming to them to be online with the additional state. So as for the next year, I would say that in later stage, we will provide a better guidance about what will be the losses in the U.S. The last one was about betting margin. Am I right?

Yes, absolutely.

Yes. So I think the -- I would say that the betting margin right now are in a normalized level. We saw last year, especially in Q4, but also in Q1, there was a quite good margin on the sport betting, which since then went back to a more normalized level.

What do you think the normalized range is going forward?

I don't want to -- I think that it's difficult to say what would be the betting. Remember that this is still only 16% of our B2C revenue. So -- but if we look at the market, I would say that the betting margin is 9% to 12%, or let's say, 8% to 12% with 10% as a midpoint.

I'm sorry, just on the $70 million to $100 million, can you indicate where you think you are in that range? Are you sort of top or bottom end?

The $70 million to $100 million, this is something that will be fully reflected in the number this year. We already implemented all what we had to implement. So it's now just to see the impact of all the processes that we did. So there is no something else that we are going to implement on our overall assistance.

We now move on to our next question from Ivor Jones from Peel Hunt.

Could I follow up first on Simon's question about U.S. growth, not about the financial impact so much? Just could you talk about the plans for the business when different states get launched, when an SI gaming product gets launched if that's coming? So what will the business look like by the end of the year, obviously, launching the sportsbook product very quickly. So that was the first question, was U.S. growth. Second question was in relation to Germany. What's the run rate revenue now? Is it 0 from gaming? Is there a gaming product? What have you done to make it viable at the current tax rate? And are you able to communicate with your existing customers in Germany? But is it 0 revenue if there's still some revenue in Germany? Third question was, it seems like a big strategic change in terms of marketing spend as a proportion of revenue. Could you talk about how much that is a change that you plan to carry on with? Or is this just a push for 2021 while revenue is so strong? So what's the marketing strategy? And then the last one was, could you just pick apart the working capital a bit more? Because it seems like an enormous prepayment for something in the U.S.? What is it? And will it reverse in the second half? Or is it structural?

So maybe we'll start, Yariv will take the last question, and then I'll go through the rest with the working capital.

Okay. So on the working capital, indeed, Ivor, we have a negative impact on the first half, and we do expect this to be reversed in the second half. And therefore, we will not see that negative movement in the working capital. So this is for the working capital issue. Itai, do you want to take the Germany? Or do you want me to comment...

No, I'll take the rest of the question. So yes, thanks, Ivor. So I'll start with the U.S. growth plans. So in the last -- in these months, we basically -- we're launching 3 markets in the U.S. We launched Pennsylvania [indiscernible] Poker with WSOP in July. And we're, I would say, imminently in the next few weeks, we're going to launch the first SI market, which is going to be Colorado, and we will be launching an additional poker market for WSOP in Michigan. The plan going forward is to roll out all the other markets that we already have licenses in. So that's New Jersey, Indiana and Iowa for SI. And obviously, we're working on the future pipeline of additional markets. But I would assume that between the next 6 to 12 months, we'll launch all of our existing licenses and working on additional licenses for the future. And as we've guided in the past, our plan is to launch between 12 to 15 states in the next 3 years. And I think we're in good shape and good progress this year on that rollout plan. So that's U.S. and SI plans. On Germany, we are still making revenue, obviously, much less than in the past as we've implemented all of the restrictions and we reduced the offering significantly and the marketing in the market, specifically in gaming, but we still are seeing some revenue coming in, in Germany. We are able to communicate with our players with no problems, and we do have -- we still have a base of players. But we're focused now on the launch of 888.de -- 888sport.de, which is our licensed sportsbook. We recently got the license and we're excited about the league that's opening, and we have some quite significant marketing plans in Germany to start building up the share that -- or the market revenue that we lost over the changes in the last 6 months. But we still believe that Germany is going to be a big and significant market in Europe as it evolves, and we're planning to take a nice share of that market, specifically focusing on sports betting. So that's Germany. In terms of the marketing spend, we did have an increased marketing spend in H1. And yes, to answer your question, it was planned. First of all, we had, like you said, a strong revenue growth. We still saw strong demand for our products in H1 this year. That was accompanied by some branding -- long-term branding activities that we did in the different markets. But also you need to remember that in the second quarter last year, there were basically no sporting activities or sports marketing budget was nearly shut down in the second quarter last year. And this second quarter was very active in sports and the marketing was also very active, and that's why ratio grew on a long-term basis, I think we're planning to go back to what you were used to seeing in the past, sub-30% marketing ratio. I think that was all of the questions. Am I right?

Yes. That's great.

[Operator Instructions] We now have a question from Jack Cummings from Berenberg.

I was just wondering if you could potentially flesh out a little bit the current trading numbers that you provided in -- given the positive trends through July and August, ahead by a mid-single-digit percentage. Could you give any color as to what the performance has been split by betting and gaming? And have there been any surprises?

So again, if we look at how the quarterly revenue were last year, we can see that Q4 was significantly strong. It was fueled by the margin on the sport event, many sport event in general and also currency that helped us in Q4. So there is a very, very tough comps on Q4. We are running right now, the current trading right now reflect single-digit growth year-on-year. But if we look at the full half -- second half versus second half last year, we are expecting slight -- to be slightly below the second half of last year. And that's what led us basically to guide for mid-teen revenue growth on the full year.

We now take a follow-up question from Simon Davies from Deutsche Bank.

Just 2 quick ones from me. Just one, in the exceptional items, you referred to a $7 million retroactive duty payment. Can you identify what that was? And secondly, you talked about ramp-up in terms of investments in proprietary content. Can you give an indication of roughly what percentage of slot revenues are now coming from in-house games?

I'm going to take the first one and leave the second one to Itai. So the $7 million related to some exposure that we identified with regard to certain gaming duty related to the past. It's not necessarily a cash out. It's a provision that we have recorded during this first half. And we will continue to follow this issue and adjust the provision as needed in the next half and also looking into the next year.

Okay. And yes, Simon, regarding the content, our in-house content. So we're continuing to invest in high-quality in-house content development via Section 8 Studio. As I mentioned, we launched about 450 games in the first half of the year, a small proportion of them were the ones that we created in-house. But what we look at is a share of kind of the volume that they're taking in slots. So usually, about 6 out of the top 20 games, slot games, are Section 8 games that are developed and they compete with all the leading games out there and based on customer preferences. And that's how we measure them on how much kind of leadership position they're taking in the top charts of our slots. In terms of the revenue percentage, although we add a significant amount of more games, they're managing to keep more or less the same percentage of the overall games in slots, which we don't report on specifically. But like I said, about 6 out of the top 20 slots, which represent a significant amount of the slots revenue are in-house developed games.

As there are currently no further telephone or webcast questions, I'd like to hand the call back to Itai Pazner for any closing remarks.

So thank you very much for everyone for joining this call. Again, we're very happy with our results for the first half of the year and with our prospects looking forward. Thank you very much.