Evoke plc (EVOK) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the 888 Holdings Half Year Results Investor Presentation. [Operator Instructions] I'd also like to remind you that this presentation is being recorded. Before we begin, we would like to submit the following poll. And if you'd be so kind as to give that your attention, we'll be most grateful. And I'd now like to hand over to Itai Pazner, CEO; and Yariv Dafna, CFO from 888. Good afternoon to you both.

Good afternoon, and thank you. And thanks, everyone, for joining us this evening for 888's 2021 Interim Results Investor Call. I'm joined here by Yariv Dafna, our CFO. And we will turn off the cameras for the first part of the presentation so we can make the slides a bit bigger and easier for you to see, and we'll open them up again for the Q&A. So starting on Slide 3. It's been a really positive picture of a business in very good shape. H1 '21 was a record half year for 888 as we continue to execute against our growth plans. Revenue in the first half was up 39%, up to $528 million. To put this into context, this was pretty much the same revenue 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 in scale has come from regulated markets, which now make up 3/4 of our revenue and where we're 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 scale and low-cost customer acquisition channel enabling us to compete effectively in the U.S. market. The business momentum is strong as we enter the second half of the year, and we remain positive about the outlook. Turning to Slide 4. So firstly, I thought it would be useful to give a quick snapshot of the 888 business today, given the significant growth in scale over the last few years that we have mentioned and outline some of the plans we have to continue supporting strong growth based on our 4 strategic pillars that you can see on the slide. Firstly, our proprietary technology and product leadership strategy. We're focused on building the best differentiated products in the market, and I'll expand on this in the coming slides. Second, our regulated market leadership plan where we're focused on building stronger, more diversified business supporting market share gain in the most attractive markets globally. We now have 16 license following the receipt of our new German sports betting license. In H1, we generated 75% of revenue from regulated and taxed markets. Third is our data-driven investments, supporting superior ROI and helping us direct our resources as effectively as possible to create value. We saw 6% growth from new customers acquisition in H1 despite really strong comparatives from last year and our AI-driven personalization continue to support improving metrics from our returning players. And fourth, all of this is underpinned by our safe and gambling strategy, investing heavily to drive continuous improvements and create an environment that is as safe as we can make it so people can enjoy our product [indiscernible] in a manner. We continue to roll out our Control Centre product that has been seen very encouraging customer responses to this product. Moving on to the next slide, Slide 5. So one of our strategic priorities for 2021 is to accelerate our growth in the U.S.A. I was absolutely delighted to announce the partnership that we did 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 now, and is very much a household name in America. This partnership gives us an incredibly powerful platform to build our U.S. position without incurring all the costs of building a brand in the U.S., which, as you can imagine, can be very, very high. 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 for us over the years. SI has a huge audience with over 45 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 that it's the fastest-growing sports media property in the U.S., with monthly users growing nearly 300% year-over-year. We are working with the SI team to support this expansion and create unique betting and gaming experiences that are really part of the SI brand. 888 will be providing SI with tools such as a multi-sport picking game, betting widgets, betting educational tools and intelligent hyperlinking designed to educate, engage and convert SI users into SI sports betting product. So you can see, alongside the right-hand side, our newly designed product is a really good-looking and modern app that brings our cutting-edge proprietary sports book technology into the U.S. market for the first time, and we will be launching Colorado within the next few weeks. And moving on to the next slide, Slide 6. So one of the key factors for supporting our market share gains in these regulated markets is actually our product leadership strategy. Our in-house sports platform has transformed 888sports. By bringing the Sportsbook in-house, it has enabled us to create great products, differentiated our marketing and promotional capability and deliver a superior customer experience, all of which translates into better financial performance for us in sports. You can see here on this page some of the examples of our truly differentiated product. So first is the Betfinder, which is a really slick and intuitive way to narrow the field in horseraces to quickly enable players to find the horse that they want to back. The second one is the BetFeed, which is a real-time stream of the most popular bets, allowing 888sport customers to be part of the action and find more bidding opportunities. Next one is the best -- the bet builder product, and this is a key product. And I believe that we have the best-in-class product in the market today, allowing customers to quickly build the same game accumulators and then track these in real time. Personalization. These really cool features mean that our customers can find more of the bets that are relevant to them and easy for them to access. The euro was a big test for our in-house sports book, and I'm delighted to say that it was a huge success. Semi-finals and then in the finals itself, we saw consecutive records broken for the highest volume of customers and turnover. Moving on to the next slide, Slide 7. We also continue to make huge leaps in our Casino product. We launched over 435 new 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 our Casino Orbit platform 3 years ago. 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 our capital live gaming campaign in the first half of the year. And we believe that we have the best product and content in the market. We now have over 300 live gaming tables from 4 top quality suppliers, helping us to deliver the best content to our players. Adding new games isn't enough. We need to ensure that our customers are getting the content that they want. And our AI continues to get better at personalizing the experiences of our players. This makes it a better product for our customers and helps us capture share of wallet, driving increased ARPU. With that, I'll hand over to Yariv who can talk you through some of this and how this translates into strong financial performance.

Thanks, Itai. I will now take you through the financial review, starting with Slide 9. You can see the strong adjusted EBITDA growth of 39% to $97 million in the first half. And here, I will briefly explain how we convert the revenue into the adjusted EBITDA. So starting with revenue. Revenue were up 39% to $528 million with strong growth in the B2C business. We have included the breakdown of revenue by product in the appendix, but this growth was driven across both gaming and betting. Gaming grew 35% as we continue to benefit from our investment in product and content leadership. Betting grew 82%, partly reflecting the sporting event cancellation in the prior year but also reflecting a step change in capability as we brought the Sportsbook platform in-house. Our gross profit represents the revenue less variable costs, such as gaming duties, royalties, rev share for third party, this mainly related to content provider and payment costs. We paid more than $100 million in gaming duty in H1, reflecting our growth in regulated markets, but we were able to offset some of these 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 market ratio increased by approximately 6 percentage points as we invested in future growth and brand building. Moving to operating costs. Our operating costs increased by only 4%, reflecting our embedded operational leverage. We maintain a stable EBITDA margin with the scale benefit compensating our increased investment in marketing. Moving to Slide 10. Here, you can see our quarterly revenue built up over the last few years. Since 2019, we have transformed the scale of this business with focus on growth in key regulated market through differentiated product, AR-driven optimization and increasing brand awareness. As you can see here, the growth trend accelerated during 2020, and we have continued to see positive momentum in the first half with both Q1 and Q2 delivering record performance. On the right-hand side, we can see that this growth had been driven by higher customer activity. Active customer in H1 2021 was over 40% higher than in H1 2019, reflecting the success of our customer acquisition over the last 2 years. Slide 11. We aim to be 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 total in H1 2021, continuing the trend of the last few years. On the right-hand side, you can see how diversified the business is from a geographic perspective. The U.K. remains the biggest market with 42% of revenue. Italy revenue were 13% of our revenues after growing 82%, and America grew 12% of the revenue. In our 5 biggest regulated market, combined revenues were up more than 50%, make up 68% of our revenue. We are building really strong position in this market and continue to see strong long-term growth prospects. Slide 12. I would like to expand now on our current trading and outlook for the full year. So we start with revenue. Given the strong performance we have seen in the first half and our general momentum, we now expect 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 the full year margin to be broadly in line with last year on an underlying basis. This basically means that slightly lower EBITDA margin for the full year on a reported basis. In terms of CapEx, we expect CapEx to also be broadly similar to last year, reflecting our efficient and capital-light business model. In terms of tax, we expect the effective tax rate to be around 15%. So to summarize, overall, we are really pleased with our performance so far this year, and we have increased both our revenue and adjusted EBITDA expectations to reflect the strength of the business. With that, I finish the financial review. We would be happy now to take any questions.

Itai, thank you very much indeed for updating investors this afternoon. [Operator Instructions] But just wanted the company take a few moments to review those investor questions submitted already. I'd like to remind you that a copy of this presentation along with the recording and the published Q&A can be accessed via your Investor Meet Company dashboard. I'd also like to remind you that your feedback is important to the company. And immediately after this presentation has ended, you'll be redirected for the opportunity to provide feedback in order the company can better understand your views and expectations. Yariv, Itai, I haven't given you a lot of time to review the live questions but we did receive a number of pre-submitted questions. And perhaps I could start off the Q&A by asking you those. The first one reads as follows. Market forecast suggests that your cash balance would increase to around $300 million, so circa 20% of your market cap by the end of 2023, and that's even after the dividend payments. Please, could you explain the needs for this? Or alternatively, would it not make sense to introduce a share buyback program, which you could turn on, turn off if you needed the capital for other reasons?

Okay, so I will take this one. So we are definitely generating cash, and the cash generation is growing from year-over-year. We have a policy to distribute half of our net profit as a dividend and we're following the policy. I'm not sure about the $300 million in 2023. But of course, the excess of cash that we will have, whether we will use it to further investment in growth, this can include potential transaction. And if it will not be used for that, the company and the Board always consider return to shareholders as part of the possible option that we have in front of us.

Thank you very much indeed. And I think to Adrian, who submitted a very similar question to the live event, I hope that addresses your question, Adrian, as well. Thank you. The second question that came in ahead of today's as follows. There's an increase in provisions on the balance sheet. Does the majority of this relate to the historical regulatory issues in Austria and Germany? Are you seeing a slowdown in the number of claims being made in these territories?

So it is related to historical regulatory matter, not necessarily Austria and Germany. And this is not necessarily will be cashed out, but it is a provision that from an accounting point of view, we had to record. In terms of the claims coming from player, so we do face claim coming from player in Austria as any other operator in this market. I cannot say that -- there was no real change on the pace of getting this claim. It's not a significant number of claims.

And I think the final question, again, I think, more for you relating now to financials. It looks like marketing spend as a percentage of revenue is slowly creeping up. What sort of marketing trend should we expect in the short, medium and long term?

So I think that when we look at the marketing on a whole company basis, sometimes it could be a little bit misleading. Generally, in a mature market, of course, we want to limit the marketing to a lower level than what we see now on overall. But on growing market or new market, we will increase even above the level that we see right now. Specifically, the first half of the year, we had increased marketing associated with investment in the brand and also investment in sport and mainly around the euro. In the second half of the year, we expect the marketing ratio to be slightly lower than in the first half. And overall full year, it will be similar to last year, maybe slightly higher than last year.

Thank you, Yariv. That does conclude those questions that we received ahead of today's event. So thank you to all those that did submit those questions. Perhaps we could turn now to the live Q&A. [Operator Instructions] And where it's appropriate, of course, could I ask you to read out the question and give a response and I'll pick up from you once you've concluded.

Yes, sure. So I reviewed the questions while Yariv was answering the previous ones. And I think in large, they're around SI and the U.S. opportunity, so I'll try to answer them, all of them. But we do see just as a kind of overview, we do see the U.S. opportunity as one of, if not the biggest growth opportunity in the market these days. We have been busy in the last 2 years setting up there and getting basically ourselves ready to capture this opportunity, and we did that in 3 fronts. The first one was technology and product. So we have been in the market -- in the U.S. market since 2013. But at the beginning, it started as a gaming market, very different to the market today, which is much more focused on sports betting. It was only live in 3 states and didn't develop much more. We had an old technological platform and architecture that fit the early stages of the regulations. And we have decided that until we bring our newest set of products, both front-end products and back-end technologies that are all our proprietary technologies, we did not wish to expand in the market before we brought our latest product to the market. That's a big technological project that we've been working and busy on implementing, which kind of reached maturity in the end of the first half of this year when we started launching new markets over our proprietary back-end solution with all of the newest versions of our Casino, Poker and Sports product. So the first part, like I said, is product and technology. The second part of our vision to the U.S. was around brand. So 888 is a great brand. It's doing very well in many, many markets in the world, as you can see from our financials. But in America, we realized that if we want to enter the market fast and strong and not pay a huge amount of building a brand in the U.S. and competing with some very significant existing brands, we need to associate ourselves with a local brand. And we spent a lot of time reviewing different opportunities there. We got in touch with the owners of SI, Sports Illustrated a company called ABG a bit over a year ago. And we started discussing the options of joining forces and launching a sports betting app or site based on the SI brand, but also leveraging all of the assets that they have. It took us a bit of a while to structure the right kind of deal for us that we think incentivizes both sides to really push this product hard but also benefits from the assets that both sides bring to the table. So in our case, it's, again, technology know-how of operating in regulated markets, the online marketing and data-driven marketing capabilities that we have. And on their side, it's obviously the SI brand, which is a household name in the U.S., which is a brand that people love. We did a lot of research around it, and we found out that people are more likely, significantly more likely, to bid on an SI app than not only in 888 brand but other brands that we tested against. So we did extensive amount of research. We found that it's the right brand. And also the other assets that they have, obviously, all the web assets that they have, they have one of the most popular sports content website, which is SI. They have a very popular Twitter feed and other social networks. So we're going to leverage all of those assets and through that to bring more, what I would call, cost-effective traffic into the SI Sportsbook app. The third part of the market is penetrating the U.S. as market access deals. Last year, we signed 3 additional market access deals. Now we have 4 market access deals for B2C, and we're in the process of signing additional market access deals in the market. Our plan is to launch between 3 to 4 markets in the next 3 years, which means that we'll get to a state in the next 3 years of somewhere between 12 to 15 regulated sports markets in the U.S. So that's kind of an overview. And now I'm going to go through the -- quickly through the questions and see if there's anything that I missed out. So Richard, the first question, do we plan to launch other states besides Colorado this year? So we're definitely planning to launch other states. We're working on a few of them, including New Jersey, where we have a license, Indiana and Iowa. I'm not sure if we will launch before the end of the year. But if it's not before the end of this year, then by the first quarter of next year, we will have another state launch. And at the end of the first half next year, we plan to have 3 states live and potentially even 4. So all the existing licenses that we have, we want to launch them in the next, let's call them, 6 to 12 months. And in addition to that, we're bringing on more licenses so we'll have an additional pipeline towards the end of next year and 2023. Next one is, any progress on Canada SI deal? So first of all, the deal of the SI is a U.S. deal with options to roll out the brand into other territories. At the moment, we haven't made any decision. We haven't really discussed it with our partners, but we keep that option, and we are following very closely the regulation development in Canada. We think it's one of the most exciting markets that's opening. It's a massive North America country. It's a market that we know well. We've been operating there. We have a good position in the market. And that's a development that we're following very closely and planning to take part in the launch of the Canadian market. And the next question is also from Richard regarding other states. So as I said, there are more states that we're working on as we speak. We're in quite advanced stages so I'm quite confident that we will be announcing some more states that we're getting access deals in the U.S. in the near future. Simon. How big do you see the U.S. opportunity for 888? Like I said, it's -- from a regional perspective, it's one of the biggest, if not the biggest opportunities that's evolving in the space. The TAM, the total addressable market in the U.S. is expected to be, between sports betting and gaming, between $20 billion to $30 billion by 2025, '26. We aren't going to be active in all of the states. Some of the states, we can't get licenses because there aren't any available. In some of the states, we don't -- we decided or we will decide not to participate in because the conditions aren't right for us. Either the taxes is too high or the operational conditions are limiting. So we will, like I said, in the next 3 years, be active. Our plan is in 12 to 15 states. And the market is going to be worth between $20 billion to $30 billion. So I can't give you the exact figure but we do have plans to -- for the U.S. to be a much more significant portion of our overall revenue in the next 3 years. There's another question here. Basically, Mike is asking about the land grab in the U.S. and all the recent announcements of DraftKings, buying gold and nuggets. Who do we see as our major competitors? And are there -- what are our differentiators as an operator? So obviously, the main -- there's a group of already large competitors, if it's DraftKings, FanDuel, Penn National with Barstools, BetMGM. Caesars are now active, Wynn Interactive are now -- there about 20 to 25 different groups that are approaching the U.S. market. What we see as our differentiator is that the combination of the very, very strong local SI brand that really appeals to the American audiences and our know-how of the operating online gaming services throughout the world and the combination of the technology and the product that we're bringing to the market. And like I said, we've invested heavily in the last 1.5 years to bringing our latest, most successful products that are taking a lot of market share in Europe into the U.S. I can share that we know and we track very closely what's going on there. In terms of product and technology, the companies that are operating, they are not always operating with the best and most modern solutions. A lot of them also had to do all kinds of compromises. And we feel now that we're going with the best set of products with a great brand, with operational know-how. And our ambition, like we mentioned, is to take between 3% to 5% market share in the markets that we will be active in, and that represents a very sizable opportunity. And related to that, there's a question here from Alistair that our revenues in the U.S. grew 11%, 12% of the total. And are we satisfied with that? So like I said, our plan is to grow the portion of the U.S. as part of our overall revenue to a more significant portion than 10%. But as we're starting as an operator that's doing almost $1 billion a year outside of the U.S., then obviously, it will take time from a proportional perspective to grow, but that's definitely our plan. And as for this year, like I said, because we were focusing on building the infrastructure, signing the deal with SI and we're only now starting to roll out the SI markets, and obviously, we didn't invest heavily until we have all of those building blocks set in place for the market. Another one from Alistair. Do you expect any acquisitions into -- in second half year? We can't comment on specific acquisitions for 888, but I can tell you that the market of acquisitions, merchants and acquisitions, as you guys are probably following, has been very active. We have a really strong set of products. We have a very strong balance sheet with no debt on it. And we'd like to grow on top of our organic growth plans with nonorganic growth and scale up our business based on our technology and our product. So I can't comment about specific time lines or specific opportunities, but we're definitely active in that field, and we're looking for the right opportunities for us. There's another one here from Richard. iGaming, GGR in Italy continued to slide sequentially in July, third consecutive month of declines. Do you see this trend continuing into August? Yariv, do you want to take that question, maybe?

Yes. So actually, Italy is a country where normally, we see a high seasonality in the summer. We can assume that the seasonality continue also into August. However, we expect to see a recovery coming in September and on, especially when the football league will resume.

And the following one, can you see it there with...

And the following one, so I think -- I'm not sure that this is apple-to-apple here. So the 80% growth in revenue, this is H-over-H, the 11% is from the increase from the year-end, so it's not necessarily connected to each other. But it's correct that in general, so we are enjoying from both increasing the number of active customers but also a bigger share of wallet in some cases.

Yes, there's another question from Nick. What is your priority of Canada on the U.S. potential market?

I don't know if this is Canada or California, so CA is...

Right, right. Not sure if it's Canada. California isn't regulated and I haven't heard about any plans to regulate it soon. But Canada is definitely very high on our list of priorities because it's a sizable market that we know very well. There's another one here about will you -- what percentage of the revenues came from Germany in H1? So we don't...

Yes, we don't disclose the number of Germany but it's become small already last year when we faced the new regulation last year, and it's declined further this year. We saw pretty much what we expect on the gaming side, like 70-plus percent decline because of the new regulation, sport was a little bit better. We got the license, the sport license in Germany. The way we look at Germany now, it's like it was a new market. So it's a new opportunity. We are actually setting up all the -- for the new regulation under the license, and we are going to actually invest in this market in order to end up with a decent market share. And because this is even with the new regulation, which is fairly tight, it's still an attractive market.

Then there's another question from Andy. Do you see the same spend in growth in marketing costs to continue going forward, assume you see a direct correlation between spend and new clients? So H1, indeed, we did increase our marketing spend because of the -- some changes in the market and some opportunities that we saw. So the changes are markets like sports betting, which basically we didn't spend in the second quarter of 2020 because of sports basically being shut down in sporting events. So when sports obviously opened this quarter, it was against a comparable of almost 0 marketing last year. So that grew. We also had high demand for our products and a lot of our marketing is based on search and demand and affiliates. And therefore, when demand grows for our products, marketing costs also grow. So that also affected the marketing. And some markets that we saw opportunities like Spain, where we saw opportunities to build our brand stronger before there are some more restrictions in the market. So we spend more in Spain. But overall, I think our marketing spend in the second half of the year will stabilize in someway at 30%, which is a normal place. We usually do between 28% of revenue to 30%. I would say that the second half will be closer to 30% in the future. We're planning to normalize it according to that benchmark, 28% to 30%. That's where we feel we should be.

Yes. There are 2 questions here regarding regulation in the U.K., so I will answer them together. In terms of what we plan to implement on our framework. So substantially, all what we plan to do on our responsible gaming framework was already done in the first half of the year. There was just a small leftover that were completed in July and August. So from now on, our business is actually operating under the new structure, which include some reduced threshold, some enhancement of our KYC and AML processes. That pretty much was what we did since the beginning of the year. In terms of how the regulation is developing, so there was slow progress than expected, and we are now expecting in December a white paper after the consultation completion. That will set the target for the new regime. It's still early to say what will be exactly the regime. And we don't know exactly if it will go to a full-blown legislation process or maybe a light process. This also will set if this will be something that will come up in mid-2022 or maybe only at the beginning of 2022. So let me see else. On the regulation on Romania. So right now, we are not expecting any change to the regulation in Romania.

Itai, Yariv, sorry, I saw that question just come in as I was approaching to cut across. But I think you've probably addressed pretty much every question that's come through. So firstly, thank you to all those investors that have taken time and, Yariv, Itai, for your time in responding. I know investor feedback is important to you guys and I'll shortly redirect investors so they can let you know their thoughts and expectations. But perhaps before doing so, Itai, I could ask you for a few closing comments.

Yes. So first of all, I also want to thank everyone for joining this call. H1 has been a really, really successful half of the year after a previous year that was also very successful. We see a lot of potential growth opportunities as we look ahead of us in terms of new markets that we're planning to launch and like we discussed in this call, if it's Germany, Canada, Netherlands, that's coming next year. The American sports betting and gaming market is a huge opportunity ahead of us. And on the product side, we also feel very comfortable in our ability to grow our share of the products and our Casino product that I shared the development, the new sports product and the poker that's also been doing well since the launch of our new product last year. So overall, we're very happy with the performance of the business and positive with our outlook going forward. So again, thank you very much, everyone.

Yariv, Itai, thank you once again for updating investors this afternoon. Could I please ask investors not to close the session as you'll now be automatically redirected for the opportunity to provide your feedback in order the management team can better understand your views and expectations? This will only take a few moments to complete but I'm sure will be greatly valued by the company. On behalf of the management team of 888 Holdings, I'd like to thank you for attending today's presentation. That now concludes today's session, and good afternoon to you all.