Evolution AB (publ) (EVO) Earnings Call Transcript & Summary

Good day. My name is Martin Carlesund, I'm the CEO of Evolution. The structure of this call will be that I'll start with presenting today's announcement, and then we'll move into Q&A. We will call -- we will keep this call relatively brief, and I will not comment on anything besides today's announcement. And as you know, we are presenting our interim report for the second quarter of 2022 in a couple of weeks. So we'll speak again soon. So let's begin. Operator, let's go to the next slide, please. We're always evaluating the options we have to be better every single day. We are always evaluating how we can strengthen our position on the market, use the largest online casino network in the world to give even more value to our customers. And with that, most important -- even with that, the most important thing is the end-user satisfaction. We need to serve the users, not only what they decide today, we need to be ahead of the game and serve them what they, in the future, want to have, seamlessly, flawlessly. This is our core mission. This is what we are paranoid about and constantly wanting to be better on. With that intro, I'm truly very, very happy to announce that Evolution has entered into an agreement to acquire Nolimit City, a leading creator and developer of online slot games, adding a missing type of games to the Evolution content network with a high user satisfaction and preference. Operator, let's go to the next slide, please. Nolimit is one of the truly innovative companies in online casino. And Nolimit is recognized in our industry for its cutting-edge technology and graphically rich player experience. Nolimit is a product developer with distinct content, both in terms of style and story line, who particularly speaks to advanced slot players who are looking for a richer player experience and a plot with a twist. We are very excited to join forces with Nolimit team to continue our journey to create a global market leader in online casino games. The company, based in Stockholm and Malta as well as in India, has rocketed to prominence over the past years by carving out a unique style of slots, sometimes dark themes but definitely with a sense of humor, simply a great playing experience with high-end user preference. Every player playing a Nolimit game will recognize the brand and the loyalty to the brand is high. Nolimit City games also feature a number of groundbreaking game mechanics, which add excitement to the games and makes players recognize a Nolimit City game. With a high brand awareness and preference, Evolution will add a missing type of games, which will move us another step forward together -- towards the clear #1 online casino provider. All in all, Nolimit City is an excellent addition to our leading portfolio of the best online casino content in the market. With the acquisition of NetEnt 18 months ago, we added both NetEnt and RedTiger slots to our Live Casino offering. It was a significant step forward towards the ambition to become the world-leading provider. The acquisition of Big Time Gaming was as well very important step for us on that journey. Now we're moving forward with the acquisition of Nolimit, which has focused on innovation and development of a different type of games with a high-end user preference, which makes them a perfect fit with Evolution. I'm very excited about the future development and distribution of Nolimit through Evolution one-stop shop, but I'm equally very excited about adding new brilliant minds to the Evolution team. Operator, let's go to the next slide, please. Let's look at a short summary of the transaction. Evolution acquires Nolimit city for a total consideration of up to a maximum of EUR 340 million, payable all in cash. I would like to emphasize that Evolution is debt-free both before as well as after this acquisition, and we are financing this acquisition with 100% of existing cash flow without any changes to our dividend policy. I see our financial strength with a strong cash flow and a strong balance sheet as even more important today than only a year ago. Upfront consideration is EUR 200 million. In addition, an earnout will be paid in 3 tranches to 2023, 2024 and 2025. Maximum earnout is EUR 140 million, giving a total consideration of maximum EUR 340 million, which I already mentioned. The earnout consideration will be payable as well in 100% cash. Nolimit revenue for calendar year 2022 is expected around EUR 30 million with an EBITDA of EUR 23 million. And so we expect the deal to be accretive to EPS 2022. The transaction is conditional upon receipt of regulatory approvals and completion is expected during Q3, but naturally, we put efforts to an as-early-as-possible closure. That's the main point of our message today, and we will now move into Q&A. So operator, next slide for some questions, please.

[Operator Instructions] Our first question comes from the phone number ending with 5846.

It's Monique Pollard here from Citi. I just had a few quick questions. Firstly, one on cost synergies. I mean, Nolimit have a very high EBITDA margin already. So I'd assume no cost synergies, but just wanted to check. The second question I had was just on revenue synergies and whether there's a material opportunity to cross-sell their content, obviously, to the Evolution client base. And then the third question was just on what we should expect for revenue and earnings growth for this business. Is it reasonable to assume the double-digit revenue growth that you've talked about for RNG by the end of 2022 into 2023 should be the run rate that we think of for Nolimit as well?

Okay. Thank you. When it comes to cost synergies, you can see by the numbers that they have a very high -- they have a high and good margin. So cost synergies is not something that you should expect. Then when it comes to revenue synergies, it all comes down to we have a good stretch in the earnout mechanism, and we expect, of course, Nolimit to grow fast, and we want to contribute to that by adding them to our fantastic network and then, of course, to one-stop shop and so on. So that is sort of included in the mechanism. As referring to the double-digit growth, that has not changed. I tried to be clear on that. We have our double-digit growth target for the already existing slot business, and that remains 100% like it is and then Nolimit is added on top of that. And I would say that I have higher expectations on Nolimit's growth than on the double digit that we have for the existing business.

Our next question comes from the phone number ending with 8588. We will move on, as there was no availability there. Our next question comes from Oscar Erixon from Carnegie.

A couple of questions for me. First of all, just briefly on the business. I assume this is a founder-led Swedish business. Could you mention something about the ownership structure and the main owner? That's my first question, please.

It's a founder-led company and fantastic, [ Emil and Jonas ] have created the company, and they will, of course, then remain in the company and contribute to the new Evolution-Nolimit combination.

Great. And in terms of the growth rate historically and also what the guidance implies here for 2022, what type of growth rates and margin expansion are we talking about will be important to know.

It's a high -- it's a fast-growing company, and we look forward to continue doing that. And as we move forward, we'll be a little bit clear on exactly these numbers as there will be comparisons. And during the coming project, we will show that separately so that you can track also the double-digit growth coming out of the already existing slots business.

Great. And then the regional sales mix, how does it compare to Evolution currently? And what types of synergies you see in terms of that regional split, please?

The obvious answer to that is that they are not present, for example, in North America and limited presence in other parts. They are, of course, in Europe. We have to remember that it's a fairly small company with -- and therefore, quite limited on the potentials there, but they also have some revenue and so on from Asia, but -- also other parts, but predominantly Europe.

Great. And then just a final question from me. One-stop shop, are you seeing an increased scalability and rationale for doing these types of acquisitions? And should this be seen as that the acquisitions so far have worked out really well and make sense? Or rather if they sort of need a higher scale, I would be interested to hear your reasoning there.

We rebuilt the whole back end and created the one-stop shop, which we're done now, of course, are rolling out. It was with the intent to be able to launch slots faster from also other sources. And so that is -- and that worked out well. And then, of course, we're very happy to have that now when we are acquiring Nolimit because that is already in place.

Our next question comes from the phone number ending with 5100. We will move on with the next question coming from the phone number of 8588.

Hello, can you hear me?

Yes. I can hear you.

It's Ed Young from Morgan Stanley. First question, I just wondered if you could talk a bit more about the characteristics of Nolimit. It's obviously known for being graphically very rich. You touched on that, but you also talked about sort of consumer satisfaction and that kind of thing. So I just wondered if you could talk maybe a bit more in the round about what attracted you towards this business? And I guess connected to that, how scarce is this type of asset? Are there many more things, like, out here -- out there like this that you might want to acquire? Or is this kind of quite a rare find, do you think, in terms of lining up what you were looking for?

Okay. Let's start with the content and then move on a little bit to how we look at it. It's a very specific niche content. As you know, it's graphically rich. It's very fascinating and it has good mechanics touch to it. Maybe then for a little bit more advanced slot player. But as anyone playing a Nolimit slot, it's attracted by that. They know they play Nolimit. It's very obvious. So the preference towards them and the long tail of the games is very good. They built a solid brand. They work a lot with that, and they keep doing these slots, which are known to the players and we see, of course, potentially spreading that to newer play groups. So the games are filling a gap that we didn't have before, clearly so. When it comes to acquisitions, it's a bit of a stochastic procedure, but there are, of course, a few companies that we looked upon. And now I would say that we're very, very happy to -- we acquired Big Time Gaming. We acquired NetEnt, the Red Tiger and now we added Nolimit. And in our world, we picked out the ones that we need. And there might be others coming up and we might look at it. But right now, we're very happy with the position and the steps that we're taking towards the #1 world-leading content provider. So I'm very happy with the stuff that we took today.

Great. Good. And one follow-up on that, if I may. Obviously, you did DigiWheel as well, which isn't this space. But most of the acquisitions you made have obviously been in the slot space over the last couple of years. Broadly speaking, do you -- is slots the obvious place for you to be making acquisitions? Or do you think there are other parts of the business you could augment? Are there kind of genuine-sized targets out there that could augment Live or other parts of the business in some kind of way? Just curious how you think about the opportunity set in that respect.

We're pushing, pushing, as you know. We're a company, never really happy. We want to do better every day. And we are doing that with Live, and we are increasing the gap to competition. And I don't see the potential in buying a company in Live. Maybe it occurs, who knows? But right now, we don't see that. But maybe there are parts of technology just like you saw with DigiWheel, where we need this piece of hardware or software or a combination of both to build the new games. So that could happen. In the slot arena, I think that we are building that business and we have a clear view on where we want to be, and we want to be a complete supplier, but above all, we want to hand over the best content in the world to the end user. And there we need a couple of pieces. And I think that we found those right now.

[Operator Instructions] Our first question comes from the phone number ending with 5100.

Hello, 5100, can't hear you.

We will move on to the next question posed by a number ending with 7639.

It's Simon Davies speaking from Deutsche Bank. Just a few from me, please. First, can you give us any more detail around the earnout structure for the deal? You talked about it being a stretched target. Do you expect the earnout to be paid in full? And what is the implied valuation for the business if you do that? And secondly, can you give us a feel for headcount within the business and where that's come from and the location of the studios? And is this a business that's been capital-constrained? Is that one of the advantages you see acquiring the business that you can apply more capital and then it can expand more rapidly?

The last question there, sorry, what was that? I didn't get it. I didn't catch it.

So just -- is this a business that is applying more capital, I mean, expanding the studio structure more aggressively?

Okay. Let's go from the back. No, I don't see that they have been strained by lack of capital. I think that -- the contribution Evolution can do is, of course, tech. We can do -- we can help with the technology to some extent. But it's equally very important to state that they have a fantastic platform. They have fantastic slots, so they can equally contribute to Evolution. On top of that, I think that the other contribution is one-stop shop and the delivery and the output of it. So capital is -- I don't think -- haven't been a constraint. The size of the companies, we don't go into detail in that, but you can look at it as around 100, so to give you some kind of figure.

And where are they based?

That's what I said is, like, Stockholm, Malta and in India, to a certain extent. We are actually -- we are off in others. But then when it comes to -- the first question you had was on earnout structure, that we don't go into details in explaining exactly how that is set up. But of course, we expect to pay full. It's -- we're pushing and we really look forward to that. So that's where we're going.

And you can't indicate the implied valuation if they achieve that in full?

That is internal information. We don't disclose that, unfortunately.

Thank you. At this moment, there are no further questions. I will hand over to the CEO, Mr. Carlesund, for closing remarks. Please go ahead.

Thank you. I can add an additional remark on that, but -- on the earnout structure, if fulfilled, it will be better deal, looking better. So it's not a higher, so you know that. Now that was all I had for today. I would also like to mention that this presentation is available on our website, so you can reach it there. By that, I would thank you all for listening. And we'll speak again in just a couple of weeks for the Q2 report. And thank you very much. Goodbye.