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

[Audio Gap] [Operator Instructions] Now I will hand the conference over to the speakers CEO, Martin Carlesund; and CFO, Joakim Andersson. Please go ahead.

Good morning, everyone. Welcome to the presentation of Evolution's interim report for the third quarter of 2026. My name is Martin Carlesund, and I'm the CEO of Evolution. With me, I have our CFO, Joakim Andersson, as usual. I will start with some comments on our performance and then hand over to Joakim for a closer look at our financials. After that, I will conclude, and then we will open up for questions. Next slide, please. Let's start with the highlights. Net revenues were EUR 526.1 million, corresponding to a year-on-year increase of 3.7% and a quarter-on-quarter increase of 1.6%. Adjusted EBITDA came in at EUR 345.9 million, giving a margin of 65.8%. Adjustments include the U.K. gaming commission settlement of EUR 5.6 million and the Galaxy Gaming termination fee of EUR 6.5 million. This was an uneventful quarter, which I believe is something good. On a quarter-on-quarter basis, all regions contributed to growth for the first time since 2024. The margin remains stable and very strong cash flow. Live revenues increased by 1.3% compared to the second quarter and by 2.6% on a year-on-year basis. RNG reported double-digit growth for the second quarter in a row, up 10.1% compared to last year and 3.2% compared to the second quarter. Nothing spectacular happen on the operational side, it's business as usual with several game releases, new studio openings and our everlasting credo becoming a little bit better every day. After the end of the quarter, the new potentially temporary ban on gaming came into force in Brazil, as you know. That will make Q4 not as uneventful, but we don't want to speculate about the final outcome. We would like to know more -- we will know more after the second run of the election this weekend. For now, we have closed the studio, but we are ready to reopen on short notice. It's highly unfortunate that populistic agenda can overflow a regulatory framework that has only been in place for 1.5 years. However, Evolution has the advantage of our global scale and size and it's not the first time we had to handle the regulatory fickleness of the market. We now focus on how to handle our employees and the practical consequence as we wait for further clarity. Next slide, please. Let's look at our operational KPIs. First, consisting of headcount and then game rounds. Headcount increased by 8.1% on a year-on-year basis and 2.3% compared to the second quarter. We launched 1 more studio in the quarter, our third in total this year and our 27th studios worldwide. We continue to optimize the distribution and cost mix. The game rounds index can be seen as a general indicator of activity throughout our network over time. We have seen a steady increase over the past quarters and somewhat of a jump in Q3. Next slide, please. Looking at the revenue mix by customer location, Europe has decreased slightly, while LatAm and Asia have increased compared to Q2. As a reminder, as we require all our customers to carry a license in a regulated jurisdiction, all our revenues are regulated. The revenue split on our customers, which is an estimation based on the IP number of players received from our customers and purchase third-party geo information, has not changed compared to Q2. The same goes for the estimated share of revenue from regulated markets, which remains at 49%. Next slide, please. Now I will go through each of the major regions based on the estimation of revenue, based on our customers' customers' IP number. Europe reported a quarter-on-quarter growth of 0.4% and a year-on-year decrease of 4.7%. It's not exciting and we should do better. No matter the regulatory situation or low channelization rates, we should do better. Demand for localized content remains high, and we launched an Italian language, Ice Fishing during the quarter. We also opened a second studio in Lithuania. Asia increased by 0.8% quarter-on-quarter and by 1.6% year-on-year. It is one small step forward compared to Q2, but you all know that there is no quick solution to the cyber crime issues that we continue to see. We are playing the long game, and I remain confident that it will pay off. Next slide, please. Yet again, we achieved all-time high revenues in both North America and LatAm, but now also in Africa. North America reported 13.6% year-on-year growth slots continue to be dominating games -- the dominated game type and our RNG portfolio performs better. At the same time, Live is slowly finance audience, and we continue to expand to meet demand. Earlier this year, we opened our second studio in Michigan. And during the fourth quarter, we will open an fourth studio in New Jersey that also will serve Delaware. We then have a total of 8 operative hubs in the U.S. LatAm reported 23.1% year-on-year growth, and it did include -- didn't include any effects from the ban in Brazil that came into force early October. If Brazil reopens its market, we are ready to accelerate. In the meantime, we're planning for further expansion in Colombia, while also building momentum in Argentina with our 2 studios there. Africa and other continued its strong performance with a 23.7% year-on-year growth. Next slide, please. Let's look at the products. In Live, two of the main launches in Q3 were Monopoly Roll’'em and Disco Balls. Both of them have been off to a very good start. In RNG, we are introducing new U.S.-focused studio, named Spinning Whale. The first game will be available in November, and it will, of course, be distributed through one stop shop. This exciting new addition will further cater to the preference of the U.S. payers. Looking ahead, I want to highlight one title under our Hasbro partnership that will be launched very soon, Game Night. It will feature a huge money wheel and 5 bonus games inspired by Hasbro classics such as Hungry Hungry Hippos and Connect 4. It will be the largest game show in the history of online casino and a truly spectacular game. Very much going forward to that release. And with that, I will hand over to Joakim for a closer look at our financials. Next slide, please.

Thank you. Let me start with a 5-year trend on Slide 8. Looking at the blue bars and our revenue development, it's encouraging to see another quarter added to the positive trend we've established since the low point in Q3 2025. Net revenue amounted to EUR 526.1 million in the quarter. We reported adjusted EBITDA of EUR 345.9 million corresponding to a margin of 65.8%. Year-to-date, our EBITDA margin stands at 65.7%, meaning that we continue to track well against our full year target of 66%. Next slide, please. Looking at the more detailed profit and loss statement, I've highlighted three areas this time that I would like to count on. First, obviously, as I just said, net revenue amounted to EUR 526.1 million, representing a growth of EUR 8.3 million quarter-on-quarter and a return to positive growth year-on-year at 3.7%. This performance was driven by positive development with the Live portfolio, combined with another strong quarter of double-digit growth in RNG. The second highlight is our cost development. On a reported basis, total operating expenses amounted to EUR 235.9 million. However, this includes both the settlement fees paid to the U.K. Gaming Commission and termination and legal costs related to the contemplated Galaxy Gaming acquisition. Together, these items amounted to EUR 12.1 million. And when we talk about our adjusted EBITDA, we are excluding these one-off items to provide a more accurate view of the underlying performance, which also improves comparability with prior periods. Looking more closely at our expenses, you will find that personnel costs show relatively high year-on-year growth, driven primarily by increased headcount of 8% compared to Q3 last year. On a rolling 12-month basis, the increase is more moderate. The third highlight is earnings per share, which amounted to EUR 1.29 during the quarter, which is 2.4% higher than Q3 last year. However, if you would compare EPS on an adjusted basis by removing the nonrecurring items from this quarter, the improvement of EPS is approximately 7.5%, driven primarily by the significant reduction in shares outstanding resulting from our share buyback program. Next slide, please. Operating cash flow after investments amounted to EUR 334.1 million during the quarter. Working capital continued to contribute positively, adding EUR 32.5 million. And I have commented on the working capital initiatives over the past few quarters. And while further opportunities remain, I'm pleased to see that the increased focus on accounts receivable is delivering tangible results. As a consequence of the strong operating cash flow, cash conversion was very strong during the quarter, contributing to a rolling 12-month cash conversion of 85%, as illustrated in the graph. I have limited comments on the capital expenditures. Investment levels remain consistent with the stable trend we have seen over recent quarters, with total investments of EUR 32 million during the period. Next slide, please. My final slide is, as always, about the balance sheet. I have two comments here. Total cash and cash equivalents amounted to EUR 656.4 million at quarter end. The cash balance is now on a slightly lower level as a result of the substantial shareholder distributions we are making via the share buyback program. As of the 30th of September, we had repurchased 16.9 million shares year-to-date, corresponding to EUR 1.1 million. We will continue our buybacks through Q4 and Q1, although at a somewhat lower pace than in Q3 as we adjust the pace to align more closely with cash generation. During the third quarter, we had an extraordinary general meeting to approve the cancellation of treasury shares held at that time. This was necessary because Swedish companies are not committed to hold more than 10% of their own shares. So in order to continue executing the EUR 2 billion buyback framework, a cancellation of treasury shares was required approximately halfway through the program. The equity amounted to EUR 3.6 billion at the end of the quarter, meaning that despite the significant buybacks completed to date, we continue to maintain a very strong financial position. And that concludes the financial detail for this quarter. Back to Martin.

Thank you, Joakim. So let's summarize and then move to Q&A. Q3 2026 have been uneventful, maybe even a little boring and business as usual. It's a state that I like. It helps us to focus on things that matter to continue pushing forward with the best and most innovative and entertaining products, expanding our footprint, creating revenue and cash flow. In Q4, we have the situation in Brazil to deal with, but it's not the first time that the single market undergoes volatility or uncertainty, and I'm sure that it won't be the last time either. We will continue to see volatility from all parts of the world, also going forward. Are Asia cybercrimes issues solved? No. What matters is, once again, to stay focused on the core and recognize the scale of which Evolution runs its business and how stable and good we are in doing that. Entertainment, user experience, people getting a little bit better every day, growth, cash flow, cost discipline and entertainment again. That's the core of Evolution and will continue to be the core. Ready, set, go time for Q4. So with that, we thank you for listening, and now we'll open up for questions. Next slide, please.

[Operator Instructions] The next question comes from Nikola Kalanoski from ABG Sundal Collier.

Just a few questions from me. So the first one is on Live growth. So now you've returned to growth in Live for the quarter, would you say that Ice Fishing has been the key growth driver in Live this quarter? Because from an outside in view, Ice Fishing has shown some very, very impressive player growth.

Ice Fishing is probably the largest game in online history, and it's the third time Evolution creates such a great game. I mean, Lightning Roulette, crazy time in our Ice Fishing, it shows what we are doing and what we're aiming to do and what we continuously aim to do. I wouldn't attribute the a single quarter to any type of game. It's the combination of all of our games.

Yes. Fair. And then the second one would be on like upcoming game launches. So I think you're launching Game Night soon. As I understand the setup for the game in the studio is quite complex. So within that 1 month, should we expect you to invest more on a game-by-game basis as you continue to develop some of these increasingly complex game shows such as Game Night?

I think that we -- our investment level on the size we are, will remain more or less the same. It's not driven by one specific game or even that we do more complex games. Game Night is going to be spectacular. It's the biggest game ever made in our history and probably in the Live history as well, and it's going to be absolutely awesome. But I wouldn't see it affecting the level of investment, no.

Yes, I appreciate that. And the final one is on Asia. Martin, I think you've historically repeated about volatility in the region, and of course, the cyber theft issues in the report. So if I'm not mistaken on this time. You didn't mention it in the report, but you discussed it briefly during this call. Should we interpret this as you being increasingly confident or satisfied with the measures you've taken? Or should we not read too much into this? It's quite for a long time now?

We are working very hard. We're taking long-term steps to protect our product. And I think that we have traction exactly on these technical endeavors that we do. And I'm happy with them exactly how that plays out. There will probably be volatility as we go forward. But we are happy with where we are technically.

The next question comes from Martin Arnell from DNB. Carnegie.

My first question is on the growth. You were at 4% growth. Is this a realistic number for you, aiming for growth in line with the market or do you see as a sort of exception of from easy comps over last year?

I would say that the takeaway should be that when we have the opportunity to do business and focus on our core business, we will see good traction and good growth. And I look forward to -- we don't need a tailwind. We don't need headwind. If we could just be continuing working, then I would assume that we can have good figures also going forward.

Okay. And the new games pipeline for 2027, ICE is only few months away. Can you share anything -- any light on the games pipeline rolled up for 2027?

Yes, we're going to have a spectacular road map also for 2027. And we are on the late side, as we all know, a little bit with the game because they are super complex, big and the biggest things that we have made. So I would say that 2027 will be spectacular year not only for what we show on ICE, but also what we release.

Okay. And my final question is on your studio in -- the new studio in New Jersey. Do you see demand to ramp it up quickly? Or do you think it will be capacity increase?

I wouldn't say slow, quick is a relative word, but I think that we will see a good ramp-up in medium term.

The next question comes from Ed Young from Morgan Stanley.

Three questions, please. My first one is on the growth in Europe. Obviously, overall, you said you're happy with a stable position across the geographies and everything grew quarter-on-quarter. But you did call out that you can do better in Europe and you should do better in Europe. And it does look like there's some market share loss there. Could you help us understand a little bit on what can drive that? I know you've talked about channelization, but there aren't any huge changes going on right now. So is it that you think you need to do better in Europe to capture some more of the market growth and get it back to a position you were in long before, which was obviously gaining market share?

I think that you will see that as we -- if we can just have a couple of stable quarters in Europe where we focus on actually working with our customers and get back from all of these external parameters and regulatory changes and taxes going here or there or whatever, even with the situation where -- if it will be stable, we will see to that, that we will do better.

Okay. Second one on Spinning Whale, Is that much of a departure from your previous strategy? You said it's focused on the U.S. Does that mean it's focused on low-volatility land-based style games? Or are you looking to do something a little bit different there? And given the success you've had in Live by also acquiring the right IP, is doing some deals around land-based IP something you're considering within that? Just a little bit on the strategy of what you're trying to achieve as Spinning Whale will be appreciated.

We want to do a localized RNG content for our North American business, and this is what we are doing with Spinning Whale.

And finally, on the comment on the buyback, you said you're selling it to more align with cash generation. That seems like a pretty clear answer. But is it fair to say then you're not considering this time taking on any debt to fund the pace of buyback? Or is that something that could or might be reviewed as you get to the full year next year?

I mean we have the timeframe to do the buyback, I mean, up until Q1 and a little bit more maybe. But -- so we will, of course, manage and if we can do that without taking up debt, that's good. It saves money. And of course, that's what we aim to do, and it looks good.

And can I just add a quick one, Ed. The capital allocation framework and the kind of leverage targets remain. So we have said that we want to be in a net cash position as kind of a standard where we want to stay. So -- and that remains. .

The next question comes from Charlie Muir-Sands from BNP Paribas.

The first one just reflects your game rounds index up to 20 -- I think, year-on-year against constant currency growth up around -- beg your pardon?

It's fantastic, isn't it?

Yes, yes. So I was just wondering why it's not dropping to stronger revenues. I know you've talked in the past about how it's sort of a directional indicator. But can you just sort of share some some of the drivers around the main mix effects as to how that translates into 4% at constant currency growth? Is it because RNG is much hit? Is it geographic effects? Are there other things going on? That's the first question.

It's a directional indicator. You can see that it indicates how well our games are doing right now and what -- in how many places. And there are so many parameters that affects the revenue and when the revenue drops down. So it's about which markets that are growing, what type of traction, what type of bet levels you have there and so on and so on. So over an eternal time, of course, there is almost one correlation between how the activity in the network and the revenue comes out, but that's over a very long time period. Quarter-on-quarter, even a couple of quarters, there is not that relation.

Okay. And but there's no change in the underlying take rates that you have agreed with your main customers?

That's a good question. But no, we don't see any major price pressure or that type of situation.

Great. And then my second question is just with respect to the improvement in momentum you're seeing in Asia. How much of that would you attribute to easing pressures around player currency headwinds versus underlying participation and incremental steps you've taken or not taken since the last quarter with respect to actions around [ video ] piracy?

I can't go down into that level. I'm happy, as I said, with the technical achievements that we do, and it's a long-term play. And I'm I believe in what we do, but it will take some time. And I'm quite happy where we are right now. .

And then just last brief question just with respect to Brazil, I know it's not a huge part of the total group, but what proportion of the cost base there are you able to mitigate near term? And can you just confirm that group-level margin targets for stability for the full year are achievable, in spite of the fact probably generate zero revenue from the region for this entire quarter.

I will only comment from the margin perspective because I don't want to go into what happens and what we're going to use where and what and what -- we don't even know if you're going to open again. But we remain -- we -- our margin guidance for the full year remains, so in line with last year. That remains. There is no change in that.

The next question comes from Monique Pollard from Citi.

There's one for Joakim, on the accounts receivables. So this quarter, obviously, you've seen another reduction in the accounts receivable of close to EUR 30 million. And you've said that opportunities still remain. So I just would like to understand, obviously, you've been talking about these working capital efficiency initiatives, and they've been coming through since the end of last year. How much more is there really still to go? Or is the bulk of that sort of working capital now?

Yes. Yes, we started to talk about this in, I think, Q3, Q4 and -- more so in Q4 when it was at a very high level. And then we said that we are -- I mean, we are following it. We are not worried, we understand what it is. And then I think we talked about that we have it in the past, maybe let our customers use us as kind of a bank to finance their operations and their working capital, which we're not doing any longer. So being more disciplined in the kind of invoicing process, getting the invoices out on time and correct and then chasing making sure that the customers are paying us where they should, that is really what we have done. So it's no magic there, and that has led to these improvements the last couple of quarters, Q1, Q2 and also now Q3. Is there more to do? Yes, as I said, there is more to do. We don't want invoice to be late. It should be paid on time, and there are still some overdues.

And then on Brazil, just from my understanding, I had never understood that, that country was geo fenced anyway. So is it the case that your Brazilian revenues go down to zero in the fourth quarter? Or will there still be some revenues in Brazil despite this studio closure in the fourth quarter?