Kambi Group plc (KAMBI) Earnings Call Transcript & Summary

Good morning, and welcome to Kambi's third quarter result presentation. I am Kristian Nylen, Chief Executive, and joining me is our CFO, David Kenyon. Please turn to Slide 2. I will begin with a brief overview of what was a record Q3, after which David will take you through the financial performance. I will then speak about the quarter in a little bit more depth and also a few updates from Q4 so far. But first, on Slide 3, let me give you a brief introduction to Kambi. Kambi is the industry's trusted and independent sports betting supplier. Our multichannel services managed through an in-house developed platform, which has been continuously developed over the last decade. The platform, together with 860 highly skilled staff forms the foundation of our service. The Kambi Sportsbook consists of multiple elements from front-end user interface and open APIs, through to odds compiling, customer intelligence and risk management, enabling our customers to offer their players a tailored and leading sportsbook experience from Day 1. On to Slide 4. Kambi's business is built upon a revenue share model with our growth linked to our partners' success. The foundation of our strategy is based on scalability at no additional cost to our partners, Kambi continuously invest in products, people and technology to maintain market leadership. We operate an experienced in-house trading and risk management team to optimize operator training module. And our business is underpinned by our corporate probity and integrity. And we have successfully obtained all licenses we have applied for. All of this combined enable us to offer our partners a flexibility and scalability required to succeed in today's highly regulated and global market. Our technology has been structured in a way that enables Kambi and its partners to quickly and efficiently comply with regulatory requirements, removing a major barrier to market and allowing them to enter new markets as and when they require. Kambi is a trusted partner to more than 30 operators across 6 continents, including some of the most recognizable and successful brands in the industry. Together, they create a powerful network of operators, which combine to generate powerful data insight that we use to inform and continuously iterate our products and service. Let's look at the highlights on Slide 5. Before looking at the highlights, let me reflect a bit on the pandemic and the impact on our business going forward. I'm proud of how well and prompt our staff have reacted to the changing circumstances, being ready to provide our operators with top-quality service regardless of the circumstances. What we have seen from heightened restrictions across Europe in the last week, top-tier sports seem to be shielded. I believe sports federations have shown they can run operations in a relatively safe manner. And it has been a very positive impact on people to be able to enjoy sports also in a lockdown. We hope this can continue, of course, as it will significantly limit any impact on our business going forward. Q3 was a record quarter for Kambi. With revenue up 22% and operating turnover up 62% year-on-year. We also demonstrated the scalability within our business model, posting an operating margin of 23%. We signed a new partner in Churchill Downs, which operates a BetAmerica sportsbook brand in the U.S. This is a great partner win for us, and I will speak more about this later. We also extended our partnership with LeoVegas, not only does it extend the length of our agreement, but it also expands a partnership to cover additional brands [ finally ]. And as it become the norm, we have supported our partners with many launches, including the Barstool Sportsbook launch with Penn National Gaming. For now, I will hand over to David, who will talk you through the financial highlights, turning to Slide 6.

Thank you, Kristian. Good morning, everyone. In Q3, we had revenue of EUR 28.1 million, up 22% from last year. For the year to the end of September, revenue was EUR 70.8 million, up 8% from last year. Operating costs for the quarter were EUR 21.6 million, giving an operating profit of EUR 6.5 million at a margin of 23%, whilst for the first 9 months, we made an operating profit of EUR 10 million at 14%. Let's look at the income in more detail, turning to Slide 7. This slide sets out the Kambi turnover index, with a graph showing the aggregated results of Kambi's operators. The turnover is the total stakes placed with the operators by their end users. In Q3, operator turnover was up by 62% on Q3 last year, reflecting the opening up and growth of the market in various U.S. states such as Pennsylvania, Indiana and Illinois, and the return of the sporting calendar after the heavy impact of the global pandemic in Q2. The first part of the quarter was the conclusion of the main European soccer leagues and the final stages of the Champions League. In September, we saw the start of the new season for the soccer league and the NFL. It's extremely positive to note that operator turnover accelerated through the quarter, with 43% of the quarter's total being generated during the month of September. The margin represents the combined trading margin made by the operators. In Q3, this margin was 7.2%. We can see the split of operator GGR by region on Slide 8. With the growth of the total business, the European GGR was up 11% on the same quarter last year. Q3 saw a resumption in the growth trend of the Americas GGR, driven by the return of the main U.S. sport and the entry into a new U.S. state, with this being the first full quarter of revenues in Illinois and Colorado, for example. We can see the conversion from the movement in operator turnover to our revenue on Slide 9. Operator turnover post foreign exchange impact was up by 62% compared to Q3 2019. The comparative operator trading margin was very high in Q3 last year. So the increase in operator GGR was 38%. The effect of the significant increased level of operator NGR was to decrease the effect of commission rates charged to our operators due to the tiered structures in some contracts. The net effect is the revenue for Q3 2020 is up by 22% on Q3 last year to EUR 28.1 million. Let's turn to the full income statement on Slide 10. Operating expenses for the third quarter were GBP 21.6 million, up from EUR 18.1 million last quarter as our operations returned to pre-COVID levels. Looking ahead to Q4, we anticipate costs will increase by 5% to 8% as we press ahead with our U.S. license applications and data supply costs reflect a busy sporting calendar. The operating profit for Q3 was EUR 6.5 million, up from EUR 3.4 million in Q3 last year and EUR 10 million for the first 9 months, up from EUR 8.6 million. The profit after tax for Q3 was EUR 5.1 million and EUR 6.8 million for the first 9 months. Now let's look at the cash flow on Slide 11. Set out on this slide are the major components which impacted our cash position during the quarter. Our opening cash balance was EUR 46.4 million. The cash inflow from the operating profit was temporarily offset by a negative cash movement in our working capital. Trade receivables increased in the quarter, predominantly due to a much higher level of invoiced amounts in the months preceding the quarter end compared to Q2. A large part of these amounts have been received after the end of the quarter. Capitalized development costs in the quarter were EUR 3.6 million, whilst the amortization charge on previously capitalized costs was EUR 3.2 million. The net cash outflow for the quarter was EUR 0.5 million, and our closing cash balance, EUR 45.9 million. In summary, our financial performance, which showed a high level of resilience earlier in the year, this quarter reflected the business' ability to respond immediately to the resumption sports and demonstrated the inherent scalability in the business model. So now let me pass you back to Kristian, turning to Slide 12.

Thanks, David. In August, we signed a new partner in Churchill Downs, which is a large multistate business in the U.S. with a fantastic heritage in sports and in particular, races, hosting one of the most prestigious events in a racing calendar, the Kentucky Derby. Churchill Downs operates a BetAmerica sports betting brand, which has been active in a few states for a couple of years. We have yet to really invest in the marketing of the brand, but plan to do so once we have transitioned to the Kambi Sportsbook. They also operate a racing platform called TwinSpires, which has enjoyed great success in the U.S. Churchill Downs plans to align this closely with BetAmerica. And as we have seen with the success of ATG, there is a good crossover between those that are racing and those bettors of other sports. Though Churchill Downs is an exciting partner for us, we are already live on property in 2 states and will add more in the near future. The company also had great market access through BetAmerica has a great opportunity to become one of the leading sports book brands in the U.S. for years to come. Turning to Slide 13. As I have said before, extending partnerships is yet as important as adding new partners. So I'm delighted to sign a new agreement with LeoVegas. Not only is this an extended agreement, but it's also an expanded one, with additional brands added to the contract, and we are already live with 2 of those brands in the U.K. market. LeoVegas has been successfully using the Kambi technology to build a unique sportsbook experience, and we look forward to supporting their development over the coming years. Turning to Slide 14. Q3 also saw the much anticipated launch of Penn National's Barstool Sportsbook. The launch in Pennsylvania was a success and Penn themselves set out last week in their report. And we look forward to supporting the launch of that in multiple states over the next 12 to 18 months. The [ API 12 ] is a great demonstration of what's possible with Kambi's technology. Kambi acts as a blank canvas for operators that wish to develop something unique on our platform, which Penn has successfully done here, creating their own proprietary apps and IP, built in-house with them with no Kambi code. Furthermore, Penn has also been leveraging our price differentiating tool to differentiate themselves further in the market, while we have also had great success in using the Barstool personalities to create unique testing opportunities for their [ players ]. As you can see on this slide, for example, players can bet with or against David Portnoy, the Barstool founder. Overall, I'm confident about the next 12 months will bring as we support Penn in creating a leading omnichannel experience, with retail channel also a major focus for them. Moving to Slide 15. In total, Q3 saw 17 partner launches in the U.S. with 3 online and 14 on property. As you can see on the slide, these launches span 7 customers in 7 states. Of the states we have launched sports betting and the repeal of PASPA, the Kambi Sportsbook is live in more properties than any other B2B or B2C Sportsbook. Turning to Slide 16. In the events of the Q3, we recently launched in Tennessee, our 12th state, enabling DraftKings to be the first tranche of operators to go live in the state. Tennessee is online-only due to the fact that we have no land-based casinos. It's worth noting that Tennessee shares a border with 8 states, none of which currently offer online sportsbook. As we have seen elsewhere, betters are more than willing to cross the state line in order to place bets from mobile. So we may see similar in Tennessee, which will increase the potential marketplace. In event of the Q3, we also signed with Bally and [ National ] [indiscernible]. I will get into more depth on that exciting partnership in our Q4 report. Turning to Slide 17. On this slide, you can see the scale we are building in the U.S. We are active in 12 states and operating sportsbook in 45 properties, which, as I said earlier, it's more than any other B2B or BTC sportsbook in the states launched post PASPA. We have more states to come as well as the expansion of our current partners. You can expect the number to grow substantially over the coming 12 months. And finally, on to Slide 18. So to summarize, it has been a return to form for Kambi following a difficult Q2. In Q3, we delivered a record financial performance. As part of that, we have proven our scalable business model, delivering strong operating margins. And what has been pleasing of late is that we have carried this momentum into Q4. We work to delivering a strong performance with growth accelerated, and we look forward to pushing on further over the final 2 months of the year. Now I will pass it over to the operator for questions.

[Operator Instructions] Our first question comes from the line of Erik Moberg from ABG.

So 43% of Q3 turnover was generated in September, which you then guided has accelerated into Q4. Aside from NBA, is there anything else that has a negative impact sequentially and on a year-over-year basis, if we look at the full Q4?

Erik, yes, I would say I thought we will have a little bit of a similar pattern since the NHL also had a very prolonged season into Q3. But other than that, there's nothing that I can see.

Got it. So all things equal then, given that you will also see the full effect for the Barstool brand, and you will also have contribution from Tennessee, you should, at minimum, be able to have an average monthly turnover in line with September for the full Q4. Is that a fair assumption?

I would say that's a very fair assumption. Yes.

Got it. And then in terms of the new contract with the Belgian National Lottery, do you have any view on the type of market share that sports betting brand possessed in the past? And also if you have any guidance in regards of what market share targets going forward?

I can't really communicate anything on that at this point, Erik. But yes. I can say at this point, they're coming from quite a low number. So they are certainly not a market leader in the Belgian market at the moment.

Fair enough. And in regards to Virginia sports betting, it is expected to launch in Q1 2021. Should we expect DraftKings to launch in Virginia with SBTech or with you guys?

I don't want to comment on that at this point.

Got you. And just in general, obviously, you're experiencing a rapid growth. But if you could give me some more flavor on the growth and receivables and how you work to improve working capital into Q4.

Erik, David here. It's -- yes, I mean, this movement in receivables have been entirely linked to the growth in revenue. So at any period end, we have 2 months' outstanding because it's the month before and then the invoice issued right at the end of the month at the end of the period. So versus Q2, of course, revenues are significantly higher. That directly translates into a higher debt balance at the end of Q3. That balance, 1/2 of it's been recovered since the end of the quarter. So absolutely no concerns with the increase in debt until the end of the quarter. And yes, if revenues are stable, then debt is typically stable. And if they go up -- if revenues go up, debts will go up. So it's a very safe pattern, and we're very happy with the position.

And the next question comes from the line of Marlon Varnik from Pareto Securities.

First, a follow-up question on October here. You mentioned that the strong trend from September has continued into Q4. Have you seen this trend also as strong in the U.S. given that basically it's only NFL ongoing? Or have you seen it offset by new launches in the U.S.?

I think the major sports still by quite some margin is American Football. So I would say that we see a very positive trend in the U.S. as well.

All right. Good. And second question, can you also comment a bit on the initial free bets and bonuses offered recently, how they got a short-term impact? Anything that you've seen in the U.S. market?

Yes. I mean I think the important thing from a Kambi perspective is we kept the amount that could be deducted. So in terms of our -- what impacts our revenues, it's a known, quantified amount kind of before we get into any contract. So yes, that's why you don't see a -- we see a fairly stable reduction on the [ awards before we show ] because we know exactly the capped amount that can be deducted before we calculate commission. So, yes.

All right. And on Churchill Downs, how should we view the long-term potential of Churchill Downs contract in relation to the other U.S. partners, for example, RSI? And what can you tell about rollout plans here?

So I mean, it's always hard to know the potential, but they have great market access. I mean, they are one of the largest when it comes to having already a network in different states. So from that perspective, it's very high potential. And as we talked about, I mean, their customer base will be in the rating quite fantastic. So if they can transform that into sports betting as the ATG was successful doing it in Sweden, for instance, we have a very, very good chance of being one of the leading brands in the U.S., going forward.

Interesting. And can you say anything about rollout plans here especially now in the next couple of quarters?

Not anything specific, but they have a quite aggressive plan to roll out into more states. So I hope they will be very present in the next 12 months, both online and retail in several more states at the moment.

Great. And also, can you also give a comment of the outcome and your exposure on the U.S. election? I mean if you can give some color of the turnover in the event in -- compared to other events?