Kambi Group plc (KAMBI) Earnings Call Transcript & Summary

Good morning, and welcome to our third quarter presentation. I am Kristian Nylen, and joining me is our CFO, David Kenyon. So I will first give you a brief overview of the third quarter, and then Dave will come in and talk about the financial performance. And then I'm coming back and talk a little bit more in depth about the third quarter. So to the highlights. I think we had a great third quarter. Very strong performance, with EUR 41.6 million in revenue, which is a 48% uplift on last year. For the full first 9 months, we're up 80% from last year. Very pleased with all numbers, and David will, of course, go through them more later on. During the quarter, we also acquired Abios, which helps us transforming our sports betting also into an esports provider. With Abios, I think we have a great addition to the team, and I will talk more about it later. During the quarter, we also expanded with -- our partner network with 2 new signings in BetCity in Netherlands and Island Luck in Bahamas. And of course, I will talk more about that later. Finally, during the quarter, we launched in 2 new states, Arizona, which was our 15th state. And just after a quarter, we also launched in Connecticut, which I will talk more about later. But for now, I hand over to David, and I'll come back later. Thanks.

Thank you, Kristian. Good morning, everyone. My name is David Kenyon, CFO of Kambi Group. I'm going to start with the financial highlights for the quarter. So revenue was EUR 41.6 million, up from EUR 28.1 million in Q3 last year. That's a 48% increase. Operating profit was EUR 14.7 million, up from EUR 6.5 million. And operating margin was 35%, up from 23% last year, as our business model continued to demonstrate its scalability. I want to talk through a few other key events that are impacting the finances also this quarter. There's been quite a few. Firstly, the acquisition of Abios, which we completed in September. They're a data content, odds and some visualization services provider to industry operators and technology companies, and a leading B2B esports supplier. We paid approximately EUR 15 million upfront for the acquisition, and there's around EUR 12 million as a potential earn-out still to come in the coming years. And we used our strong balance sheet to finance the cash acquisition. Secondly, the Netherlands. New regulations started in the Netherlands at the start of October. Some of our main operators did temporarily exit the market. For those who pulled out, they're confident of gaining licenses in the first half of next year. And we also have to mention JVH, who we did sign before regulation started, who also is yet to acquire a license. BetCity did launch on the first day of regulation, and we've been very encouraged by their start. The net effect of being in this newly regulated market with an incomplete suite of operators is approximately EUR 0.4 million to EUR 0.5 million per month on our EBIT. However, in the medium term, we do expect to be in a strong position in the Dutch market when all the operators do acquire their licenses. Thirdly, in August, Penn National Gaming announced it had agreed to acquire the theScore media group. This doesn't impact our current contractual agreement. But I really want to just highlight that based on the official data in the U.S., Penn National Gaming, they represent around 5% to 10% of our revenue this quarter. And lastly, I'm really pleased to mention the share buyback program that we initiated today. It's a EUR 12 million buyback program. Over the last years, our strong performance has really contributed to strong cash generation, and that's put us in a position to be able to start this buyback program. So that will happen in the coming weeks. This is the Kambi turnover index, which we always present. It's the aggregation of the results of all the operators. The blue columns are the aggregated turnover and the orange line is the aggregated operator trading margin. The turnover is indexed. It started at 100 when we first listed, and it's indexed versus that. You can see it has fallen significantly to 575. It is severely really impacted, of course, by the migration of DraftKings. So this number here in Q3 almost entirely excludes DraftKings. If we include an estimation of what the DraftKings turnover would have been, if going through our books, 875 to 900 is an approximate range that we think it would have landed. From a seasonality perspective, Q3 is typically a very quiet quarter in the sporting calendar. Really only in September do we see a return of NFL as well as the soccer season in full swing in the major European Leagues. So that's worth highlighting this quarter. The margin was 9%, obviously, relatively strong compared to where we've been in recent quarters. But we do know the comments of one of our operators, Kindred, this morning around the weak sports betting margin at the start of Q4. And that is also true for us. The results at the start of the month have indeed been -- have seen many favorites winning. But as we always stress, when we talk about operator trading margin, whether it's weak or whether it's strong, it's really only a short-term impact and it's nothing that affects the long term of the business. And indeed, on the topic of margin, actually in our report today, we've raised our long-term guidance on margin to 8% to 9%. And this is really driven by the increased popularity of high-margin products, which we're seeing much more of now, such as Bet Builder. This graph is the conversion of our operator turnover growth to our revenue growth. And I'd have to again flag that this quarter, it's heavily skewed by the migration of DraftKings, with very little coming through our books actually in Q3. Without DraftKings, turnover is down 14% versus Q3 last year. However, there in the third column, you see the impacts of the trading margin, which at 9% is significantly stronger than the 7.2% we saw last Q3. In the other column, the -- pretty much a one-off is the impact -- the positive impact of the fees we charge to DraftKings in lieu of the services going through our books. So post migration, we still saw revenues from DraftKings in Q3, and that significantly impacted our revenue here in the other column. And that took overall revenue up by 48%. This is the last quarter where you'll see any impact from DraftKings. That service has now ceased. It's worth highlighting that DraftKings amounted to approximately 30% of our revenue for this quarter. If we exclude DraftKings from both this year and last year, underlying revenue growth was 22%. Here's the main feature of our balance sheet, still a very strong balance sheet, as we've said in recent quarters, but it's getting stronger all the time. So even after the EUR 15 million acquisition of Abios, our cash balance was almost EUR 85 million. Our cash inflow, excluding working capital movements and the acquisition, was almost EUR 12 million. And we have a very healthy equity to assets ratio of almost 70%. Lastly, I just wanted to give some updates on the addressable market that we presented in June at the Capital Markets Day. There's been some updates in important markets, which were the kind of pillars of those assumptions on the left there, you can see, in terms of addressable market. So the main changes this quarter have been in Arizona, where we launched on day 1 of the market regulation in September in time for the NFL season. And we're now live with 4 operators: Rush Street, Churchill Downs, Penn and Kindred. Connecticut became the 16th state we launched in. When we launched in October with Rush Street Interactive, who won a competitive tender to partner the Connecticut lottery, both online and on property at 15 locations. In New York, we're the lead platform bidder on 2 consortium bids, with the results of the RFP expected to be announced in December this year. In Canada, legalization of single sports event wagering came into force in August. And Ontario is in the process of opening its markets to private operators, and the application process there began in September. And as I mentioned earlier, in the Netherlands, regulation started in early October. BetCity has started very strongly in that market, and we have high hopes for other operators to be licensed in due course. With that, I'll hand you back to Kristian.

Thank you, David. So yes, as we also mentioned during the Capital Markets Day, so we will update you around our 4 key pillars that we have, yes, mentioned in the Capital Markets Day. And I think we have some really nice updates on all 4 of them. Firstly, we delivered the Bet Builder for the NFL for American season. I will go through that more in detail. But so far, it has been a great success. On the differentiation piece, we have built and launched bar-top terminals. I will go through that more in detail later on as well. But again, very pleased with the reception we got for that. On the power of the network, I think we have increased our AI capability significantly during the quarter. And we launched successfully fully automated pricing on some of the lower-tier soccer leagues, with much more to come. And finally, on our scalable business model, we kicked off a rollout of the retail launches in Belgian National Lottery, and we can do this remotely. And during Q3, we launched 30 retail stores. And today, we stand about 80 stores in total. So Bet Builder for American football, I think this has been one of the key projects for the year. And it has been a fantastic success so far. We see when we look at the bettors on NFL, more than 40% of the bettors have been engaging with Bet Builder. And roughly 20% of all premium bets is on the Bet Builder. And of course, it is a much higher margin on this product. One thing we have that is unique in the market is that you can play with multigame. So you don't only have to bet within a game and the correlated bets, but you can also combine it with other bets. So you can have, for instance, a baseball match combined with an American football match, which is a great advantage and something that we are quite alone on. And roughly 1/3 of all Bet Builders is combined with -- in every event. This is a big project. It started many years ago with soccer. And now we have rolled it out to American football. And with that, I think we are in a position where we can become much, much more fast with new sports. And I think or I know that during this weekend, we will start with the college football, which is giving us yet an average. And I think we are alone on delivering Bet Builders for college football. And later in the year, we will expand on ice hockey as well to have a great Bet Builder product, timely enough for the launch of Ontario market, of course. And next year, I think more sports are to come. So very pleased with this product. I think Bet Builder is one of the key elements of any future sportsbook. I think it's very, very hard to create a product that is competitive. Most operators are using third-party solutions, whereas ours is fully built in-house. And now we have all the flexibility to keep on developing this. And I think in future years, you will see us going into Bet Builders in play and creating cash-outs on Bet Builders and so on and so on. So I think we are in a great position with what we have built so far. Another thing that I talked about before is our bar-top terminals. I think this has been a request from many of our casino operators especially. And now during G2E, we exhibited this new bar-top betting terminal, which I think got great traction. And many existing operators and prospects really liked it. This is very popular in the U.S. market. Traditionally used for casino games and especially card games such as poker. And as usual, I mean, we're taking our online product and adapt it to suit very, very well in the retail market. We have been innovative before, especially when it comes to bring your own devices and so on. So once again, very pleased about being able to deliver something new and great to our current customers and future prospects. Next thing I wanted to talk about is automation of our soccer odds compilation. This is a product that we have been working on for a while. Of course, there is probably many who will talk about being able to automate their soccer pricing. What we are doing here, I would say, is very, very different. We are not looking at the market. This automated soccer compilation, we can actually open any market. And that is what we're doing on more than 1,000 games across 20 leagues during Q3. So we can be first on the markets, increasing slightly higher turnover on these leagues and maintaining a very, very strong sports-betting margin on these automated leagues. This is obviously something that we will roll out in a much, much further scale. This is a first test. But I think it's a small step in a direction of a much, much higher grade of automation in sports betting. Now I would like to talk a little bit about our acquisition of Abios. I would say that esports is something we started many years ago with some pricing. I wouldn't say we have had a strong focus to really become a leader in the field. But it's something we have been looking at. And yes, looking for the right timing to really become stronger in this field. With Abios, I feel we have found a great partner. And I think Abios is a fantastic company. I really like their leadership and their technology. And I think it's a very, very good fit of cultures. So really pleased with it. I think when we looked at esports, especially during COVID when most other things disappeared overnight in April last year or even March last year, esports was one of the things that was there. And we saw that there is definitely a future for esports. I still think it's a few years away. But I really think this is a great timing to start getting a leadership role in the esports market. During Q3, we also won a few new customer contracts. Island Luck, which is a clear market leader in Bahamas. Again, our focus in Americas is paying off and we're very pleased to add Island Luck and the Bahamian market to our offering. Island Luck is regulated in the Bahamian market, and as I said, a clear market leader. And then BetCity, which we launched on day 1 in Netherlands. And so far, as David mentioned, have performed very strongly. They -- yes, at the moment, it's actually our only operator in the Dutch market. So very pleased we're getting yet another strong brand in the Netherlands market. And I think for the future, when we get all our customers back, we will have a very, very good position in the Dutch market. During Q3, we did a lot of launches with our existing partners. To start with, in Arizona, on day 1, we launched with both Penn and Kindred. And shortly after, CDI was also following. And early in Q4, we also got Rush Street joining in Arizona, as David mentioned. For other states, we launched Penn in 5 new states during the quarter. And we also launched Kindred in Iowa and Parx in Michigan. On property, we did 2 launches in Pennsylvania and Arizona with 2 of our partners. And as I mentioned earlier, we did 33 retail locations in Belgium with Belgium Lottery. So we have been very, very busy. And I think this is one really strong ability we have, to be able to support our partners to launch in so many different markets at the same time. And I think it's a very core strength for us as a company. After Q3, I think the highlight is us launching with Rush Street and the Connecticut Lottery in Connecticut. Connecticut, of course, is not the largest state, but Rush Street is one of only 3 operators in the state. So it's a very important state still for us to be in. Rush Street will also have a great advantage. The other 2 operators only have one retail spot each, whereas RSI will be located with 15 different retail locations in much, much more urban destinations as well. So that is looking very good for us. We will -- yes, as I mentioned, we, of course, also launched RSI in Arizona. And earlier in the month, we went live. We were raising Western Australia also. We expect Louisiana to be state #17 in a few weeks. So it is another busy quarter. To summarize the quarter, Yes, it's yet another very strong financial performance from us, with revenue up 48%. And I think it's worth pointing out again, this is not the greatest quarter when it comes to sporting events. As a comparable to last year, it's quite a tough comparable because, last year, the sporting calendar in Q3 looked way better than it usually do in Q3 due to the COVID effects. So we're very, very pleased to see that performance is really holding up on a year-to-year comparable. As I mentioned, we acquired Abios to become a leading player in the esports field. And other than that, I really think the future is looking bright. Our sales pipeline is very, very strong at the moment. And finally, we initiated a share buyback program today. Thank you very much. And with that, we can take some questions.

So thank you so much, David and Kristian. And now we will have time for some questions. And we will -- yes, my name is Mia Nordlander, and I'm Senior Vice President, Investor Relations at Kambi as well. So we'll start with the audio questions, I think.

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

You mentioned the sales pipeline there. What type of potential clients is it that you currently are in discussion with? Is it up and coming operators that is about to launch an online brand? Or is it actors that turns to have a sports product that are evaluating new options?

Erik, thanks for the question. So maybe I should repeat the question again. What type of customers do we have in our pipeline? I would say it's a wide variety of customers. I think in U.S., it's mainly operators who are looking to get into the market. So I wouldn't say -- we see a lot of operator at the moment that are currently doing business in sports betting. The same goes a little bit for what we see in Latin America. In Europe, however, I would say it's very different what we're looking at, at the moment, where we see a lot of operators having our solutions or in-house solutions who are looking to change to Kambi at the moment.

That's quite interesting there in terms of Europe. So what type of actors? Is it more sort of -- do they actually look to source out a certain region? Or is it for the complete offerings? Or -- and also, what type of actors? Is it publicly traded companies? Or is it more smaller private companies in Europe?

I don't want to get into more detail. But yes, as I said, they are not insignificant. And they are definitely companies that would bring a lot to the table for Kambi.

Understood. And then just a follow-up on your kind of pipeline here. I mean you signed with Fanatics gaming, you have agreement for potentially for New York. What's the latest in terms of the application in New York? And also, do you expect Fanatics to expand into other states and become a national player?

Yes. The state of New York, I think we expect to get a final decision somewhere late November, early December. Regarding Fanatics, obviously, we hope that it could extend to more states. But it's nothing I can comment on at the moment.

Fair enough. And then if we just look at the European side of the business, obviously, Kindred now has ceased its Dutch operation. However, my assessment is at least that the Kindred Dutch operation is a relatively small part of your revenue. But how should one think regarding Netherlands going forward? I mean you have signed with 2 clients already, where one of them already have entered the market, do you expect the net effect from this dynamic to be neutral, negative or positive?

Yes. Thanks, Erik. So I mentioned in the presentation that, at the moment, it's a negative. Whilst we haven't got a full suite of operators there, we're probably looking at EUR 0.4 million to EUR 0.5 million a month down. But if all those operators and the new operator, JVH, will get licensed, then we could be net -- could be a net positive position. But we have to see a bit closer to the time with the timing of the licenses and how the market pans out.

All right. Fair enough. So looking into to 2022 for full year, it could very well be a net positive, in other words?

It really depends on timings in 2022, I'd say. But yes, we'll watch this space.

All right. Got it. And then just one last question here on the U.S. You mentioned there that turnover is flat year-over-year in the U.S. even when we exclude DraftKings within NFL. Do you think that this means that revenues could be up year-over-year given that you will have higher hold rates and then also better mix impact through take rates?

Sorry. Can you repeat? I didn't really catch the drift to the question.

Yes. So in the U.S., you mentioned the turnover is flat year-over-year in NFL even if we exclude DraftKings. But just looking ahead here into Q4, obviously, you will have 3 large months versus 1 large month in Q3. And do you think that this means that revenues actually could be up year-over-year given that you will have a higher hold rates, sportsbook-margin driven, and then also better mix impact through takes rate - through take rates?

I mean I'll just caution slightly with 2 things I mentioned earlier, one, of course, is the Netherlands, that impact. And also then the margin, which -- it has been weak at the start of the quarter, which we'd expect to come back later in the quarter, but we've already had best part of the month with a low margin. So I don't want to get too much in speculation about how Q4 will pan out really.

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

Kristian, just a question here. I mean we saw Kindred reporting up this morning for Q4, extraordinary low sportsbook margin up until 24th of October. You said that you've seen similar effects, but what keeps [ that ] development on the U.S. market compared to the European market in the start of Q4?

I think this has been quite an odd quarter so far in that perspective. But I mean it's quite bad results or player-friendly results, maybe I should say, both in the European soccer and the American football. So it's not great at the moment. But as we said before, and I think long term, we expect margins to -- on average, become better. So I mean, it is a quarter. It is not very often nowadays where we have poor quarters. But yes, it can happen now and then. But long term, I'm pretty confident that our sportsbook margin is trending upwards rather than the other way around.

And are you still comfortable that you will achieve the trading margin guidance of 8% to 9% here in Q4 given the Q4 start?

I would say that our guidance is on future numbers. So I mean, on every quarter or every month, we expect an average to be 8% to 9%. If you have a month in a quarter where it's significantly lower, of course, we would expect us to come in lower on the full quarter.

Perfect. And you lifted operator trading margin guidance to 8% to 9%. The historical average has been 8.5%, so I understand that. But looking forward, I mean -- I understand that they play more money lines in the U.S. But they do also play more parlays, and also the Bet Builder products is boosting, too. So why don't you expect the sportsbook margin to continue its positive trend and increase from historical average?

Maybe we are a little bit too careful. But I would say that, I mean, we feel that we have enjoyed a few years of great sports-betting margins. We have hardly have any months where we have seen really poor results. So maybe we are a little bit too cautious, as you say. If you look at a few -- the last couple of years, we have averaged quite high numbers already. So it's not impossible that we would do a future adjustment even further. But at the moment, I think this is where we believe we should be.

And also, I mean, what's your expectations on the playing patterns in markets such as Latin America and Canada if you compare it to, for example, Europe?

So Latin America, I think we have quite good evidence of Colombia so far. And I think they are very happy to play large parlays. So I would expect us to have quite good theoretical margins in Latin America as a whole. Canada, I think, is a little bit trickier to evaluate at this point. I mean single wagers has been not legal for lotteries to offer for -- yes, since they started in Canada at the lottery. So I think most of the players, they are very used to use parlays. So I think it will be higher theoretical payback in the Canadian market and the U.S. market. But it's speculation at this point, I would say.

Perfect. And just the last question here. I mean if you can give us an update on the Churchill Downs rollout in the United States.

The United States? Maybe...

I think we're now live in certain states, I think?

Yes, I think it's accelerating. I mean they've rebranded to their TwinSpires brand. And so -- and I think that's really been the cause of an acceleration in the rollout of states. So it's one we've definitely got high hopes for looking forward, at least.

Our next question comes from the line of Viktor Högberg from Danske Bank.

Yes. Sorry. I was a couple of minutes late so maybe you covered it, let me know if so. In the report, you stated that Penn is 5% to 10% out of Q3 revenues derived from public data. Have you said or have you seen anything indicating that the length of the contract? You signed them in the mid of 2019, my assumption is that 2023 could be covered and you've already said that it's a long-term contract. Could you help us add some color on the length of it, if you haven't already?

So I mean, I don't want to comment on the relationship between us and Penn. But I can tell you this much. Penn themselves commented on what they expected to move away from Kambi earliest in -- yes, for a football season in 2023. So that's, yes, more than 1.5-year away. If that will hold up or not, I don't want to comment on. But yes, I can't give you more light on the contract situation.

Okay. We might -- we'll see. But maybe it's a situation where -- with the DraftKings situation where you compensated your revenues even if they move earlier. Let's see. On Netherlands, just checking, the EUR 0.4 million to EUR 0.5 million, was that on sales or EBIT?

That's on EBIT.

Effects currently.

Yes, EBIT. They're very similar, to be honest, but it's on EBIT.

Monthly or quarterly basis?

That's on a monthly basis.

Okay. And just the Latin American opportunity that you talked a bit about on the CMD, could you have -- help us update on what to expect there in terms of potential timing?

I think we see Argentina moving slowly towards more and more regulation. So I hope the timing there is, yes, in the coming months, to be honest. Brazil, I don't really have any new update. We still hope that it will happen in 2022. But I don't really have any new updates since the Capital Markets Day.

We currently have no further audio questions. I'll hand back for any other questions.

Okay. Great. Then we have actually got some on the web here. So I think I'm going to start with you, David. You presented strong financial performance even compared to tough comparables due to busy sporting calendar last year. What were the key drivers behind this?

Yes. I'd say we've really seen the fruits of our regulatory and sales efforts over the last years. We've launched into new states in the U.S. So a whole number since Q3 last year, we got Arkansas. Arizona, I mentioned that was in September. Michigan Online, Virginia, Tennessee, that's 5. We've also launched in Argentina, Kristian mentioned, so parts of Argentina have regulated since then. And we've launched new customers from the sales efforts. So Belgium National Lottery, Casino Magic, BetWarrior and Nexus in Peru. And then we've seen growth from our existing operators. So I think across the board, it's regulatory, it's sales and it's performance that's driving growth of the operators.

Great. Thank you, David. One for you, Kristian. Can you please comment on Kindred's poison pills ending 2023? Please elaborate on the long-term strategy regarding this matter.

I can't really comment very much on it. I think the only thing we have stated, it is in the notes of older EGMs and AGMs. So you have to look there. I can't really elaborate on the status more on that.

David, one for you here. Regarding Connecticut, how will you deal with Mohegan FanDuel work going forward? Can you give some flavor around that?

Yes, sure. We actually -- so we struck an amendment agreement with Mohegan Sun to allow them to pursue their FanDuel opportunity. But what it meant for us was that we had actually recognized the revenues -- the anticipated revenues from the deal. So over the term of the contract, they'll pay us the revenues we would have earned anyway. But it frees them up to do that thing with FanDuel. The other thing that's definitely worth mentioning then that, we also get -- working with in Connecticut with Rush Street, so we almost have 2 revenue sources in that one state. So yes, we're very happy with the position with Rush Street and, yes, their work with the Connecticut Lottery going forward.

Thank you. And another one for you, Kristian. SBTech built their product over 10 years and DraftKings then spent several hundred millions improving it, and just by recent sportsbook margin in the U.S., they are quickly losing market share after migrating away from Kambi. With that in mind, how can Penn be comfortable doing it?

I think that is clearly a question for Penn rather than me. I can't really speculate. But I said it before, I think what we are doing is highly complex. It's not very easy to replicate. Many has tried in Europe and failed before. So yes, starting from scratch and getting something up and running in a couple of years' time, I think, yes, it's a tough task.

We have time for a few more questions, I think. So I have another one for you, Kristian. Is there a reason JVH Gaming is not live in Netherlands? And when do you expect them to get the license? Or do you expect them to get a license soon?

I would assume there is a reason. I don't know what. So I hope and expect them to get the license as soon as we give out more licenses. And hopefully, sooner rather than later.

Another one for you, Kristian. Usually, a low hold rate happens in conjunction with higher turnover. Does that relationship still holds in Q4? And any comment on what your thoughts are for quarter-on-quarter turnover growth?

Yes. So that always holds true, I would say. It's quite simple. I mean if players are winning, they tend to spend more of their winnings on betting. So that definitely holds true. It is a tricky comparable this year as well compared to last year. But yes, taking out DraftKings, because that, obviously, you have to do when you're looking at it, I'm quite confident we should beat the turnover compared to last year.

Okay. I think that was the question we had time for today. Thank you, both David and Kristian, for presenting today, and we look forward to being here back again for the Q4 results, 11th of February next year. So thank you very much, and have a good day.

Thank you.