Kambi Group plc (KAMBI) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Kambi's Q2 2022 Report Presentation. My name is Mia Nordlander, I am Senior Vice President, Investor Relations; and today I have our CEO, Kristian Nylen; and CFO, David Kenyon, with me. They will present the quarter for you and thereafter we will have time for questions. [Operator Instructions] So over to you, Kristian. Please present the quarter for us.

Thank you, Mia, and good morning. So today I'm planning to go through the highlights first and then hand over to David to run through all the numbers, and then I come back and talk more about the Q2 in detail. So the highlights, I would say we had a very robust financial performance against the very demanding 2021 comparatives. A tough comps, I think first of all last year it was European Championship. And normally we would have expected a World Cup this year, but that is moved to December. So the sporting calendar is quite slow this summer. We also don't have the same kind of revenues from Netherlands since our operators' pre-regulation, nearly re-regulation in Netherlands is still not operating. Of course we have, as I will talk about later, Kindred coming back into a market early in Q3. And the largest factor, of course, is that all numbers were still including DraftKings last year. So our operator turnover this year is up 16% if we exclude the DraftKings number. During the quarter we also achieved a key milestone study. We were first a phase completed of separating our pricing from a core platform in what we call the trading gateway, which I will talk more about later. We strengthened our partner network by extending our relationship with betPARX, we even longer contract. We also signed Mohegan Gaming in Ontario. And finally we expanded in America, our Americas reach with day one launches in Canada or Ontario, with 4 partners and then one more later on. We also have done quite a few launches in our countries, mainly in U.S. and Mexico. With that, over to you, David.

Thanks, Kristian. Good morning, everyone. So overall, this quarter we saw a very strong financial performance. We continue to be profitable. We see underlying operator turnover growth, and we have a powerful balance sheet. As Kristian mentioned, we saw 16% growth in that operator turnover, that excluding DraftKings. And that's despite the impact of the Netherlands regulation and the euro soccer tournament last Q2. So very strong numbers there. And that strong turnover allied with a margin of 8.6% lead to revenue of EUR 34.7 million. Costs pre effects of EUR 32 million were in the forecast range. And they were offset to the tune of just over EUR 2 million on foreign exchange gains relating to the revaluation of our U.S. dollar assets. This gave an operating profit of EUR 4.9 million at a margin of 14.1%. And our net cash position of EUR 74.2 million gives us firepower to continue using our balance sheet to drive our strategic growth. The next slide here is the Kambi turnover index. It's an aggregation of the entire Kambi networks results quarter-by-quarter. The blue columns are an aggregation of the operator turnover, index originally set to 100 when we spun off the business. And the orange line is an aggregation of the operator trading margin every quarter. This quarter, the margin was 8.6%. And when we look at the comparatives, that was pretty high this time last year at 9.3%. The operator turnover on the index is 656. As Kristian mentioned, it's a very quiet -- Q2 is typically quiet from a sport in Canada perspective for many of our key sports. But of course this year, there will be a World Cup taking place in Q4 and a condensed football calendar before and after that World Cup. So that you know some strong months ahead. In more detail then on the operator turnover versus last year. So the turnover went from 911 on that index to 656. Firstly, there were some big headwinds we should talk about. Firstly, and by far the biggest in terms of financial impact, was the DraftKings migration, which we saw after Q2 last year. That DraftKings accounted for 20% to 30% of our revenue Q2 last year. In the Netherlands, of course, there was no activity with Kindred here in Q2 this year, but we are delighted to see them obtain a license and launch in early July. And Euro 2020 was delayed to 2021 and the majority of the matches took place in Q2 last year. And again, we are very much looking forward to the World Cup taking place in Q4 this year. Those headwinds have been offset though, there have been some growth factors here. We have new operators since this time last year. They include BetCity, JVH and RWWA. We've moved into new markets including Arizona, Connecticut, Louisiana, and most recently Ontario. And we've seen growth from some of our existing operators both in their organic growth and but also in their geographical expansion into new markets. This then feeds into the waterfall of the Kambi revenue conversion, which sets out how operator turnover movement resulted in our revenue movement versus last year. So constant exchange rates, operator turnover was down 32% on Q2 2021 for the reasons I've outlined. Due to the dollar being stronger than last year versus the year over, this decrease was reduced to 28%. The operator trading margin of 8.6% compares to the very high 9.3% last year. And there in the other column you see a big kind of positive impact on our revenues. There's quite a few drivers behind this one. Firstly, most importantly, our customer contracts often include tiers, which charge significantly less on the upper bands of activity. So the lack of DraftKings and other factors impacting the NGR results in a relatively higher effective revenue share across the network overall. Secondly, we have more live events income this quarter and other fixed revenues which are not driven by the levels of operator turnover. We also have revenues from our settlements with Mohegan Sun, which has a fixed revenue each quarter. And we have revenues from the Abios business which we acquired at the end of last year. The net effect of all these factors is a 19% decrease in our revenue in total to EUR 34.7 million. Last I'm going to talk about the cash flow. There's a few particular points to note this quarter. Firstly, the CapEx is slightly higher than we usually see. We've had some fit out costs in a couple of our offices. The tax impact you see on the right-hand side there is higher than normal. So we're due a tax refund as part of our yearend tax position. And that's expected to be received in Q3. But that magnifies the effect of the tax outflows here in Q2. And in terms of inflows, we receive EUR 2.6 million in relation to the option price on share options settled earlier in the year. The net effect of all these various cash flows is an increase in our cash position to EUR 81.6 million. With that, I hand you back to Kristian.

Thank you, David. Okay. So as I mentioned earlier, we have of course kept on working on our strategic work with the modernization. And we have done one key milestone that was achieved during the quarter and that is the trading gateway interface where we have completed the first phase. So for first time, we have some standalone pricing for low league soccer, so that are not done through the normal way that we have done for many years where pricing and trading and technology was heavily intertwined. And it has served us well for many years, but we have a new set up. It will give us a lot of new benefits and also our customers that I will talk a little bit more about. So we have a creation, obvious a standalone pricing functionality. We now have a setup where we can much faster develop new algorithms for different sports, and tweak them and change them a much, much quicker. So we will have much faster pace on our internal development. It also gives us the opportunity to package and sell products outside of the normal fully managed service. So that's a very positive modernization effect. Also it gives us another crucial element and that is about our existing partners or future partners, can and now in the future be able to trade some of the sport to themself if they would like to. And we can also give opportunity to our third parties that we ourselves or our partners want to add to the pricing. So very crucial step for us. And we're very pleased to see that it worked very, very well and it's still a lot more work to do on this gateway, but a very crucial and important first step. Another thing that we have managed during the year -- during this quarter is a new betting market where we can bet on if a served tennis is making an ace within a game. This is unique for our network, we believe. So it gives our operators a great differentiation from the rest of the market in a very popular sport in tennis. In this feature, we will update orders off to every single point up until of course if an ace is being served within the game. And with that we would like to show you a promo of this. [Presentation]

Thank you. So yes, I hope you enjoyed that little promo. So now I would like to talk a little bit about some commercial updates. During the quarter, we strengthened our presence more in Ontario with the signing-in agreement with Mohegan and it's a Fallsview Casino. The Fallsview Casino is the largest gaming resort in Canada. We have a very nice brand. So I think and hope that will strengthen our presence with a great local partner in Ontario. During the quarter, we have also extended the Greenwood Gaming and Entertainment agreement and its betPARX brand. That currently operating in 3 states and we hope are quite positive about us being able to support them in their expansion into new additional markets. Thus every quarter we have been very active. We have a lot of new launches. I think give a total number this quarter was 18 in new launches. And the major ones here, we went live in Ontario on day one with 4 our partners and after that we have added a fifth during the quarter. On the final day of the quarter, we relaunched in Mexico with Rush Street entering the market. Rush Street has built a very prominent position in the Colombian market and we hope they will be able to do the same in Mexico. Online launches in the U.S. we have done with Rush Street in West Virginia and we've Soaring Eagle in Michigan. And on the U.S. retail side, we have done several launches. I think 3 in total. We've Kindred in Arizona, and also we've Churchill Downs in Louisiana. So yet another busy quarter and we hope there is plenty more to come. At the moment we are preparing for Kansas for the start of a new football season in September and we hope Ohio is next in turn. We are still hopeful for sports betting regulation to get green light in Brazil very soon. So that would be an absolute major market for us of course. And a lot of attention for us will be on California in November when 2 sports betting bills will go to the ballot. In June, it was great to see us winning another 3 awards at the EGR awards. We won best sportsbook platform for the year for the third consecutive year. So I think we, yes, cementing our position as the premium supplier of sports betting in the industry. We also especially proud of winning the Sports Betting Software Innovation of the Year with our Bet Builder product. We have been spoken a lot about our Bet Builder product in the last quarterly report and about the possibility to combine across games and sports which is fairly unique with Kambi. So it's very pleasing to see recognition it deserves from our peers and also recognition for all our people internally who is continuously improving the product. After Q2, or in July I would say, Kindred has re-entered Netherlands with Unibet brand. So, yes, we hope that that will be very positive for us going forward in Q3 and Q4. And with that, we think we have strengthened our position significantly in Netherlands where we already have BetCity and JVH active since market reopened -- reregulated. And we also expect additional partners that formerly was in Netherlands will re-enter the market in the coming quarters. So to summarize, the Q2 as I started with, it was a quieter than normal quarter from a sporting calendar perspective. I think we have made some great progress on our strategic plans. We have achieved a key milestone with a successful completion of phase one or trading gateway. When it's all finalized, it will deliver multiple benefits for both Kambi and for our partners. We have, during the quarter, expanded to support more partner launches in several different markets. And looking ahead, we expect things to happen in Ohio and Brazil. And as I mentioned, we're really looking ahead for November and web ballots in California. These 3 markets would definitely increase our term. We are a very profitable business with a strong financial performance and we have a very strong balance sheet. So I believe we are very well positioned for the future. With that, I think it's time for question. Thank you very much.

Yes, thank you, Kristian and David. We will start with the questions on the telephone. So over to you, operator.

[Operator Instructions] The first question comes from Oscar Ronnkvist with ABG.

I have 4 if that's okay. So starting on the recruitment pace, I noticed you only hired 10 people net in the quarter, had quite a steep decrease comparing to the 6 previous quarters. So I was just wondering if you had any comments on the recruitment pace and what we can expect going forward.

Yes, sure. I think we are recruiting quite well. I think as many other companies after COVID has had a much higher staff turnover than we are used to see. So net it's looking a little bit tougher at the moment. Having said all of that, I think we also see what various -- quite a few of the larger competitors when it comes to tech people here in Stockholm who are decreasing their stuff. So I think it looks very positive going forward.

All right. So can I interpret that that pace should increase a bit in Q3, Q4?

Yes, I definitely hope so.

I had a question, next one on your OpEx and OpEx guidance but first, David, could you explain you had a positive FX impact on the OpEx. Is that correct?

Yes, as you can imagine, with the majority of our business now coming from the U.S., we do have a lot of cash inflows in U.S. dollars and the dollar has strengthened significantly, both versus Q1 but -- and equally against Q2 last year. So yes, that's a kind of a one-off unrealized revaluation on those -- in the books on those U.S. dollar accounts.

All right. But on your OpEx and OpEx guidance, we have seen both Q1 and Q2 coming in well below your guided midpoints. Yet your new OpEx guidance midpoint is raised slightly. So just looking at the midpoint of your Q3 guidance and the implied Q4 OpEx then, that would be a Q-o-Q increase of 12% and 14% respectively. So can you just share your explanation of what is driving the slow processing in H1 and why H2 increases massively?

Yes, I think a lot of this has actually FX related, that's your first question. So actually when you add back the FX, the real underlying OpEx this time was actually towards the top end of the range, probably EUR 32 million pre FX. And when we've set the full year guidance, we've tried to strip out all FX that can be done to kind of speculate what's going to happen there. So actually we've probably done adding back that affects EUR 62 million first half of the year and then the midpoints of the guidance is probably EUR 68 million for the second half. So yes, it's probably lower percentage growth quarter on quarter than it looks.

Okay. Yes, that makes sense. So next one on your net cash position, it remains quite large. So can you say anything about your M&A pipeline like is that the main explanation behind keeping EUR 80 million in cash?

We are definitely looking at M&A as we always are currently. Of course cannot if we are close with anything, but we are definitely open to do M&A. And if we can't do that at some point, I think we will look at our ways of distributing the cash.

Okay, understood. Kristian, just a final one. The last sentence in your CEO word explains your excitement for H2. For instance, mentioning partner signings. So just given your previous communication of a strong pipeline, if it has, like how has that changed over the last few months and should we expect the signings to be tier 1 operators solely?

I don't want to comment about the signings before happen, but I am still very excited about the pipeline and I definitely hope we will see some signings happening. As I've said many times before, signings are often very tied to new regulations. So it's hard to know when timings will be, but I feel very good about our opportunities going forward.

Okay. And just a follow up. Can you share if it's more in the Europe or more in rest of world or in the U.S. that you see the strong pipeline?

I think in Europe, I mean, it's so many fewer opportunities out there because the market is much more settled. So the opportunity is definitely more of them in the U.S. and in other parts of the world. But yes, we have some opportunities in Europe as well.

The next question comes from Viktor Hogberg with Danske Bank.

Just another question on the OpEx status. If you will put it this way, is the underlying OpEx guidance the same for the top band. It's EUR 133 million now, it was EUR 135 million before, the difference being the positive 2 million FX in Q2. Is that how we should read this?

No, not -- I think we've narrowed the range. So we've taken it down to a EUR 5 million range. Obviously, we're getting closer towards that full year position. Yes, that guidance, again, is completely excluding FX. So we've had EUR 2.7 million in the first half of the year. So the guidance is excluding that. So that EUR 2.7 million in our world is -- will reduce that number. But again, we're trying to guide without FX. But we've narrowed the range down into the middle.

Without the FX we have seen in H1 already, is that how we should read it as well? Or is it the only your -- that you won't speculate on FX movements in the second half?

No, it's without the FX we've seen in H1. So, yes, the EUR 128 million to EUR 133 million will be completely out excluding that EUR 2.7 million that we've seen in the first half. So that would actually reduce that EUR 128 million to EUR 133 million on the books.

If you were to come in at EUR 133 million then reported, what would that mean if FX were -- you wouldn't see any FX movements in the second half against the ones we've seen in the first half. If we see a reported FX number of EUR 133 million for the full year, what does that mean?

Then you would see EUR 133 million less EUR 2.7 million in the books, so EUR 130.3 million in that case if there's no other FX movement in the year.

And on the customer signings on the previous question, this is for Kristian maybe. On the CMD last year, you talked a bit about the potential to sign a midsized or [indiscernible] sized European operator that might have come to [indiscernible] when it comes to protecting the development today. Might be looking at outsourcing, you talked a bit about that. We haven't seen it. Is that opportunity still there? Have that potential signing decided to do something else? Or is that opportunity still there?

It's still multiple. It's not only one, but there is the same ones I was talking about then is still there.

And have you -- would you say that the potential or the prospect to sign them is better or worse or the same as last year?

I will not comment on that.

Did you say -- and maybe for David, did you say anything about Abios? How much that contributed in revenues in Q2?

I didn't. But yes, they contributed around EUR 0.5 million this quarter. Just a small net profit for them. But I think they're looking forward into H2 when they launch the other product, which could be hopefully in Q4 now. That's probably when that profitability is forecast to increase for them.

But Q3, maybe your revenues at the same level?

Yes, you can expect that. I mean it shouldn't be lower at least.

And on the modernization strategy, you previously said that it's reasonable to expect the first potential signing on this one in the first half or early parts of 2023. Is that still the same timeline you would say? Or any revisions to that potential timeline for adding customers on this one?

I mean, as usual, it's hard to know when we do signings, but we still believe that there is an opportunity for us to be able to market and sell it in Q1 next year.

Speaking of sports schedule, it was really slow now in latter parts of the second quarter, still slow now during the summer, but it's going to ramp up and then we have Kindred live in as well. What do you expect in terms of sequential movement in revenues potential to see revenues having troughed now in Q2?

I think we can't give -- and we won't give a sales forecast. But I mean, you can say that the proper season is starting a little bit earlier than normal. So -- and with Kindred as well, as you mentioned in Netherlands at Q3 yes, we're looking forward to a busy sporting schedule and then hopefully that comes through into the revenues in Q3. But yes, I can't give you a number.

Okay. And last question for me. On the regulatory movement side, would you say on a net basis that it has improved for -- is it at the same level as when you did the call?

I don't think it has become long term better or worse, but I am a little bit disappointed about especially the pace in Brazil, which I definitely thought would happen during the year when we talked last time, and I'm starting to doubt that it will happen in 2022 now.

[Operator Instructions] As there are no further audio questions, I would like to turn the conference back over to the speakers for any written questions.

Thank you very much. I think we start with one for you, Kristian. We said -- we've seen competitors seeing major growth in Latin America. What can be position in Lat Am? And are we seeing any possibilities in the region?

Absolutely. I mean, that is a region we look at it very positively. I mean, we have a very, very strong position in Colombia. We have partners in Peru and in Argentina already, and we keep on yes, looking at more and more partners in Latin America. But I think the big thing that is a big focus for us now is to find the suitable partners for the opening of Brazil.

One for you, David. Are we considering buybacks? Or what will we do with the big cash position and low valuation of the stock? Is one question?

Yes, it's a good question. I mean, in the last 12 months, you've seen that we've done both M&A and share buybacks, so they're absolutely on the radar in the agenda. In terms of M&A, there's some key areas we've talked about before, we think which could really strategically drive the business. So I think M&A is absolutely on the agenda, but also buybacks. We've done it recently, and it could well be that we do it again.

One question for you, Kristian. With our new modernization strategy, we're saying that offering operators greater control over pricing will drive broader operator appeal, particularly among those that wish to trade on a more sports in-house. Have you had any specific interest from operators regarding this?

We have. And I think that has been something we have had interest for many, many years, but we have not felt that, that has been something we have been able to prioritize until now. So there are definitely a few opportunities out there already now. But yes, it will certainly increase our addressable market going forward.

Okay. I think that was the last question from the web as well. Thank you very much, Kristian and David, and thank you, everyone, for listening in to us. We will be back with our Q3 report 26th of October. So I look forward to see you then again. And if you have any questions, always feel free to reach out to the IR department. Thank you very much, and have a good day.

Thank you.