Kambi Group plc (KAMBI) Earnings Call Transcript & Summary

Good morning, everyone. We are here today to present our Q3 2022 report presentation. And today, with me, I have our CEO, Kristian Nylen; and our CFO, David Kenyon. We will start to present the quarter and after the presentation, you are very welcome to send your questions through the website or we can also call in to ask them here. So once again, we welcome and over to you, Kristian.

Thank you, Mia. So yes, good morning, everyone. I will begin with a brief overview. Turn to the next slide, please. After which, David will go through the financial performance and after that, I will go in a little bit more depth on the quarter before we're taking some questions. So highlights of the quarter. First of all, I am quite pleased with 12% operator turnover growth during the quarter. Q3 is notoriously a very weak quarter over year, very little sports going on, especially since we started in the U.S., it has become even higher seasonality impact since the 2 big sports, the American football only has 1 month in September, and the basketball doesn't start until mid-October. This year, we also have some extra headwinds with DraftKings having some turnover in earlier the quarter. And we also, last year, had a big soccer tournament, the Euros, which had developed much as last year. More about the impact of that, Dave will talk about. We also are in down -- tough global economic situation. I would say for us, the impact is a little bit softer since we have a lot of business in the Americas, where the economics looks slightly better. And also, we have a very strong currency in the dollar. Outside of that, I think we have done 5 signings during the last 3 months. So very happy about where we're going there, especially Great Canadian that came after the end of the quarter, it's a great signing, which I will talk more about later on. During the quarter, we also signed a front end specialist Shape Games, which will have a great impact on our offer, where they are having a front end, which is something very much desired by our prospects, and it fits very, very well into our story, and I will talk more about that later. And finally, we have identified Bet Builder as the first product will go with a modernized offer, and we'll talk more about that later. And the plan is still the same. We're planning to launch this for market in Q1. But first, over to you, David.

Thanks, Kristian. Turn to Slide 4. So yes, we saw overall a robust financial performance this quarter. We continue to be profitable. We use our powerful balance sheet to fund the purchase of Shape Games, and we look forward to a very busy sporting calendar in Q4. Revenue of GBP 36.7 million was driven by operator turnover growth of 12% and an operator trading margin of 9.5%. And as against the comparative, you see there GBP 41.6 million, which included around 30% from DraftKings in its last quarter under contract with us last year. Costs before FX and before the Shape acquisition, cost of Shape, which we added to the P&L, were GBP 32.8 million, which was in the forecast range we gave last quarter. And this led to an operating profit of GBP 3.9 million for the quarter at a margin of 10.6%. The net cash position of GBP 38.1 million reflects the GBP 35 million we used to acquire Shape Games during the quarter. The agreement with PENN that we announced recently has seen the GBP 12.5 million termination fee paid after the quarter end. So I can expect this cash balance to increase significantly during Q4. Turning to Slide 5. This is the operator turnover index. It sets out an aggregation of the results for our operators. The blue columns are an indexed turnover across the portfolio. And the orange line is the operator trading margin again, aggregated across the portfolio. This trading margin for the quarter was 9.5%, very high this quarter against 9% in Q3 last year. Year-on-year, the turnover went from 573 to 640 despite this increase in operator trading margin. And actually should be noted, there are some factors increasing the comparative that were against the 573. So firstly, DraftKings, the tail end of their business actually did fall into Q3 last year. So that added around 40 to the index in Q3 2021. And also the last 7 matches of the Euro 2020 Soccer tournament also in Q3 last year, which added around 20 to the index. But these positive last year were offset now by this time this year by a number of factors, including new customers we launched since then and new markets we've launched into Connecticut, Louisiana, New York, amongst others. I really want to drill down into that 640, because it's quite an interesting quarter. We start with July with very kind of a quiet sporting calendar. Then during August, we see the return of the major European soccer leagues. And then in September, in the middle of the month, the NFL season starts. So we see a very rapid progression of the index turnover during the quarter, up 257 in the month of September. Rolling that forward into Q4, in October onwards, of course, we'll see full months of NFL and soccer. The NBA season also started last week, and the college basketball season will begin in mid-November. On top of that, the Soccer World Cup also starts mid-November and runs for a month before the major European soccer leagues resume in short order after that. So I think the Q4 sporting calendar is going to be extremely busy. And the September run rate, you see here should be exceeded each month in Q4. Turning to Slide 7, the revenue conversion chart. So constant exchange rates, operator turnover was up 5% from Q3 last year. This was boosted by the dollar being stronger than last year versus the euro. This grew the growth to 12% in total. As I mentioned, the operating trading margin was higher than last year at 9.5%, up from 9%. Whilst tax and marketing deductibles were also higher than last year with increased taxes that we shared in the Netherlands, Connecticut and New York amongst others. The biggest factor on this chart, of course, is in the other column, and it's a significant negative impact this quarter. The biggest single item there is DraftKings. So in Q3 2021, approximately 30% of our revenue came from DraftKings and the vast majority of that was shown in the other column in Q3 last year. That, of course, disappears this year. But that negative is offset by, to some degree, by fixed revenues from Mohegan Sun, by our revenues from Abios and also by the revenues from Shape, which accounted for around EUR 1 million in the month of September. So the net effect of all those items is a 12% decrease in our revenue to GBP 36.7 million. Turning to the cash flow on Slide 8. So our opening cash balance at the start of the quarter was GBP 81.6 million. And as you see, the biggest single item affecting the cash was the acquisition of Shape. We used GBP 35 million of our cash, and that took the closing balance to around GBP 45 million. As I mentioned, I think this balance will increase significantly during the quarter. Not only do we expect the very busy sporting calendar to generate good results, but also the recent agreement with PENN has seen that $12.5 million come into the bank for Kambi since quarter end. And finally, I wanted to introduce Shape Games. From a financial perspective, we brought a profitable and fast-growing company. They work with a number of major operators, including Danske Spil, Norsk Tipping and JACK Entertainment. The revenue model works in a number of ways. They offer in different ways to different operators, but it can be either through fixed fees or revenue share or on a per resource basis. The biggest cost they have is their staff. They have around 70 staff mainly based at their head office in Copenhagen, and we look forward to a successful partnership going forward. So with that, I'll hand you back to Kristian.

Thank you, David, and I will continue on Shape. So I mean, we're always looking to improve our offering. And I think one area where we have, for a long time, taken a very conscious decision is to not invest in a native frontend applications. At this point, we felt that this is something that more and more of our prospects and customer base are asking for. And therefore, we have, for some time, been partnering up with especially Shape when it comes to native frontends. So this deal was very natural for us. We knew the company very well, and we felt that we had a very good culture fit. But on top of that, I mean, what we get here is a frontend that is very customizable that gives our operators even more differentiated capabilities. They have also developed a wide range of engagement products, such as an AI-driven recommendation engine. We have a lot of social features, and we have a free-to-play application as well, but JACK Entertainment are currently using -- waiting for Ohio State of Ohio to regulate. So in short, I think we have taken a major leap when it comes to user experience. And I think Shape Games is a great fit for us and accounts, as David mentioned, we have some fantastic customers themselves. On top of that, I think Shape Games can really benefit from gaining access to our partner network and possibly make a few customers of our existing customers. We have been talking a lot about the modularization over last couple of quarters. And the plan is still progressing very well. Now we have come to a decision that the first product we will modularize the Bet Builder. The Bet Builder, I think we have been winning awards because we have a very standout product in the market. Now with basketball being launched just in time for the NBA season, we have a full suite of the U.S. sports and we've had also the 5 biggest team sports for the Kambi network. We have looked a little bit on the interest, and we feel that there is definitely an interesting market, and it will make us -- give us a possibility to penetrate a market that we have currently not really have an access to. So we're really looking forward to this. The plan is still to go to market with moderate services in Q1 in 2023. We have done a lot of signings. In the last 3 months, we have done 5 signings during Q3, 4 of them. Oaklawn, which is -- have been a customer of ours through Churchill for some time. But now we have a contract with them on their own and with that, we also added the online to what we had before in retail in Arkansas. We have ilani, which has a very large casino in Washington State, which means that we enter the 19th U.S. state with Washington. I think this is a state that we foresee being only retail for some time. So having one of our best located casinos in the state is very, very good for us. Thirdly, we have Mohegan, which we have had a relationship online, but now also we have an own property deal launching in 2 casinos in the state of Ontario. And lastly, on this slide, we have Ondiss, which are operating in Argentina. And with this agreement, we can expand our reach in the -- in Argentinian market from 3 provinces currently to potentially 10 [Technical Difficulty] so very happy about that. Of course, we have also been busy with launches and of course, the biggest one this quarter has been reentering the Netherlands with Kindred. And as Kindred reported themselves during the Capital Markets Day, they have done better than they expected. And yes, taking quite a decent share already of marketing in the Netherlands again. We have, of course, as I mentioned earlier, we launched the 2 casinos in -- no, the online sports book for Mohegan in Ontario. And finally, we have done 6 partner launches in the U.S. Two of them worth mentioning is the first entry for MaximBet in Indiana and also we have launched PENN in the state of Kansas. After Q3, we have done probably what I believe is the most important deal to talk about here, and that is the Great Canadian entertainment. Great Canadian is one of the largest casino operators in Canada. And we will be launching in 10 properties in Ontario to start with. Great Canadian is also owned by Apollo, which owns numerous other gaming assets. So hopefully, that means that we have an easier access to some other potential partners in the future. We also mentioned after Q3, we have come to an agreement with PENN. This agreement means that PENN will stay on for retail to somewhere in 2024. More importantly, it also means that we'll receive a $27.5 million in early termination fees, but also a transition fee that will be spread out over the remaining period here. We have agreed to cooperate with some additional state launches. We have done Kansas just recently, and we have a few others that we will do late this year or early next year. I think it's very important also to point out that during this time up until they leave us, we will, of course, continue to make commission on their revenues for the part of a business that we continue to operate, which is more or less everything we operate now up until Q3 2023 and after that, all of the retail properties for another period of time. So to summarize the quarter, with the acquisition of Shape, I think we're taking a major leap forward on the user experience side. I believe we're putting ourselves in a great position with the product we have at the moment. We have a very positive commercial momentum with 5 signings during the last 3 months and most notably, as I mentioned, Great Canadian. And I also would like to mention that the pipeline remains still very strong. And I think we're very well positioned to withstand the global economic outlook. I think B2B business will thrive going forward. And also the sporting calendar is at its busiest and we're looking forward to see all the big U.S. leagues up and running soon, and we're looking forward for World Cup in November and December. So with that, thank you very much, and let's take some questions.

Yes. So thank you very much, Kristian and David, it sounds like you are pleased with the quarter despite a very quiet sporting calendar and very excited about the future. As I mentioned in the beginning, you can either send the questions to me here through the web page or you can call in. So we're going to start with the questions from the phone. So over to you, operator.

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

First off, I just wanted to hear your thoughts about the sort of the turnover growth sequentially. You said that you're pleased with the quarter. So when we have like Rush Street in Mexico, Kindred, Netherlands, Ontario ramp-up, PENN, Kansas. Sort of the like-for-like growth, excluding all the sort of headwinds, I mean it should be down quite a lot from Q2 levels. So can you just explain to me? I mean, obviously, we have some sort of seasonality, but are we sort of thinking that, that seasonality impact isn't as great as you might think?

Yes. I think, I mean, the seasonal impact between the quarters is massive. And I think you will see that in Q4 now, as I said, I mean -- or as David said, I mean, we expect all 3 months in Q4 to quite handsomely beat out September. We had as we mentioned, a few headwinds when it comes to seasonality as well, especially when it comes to having some revenue still from DraftKings, but mainly having the ending of the Euro championships from last year.

All right. So that's why we saw better sequential obviously. But I mean, sort of Q2 should also be a very quiet sporting calendar as you also mentioned in the last conference call, right? I mean the U.S. sports are sort of ending in April and the NFL is ending in February. So Q2 should be really quiet as well.

No. I mean, the basketball or NBA, I mean, I think the final is usually in June. So that is going on for quite much more of a time. You have the soccer is usually ending somewhere late May. And the ice hockey also have a finals in June. So Q2 is usually a much better quarter than Q3 also.

All right. Got it.

The operator trading margin, which was a point higher here in Q3 versus Q2, which, of course, has somewhat of a dampening effect on this Q3 number.

All right. Got it. So then just on the operating expenses. So sort of excluding the Shape Games acquisition, which obviously comes with some staff, I think that your sort of FTEs are not up really that much since Q2, and it wasn't really up that much from Q1 to Q2 either. So are you sort of not hiring people at the moment? Or how should we think about that going forward?

Yes, it's a good question. I think -- I mean, obviously, there's impact of attrition as well. So it's not been a massively conscious decision to this stage to stop hiring. It's more been making sure we can fill the gaps. But I think more importantly is, what we talk about going forward. We've been standing here and talking about slowing down our rate of cost growth ultimately because we've been spending on projects such as automation, which are intended to be able to lead to longer-term cost growth slowdown. So I'm really pleased that we can announce today that we'll be slowing that rate of cost growth. At the same time, as we're seeing inflationary pressures on quite a few parts of our cost base. I think it's really important we don't ignore that and we take tie grip on that and make sure that when we do make new signings, the other ones Kristian has talked about that they will lead to kind of prove the scalability in the business model which we've also been talking about. So yes, it's -- the main thing is to look forward, and we'll give more details in future releases about what this cost growth will look like next year, but just take it from us that we are working on making sure that cost growth does slowdown.

All right. And does the slowing cost growth have anything to do with revenues coming in slower than you expected or sort of the pipeline coming in slower than you expected?

No. I think as David said, I mean, first and foremost, I think it is a product of us being able to automate more and more in the future. And also, I think, I mean, we have some obvious synergies that we need to realize when it comes to our own frontend development and what we now can do with Shape. So no, I wouldn't say that. It has very much to do with slower revenue growth. It's more about what we feel this is a very, very good time for us to become more prudent with our cost. And now we really see that we have opportunities with more of automation and some synergy wins to come.

All right. Understood. Just a final question, you talked a lot about the sort of strong pipeline that you see. Is it anything that have changed over the last year? Or is it anything that have changed from your -- what you're seeing now relative to what you've seen sort of 1 year ago. And the Great Canadian signing is that sort of the great pipeline that you have been talking about? Is that included there? Or should we see that sort of better signings or larger signings further on what you think?

I will obviously not comment on what signings we will do. But of course, Great Canadian was a part of the pipeline before we signed them. But I'd also say that, I mean, it's still very strong and coming just back from G2E, I feel we are in a very, very good shape going forward.

The next question comes from Ed Young from Morgan Stanley.

I've got 2 questions, please. First of all, in your remarks, you said that the impact of macroeconomics would have been softened by your large exposure to the early stage U.S. market and also currency was a sort of factor in there. Just to be clear, do you think you've seen some impact of softness from the macroeconomic environment? Are you just saying that broadly, it will be harder to spot because of your mix? So have you seen it any? And then second of all, on the Bet Builder, I wonder if you could talk a little bit more about the modularization there. One of the issues that operators who have outsourced that product from other suppliers have found there's essentially been a friction between the odds generated or odds used within the same game parlay and those from the remainder of their book, and that's created some UX issues. How are you solving those if you're modularization the product to give to a supplier who already has their own trading and risk book for the rest of their offer?

So on your first question, I mean, it's so hard to see, what is the cause and what it would have been if everything was still the same. I mean, since the seasonality is such a big part of our turnover, we obviously have new customers that are growing quite handsomely. And I'm more saying that, I mean it's quite obvious that with the cost of living going up quite significantly. It will have an impact on what the people can spend on entertainment and gaming in particular here. So it will have an impact, and I'm sure it has had some impact already. On your second question about Bet Builder, I think this is one of the big reasons. We strongly believe that we have an opportunity here. I think we have a significantly stronger product than our B2B options out there. And I think we also may have a solution to a problem going forward on how to harmonize the pricing.

The next question comes from Viktor Hogberg from Danske Bank.

So a follow-up on the pipeline, you talked about the opportunity to run European operator that might have come to road, so when it comes to our tech development. Is that opportunity still there?

There are still opportunities out there, absolutely.

Okay. And Abios, how much did that contributed with you? You mentioned the Shape contribution?

Yes. Abios was around EUR 0.5 million in revenue and about EUR 0.1 million on the EBIT line.

So roughly trading in line with where it has been the past couple of quarters. Is there any seasonality in that? Is it going as planned? Or what do they expect from Abios?

I mean, like I say, there's not so much seasonality there. I think the path to greater profitability will be when they move into the -- making revenue from the odds on the e-sports, which is certainly in the pipeline, and certainly, we'd hope to in the first half next year, be showing that increased profitability from that revenue. And that's when you're going to launch that. That's the plan.

Yes. Okay. And on the turnover growth or turnover index, when you slice it up in the quarter, that when high end looking into Q4 and do you expect all 3 months to be better than September? It sounds like you expect each month to be better than the previous. Is that how we should read it as well, November but then in October, December better than November and so forth given the schedule?

Yes. I think certainly November should be better in October. [indiscernible] is we -- the World Cup, I mean, it is a great tournament. It also means that a lot of domestic soccer leagues is taking a pause. So I struggle a little bit to feel confident on if it's a positive or negative, we have World Cup for that period. For longer-term, it's surely a positive because the fixtures in the domestic leagues, they have to be played at some point. But I'm sure that in November we will be stronger than October. I would guess that December will probably be -- yes, on par maybe with November or possibly slightly worse.

Looking at Shape, could you describe your P&L model, the drivers, what you expect in terms of growth, doubling its revenue this year, but that's from customers going live. What do you expect here? What's the market growth rate? And what's the opportunity for them to grow under your umbrella?

Yes. I mean, I think, there's 2 ways they are going to grow the revenues. One is upselling of services. So they offer quite a broad range of services. And obviously, they can enter with an operator with one service and then expand the offering. So that's only one and that would be one way of growing that revenue. Second is new customers, I mean, they're currently with kind of just under 10 -- 9 or 10 customers, there's a clear potential for that number to increase. And I think with the fantastic offering, that's absolutely the plan that they can keep selling. And just at the start of their journey, really.