Raketech Group Holding PLC (RAY) Q3 FY2025 Earnings Call Transcript & Summary

Welcome to the Raketech Q3 2024 Report Presentation. [Operator Instructions] Now I will hand the conference over to CEO, Johan Svensson; and CFO, Mans Svalborn. Please go ahead.

Good morning, and welcome to Raketech's Q3 presentation 2025. My name is Johan Svensson, and I'm the CEO of Raketech. Today, CFO, Mans Svalborn, and I are here to present our Q3 report. Starting with financial highlights. The Casumba assets were divested on September 24 for EUR 12 million plus an interest component. The payment consideration will be paid over 4 years starting during Q4. The background to the divestment was to increased regulatory risk in the local region. The continued operations, excluding Casumba assets came in at EUR 6.2 million in revenue for the quarter, an organic decrease of 42.2% year-on-year and down 9.6% compared to Q2. The vast majority of the revenue decline came from the paid publisher network within sub-affiliation, where our paid publishers have continued to face operational challenges and new traffic from these publishers has been minimal. Affiliation Marketing, excluding Casumba, saw a 7% year-on-year decline, partly impacted by no major football championship this summer. Adjusted EBITDA for continued operations, excluding Casumba, amounted to EUR 1.2 million, while reported EBITDA was EUR 1.1 million with a free cash flow of EUR 1.1 million. We secured our first large share exclusive publisher agreement for Affiliation Cloud during the quarter, and we saw a good increase in revenue quarter-on-quarter with organic network coming in on EUR 0.9 million in revenue compared to EUR 0.5 million in Q2. Let's now review the performance of each business area, starting with affiliation marketing, as we call Raketech-owned publishers. Excluding Casumba assets, the affiliation marketing portfolio came in at EUR 4.3 million in revenue. This portfolio, excluding the Casumba assets, has remained relatively stable over the past year, supported by a strong foundation in our Nordic assets across both sports and casino products. This year, there were no major football championship, which had an impact on the sports sales. During the quarter, a new app of our popular TV sports guide was launched and has been well received by users, showing high levels of engagement. Sub-affiliation performed in line with Q2. The main difference was the revenue split between the pay network and the strategically important organic network, where organic network grew significantly quarter-on-quarter from EUR 0.5 million in Q2 to EUR 0.9 million in Q3. During the quarter, we entered into an exclusive publisher agreement with U.S.-based publisher, which contributed to this growth. We do not anticipate a turnaround within the paid segment as our full focus remains on expanding organic publisher base, primarily in the U.S. market and Sweden. Going to the next slide, where I'd like to give you a brief overview of Raketech's transformation in recent years and our platform first strategy. Raketech was founded in 2010. And during its first decade, the company had a focus on affiliation marketing products. These were operated from teams in-house and in partnerships with entrepreneurs, what we today refer to as entrepreneur partnerships. In addition to affiliation marketing in the beginning of 2020, a smaller sub-affiliation network focused on paid was acquired, marking the beginning of a growth journey within paid sub-affiliation that peaked in 2023. In 2021, 2 acquisitions were completed in the U.S. tips and subscription segment, where betting tips were sold directly to end users. These assets are now being fully divested during 2025. The share of our affiliation marketing portfolio operated through entrepreneurial partnerships has increased over the past year. The entire affiliation marketing portfolio, which we refer to as Raketech-owned publishers, is managed with high margins and generates strong cash flows. Excluding Casumba assets, these have maintained stable sales over the past year, all of which are important given our financial commitments. Looking ahead, we see our next wave of growth coming from Affiliation Cloud, our B2B platform that connects Raketech-owned publishers, external publishers and operators. By helping our partners optimize and monetize their traffic more effectively, we are taking performance to the next level. Our goal is simple: to deliver outstanding commercial service to every publisher and operator we work with. For external publishers, we are executing with sharp focus in 2 high-value markets, U.S. and Sweden. These are the core markets where we are building long-term strategic relationships and positioning Raketech and Affiliation Cloud as a preferred growth partner. Let's move on to the next slide, where I will provide insights in how Affiliation Cloud works and what we have improved with the product and implemented during the quarter. Affiliation Cloud is currently used by Raketech publishers, of which the majority are operated through entrepreneurial partnerships, also external publishers and operators who are buying traffic from both Raketech-owned and external publishers. In addition to facilitating commercial agreements between publishers and operators, the platform provides its users with data insights, fast payments, ensures compliance among other essential services. During the quarter, we took important steps to make affiliation cloud platform smarter and more efficient. We automated key processes from commission handling to deal request and compliance checks. This saves time and reducing the manual work. We also improved our data tools and advertiser information, making it easier for both our commercial team and publishers to find helpful business insights and act quickly on these. Altogether, these upgrades make the platform faster, more scalable and ready to support both publishers and operators in our next growth phase. Now let's turn to the next slide and take a closer look at our commercial strategy. We will start with our exclusive commercial operator agreements. We have previously reported on our exclusive commercial operator agreements. We currently have a handful of these in total live and up and running, both in the U.S. market and the Swedish market. We are continuously working to expand both existing partnerships and secure new agreements of this type. In practice, these agreements mean that Raketech is the only affiliate network able to offer a deal with a specific operator. As a result, unless you are a major Tier 1 publisher, you must go through affiliation cloud to establish a commercial deal and promote a specific operator. For operators, these models offer significant advantages. Through a single agreement with Raketech, they can scale distribution and accelerate player acquisition, while we handle account management, including communication, compliance checks, KYC and payment to the publishers. Let's go to the next slide and exclusive publisher agreements. During the quarter, we secured our first larger exclusive publisher agreements. This means that we handle the sales of all inventory and manage all commercial deals on behalf of the publishers. The advantage for the publisher is that they can fully focus on their product development and maximizing traffic to the operators, where we take care of all sales, deal optimization, administration, we invoice the operators and we pay the publishers on demand. This type of partnerships is a key strategic focus for us, and we believe it will be more common as it becomes less cost efficient for smaller publishers to build their own commercial departments, including sales, legal and compliance and all related administrative. For Raketech, it allows us to leverage on our existing commercial agreements and infrastructure. Together, we drive mutual growth and efficiency. Now I will hand over to Mans here for a deeper look into our financials.

Let's start with the overall revenue picture for the quarter, which illustrates continued operations, and this means that the recently disposed Casumba assets are excluded in Q3 and all comparative periods. Affiliation marketing accounted for roughly 69% of total revenues in Q3, which is up in relative terms, in line with expectations given the expected decline in paid network for sub-affiliation. We did see a bit softer performance within affiliation marketing compared to Q2, however, mostly driven by seasonality through slower sport activity and casino, which also experienced its usual seasonality. Within sub-affiliation, what's encouraging to see is that our organic publisher network continues to grow through Affiliation Cloud, showing that our platform-first strategy and our investments in technology and partnerships are paying off. As Johan mentioned, the growth stems primarily from the expanded exclusive partnership with the U.S. sporting betting and casino publisher that went live in early August. Moving on to revenue mix. The variations you see here are primarily driven by CPA activity and is an effect of the decline within the paid publisher network. The growth within our U.S. organic publisher network, I mentioned on the previous slide, does, however, positively offset this, leaving us essentially in line with Q2. Also positive is that flat fees and rev share are relatively stable, showcasing continued demand from our assets within affiliation marketing. EBITDA, excluding Casumba, remained stable compared to the previous quarter, excluding one-off and discontinued operations. Despite a somewhat softer top line, it shows that the cost discipline and efficiencies we've worked on throughout the year are having a positive effect continuously. Compared to Q3 of last year, we're approximately down 27% in cost, excluding publisher costs. We are also lower in Q3 compared to Q2, an effect of the U.S. assets that were disposed at the end of Q2. We did see some transitional costs relating to these assets still in Q3. And as such, we expect to see somewhat even lower cost in the last quarter. We will also continue with cost discipline and adjust if need be as we move along. Turning to cash flow. Cash conversion was reasonably stable in the quarter, broadly in line with EBITDA, however, somewhat impacted by a settlement of tax in the quarter. And the main differences between EBITDA and free cash flow were related to taxes, lease and interest payments and some smaller CapEx items, all within expectations. We also continue to settle earn-outs, of which we settled about EUR 800,000 in the quarter, and the remaining earn-out balance will continue to be paid in partial installments through March 2028. On the Casumba disposal, which closed at the end of September, the fixed consideration of EUR 12 million will be paid in monthly variable installments through December 2029. At closing, that consideration was measured at a fair value roughly of about EUR 7 million, reflecting both the time value of money and the underlying credit risk. And we will continue to assess this balance as we move along. Now back to Johan.

Thank you, Mans. To summarize before we open up for Q&A. Financials. Revenues, excluding divested consumer assets amounted to EUR 6.2 million, adjusted EBITDA of EUR 1.2 million, representing a margin of 20% and an EBITDA of EUR 1.1 million. Some key takeaways per business area, starting with affiliation marketing, as we refer to as Raketech-owned publishers, stable performance, excluding divested consumer assets, while revenues partly impacted by no major football championship this summer. Sub-affiliation. Sub-affiliation performed in line with Q2. The main difference was the revenue split between the pay network and the strategically important organic network. Our organic segment grew from EUR 0.5 million in Q2 to EUR 0.9 million in Q3. This growth is fully aligned with our commercial strategy and long-term focus on strengthening the organic publisher base. Business outlook. The divestment of Casumba assets has now been completed, which has required significant attention from the management team. We can now focus our efforts on further expanding Affiliation Cloud and developing new exclusive partnerships. Preliminary October data shows that revenues from Raketech-owned publishers were slightly below Q3 levels, while our external publishers on Affiliation Cloud continues to gain momentum with additional exclusive partnerships in the pipe. Overall, our focus is to strengthen the balance sheet and pay down the earn-out liabilities as early as possible. We remain confident in our strategic direction, focusing on scalable technology, exclusive partnerships and a balanced mix between Raketech-owned and external publishers to drive long-term growth. With this word, we are now opening up for Q&A.

[Operator Instructions] The next question comes from Rikard Engberg from DNB Carnegie.

So my first question is related to the trading update. You say that you see a stable revenue from affiliation marketing at the start of the quarter. And first of all, usually the Q4 and is that an accelerating quarter making the later end of the quarter stronger and more important than the start of the quarter?

Yes, historically, December have always been stronger than the start of the Q4, yes.

Okay. Good. And second of all, looking at the organic publisher network, you say that you see a strong positive momentum. Is that momentum on the same pace year-on-year as we reported numbers now in Q3? Or are you seeing an even accelerating momentum?

We see a good momentum, and we have a good pipeline of new larger publishers. When this materializing into revenue, it's too early to predict.

Okay. Great. And can you also discuss this new U.S. publisher partnership that has been live since August? Are you satisfied with the development?

Yes, we are. It's a milestone for us. We also have made a smaller investment in this U.S. publisher, and we secured a longer exclusive commercial agreement with them. And it's a milestone for us to -- in previous investments, we have always taken the full operational responsibility for all acquisitions. But here, we made a smaller investment, and we are acting as a commercial partner, which is -- goes in line with our strategy for Affiliation Cloud.

Okay. Great. And also this strategy of making strategic investments in use in publishers. Is that something that we should look for going forward as more common? Or is this more of a one-off, so to say?

We do this now, but it's not a part of the growth strategy. The growth strategy is to focus on the platform and the value it adds to external publishers and operators. Our main focus when it comes to the free cash flow is to strengthen the balance sheet and pay down earnout liabilities.

And one last question regarding the sale of Casumba. You are achieving monthly payments for the sale. And I guess they have come in as expected for since the sell-off to sub?

Yes, that's something we're going to comment on when we get to Q4, but we'll keep guys updated on how that progresses for sure.

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any written questions or closing comments.

Okay. Let's start with the questions. So first one, with the Casumba sale completed and the transition to a decentralized affiliation marketing model where entrepreneurial partnerships now represent the clear majority of revenues, do you expect to free up resources to improve group margins and move closer to historical levels? And for sure, we do expect to free up resources, and that's work that has been ongoing for the last -- during the year now and definitely refocus resources to the organic publisher network and affiliation Cloud in particular. With regards to group margins, just the fact that we are increasing the relative share of sub-affiliation, which has a lower margin, if you go back to very historical levels, no, we're not looking to go back to those type of margin levels, but it's just an effect of the business mix we have at the moment.

Yes. Next one, affiliation marketing, excluding Casumba has shown steady 3% to 5% quarterly growth over the past 4 quarters, but now we see a reversal with revenues down about EUR 400,000 to EUR 500,000 in Q2 and preliminary October is slightly lower in Q3. Can you share what's driving this change and what actions you are taking to restore growth? Yes. First of all, in Q2, we have some major sport events, which we didn't have in Q3, which is part of a decline quarter-on-quarter. As well, these assets are -- have a lot of SEO traffic, which could be partly between quarter-on-quarter. We believe in our strategy with these entrepreneurs we're working with, which have a good track record, and we also believe in the team in-house operating assets we're still operating in-house. So we -- for us, it's business as usual where we adapt to the new market circumstances, which is -- which we have done for the last 10 years. We're working with Google to make sure that we constantly improve and adapting. Next one, given that company will be more profitable without the sub-affiliation business, how do you view its strategic importance today? Is there a path to improving its profitability? Or could it make sense to focus more on affiliation marketing to lift overall margins? Yes. Well, we believe in our strategy with the platform and to both serve Raketech-owned publishers and external publishers with the best commercial service. As we have seen over the last 2 years, it could be volatile with high dependency on SEO traffic. So our strategy is to scale up both external publishers who like the platform, which is lower margins, but also to grow our Raketech-owned publishers. So it's a mix where we like to lower the concentration risk in a certain product. And the next question ties back to that as well. The question is, you're now approaching 100 FTEs in total. Back in 2019, Raketech generated EBITDA margins around 50% on a roughly EUR 5 million revenue base. What is different today in terms of structure, cost base or business mix that makes those historical margin levels harder to reach? And it simply is because of the business mix with the sub-affiliation and Affiliation Cloud, which is a strong strategic approach we've taken. So that is the simple answer to it. Another question relates to software development payments have increased compared to last year. Can you provide some color on what's driving that increase and how you see this trend developing going forward? So this is exclusively tied again to the development of the platform Affiliation Cloud. Looking ahead, we will continue to invest in it, but we don't foresee to see any significant increases going forward. You mentioned strong growth in organic publisher network supported by a new exclusive partnership. Could you elaborate on this business? Is its revenue more stable compared to the rest of the sub-affiliation segment and how does the margin profile compare to the group average? It's definitely more stable since we are selling all the full inventory of this publisher. But we, of course, dependent on the performance of the publishers. That's why we like to expand this and onboard more exclusive publishers into Affiliation Cloud. Margin is around the same gross margin as we have within the sub-affiliation segment.

Next one regarding another USD 750,000 investment in U.S. sports betting and casino partnership. What are your key expectations for this collaboration over the next year in terms of growth or strategic contribution? We saw, as I mentioned earlier, we see this as a milestone to secure a large exclusive publisher agreement. And we like to expand and do more of this, not necessarily involving an equity investment. And we believe in this partnership and in the product. So we believe it will grow over the next year. Next one, given the recent financial commitments and the developments and investments made in Affiliation Cloud, should we expect the business to operate more leanly and deliver higher margins at the current revenue level going forward and that current investments already supports the next wave of growth. Looking at previous years, there seems to be an underlying earnings power that could be better leveraged? So we definitely expect to operate more leanly and that's an effect of the work we've done throughout the years this year, again. With regards to margin, we covered this a little bit earlier. So it definitely depends on the mix versus revenue growth within sub-affiliation and affiliation marketing.

I think we have the next ones are about the investment in the U.S., which we already commented on. We have a question here. How do you value risk of ChatGPT AI taking approximately 50% of first few traffic due to the fact that your sites are SEO focused? Good question. We -- I don't agree on this number for iGaming and gambling search. We still -- we haven't seen [indiscernible] on Google to be that visible when you search for the most relevant keywords for casino and sports betting searches. But it's important to adapt and to be relevant for not only SEO also to be relevant for AI bots, but also do beyond the SEO activities, which we're constantly working on to lower our SEO dependency. And all entrepreneurial partnerships and team operating in-house it's a priority for them to be less dependent on SEO. Another question here, why do you need to make an investment to win the commercial partner business? I guess this refers to exclusive partnership with a U.S. publisher. In this case, we would have liked the business of a company we would, of course, not have made an investment. It was a good opportunity to secure a minority stake in this company and as well secure a large commercial agreement. But as commented on earlier, we don't expect to invest in all publishers where we secure an exclusive agreement. Our main focus when it comes to free cash flow is to strengthen the balance sheet and pay down our earn-out liabilities as soon as possible.

And last one, when are the payments for the Casumba sales scheduled to start? Already as of closing or next year, and they are scheduled to start in Q4 already.

Good. That was all questions. Thank you for all questions, and thank you for listening. And we hope to see you again in February when we -- in relation to Q4 report. Thank you.