Sportradar Group AG (SRAD) Earnings Call Transcript & Summary

All right. Great. All right. We're going to get started. I'm happy to have at the conference for the first time, Carsten Koerl, CEO of Sportradar, thanks so much for being here.

Thank you for having me.

Okay. So while sports betting is a relatively new vertical for U.S.-based TMT investors, Sportradar is certainly not a new company. You have extensive operations globally. And in the U.S., that predate legalization here. So maybe just for investors who are a little less familiar, what's important for them to kind of understand about Sportradar, what you bring to the marketplace?

Well, we are in the B2B marketplace. So we are a technology provider to 3 different client groups. One is the leagues and the teams. The other one is the media business, big brands like Fox, CNN, Twitter, you mentioned it. And the third and the strongest vertical is sports betting. We do this globally. And yes, there is a specific focus at the moment on the U.S. business. We are running mixed model in the rest of the world, which is our biggest chunk. We have a SaaS business with returning revenues. Here in the U.S., we have a revenue share model, which helps us to profit from the huge market growth.

Got it. Okay. A question that we sometimes tend to get from investors is sort of what differentiates Sportradar from its competitors? Or maybe more specifically, how would a sports league media company betting operator, all of whom you just mentioned you serve, kind of frame that answer?

Well, I'm a number-based guy, as you know. I'm a studied engineer, and I believe in numbers and mathematics. What diversifies us first is we are, by far, the biggest player in the market by revenue. So that's measurable. And we have a global business. We have more than 1,000 clients globally. We cover more than 70 sports. We cover more than 900,000 live matches, and there is no market companion, which is even close to those numbers. I think that diversifies us.

So the scale piece of it. Yes, right. Okay. All right. So we're sitting here, it's almost, I think, exactly 5 years to date since the Supreme Court declared PASPA as Constitutional. So the U.S. betting market has seen significant growth since then. And I think it's close to 40 states now with some form of regulation. So how is the U.S. market kind of evolves relative to the way you thought it would? And where do you see the TAM growing from here?

Well, for us, let me start with the story of Sportradar in the U.S. We started here to invest into the U.S. in 2014, and that is a long time before PASPA was appealed. And the belief was always we saw what happens in the United States with people which want to bet. They could go to Vegas or to some of the travel casinos. And some of them went abroad. And this liquidity was leaving the country also the taxes leaving the country. And in 2014, there was the clear assumption we're going to have to invest in that market. And I, by myself, went on to New York. I took an apartment in New York to try to understand what is driving the market, what is driving the leagues, building their partnerships and trying to get into it. And what was fascinating for me as a sport enthusiast, is how much the sports fans in the U.S. are driven by data and information. So that was very exciting. And we started without sports betting for 4 to 5 years. We did a very successful media business. I think we structured this quite well, and then looking into PASPA, that was not a big surprise for us. So I think we had the right instinct. We had been an early mover into that space. And we enjoy now that first-mover advantage, which we have here. So that's the first thing. And looking now into when that all started, it was pretty unclear where this market is developing. Now we see relatively explosive growth. So we're seeing growth rates in our betting market within 80% plus, which is great. We see growth rates in the advertising business, even a little bit higher than this. And it probably plays out between 25% to 33% of the worldwide market piece, depending on the statistics, which we read there from a GGR perspective. So that is 25% to 30%, 33% of the worldwide market, that's great.

At maturity, you're saying?

At maturity, speaking maturity.

Yes. Right. And sort of while we're on this topic, it would be good, you talked about people leaving the country about leaving the state, right? And that leads to the question of sort of your view on California, Texas, even some of those tax differentials that you see between states, how do you sort of see this playing out over the next few years?

It's -- this is still a gold rush time. So -- and you see in such a time, a lot of experiments. I think the nation is somehow -- the states are so close to each other and it doesn't make sense that there are so big gaps in the taxation. So if I'm playing in New Jersey or if I'm playing in New York, that's a significant difference. And if you are in New York, and I'm there frequently, if you're driving the subway to Jersey to [indiscernible], all of a sudden, on the first stop, you have all the betting shops. Why? That's a taxation issue. And I think -- that doesn't make sense. On the long term, we will see that we see the states more harmonizing this kind of discrepancies. And I think that's very natural. I think we have to find a reasonable split. How much tax does a state take from sports betting to grow the business, and we see this already. We see some regulation happen here in that space. I think on the long term, that will be harmonized. I think the federal way is more or less impossible anymore. So we see that state by state. They have strong arguments from the states, and that's how it will play out. I think we will see more a level playing field here over the time.

And on some of those states that haven't legalized is the idea just then that opportunity becomes too much to pass up?

And look, there are 3 interesting states as we both know. And they are very, very different. If I'm looking to California, I think there is an opportunity that the operators and the tribes find some common ground. You need to talk to each other. And that obviously has not happened. And I think if you find the common ground, there is an opportunity that California would vote in favor. And that makes a big difference. Texas and Florida, I think, are in a process here on different stages. So these are the 3 big missing pieces. If we have this, 95% of the U.S. population have access to loitering and sports betting, which I think is the ultimate game here. I believe that will happen in the next 5 years, but there's still some work to be done.

Okay. So in Q1, Sportradar saw, I think, 55% growth in the U.S. Those you mentioned that figure goes to 80% when we just look at the betting products. I don't think the U.S. region grew that fast. I don't remember the exact number, but what's sort of driving your ability to outpace the market? What do you need to kind of execute on to kind of maintain that multiple of the underlying market growth?

Well, for the U.S., the special thing where we are benefiting is our partnerships and the early start in the market. We have partnerships with NBA, NHL and Major League Baseball. That is in total now per year, 5,000 matches, which we build in this portfolio. And around this, we can create a very attractive product for our clients. And that's what you see now. So we are growing faster than predicted. We said at the IPO in the U.S., we might be EBITDA positive in 2024. We've reached this 1 year before that time, which is a great news, I think, and it shows you how explosive the revenue growth was, a bit more than 80% on a quarter-by-quarter comparison there. And for the ads business, it's growing even a little bit more than the betting business. But we have the 4 pillars. We have the media business. We have the sport solution, which is for the teams and the league, and we have the betting and the ads service in the U.S. All of them enjoying the mix growth of more than 50%, which is a great opportunity. And you see the leverage in the business model from a profitability perspective.

Right. You've talked a lot in the past about the importance of in-play betting as a growth driver for you. And before we sort of get into where that is in the U.S. and where it's going, I just want to see if you could walk through why kind of a series of bets placed during game is more valuable to you, but also to your partners and relative to that placed in pre-match?

Well, I don't know how many here in the room ever wagered and ever did an in running or live bet. If you watch the match, it's so much more exciting. If you can bet during the activity, it's so much more appealing, it needs a stimulation. It needs an interface, it needs all the visuals for this. But the trend internationally was when I started that business 20 years ago, we had exactly 0% live betting proportion. Now internationally, live betting is between 70% to 80%, depending on the country, which we are talking about. Here in the U.S., we -- depending on the sport, it is between 15% to 35%. And guess what, it was 0 in 2019. So we see that there is a trend. And without any doubt, the U.S. will follow the international markets. We have no reason to believe different. Why is it so important? It is so important because our profit is exponentially higher for everything that is live. 90% of all the revenues and the associated profits for Sportradar are coming from the live environment. And this is which makes us so exciting about the U.S. opportunity. We have to help to develop this market. We have to help to create the right products. And from a technical perspective, which you might ask is the next question. We think the U.S. is really leading in the way how you're deploying technology on player-related data. And that's now a global trend. What we see in the global sports world is that the sports fan is not so loyal to the team, but they are very loyal to the player. And if you are offering betting types, which are related to player-related markets, that is what is appealing for the sports fan globally. And what we see here in the U.S., there's an acceleration about this. And for the player-related markets, you're speaking about technology. You need a tracking system there. You need it in real time. And that is where a lot of investments and future growth will come from.

Is there any kind of investment or buy-in that you need from the leagues and their broadcast partners to also push for the in-play betting angle as well?

That's a good question. So for broadcast, we have to convince the broadcast partners that it's not cannibalizing their business. Some broadcasters are saying, why should I allow that sports betting operators can, behind the paywall with the user registration, show a very low resolution video stream of the match. We have data and evidence that this is not cannibalizing the consumption of the big screen. So the subscriptions are working because you want to see the big screen at the match. You don't want to see it on that small computer screen. But from a small computer screen perspective, it's the stimulating product for live betting activities. So that is a process to convince the partners. And with the help of the leagues, we could convince already in hockey, the partners that we can do this, and we are showing great success for the NHL and for the sport. So this, I think, is a clear trend. And it will take a while but we see that the broadcasters are getting more open on this because they understand the consumption behind the paywall on a low-resolution video stream is maybe 1, 2, 3 or 4 minutes, depending on the sport. The punter is placing his bet, looking on this gets his stimulation, then he might change back to the big screen to enjoy the match. So it's a different activities. It's not cannibalizing, but some broadcasters are saying it might be. So there is a slow adaptation of this. I would wish it's faster. But if it would be easy, everybody can do it. So we're going to have to work on this.

And just to be clear, for those in the room who aren't familiar, I mean, the dynamic that you're talking about has long existed most of your rest of the world markets, meaning. [indiscernible] a low resolution stream...

I had this debate since 20 years. It's following me. And it's all the time the same, and I totally get it. So if you have a working business model, you want to protect this. If you have the rights, why should you allow somebody who might somehow cannibalize your existing market opportunity, why should you do it. You do it if you see more revenue opportunities there. And the leagues are seeing this and there is no cannibalization.

Right. And so the leagues will see that the revenue is there, they'll go to their broadcast partners and the dynamic can play out. Okay.

And for some of the leagues, maybe if I can add this, there is a very important aspect. So if I'm looking to hockey, the NHL is global. I would say they have 20, 25 markets where NHL is really, really popular. If I'm looking now to baseball, it's Korea, it's Taiwan, it might be Japan. But then it's already -- it's getting more difficult. Sports betting can help to develop the sport by deploying video streams, interesting data to it. It must not necessarily be associated to betting but it can be. And that is very helpful to make the sport more global and the penetration for the leagues better. So I think there is a nice aspect on the globalization for some of the U.S. leagues.

And you touched upon this before and said I might follow up on it, but I will, about technology that you're kind of implementing into the game. I think you've done this with the NHL. As far as player tracking, how do you sort of translate, okay, we have the tech too, okay, this is a bet we could put in front of a bettor to get them to bet on?

Well, the skill is, we call that customized user journey. So you try to understand, let's use basketball as a example, is he a Lakers fan? And that's something you can do by give him some league statistics on tables. You can begin to track that player, identify him and see he is a Lakers fan. Then the next assumption is, is a Lebron fan? If he is, push him the 3 points or 2 points from the last playing day, learn about the profile, enrich this then you can use this as creating his customized user journey. And the end game is you get a product which is really made for you with the betting stimulation in there with that knowledge. So this is where technology is going. And you're going under consumption behavior of the user. And the younger user, he wants to have a couple of streams. He has a couple of teams. He has a couple of players. You mix this together, best in a live environment. You're putting the right stimulation in and then that goes far beyond sports betting. That can go into sponsoring, merchandising activities, all of this. We are not in that area. But from sports betting, we understand how to stimulate and do customer acquisition and retention for our clients with their customized journey.

So within the U.S., you've now reported positive EBITDA for 3 straight quarters. You've guided, I think, the next 2 similarly. As we get into Q4, that's expected to turn negative. That's a lot of -- a lot of that has to do with the way, I think, the accounting and the NBA contract works. I'm not going to ask you about '24 unless you want to talk to it. But conceptually, how should investors think about your ability to sort of profitably leverage rights agreements, which have increased in costs in recent years?

Well, I always -- I said in the beginning numbers is the main thing for us. So we want to be measured with what we promised and how we deliver this. Looking now into the last quarters, I think you see very clearly that we are managing our right costs in a way that we show scalability and leverage. So from the revenue growth, comparing it with the growth on the sport rights, we are outperforming this. So we are spending less money, proportional-wise, looking then to the revenue growth. So we have that well controlled. Looking now into the NBA. That is 8 years deal. And when we closed that deal, we looked on that 8 years term. Now from an accounting perspective, on 8 years, we have to linear -- amortize this deal in a linear way. Looking from a product perspective, it brings us now the ability to enrich the video feeds with deep data, to use that deep data to calculate probabilities. We need time for the product development, but we will deploy this into the market. So we will grow exponentially. On the first thing, we have to amortize linear but the growth from a product side is exponential. So on the beginning of that deal, that is not favorable for us. At the end of the deal, that's very favorable. So we said in quarter 4, that might be a quarter where we break even from a U.S. perspective with the NBA deal. We are very positive that we can show the scalability in 2024 and reach the margins of 2023, which we have. And from there onwards, we will grow. That's usually a long-term deal, and we are very, very happy to have 8 years deal with the NBA and to have still a 9 years deal with the NHL. So I believe in a strong growing market, that's the right thing to be done.