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Edited Transcript of BETCO.ST earnings conference call or presentation 14-Aug-19 7:00am GMT

Q2 2019 Better Collective A/S Earnings Call

Aug 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Better Collective A/S earnings conference call or presentation Wednesday, August 14, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Flemming Pedersen

Better Collective A/S - CFO & Executive VP

* Jesper Søgaard

Better Collective A/S - Co-Founder & CEO

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Conference Call Participants

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* Christian Hellman

Nordea Markets, Research Division - Director of Small and Mid Cap

* Jonas Amnesten

Redeye AB, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and thank you all for standing by. Welcome to today's Q2 2019 presentation.

(Operator Instructions) I must advise also that this call is being recorded today, Wednesday, the 14th of August 2019.

And without any further delay, I would now like to hand over the call to your speaker today, Jesper Søgaard.

Thank you. Please go ahead.

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Jesper Søgaard, Better Collective A/S - Co-Founder & CEO [2]

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Thank you very much. Welcome to Better Collective's webcast presentation in connection with the Q2 report covering the period January 1 to June 30, 2019, which we released today.

My name is Jesper Søgaard, CEO and Co-Founder of the company. And with me today are CFO, Flemming Pedersen; and IR Manager, Christina Thomsen.

Q2 has been an eventful quarter for Better Collective, to say the least, so I'm excited to be sharing this report with you. We're continuing the profitable growth and expanding our position as the #1 aggregator within online sports betting, now also with a strong foothold in the emerging U.S. market. Q2 also marks the conclusion of our first full year as a listed company. And wrapping up today's presentation, I will walk you through what we have delivered during the year.

Please turn to Slide 2, where we display our disclaimer regarding any forward-looking statements in the presentation. I ask you to please pay attention to this.

Please turn to Page 9 -- Page 3. The agenda of the presentation is structured so that we will start with a presentation of the highlights of Q2. We'll walk you through the financials for the quarter. Then we will update you on our U.S. business recent acquisitions and recap the [framework of] financial targets we decided upon in connection with the IPO. We will, as always, end the presentation with a Q&A session.

Please turn to Page 4, on to the financial highlights of Q2.

Growth in Q2 was strong compared to the same quarter last year even with tough comparison to last year with the World Cup in football as a big revenue driver. 64% revenue growth, of which 18% was organic. Operational earnings grew by 77%, with a reported 43% EBITA margin. And a strong cash flow with a cash conversion of 93%. For the first half of 2019, we generated more than EUR 14 million in cash flow from our operations before special items.

Flemming will revert with more insights into the financial performance and, in order to give a bit more insight into the moving parts of our business, share some in-depth insights into the underlying performance of the business.

We continued to deliver a high number of NDCs, adding to our bank of players and laying the foundation for continued growth. In Q2, we sent more than 111,000 new depositing customers to our partners. This is a 60% increase compared to the number of NDCs in the same period the year before, which as mentioned is a tough comparison due to the World Cup in football last year.

Q2 highlights this quarter -- sorry. Q2 highlights this quarter was the 2 U.S. acquisitions and the first media partnership, along with the revenue share license in New Jersey. We will comment in more detail on the U.S. business later in this presentation.

We also expanded our bank credit facilities to ensure the continued funding of our acquisitive growth.

Last but not least, we cofounded an affiliate trade party in the U.K., which we will also add a bit more flavor too in today's presentation.

Please turn to Page 5, and the word over to Flemming.

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Flemming Pedersen, Better Collective A/S - CFO & Executive VP [3]

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Thank you, Jesper.

Now we'll look at the financials for Q2, so please follow me to Page #7.

In Q2, total revenue was EUR 15.8 million, which was a 64% growth compared to the same period last year. The organic revenue growth was 18% compared to 41% in the strong Q2 2018.

If you look at the revenue graph to the right, you can see the quarterly fluctuations and average quarterly growth in revenue and NDCs. A significant part of the growth we have seen in this quarter is a strong -- is a result of the strong NDC intake in recent quarters, as we mostly work on revenue share where there is a delay from NDC to revenue.

The split between revenue share and CPA was 74% to 15%, when we look at the revenue generated by players, whereas 11% of our total revenue came from other revenues such as advertising, et cetera.

With RotoGrinders consolidated into our accounts from June 1, 2019, we're also beginning to recognize subscription-based revenue which represent a high degree of recurring revenue, as is the case for revenue share income. We will comment on this in more detail next quarter, when subscription revenue will have been present for the whole quarter.

We saw again high NDC numbers this quarter with more than 111,000 new NDCs, most of which transferred to revenue share contracts. Q1 and Q2 are normally strong on NDC performance, impacted by large U.K. horse racing events such as the Cheltenham Festival and the Grand National. And in these 2 recent quarters, we prepared better than ever for these events that delivered a high number of NDCs.

Looking at other underlying key performance indicators, we also saw high -- all-time high performance, but I'll come back to this in a few slides.

Now please turn to Page #7.

Looking at the earnings. Q2 EBITA was EUR 6.8 million before special items, resulting in an EBITA margin of 43%. This implies a growth in the operating profit of 77%. We have seen the expected leverage from the organic growth as well as effect from acquisitions.

Looking at the cost base, we saw added costs from the acquired companies as well as added costs through activities that will impact future growth in earnings. These activities relate in particular to the U.S. acquisitions and the organizational expansion connected to that, the launch of our new leg to the business, media partnerships and also continued investments into product development.

Overall, investments have and will be made in the organizational buildup and integration of the new entities. In the U.S. this comprised offices in Nashville, Tennessee; Fort Lauderdale, Florida from the acquisitions; and a newly opened office in New York, out of which the NJ media partnership will be run. All these investments, in the future, are being expensed as costs as they come, whereas we will see the revenue and income in the future. On that note, I'm pleased to see that we have maintained strong earnings and margins.

Please turn to Page 8, moving on to the cash flow and balance sheet.

Operating cash flow before special items was EUR 6.6 million, resulting in a cash conversion of 93%. Cash payments related to acquisitions and other investments amounted to EUR 30 million in the quarter, related to the RotoGrinders acquisition, along with deferred payments regarding the year 2018 acquisitions in Vienna, in Greece and also the Swedish Ribacka Group.

In Q2, Better Collective acquired 60% of the shares in the RotoGrinders Network and has an obligation to acquire the remaining 40% in the years 2022 to 2024. Therefore, the total business has been consolidated and a fair value has been determined for the remaining [40%] of the shares based upon the purchase agreement and financial forecast. This has resulted in a long-term debt of EUR 21 million that has been posted as contingent consideration. This amount is based upon the current knowledge and forecasting and may differ from what actually will have to be paid. Any future adjustments to this amount will be posted as special items in the P&L and corresponding to the various intangible assets.

Cash and unused credit facilities stood at EUR 77 million end of Q2. And the equity ratio was 53%.

The strengthened balance sheet, combined with higher cash flow from operations, gives us significant room to further explore M&A opportunities.

Please turn to Page 9. Coming back to the revenue and growth. We have decided to share some of our important key performance indicators, i.e., the sports wagering, which is the underlying betting volume where we also have added historical numbers from the acquired companies; and indexed them all back to index 100, starting in the Q1 2013. The numbers are derived from accounts that represents more than 50% of group revenue, and it is one of our important key performance indicators.

As can be seen from the graph, the underlying betting volume in these revenue share-based accounts increases significantly over time, with a steep growth in recent quarters that we mainly attribute to the many NDCs that we have sent throughout 2018 and 2019. The recent [C curve] is, of course, very encouraging, as this is a strong indicator for a sizable increase in the value of the player databases that we have built over time.

Please turn to Page 10. In addition to the betting volume, we also look, of course, very closely to the average gross win margin, i.e., the percentage that is paid out on the volume -- underlying betting volume. We have used the same indexing as the graph shown before, and what can be seen is that the margins fluctuate over time over the quarters. And in Q2 2019 it was fairly average at an index 93. The average index number over the quarters shown here is 94.

Please turn to Page 11, and the word back to Jesper.

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Jesper Søgaard, Better Collective A/S - Co-Founder & CEO [4]

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Thanks, Flemming.

Generally, we are focused on being present in markets that has a clear and transparent regulation for online betting. This offers visibility and predictability. Most of our business is focused on being strongly positioned within sports betting in the various markets. This is where we have our core competencies and where we believe our products and technology allow us to have a competitive edge.

Furthermore, we can see that, from a regulatory point of view, sports betting is in some countries viewed favorably compared to other online gambling such as casino. We always follow the market developments closely and welcome regulation that typically result in significantly larger markets. For this quarter, we've decided to focus on the U.S. and, as in previous quarters, lay out the regulatory landscape for our full scope of business. Going forward, we will, of course, bring any updates that will significantly impact our business and our expectations.

Please turn to Page 12. The regulatory development in the U.S. is obviously something we follow very closely. Better Collective has been licensed in New Jersey since 2014 and we keep growing our market share. Pennsylvania has recently launched sports betting online, and Better Collective has started activities in this market.

In West Virginia the market has been online since December 2018, but it was recently shut down due to operators facing issues with a third-party provider. We expect this to be resolved during the next quarter.

New York has gone live off-line but is not expected online betting before 2020.

Similarly, Rhode Island is currently not live online and is not expected to go live until late in the year.

In Tennessee regulation is expected during late 2019 or beginning of 2020. We have seen positive development in Vienna, as launch is expected in September 2019, beginning with off-line sports betting, after which online is expected to follow.

Iowa and Illinois are expected to go live late this year or early next. However, we expect there will be a requirement for physical personal registration, while the business case in these days currently is less interesting for affiliates.

The U.S. market is characterized by high player values, and we expect that the market long term will exceed the European sports betting market. However, we also expect that it needs a different and dedicated approach in order to unlock this big potential. We view each state as an individual country with different regulations, different operators and often with different views on individual sports. Some products can work for the entire U.S. market, whereas some needs to be tailored to the single state.

We're teaming up with relevant online operators and seeking necessary licenses. In Q2, the New Jersey Division of Gaming Enforcement deemed our application for an ancillary license complete, and with that, we can start working on partnerships based on the revenue share model. So far, we have been operating on CPA.

Please turn to Page 13. Taking part in the consolidation of the affiliate industry is a vital part of our strategy. And in Q2, we completed our first U.S. acquisition, rapidly followed by the second U.S. acquisitions -- U.S. acquisition after the end of the quarter. While we have had U.S.-focused products up and running for some time, even some revenue streams from online sports betting since last year, we have now started building a presence in the U.S. Taking part in the big U.S. market opportunity was significantly boosted by the acquisition of the RotoGrinders Network in Q2, adding strong products and dedicated people with insight into the U.S. market. Founded in 2009 and headquartered in Nashville, Tennessee, RotoGrinders owns a strong network of platforms for sports betting and daily fantasy sports or DFS in the U.S., including RotoGrinders.com, PocketFives.com, SportsHandle.com and usbets.com. DFS has a strong fan base. While -- we expect this part of the business to continue while also ensuring sports betting exposure to a sports-interested audience. The 3 founders in the RotoGrinders Network will continue managing the daily business and comprises approximately 50 employees.

After the end of Q2, we acquired 2 U.S. market-leading sports betting brands: VegasInsider.com and scoresandodds.com. These 2 websites have since many years been the platforms preferred by millions of visitors and have the potential of becoming the largest revenue-generating assets in Better Collective in the coming years.

Furthermore, they have significant synergy effects with all of U.S.-facing assets, not least with the RotoGrinders Network. The business model that has been applied by the websites so far, is based on user subscriptions; sale of picks; which is tips in European standards; and brand advertising.

Following Better Collective's acquisition, the business model will be changed towards affiliate marketing within sports betting. We will make a technical and commercial overhaul of the website in order to facilitate regulated affiliate marketing and related revenue from the states that allow online sports betting. The 2 websites are expected to send traffic to licensed operators from Q3 2019, and the technical and commercial overhaul is expected to be complete during the second half of 2020. During the transitional period of the websites, revenue and earnings from the websites will be temporarily reduced.

Last but not least, in Q2, we entered into a media partnership with leading local news media in New Jersey, NJ.com. This is a first of its kind for Better Collective, while this also marks the launch of a media partnership division within the company. Essentially, we team up with NJ.com to deliver a sports betting session co-branded with our flagship bettingexpert.com. We will deliver our innovative technology and content for sports betting and casino. This collaboration exposes us to a large group of betting-interested readers to whom we can offer entertainment, education and transparency. We expect to enter into more media partnerships, and currently we're in advanced dialogue with a media group in Europe.

Better Collective U.S. key points after these acquisitions include annualized revenue of more than $10 million in 2019 and an anticipated profitable business with a strong foundation in both DFS and online betting and gambling.

In order to manage the total U.S. business, we are currently building a strong team in the U.S. To give you an idea of the setup investments will be made in the organizational buildup and integration of new entities. In the U.S. these comprise offices in Nashville, Tennessee and Fort Lauderdale, Florida from the acquisitions; and a newly opened office in New York, out of which the NJ media partnership will be run. Our VP of Business Development and Sales Marc Pedersen will act as general manager to ensure BC alignment, building on his many years in the BC family.

Currently we have about 65 employees in the U.S., most of which joined us through the acquisitions but also hires for new roles. All relevant functions are aligned with our teams in Copenhagen and Paris who are already working with the U.S.-facing products and SEC.

Please turn to Page 14, which brings me to a brief look at our strategy and outlook.

Please turn to Page 15. As you may recall, our strategy for the coming years is focused on 3 main themes: organic growth, M&A and geographical expansion. These 3 will continue to guide our activities.

Please turn to Page 16. Being a prominent affiliate in the iGaming industry, we recognize our responsibility and we're aware of the impact we have on the global iGaming industry, the rest of society and Better Collective's other stakeholders. We want to use our position to influence and support responsible gambling, for the benefit of our users and partners. Our mission is to make online sports betting and gambling entertaining, transparent and fair, while we strongly endorse responsible gambling.

In Q2, together with 2 of our colleagues in the iGaming business Oddschecker and Racing Post, we have launched the trade association Responsible Affiliates in Gambling or RAIG. We recognize the role of affiliate marketing providers must play as part of wider industry initiatives in the U.K. to promote social responsibility and a safer gambling environment for consumers. Our ambition is for RAIG to be a game changer in terms of compliance standards for affiliates, ensuring a lift of the entire industry for the benefit of users. We also hope for more affiliate companies to join our initiative and help fulfill the ambition.

Please turn to Page 17. Our financial targets remain unchanged from the IPO and will be our current financial framework. During the 4 quarters since the IPO, the financial targets have been met.

Please turn to Page 18. As I mentioned in the introduction, Q2 also marks our first full year as a listed company. I want to share a snapshot of Better Collective pre IPO, a successful but yet quite small, private Danish company with less than 200 employees in 4 European offices.

Please turn to Page 19. During this last year, we have grown on every parameter. Since the IPO last year, we've invested a total value of more than EUR 125 million in acquisitions, growing our market share, leading position, number of offices and employees. The local presence is important to us, as it provides valuable local insights and understanding. The exchange of knowledge and best practices offers synergistic effects and keeps us at the forefront of the industry. In total, the acquisition strategy has provided significant profitable growth to the Better Collective group, and we expect to continue the strategy.

Revenue has been growing steadily with a year-to-date CAGR of 53% over the last 3 years. In 2018, revenue amounted to approximately EUR 40 million. Our target EBITA margin before special items was more than 40% in 2018. And the business model we apply allows for high cash conversion close to 100% before tax.

With the acquisitions this year, however, the 2018 numbers do not provide the full picture. On pro forma basis excluding organic growth, the revenue would exceed EUR 60 million.

The IPO that we completed in June was the first time we took in external financing to the company. We did so in order to continue the M&A strategy that we started in 2017 by using the company's own cash flow. Following the IPO, the ownership structure has changed. However, more than 60% of the shares are still held by founders and management.

Both Christian and myself continue as part of the executive management team. Better Collective is today the leading affiliate company within online sports betting, and our strategy is focused on retaining and expanding that position.

This concludes our presentation, and I will now give the word to the operator to lead us through the Q&A session.

Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Okay. Our first question is from the line of Christian Hellman from Nordea.

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Christian Hellman, Nordea Markets, Research Division - Director of Small and Mid Cap [2]

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Just a question on this media partnership in New Jersey. I understand that it's -- might be difficult, but can you elaborate a bit on how perhaps we as analysts or other stakeholders -- external stakeholders should sort of think about this, if there's any way to sort of understand what this could mean for you guys in terms of revenues in 1 or 2 or 3 years out?

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Flemming Pedersen, Better Collective A/S - CFO & Executive VP [3]

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Yes. Christian, Flemming here. Yes, you are right. It's very difficult to answer and give specific numbers since we haven't given any guidance to that. Clearly, we see this as an important business going forward as we are teaming up with medias that have significant volumes of traffic already. Some of -- some media already have betting sites up and running that has massive online traffic.

The way we, can say, contribute to this is, of course, that we have deep knowledge within affiliate marketing and thereby get access to the volume and to the traffic volume. And with each media, the idea is that we agree on a sort of a split of the profit. We have come so close to guidance, as this is, you can say, the profit split is in favor of Better Collective.

So basically we will apply the exact same business model as we do of any of our other websites but basically tap into sort of a whole new channel of traffic. And we believe this will be an important leg to our business and thereby also significant in future revenue and profit generation.

I would defer from putting numbers to it today, but this is how we see it. And of course, the impacts will -- sort of will take some time to build up, as we need to basically align the products for affiliate marketing. So, I will reckon that this will have a significant impact from 2020 and going forward.

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Christian Hellman, Nordea Markets, Research Division - Director of Small and Mid Cap [4]

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I understand that it's difficult. And then another question, on the 2 websites VegasInsider and Scores and Odds. You're saying that those 2 websites combined, over next couple of years, could be larger than, I guess, bettingexpert in terms of revenue generation. Is that what you're saying, or did I misinterpret it?

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Jesper Søgaard, Better Collective A/S - Co-Founder & CEO [5]

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That's correct.

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Christian Hellman, Nordea Markets, Research Division - Director of Small and Mid Cap [6]

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Okay. And do you have or have you said historically how big bettingexpert has been in terms of revenue generation for you guys or as a percentage of total revenues in terms of the IPO or...

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Jesper Søgaard, Better Collective A/S - Co-Founder & CEO [7]

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Yes, we've never really -- we've never given a specific number for any of our websites, so we would refrain from comment on that. I would rather speak to the potential of VegasInsider and Scores and Odds. And these sites are, as we've communicated, already established brands in the mind of American sports consumers and hunters. And now with the regulated market that's going to open up state by state, these sites is already reaching the exact demographics that we want to target that are used to sports betting. So -- but now we'll be looking for regulated operators in those states, and that's why we see such a big opportunity with this, that it's really established brands where we are now going to apply the business model we know so well. And so we'll need to work with the sites, but we believe the potential is very big [with the sites].

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Christian Hellman, Nordea Markets, Research Division - Director of Small and Mid Cap [8]

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Okay. Okay. And then just my final question, just to understand the balance sheet correctly. You have EUR 17 million in cash in the balance sheet. Is that -- have you paid for VegasInsider and Scores and Odds? Or should one sort of adjust for that when looking at the cash position?

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Flemming Pedersen, Better Collective A/S - CFO & Executive VP [9]

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That's correct. We paid for VegasInsider and concluded that transaction in July.

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Operator [10]

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Our next question is from the line of Jonas Amnesten.

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Jonas Amnesten, Redeye AB, Research Division - Equity Analyst [11]

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So I have 3 questions. And the first one is, as you already mentioned, the FIFA World Cup is one of the world's largest sports events that we had last year. Could you elaborate a bit more on how this has affected your revenue and the fees in June compared to June last year?

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Jesper Søgaard, Better Collective A/S - Co-Founder & CEO [12]

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Yes. We -- I think we talked about that last year. That -- the effect of the World Cup is primarily 1 month in the quarter, but what we, of course, see is a very strong intake of NDC in World Cup. We also have some elements of the business where we monetize by partly CPA or some positions on sites. And prices for that also increased during the World Cup simply because of the strong demand from our operators. But still it's mainly 1 month where we see a big impact from the World Cup.

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Jonas Amnesten, Redeye AB, Research Division - Equity Analyst [13]

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All right. And you also mentioned that you are in a pole position to become the market leader in the U.S. market. Which are your main competitors for this market-leading position in the U.S. market, would you say?

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Jesper Søgaard, Better Collective A/S - Co-Founder & CEO [14]

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Well, in New Jersey we have a good colleague doing very well, Catena Media. And then we know there are still several of our colleagues in the industry that have -- all have great ambitions and aspirations for the American market. So it's not like there won't be any others, but fortunately, this is a very big ocean that -- where the fish will be swimming around. So I think there will be a good business for several companies in this market, but with the 2 acquisitions we have now done, we really feel confident about that we can achieve the full potential in the U.S. with our business.

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Jonas Amnesten, Redeye AB, Research Division - Equity Analyst [15]

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Yes, but you would say that the -- Catena Media is the largest competitors for this position then?

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Jesper Søgaard, Better Collective A/S - Co-Founder & CEO [16]

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I can't say specifically, but they are -- surely, they do a great job. They have also done some good acquisitions in the past. So surely, yes, they are a very important player in the market.

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Jonas Amnesten, Redeye AB, Research Division - Equity Analyst [17]

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Yes. And could you mention any other companies that you would say are large competitors too?

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Jesper Søgaard, Better Collective A/S - Co-Founder & CEO [18]

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I think, as I said, there are several companies in the industry, so it's more about looking at which companies do we have in the iGaming affiliate space and most of them have ambitions for the U.S. They will be competitors, but again that's not really the concern to me. The market potential is so big. So I think, if we do things well with the foundation we have now created for ourselves, I'm not really concerned about competition. And I think there is room for other companies to be successful in this market. As you see, in Europe there are several successful affiliate companies. So it's a very big market. So competition is not my main concern in the U.S.

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Jonas Amnesten, Redeye AB, Research Division - Equity Analyst [19]

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All right, all right. And you also mentioned that you continue to see many acquisitions opportunities. Which markets are the most interesting for you? Is it still the U.S. market, or is it another specific market that you're looking closely at?

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Jesper Søgaard, Better Collective A/S - Co-Founder & CEO [20]

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Well, the U.S. we feel we have now done some very good and attractive acquisitions, so obviously we also need to work with them. So U.S. is not first in mind anymore. Europe, we're also in a very strong position. So we are not aggressively looking for specific targets. We have a nice inflow of targets.

I think we have a good position in the M&A space, where we are known, so if somebody is considering selling their business, I'm quite sure they will reach out to us. And then we're also looking at skill sets. So there could be some skills that we would like to add to our business. And potentially, yes, there could be the markets or environments where we believe sports betting is important.

So right now, we have a pretty broad approach and feel that we are in a good position with the current business. So we don't feel any strong need to go and act, but fortunately, we still see a nice inflow of new opportunities.

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Jonas Amnesten, Redeye AB, Research Division - Equity Analyst [21]

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Yes. And my last question here. What's your view on South America? Is it still a very interesting market? Are you doing anything, [products in that market]?

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Jesper Søgaard, Better Collective A/S - Co-Founder & CEO [22]

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Yes, we believe South America represents also a greater opportunity. We are already working actively with South America and investing in that region, and so it's something which is also quite high on our agenda.

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Operator [23]

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No further questions on the phone line. Please continue. No further questions on the phone line, ma'am. Please continue.

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Flemming Pedersen, Better Collective A/S - CFO & Executive VP [24]

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All right. There seems to be no further questions. Then we'll, from the company, thank you for your participation. And if you have any further questions, you are as always welcome to contact us directly.

Thanks, and have a nice day.

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Operator [25]

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So that does conclude our conference for today. Thank you all for participating. You may all disconnect.