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Edited Transcript of BETCO.ST earnings conference call or presentation 7-Nov-19 9:00am GMT

Q3 2019 Better Collective A/S Earnings Call

Nov 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Better Collective A/S earnings conference call or presentation Thursday, November 7, 2019 at 9:00:00am 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

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Presentation

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Operator [1]

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Good day, ladies and gentlemen. Thanks all for standing by. Welcome to today's Q3 2019 presentation. (Operator Instructions) Please be advised, the call is being recorded as well.

I would now like to hand the conference over to your speaker, Mr. 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. Welcome to Better Collective's webcast presentation in connection with the Q3 report covering the period January 1 to September 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.

Q3 is normally a low season quarter with lower player activity and with most major sports leagues pausing in July and part of August, which was also the case this year. With that in mind, I'm happy to report on a strong business performance, landing us the highest quarterly revenue in the company's history. Also, Q3 brought acquisitions and a media partnership, so we are continuing the higher pace set throughout this 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 3. The agenda of the presentation is structured so that we will start with a presentation of the highlights of Q3. We'll walk you through the financials for the quarter. Then we will update you on our U.S. business and recent acquisitions and partnerships. Last but not least, we'll share our thoughts on the future strategy 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 highlights of Q3. Growth in Q3 was strong compared to the same quarter last year and taking into consideration that Q3 is normally a low season quarter with most major sports leagues pausing in July and part of August. 54% revenue growth, of which 25% was organic. Operational earnings grew by 43% with a reported 40% EBITA margin and a cash flow increase of 39%. Then we 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 continue to deliver a high number of new depositing customers, NDCs, adding to our bank of players and laying the foundation for continued growth. In Q3, we sent more than 85,000 NDCs to our partners. This is a 27% increase compared to the number of NDCs in the same period the year before, most of which is organic growth.

Q3 highlights. This quarter includes our second media partnership, this time with The Daily Telegraph in the U.K., and acquisitions in the U.S. and U.K., respectively. We will comment in more detail on the U.S. business later in this presentation.

On the product side, we upgraded our flagship brand product, bettingexpert.com, and we made an investment in Mindway AI, which specializes in innovative and advanced software solutions for that identification of at-risk gambling and problem gambling behavior.

So all in all, a very satisfactory and busy quarter where we took new steps -- new big steps in building our business, while at the same time, showing solid financial performance.

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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Thanks, Jesper. Let's look at the financials for Q3, and please turn to Page #6. In Q3, total revenue was EUR 17.1 million, which was 54% growth compared to the same period last year. The organic revenue growth was 25%. The total growth in the quarter compared to last year was affected upwards by the acquisitions in the U.S. and Sweden.

The organic growth that we have seen during the first 9 months of 2019 has been broad-based, however, we have been specifically excited about strong growth in markets like Brazil, Italy, Spain, Greece and the German-speaking markets. The split between revenue share and CPA was 76% and 15% when we look at the revenue generated by players, whereas 11% of the total revenue came from other revenue, such as advertising, et cetera.

With RotoGrinders, now Better Collective Tennessee, consolidated into our account from June 1, 2019, subscription revenue has been present for the whole quarter, making up 9% of revenue. Subscription-based revenue is to a high degree a recurring revenue, as is the case for revenue fee income.

We saw an increase in NDC numbers again this quarter, this time at a rate of 27% growth, most of which was organic growth and mostly on revenue-share contracts. As you can see in the graph on the slide, Q1 and Q2 were very strong quarters NDC-wise. And as we commented on last quarter, this is due to big horse racing events in the spring that we were better prepared for this year than ever.

The NDC performance increased significantly upwards towards the end of September due to several factors, including updates to Google and the strong SEO performance in general. I'll come back to some more underlying key performance indicators in a few slides.

So please turn to Page #7. Looking at the earnings, Q3 EBITA was EUR 6.8 million before special items, resulting in an EBITA margin of 40%. It is worth noting that the margin includes an expected downwards impact of 4 percentage points from the newly acquired U.S. businesses that, on a consolidated level, delivered a small positive profit in this first full quarter where we are implementing new business models and strengthen the organization. In general, we have seen the expected leverage from the organic growth as well as the expected effect from acquisitions.

Looking at the cost base, we saw added costs from the acquired companies in the U.S. and Sweden when we compare to the same period last year. Beyond that, we added cost to activities that would have impact on future growth and our earnings. These activities relate to the U.S. activities, obviously, and the organizational expansion connected to that; the launch of our new leg to the business, i.e., the partner -- media partnerships; and continued investments into product development.

All these investments in the future are being expensed as cost, whereas we will see the revenue and income in the future. On that note, I'm very happy to see that we have maintained a good performance in our earnings.

Please turn to Page 8. Moving on to the cash flow and balance sheet. Operating cash flow before special items was EUR 4.9 million, resulting in a cash conversion of 65%. In Q3, a higher working capital negatively affected cash flow with approximately EUR 2 million, in line with the seasonal pattern we saw last year. Year-to-date, cash conversion was 90%, so this is in line with our expectations for the 9-month period.

Cash payments related to acquisitions and other investments amounted to EUR 24 million in the quarter related to acquisitions of the assets of Florida-based Vegasinsider.com and Scoresandodds.com as well as the acquisition of the shares in the company owning and operating the site, mybettingsites and the minority investment in Mindway.

Cash and unused credit facilities stood at EUR 56 million end of Q3, and the equity ratio was 48%. Our current bank facilities, combined with the 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, again, share some of our internal key performance indicators, i.e., the underlying sports wagering, which is the growth in the betting volume where we, in the chart also, have added historical figures from the acquired companies and indexed them all back within [index of hundreds], starting in Q1 2013.

The numbers are derived from accounts that represent more than 50% of group income from revenue share. 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 indices that we have been sending in 2018 and the first part of 2019.

Again, in Q3, we saw a continuation of the up-going curve, which is very encouraging, and this is a strong indicator for the increase of value in the player databases that we are building.

Please turn to Page 10. In addition to the betting volume, we are looking at the average gross win margin, i.e., what percentage is paid out on the betting volume. We have used the same indexing in the graph shown. And what can be seen is that the margins fluctuate over quarters and that Q3 2019 was a bit below average. It was index 92, whereas the average index number for all quarters shown is 94.

With this overview, I'll hand the word back to Jesper, and please turn to Page #11.

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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 have a clear and transparent regulation of 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 expertise, 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. Note that when discussing the regulatory landscape, we bring any updates that will significantly impact our business and/or expectations rather than providing a full overview.

Please turn to Page 12. The regulatory developments in the U.S. is obviously something we follow very closely, and we are now live in New Jersey, Pennsylvania and Indiana. In the report, we have commented in more detail on upcoming regulations. 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. New Jersey was the first U.S. state that allowed online gambling approximately 1 year ago, and the total betting -- or wagering has shown significant growth during this initial period. Most of this initial business has been driven by the biggest fantasy sports operators who already have a lot of registered players, meaning that DFS players switching to sports betting where their current operator has not generated any revenue for affiliates. We have seen more operators, including international operators, going live, which we believe is the basis for future growth along with the general uptake in online sports betting.

Even though it is still early days for Better Collective in the U.S. market, we believe that the market will show strong growth in many years, provided the state regulation and other fundamental market dynamics develop according to expectations.

Please turn to Page 9 -- 13. Taking part in the consolidation of the affiliate industry is a vital part of our strategy. And in Q3, we completed our second U.S. acquisition. As it happened in time for the Q2 report, we commented on it in the last webcast, but I'll recap the highlights. We are now well into building a presence in the U.S. as our 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.

In Q3, 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 coming years. Furthermore, they have significant synergy effects with other U.S.-facing assets, not least with the RotoGrinders Network.

The business model that has been applied by the website so far is based on user subscriptions, sale of picks, chips and brand advertising. Following the acquisition, we've begun the transition towards affiliate marketing within sports betting. We are making 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 slowly but surely sending traffic to licensed operators from Q3 2019, and the technical and commercial overhaul is expected to be complete during the second part of 2020.

During the transitional period of the websites, revenue and earnings from the websites will be temporarily reduced. Better Collective's consolidated U.S. business after these acquisitions include annualized revenue of more than $10 million, and the business is profitable with a strong foundation in both Daily Fantasy Sport and online betting and gambling. In order to manage the total U.S. business, we have strengthened the management structure and support functions significantly.

Please turn to Page 14. The home of the world's biggest community of sports betting tipsters, bettingexpert.com, has been upgraded. The site is now backed by our innovative micro service infrastructure that, amongst other benefits, allows us to effectively scale the product across U.S. states while also providing the global tipster community with a more intuitive betting journey. We've added more U.S. sports to accommodate our new audiences over there, and we strongly believe in the future of our branded products. We will continue to invest in making these the go-to products for the global sports betting audience.

Please turn to Page 15. In Q2, we entered in our first media partnership with leading local news media in New Jersey, NJ.com. This was the first of its kind for Better Collective, while it also marked the launch of a media partnership division within the company.

In Q3, we entered a partnership with the Daily Telegraph, recently named as the U.K.'s leading quality news brand. The digital content reaches more than 25 million users across U.K. The partnership includes Better Collective delivering our innovative technology and content for sports betting and casino co-branded with bettingexpert. The aim is to educate and empower the U.K. audience of online bettors and help them navigate in a market of rapid growth. As such, this provides us an additional channel to market, operate and manage customer contacts to the betting and casino operators. Our ambition is to enter more of this type of arrangement going. I'm very proud of Better Collective being the chosen partner of such prominent media brands, and I have high expectations that these partnerships will become an important part of our business in the future.

Please turn to Page 16, which brings me to a brief look at our strategy and outlook. Please turn to Page '17. 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 18. Being a prominent affiliate in the iGaming industry, we recognize our responsibility, and we are 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 that 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 Q3, Better Collective acquired 19.99% of the shares in Mindway AI, which specializes in innovative and advanced software solutions for the identification of at-risk gambling and problem gambling behavior. The investment aligns with our ambition to take social responsibility by establishing a safe betting environment, while at the same time, engaging in a business where we foresee a sound future growth and profitability.

Please turn to Page 19. Since the IPO, our financial targets have been met and remain unchanged as our operational framework.

Please turn to Page 20. I'll finalize this presentation with a short summary of the developments that Better Collective has gone through since we listed the company's shares on nasdaq.com. We've expanded from 4 to 13 local offices. We have almost doubled the number of employees, so we are now more than 400 employees. We've seen broad-based revenue growth, including significant organic growth. We have established significant presence in the U.S. through 2 acquisitions. We have started a media partnership division and side 2 large -- and signed 2 large partnerships. We have acquired companies and assets for more than EUR 125 million, bringing profitable growth and market expansion, plus a much more diversified customer base. We've met the financial targets we set at the IPO. And not least, we continue to see a very strong performance in bringing new business to our customers through a strong NDC performance.

I could mention much more, but in conclusion, I'm truly proud of the achievements, and I believe that Better Collective will take affiliate marketing within sports betting to new levels. This concludes our webcast presentation for Q3 2019.

I will now open up for questions from the audience. Thanks for listening in. Please turn to Page 21.

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Questions and Answers

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Operator [1]

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[Operator Instructions] First question, it's 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 the U.S. You mentioned $10 million in revenues, but I didn't really hear exactly what you said that referred to? Was that just some of the acquisitions that you made? Or was that the U.S. business combined, as it looks right now? If you just can clarify your sort of size in the U.S. at the moment?

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

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Thanks, Christian. Flemming here. This number basically refers to the size of business that we basically acquired, and it is now, you can say, as a starting point. So it was just a reference to sort of the magnitude. And a big part of that is the RotoGrinders Network, which is a combination of Daily Fantasy Sport and sports affiliations. And then you can say the 2 recent -- or the recent acquisition of the assets, VegasInsider and ScoresandOdds, which is, you can say, initially, revenue from selling subscriptions and then adds to that. So that's the starting point, basically.

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

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Right. And in terms of -- you mentioned that you make a small profit in the U.S. combined. Could you clarify a bit on that? Are you making a loss on these newly acquired assets, VegasInsider, ScoresandOdds, and you're making a profit on RotoGrinders and it sort of evens out? Or how does it look?

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Flemming Pedersen, Better Collective A/S - CFO & Executive VP [5]

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Yes. So to give a bit of flavor on that, and then I think also we trust to fund the -- you can say, the whole strategy when we acquired the companies. Clearly, RotoGrinders is a running business and is profitable with a, you can say, initially a lower margin than the whole Better Collective group, obviously.

The acquisitions of the assets, as we stated when we acquired them, we will retain some of the revenue stream that they have, but we also has -- we have been closing down some revenue streams that we'll not continue. And we have done this in Q3. So from here, the revenue should increase from these assets. So in the quarter, we also, you can say, strengthened the organization, the whole management of the U.S. operation and some support functions to that. So that's, you can say, combined, made us a small profit in this first quarter, and with the expectation, obviously, that this will increase from here and show growth both in the revenues and earnings.

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

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Okay. Great. And could you just talk a little bit about Europe? If you could just highlight -- I mean, some of your main markets include U.K., Germany, also Sweden is an important market for you. Can you just highlight a few sort of brief comments on those markets to sort of give us a flavor on how you sort of perceive business conditions at the moment?

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

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I think overall, as we also mentioned, with the specific markets where we see revenue growth. Overall, performance is good in the core business in Europe. To comment concretely on Sweden, business is in line with expectations. The market, as everybody knows, has been struggling this year. But we are pleased with the performance there.

We did see to all markets the effect of a Google update, end of September being positive for Better Collective, which has also driven momentum in the business for these European markets. So U.K., doing well as well. And really, the markets we mentioned with revenue growth, performance is good.

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Operator [8]

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[Operator Instructions] There are no further questions over the phone. Please continue.

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Jesper Søgaard, Better Collective A/S - Co-Founder & CEO [9]

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Okay. Yes, we have some questions on the web from a [Mathias Yuricich]. "What is your view on the regulations in Germany?"

We view sports betting in Germany as a regulated market but acknowledge that currently sort of the development of the general regulation is changing and that there will be a framework of not just 20 licensed operators, which was the old framework not acknowledged by the European Union where sports betting will become legal. Online Casino is more doubtful, at least in the initial phase. But I think our take is that, in general, having the vast, vast majority of our revenue in Germany being sport betting revenue, we're quite comfortable with the developments there.

Second question, "Regarding U.K. market, how does GBP 2 restriction on online slots can affect BC?"

Again, since we are, by far, mostly a sports betting business, the slot machines will be more of an indirect effect that sports betting players, to some extent, also play casino. And of course, any restrictions on slots in that regard would be negative, but we are talking out of a very small base of our revenue.

And since there are no further questions, this concludes the webcast. Thank you very much for listening in.

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Operator [10]

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Thank you. And that concludes our conference for today. You may all disconnect. Thank you all for participating.