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Edited Transcript of NET B.ST earnings conference call or presentation 20-Apr-17 7:00am GMT

Thomson Reuters StreetEvents

Q1 2017 NetEnt AB (publ) Earnings Presentation

Stockholm Apr 20, 2017 (Thomson StreetEvents) -- Edited Transcript of NetEnt AB (publ) earnings conference call or presentation Thursday, April 20, 2017 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Per Eriksson

NetEnt AB - President and CEO

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Conference Call Participants

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* Rasmus Engberg

Handelsbanken Capital Markets - Analyst

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Presentation

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Per Eriksson, NetEnt AB - President and CEO [1]

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Welcome, everyone. As [Badir] said, both you that are here at the NetEnt office in Stockholm and you that are on the web.

The agenda for today is the following. I will start with the Q1 highlights followed by a financial update and a product update. And then I will give you a future outlook as well. And then we will, as always, have the Q&A session.

So now let's look into the Q1 highlights. In Q1, NetEnt signed 15 new customers, which is new record. We have never signed so many customers before. We launched six new customers as well and we also got live with Codere in Mexico, a new market for us. The first operator live there. So we are really happy with that.

We also had exciting product news in this quarter. At the big gaming exhibition in London in February, we showed our first VR game, Gonzo's Quest. This will be released within 12 months. And we showcased it and showed the world that we are actually in the forefront when it comes to VR.

Also, we launched our Live Casino Common Draw Black Jack for mobile. We are the only supplier on earth that has this Common Draw Black Jack and also for mobile. This is unlimited players at the table, which is unique. We also launched our Live Reward, the bonus program for live casino. Something that is also very exciting in this area.

And we also announced our branded games for 2017: Planet of the Apes and Emojis, two very strong brands. Planet of the Apes, an iconic brand for film, and Emojis. Most of you have already maybe sent a text message today this morning to friends of yours with a smiley or a red heart to your loved ones.

And this game will be something particular. It will not be just a normal slot; it will be something with a social twist. So when we launch this in August, you will see something completely different. So it will be exciting times ahead of us.

So now let's look into the financials. NetEnt reached, as we predicted, SEK398 million in turnover and a EBIT margin of 34.2% according to what we predicted. The revenues were up 15.2% in Swedish krone and 13% in euros.

The EBIT was up year on year 6.3%. So now -- and when we look into rolling 12 months, we can see that NetEnt now has exceeded SEK1.5 billion in turnover. So rolling 12 months, revenues are up 23.6% year on year and EBIT up 21.5% year on year, and the EBIT margin is 36.1%.

And now let's look into our transactions. The transaction levels are record high again: 9.8 billion transactions during the quarter. And as you can see, it's up 10.5% from last year.

Costs and investments. The total costs raised up 7.1% quarter on quarter. Personnel costs were up 5.7%, other costs 10.9%, and investments down 5.3%. The other costs up 10.9% is due to -- that we moved from a new office -- from our old office to the new office in Stockholm. And the investments down -- we took some investments in Q4 already for that move.

And now let's look into the mobile penetration. The mobile penetration is now 47%, the highest we have ever had, and you can also see that we are in the forefront in the industry with this number.

And let's look at the game breakdown. It's the same as last quarter: slots, 89%, roulette 6%, blackjack 3%, video poker, 1%, and other games, 1%. And now let's look at our free cash flow. The free cash flow was SEK387 million and our net cash position at the end of the quarter was SEK573 million.

During the quarter, we also launched four new games. Very strong titles: Wild Wild West, Divine Fortune, Jungle Spirit, and last, but not least, this is the Common Draw Black Jack for mobile, which has started very well. And, as I said, this is a unique game for live casino.

And now, let's look into the future. NetEnt has 39 new customers yet to launch. We have never had so many customers in our pipeline to launch, which safeguards future growth.

We increased the pace of new releases for new games in 2017. We have two branded games in the second half of this year, which will push the revenues up. You saw that last year when we launched Guns N' Roses. We had a big push in Q1.

And that is also why the growth numbers in percent is not as high this year. But we will see a significant growth push the second half of this year. And our growth drivers are the UK market, the biggest market in Europe, that we are growing significantly still.

We also have the mobile space where we are dominating, and North America, which is really exciting, where we hope to see our games live in British Columbia at the end of the year and also see Pennsylvania opening up as well.

Long term, we have Asia, we have live casino, retail, and Latin America. So NetEnt is well positioned for the future, and we are looking very, very much forward to the second half of this year.

And with that, I would like to give the floor over for Q&A session. Mathias?

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Questions and Answers

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Unidentified Participant [1]

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Thank you very much for that, Per. So well, let's start with a few questions on my own. Then we will hand over the mic to the audience and then also take some questions from the web and telephone, perhaps.

So, as we have now kicked off 2017, what do you look most forward to for NetEnt this year?

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Per Eriksson, NetEnt AB - President and CEO [2]

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I think new markets is very exciting. We see British Columbia, where we expect to have a license within a few months now. Pennsylvania, which will most likely open up as well. Those markets are very interesting for us for future growth.

But we also see UK as our main market, where we still have small market share and are growing rapidly. Let's hope that the pound is going to be more stable now because we see that we had some negative impacts due to the FX effect. But we are looking forward to that. But also, the branded games that we are launching. They are really hot brands, especially the Emojis.

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Unidentified Participant [3]

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So, you mentioned new markets. Could you perhaps elaborate a bit on which markets are new in 2017 compared to 2016?

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Per Eriksson, NetEnt AB - President and CEO [4]

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Yes, there will be new markets opening up. It is hard to predict which one will open up first. But what we saw at the end of 2016, we saw Eastern Europe is moving and there will be Eastern European countries opening up as well.

And as you know, NetEnt is the only supplier that more or less have all regulated markets. So we are the ones with the most regulated markets in our portfolio. And for us, regulation is key, because then you know exactly what is expected from us.

And that safeguards also the future. Sweden, for example, we just saw that the gaming commission in Sweden came out with a proposition how it will look. So in 2019, it will start. So that is one thing that is important for us: regulated market.

So it's hard to predict exactly which markets will open up, but North America is absolutely the key market for long-term growth for us. And it looks very promising now for Pennsylvania, too.

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Unidentified Participant [5]

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Great. And I'm also a bit curious about your live casino venture. How is that going? Could you give us perhaps a more color on that?

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Per Eriksson, NetEnt AB - President and CEO [6]

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Yes. It has started to kick off really well. It is still small numbers. We've done this for quite some time now, but now we see the traction coming, which is very exciting.

We have signed up new customers for this. For example, we are now live with 888 in UK, one of the major operators there. And we see more operators that want to have exclusive tables with us. And that is also a sign that we will get more traction there. We just have the tables for all operators at the same time. And now we will have more exclusive tables, which is something that is very important for us.

So we will see traction. It is still, as you could see in the breakdown, as we are very dominating in slots. But we will see more and more that roulette and blackjack will take a stronger part of our revenue.

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Unidentified Participant [7]

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Great, thank you. So do I have any questions in the room?

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Rasmus Engberg, Handelsbanken Capital Markets - Analyst [8]

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Rasmus with Handelsbanken. Per, you don't give any comment on the second quarter, as you did in conjunction with the loss report. Are you more at ease with expectations now or is there something else?

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Per Eriksson, NetEnt AB - President and CEO [9]

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We are more at ease. But it's important to say when we look at the future, we have said -- and we are very clear about that -- our margins will be stable, and we will see scaling in the margins. That's something that we said in Q4 and that we also see for 2017. And also, we see a nice steady growth coming as well.

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Rasmus Engberg, Handelsbanken Capital Markets - Analyst [10]

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Can you repeat about the margins, just --?

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Per Eriksson, NetEnt AB - President and CEO [11]

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That we expect the margins to be higher in 2017 than in 2016. That we see that our business is scaling.

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Rasmus Engberg, Handelsbanken Capital Markets - Analyst [12]

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Thank you. You talk a lot about your focus on regulated markets. Can you give us an update on what your revenue share is from that?

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Per Eriksson, NetEnt AB - President and CEO [13]

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No, I cannot. We haven't given out those numbers and we will not do that either. What I can say is that even if we are the only supplier that has so many regulated markets in our portfolio, we still have more from dotcom than regulated markets. But when we see the Swedish and the Dutch markets, when they regulate, we will see a significant upturn in the regulated market. So that's why we don't want to go out and give that.

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Rasmus Engberg, Handelsbanken Capital Markets - Analyst [14]

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Okay. And the final question, you have had a very high tangible asset CapEx in the last two quarters as you move to the new office, I presume. Is that mostly done now and that we sort of have a more normal level going forward, or --?

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Per Eriksson, NetEnt AB - President and CEO [15]

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Yes, we will have more of a normal level. Just want to point out that we are moving into new offices in Gibraltar and Malta as well during this year. So everything happens at the same time. So it's a little bit, the timing -- we have outgrown all our offices, which is a good sign, but also it will hit us a bit on the cost side. But the biggest chunk is taken from that.

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Rasmus Engberg, Handelsbanken Capital Markets - Analyst [16]

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Thank you.

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Unidentified Participant [17]

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Great. Do I have another question in the room?

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Unidentified Participant [18]

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Question coming from the web. Martin Arnell, analyst at DNB, is asking the 34.2% EBIT margin in the first quarter, was that more or less in line with your expectations?

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Per Eriksson, NetEnt AB - President and CEO [19]

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Yes, it was.

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Unidentified Participant [20]

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Great. Do I have any other questions? Then I guess we can wrap this up. Thank you very much, Per. Thank you very much.

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Per Eriksson, NetEnt AB - President and CEO [21]

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Thank you. Thanks.