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Edited Transcript of XLM.L earnings conference call or presentation 25-Sep-19 10:59am GMT

Half Year 2019 XLMedia PLC Earnings Presentation

Jersey Oct 4, 2019 (Thomson StreetEvents) -- Edited Transcript of XLMedia PLC earnings conference call or presentation Wednesday, September 25, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ory Weihs

XLMedia PLC - Co-Founder & Non-executive Director

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Presentation

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Ory Weihs, XLMedia PLC - Co-Founder & Non-executive Director [1]

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Hello, everyone, and welcome to the H1 2019 XLMedia Webcast.

I'm Ory Weihs, Founder and CEO of XLMedia.

What we're going to do today is review the first 6 months of 2019, look at current trading and look at what the future holds in store for us.

I'll start on Slide 2 with a description of our business.

XLMedia is a leading performance marketing and online publishing company. We attract paying users from different online and mobile channels and direct them to online businesses in exchange for performance-based models. Our main source of revenue is our network of publishing assets, which are effectively price comparison websites targeted at helping users make educated decisions about what products to buy or what services to buy, and we are very focused on the gambling and personal finance sectors.

XLMedia is an extremely cash-generative business with high margins, supporting a progressive dividend policy. The high-level figures for 2019 first 6 months were revenues of USD 42.5 million, $18.6 million of adjusted EBITDA. And we've just declared an interim dividend of $0.03.

Moving on to Slide 4, key highlights for the period.

Our focus remains on higher-margin publishing activities, as we highlighted in February. The first 6 months of the year were affected by regulatory headwinds in some of our core markets such as Sweden, Germany and the U.K.; as well as some smaller markets like Switzerland. On the flip side, the U.S. gambling market continues to develop nicely. We have just been registered via a subsidiary, XLMedia US, to the Pennsylvania Gaming Control Board. This will allow us in the near future to send users to locally licensed casinos and sportsbooks in exchange for performance-based models. We already hold a similar license in New Jersey.

We also saw record performance from our personal finance division, which now represents 14% of group revenue.

On the 29th of July 2019, we announced that Stuart Simms will be joining us on the 2nd of October as our new Chief Executive Officer. I will remain with the company as a nonexecutive director and as a very supportive shareholder.

Moving on to Slide 5, current trading.

Despite the strong rankings we saw in some of our key assets, the regulatory headwinds I highlighted in the slide before continued to create some trading uncertainty. The main effects of this have been so far in Q3 of the year, in July, August and the beginning of September. As you saw, trading during H1 of the year was broadly in line with the original expectations. However, we are revisiting our forecasts based on the softer trading in Q3. And the combination of these regulatory headwinds and slowdown of the group's acquisition activity means that we are changing the guidance. By acquisition activity, I mean M&A and transactions of us acquiring assets and acquiring companies, which we didn't acquire any during this year. The board now expects the group's to deliver revenue of circa $80 million and an adjusted EBITDA of around $34 million.

Moving on to Slide 6, regulatory summary. As you can see, there's quite a lot on this slide, so I'm going to try to go country by country.

First country, United Kingdom. As we've seen in the U.K., there has been quite a few regulatory developments mainly in terms of the U.K. Gambling Commission being quite strict with operators as to source of funds, AML and advertising restrictions. We've also seen an increase in tax from April 2019 for nonsports products, as in online casino, bingo and poker as well as lotteries, which obviously had an effect on us. Although most of our activity in the region is in sports betting, we do own WhichBingo and a few other assets, so we -- in some capacity, we were affected by this. Our high rankings in the region, of course, are very encouraging, but the increased scrutiny obviously had an effect on average revenue per user and in turn had an effect on our commission.

In Germany, we have highlighted this before a few times. Germany is a country that's going through regulatory uncertainty with online sports betting moving towards solid long-term regulation, with online casino, however, being a bit more complicated at this point. There's still uncertainty whether online casino will be regulated and when it will be regulated. As a result, we've seen quite a few of our clients leave the market during the period. This had an effect both on revenue streams as well as our ability to acquire users to clients even though we've seen stabilization in ranking. Again, most of the effect was felt during Q3.

Sweden, which is probably the most talked-about regulatory environment currently. Sweden introduced a new regulatory framework in January of this year that introduced an 18% tax. We, of course, forecasted this, and Sweden historically has been one of our larger markets and still remains a large market for us. However, the effect of the new regulatory environment extended beyond just the tax rate. We've seen quite a few operators struggling to get licensed, struggling to maintain their licenses and definitely struggling to extrapolate a higher value from users with anything from limitations on the amount of bonuses that can be given, limitation on advertising, AML restriction, source of funds and so on. Generally speaking, we're seeing more player values, but this is -- was offset by higher rankings during the period. During the summer season, again July and August, we've seen a seasonal slowdown in the amount of new depositing players [instead], and obviously that had an accumulated effect on revenues.

However, both for the U.K. and Sweden, we believe, in the mid-, long term, these are markets that will stabilize and represent a solid and "very easy to forecast" revenue stream for us, although definitely in the short run we're seeing some volatility. But again, in the long run, we feel these are safe environments to work in.

Switzerland has not been a big country for us, but we did have a solid revenue stream developed over years of sending users to revenue-sharing accounts. Switzerland has introduced a new regulatory environment in which effectively only locally licensed land-based operators can be active, meaning most of our clients have either left or limited the amount of users they're willing to accept. Unfortunately, during the end of Q2 and beginning of Q3, many of our clients have left the market, and with that disappeared revenue sharing. At this point, we don't think we will be able to repeat this revenue in the near future.

North America, we've talked about this quite a lot. Obviously, there is very positive regulatory developments, and we're seeing state-after-state rollout. We've seen, of course, New Jersey, Delaware and Nevada, which were the first batch. We've seen Pennsylvania, and we're looking at West Virginia and quite a few other states coming. XLMedia intends to be in the forefront of this and, as I mentioned, has just been licensed in Pennsylvania.

We are exploring options in Asia. India is an interesting market, as well as a few other markets in Asia. This is still very much nascent and we don't really have real activities there, and we will update in case we would like to change that.

Moving on to Slide 8, the financial results.

And as I mentioned before, revenue is $42.5 million for the period, gross profits $28.8 million, adjusted EBITDA $18.6 million, net profit for the period $12.15 million, cash and short-term investments of $43.1 million. Small comment here: We actually do have $3 million more that used to be in Webpals Mobile that was divested, and so effectively there's a bit more in the bank. On top of that, close of the period, we obviously had a tender offer, which decreased by $20 million our cash balance.

Customers, quite a few customers, more than 300; 160+ Tier 1 websites; currently about 370 employees post the divestment of Webpals Mobile. And we are active in a variety of countries.

Moving on to Slide 9, revenue diversification.

Obviously, quite a lot has happened here over the years. In terms of countries, 44% is in Scandinavia, Sweden, of course, being a relatively important part of that; Denmark a bit smaller. These are the 2 regulated markets in Scandinavia. North America, which is 22%, that is predominantly a personal finance activity, but there's some gambling activity in Canada. Other European countries, meaning mainly German-speaking countries as well as a few others, accounted 14%. The U.K. currently is 14% as well, and other territories 7%.

In terms of revenue diversification in the products scene, we've seen gambling rise up to 86%, personal finance now 14%, which is a great improvement. We have to remember that all the numbers you see exclude the discontinued activities which were later divested, Webpals Mobile. Therefore, we removed a lot of activity in the media sector that was not particularly profitable. These were apps and games and so on, but again we're seeing an increase in higher-quality earnings both from personal finance as well as regulated gambling regions.

In terms of the business model: 71% revenue sharing, which of course is encouraging; and 29% CPA. CPA also includes some fixed deals, which we count them as CPA. 71% rev share is encouraging because we've always stated that, that is probably the preferred model for us going forward. Some industries like personal finance, it is impossible [for us really] to work on rev share, so CPA is absolutely fine.

Moving on to Slide 10, the income statement. Nothing surprising here: $42.5 million, as I mentioned, were the revenues for the period, $18.4 million adjusted EBITDA and net income of $12.1 million for the period. As you can see, income and loss from discontinued activity, the write-off during 2018, that was that $11.2 million you see there, very minor amount during 2019 and so forth.

Moving on to Slide 11, the cash flow statement. We see the net income, as I mentioned before, of $12.1 million for the period. The changes in working capital were actually nothing substantial. These were mainly collection issues of collection that was moved between 2018 and '19 as well as outgoing payments, nothing that will repeat itself or have a significant impact. We've seen the acquisition of domain, websites and technology of $4.3 million. That was capitalized development. Obviously, we haven't acquired any assets, as opposed to last year which we acquired quite a few assets. We saw the acquisition of treasury shares of $9.6 million. That was the buyback. Obviously, a relatively large chunk of $20 million was spent afterwards in the tender offer, so you'll see this grow for the full year. And beyond that, we'll see the repayment of lease liabilities. That's obviously -- for those of you familiar with IFRS 16: That is a new accounting system that will be -- our CFO will be happy to talk about that requires different locations of rent in the cash flow statement and profit and loss.

Moving on to Slide 12, the balance sheet, cash and short-term investments of $43 million. As I mentioned before, there was an extra $3 million released during the divestment of Webpals Mobile. That is in part the assets held for sale. Beyond that, we have property and equipment which seems abnormal, $10.8 million -- $10.9 million, sorry, but that of course is the IFRS 16 [code]. Beyond that, nothing out of the ordinary on the left side of the balance sheet. On the right side, we're seeing that our total debt level has decreased. We now have a total debt of $4 million, obviously quite insubstantial compared to the cash flow generation of the business. And treasury shares, again those are the ones bought in the buyback. Obviously, there'll be quite a few more afterwards when the tender offer is included.

Moving on to Slide 14, our publishing.

We had multiple headwinds, as I mentioned, in the European-regulated gambling markets. We believe that these headwinds are temporary, and in the longer run, of course, we would prefer to work in fully regulated environments with predictable earnings and with a tax rate and which we believe our technological abilities or know-how will come into play. Our scale will be important. We want to leverage our gambling expertise and focusing on broadening our group reach. As we mentioned in February, we're committed to spend $7 million during 2019 to '21 developing our U.S. gambling market. We continue to build and develop our personal finance sector as well. And we're adding different subproducts within personal finance such as loans, such as insurance and more banking products. And we truly believe that the U.S. represents a great online gambling opportunity for the next couple of years, and we will soon be able to show some of what we've been doing there.

Moving on to Slide 15, personal finance. We've talked about it quite a lot, but I'll just repeat. And personal finance currently represents 14% of revenue and has grown substantially over the last couple of years. And we believe, after gambling, of course, which is the largest sector, personal finance is the one definitely that shows the most promise and showing the best growth trajectory. We're committed to expanding our U.S. operation, and we will have more people on the ground. We're pursuing further acquisitions in the sector, and I'm very optimistic about what the future holds in store here.

Moving on to Slide 16. I'm going to reiterate some of the messages regarding gambling opportunity in the U.S.

XLMedia is actively investing in developing assets, creating a comprehensive portfolio both in sports and casino targeting the U.S. we will soon be able to show. The group is still looking to make strategic acquisitions. It might be acquisitions of sports media sites. Some might be acquisitions of competitors. There are quite a few options, but we're not focused exclusively on acquisitions. We're definitely taking a buy-and-build approach. XLMedia, as I mentioned, is committed to spending $7 million over 3 years targeting this market.

Moving on to Slide 17, some key growth initiatives summarized.

We will pursue the North American opportunity both on the gambling side of things as well as personal finance. We will continue to develop the group's core technologies and retain our competitive advantage. We have a large team of developers. We have a long history of developing great systems that support both optimization and development and reach of these assets. We would like to expand our publishing portfolio and use our media division as a supportive tool. As we mentioned in February, media is -- from our perspective, is more of a supportive tool to support the sectors we're active in: publishing, at this point; gambling; and personal finance.

We're still looking to make acquisitions even though we haven't acquired anything during the first 9 months now of the year. We have quite a full acquisition pipeline, and we intend to continue acquiring assets in the future.

Moving on to Slide 18, the summary and the outlook.

As we mentioned, at the beginning of the year, we proactively exited from lower-margin activities in the games and apps sector. We have later divested Webpals Mobile. We've decided to focus our efforts on our core competence, which is publishing and with having media support that. The core products we want to focus on, obviously, are gambling and personal finance. We did have a short-term financial impact, but the Board is confident that the steps taken to deliver higher profit margins and more visibility into earnings by focusing on regulated markets, by understanding them better and by developing a wide network of assets will yield strong results in the future. We would like to continue acquiring assets as well as developing them. We haven't acquired anything during the first 9 months of the year but have aspirations to continue acquiring businesses in the future.

We're highly cash generative. We have no real debt on the balance sheet, small -- a very small amount of debt. And we're looking to expand.

I have a very strong conviction that the new management, led by Stuart Simms bringing a wealth of experience in growth and scaling up of businesses, accompanied by Sheila Kagan which will run our operational subsidiary Webpals in Israel, will see a great, new future for XLMedia. We've had a great run so far, and now it's time to scale up, and with this team in place, I believe we're positioned well to do that.

Thank you.