Edited Transcript of BETCO.ST earnings conference call or presentation 8-May-19 8:00am GMT

Please turn to Page 5. On to the financial highlights of Q1. Overall, it was a quarter with very strong performance, 97% revenue growth, of which 41% was organic. Operational earnings tripled with a reported 44% EBITDA margin and a strong cash flow with cash conversion of 112%. As we have highlighted in previous presentation, there is a delayed effect of new depositing customers as most of them are on revenue share contracts. This quarter we are seeing the effect of NDCs delivered last year, as expected, and they’re materializing in strong organic growth. Flemming will revert with more insights into the financial performance and to give a bit more insight into the moving parts of our business.

Looking at our expected future performance, I was very pleased to see the fourth quarter in a row where we see a company record of NDCs in Q1. We sent more than 116,000 NDCs to our partners. This is close to 150% increase compared to the number of NDCs in the same period a year before, a very strong performance and a result of the dedicated and focused effort following the slowdown from late 2017 on the back of temporary compliance measures from some of our partners.

From Q1, we consolidated our recent acquisition Ribacka Group in Sweden and with regards to new acquisitions, a large pipeline of potential targets is keeping us busy. I believe we can create a lot of value by continuing our M&A strategy, and I’m looking forward to integrate more successful companies into the Better Collective Group this year too.

Please turn to Page 6 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. Let’s look at the financials in more depth for the Q1.

Please turn to Page 7. In Q1, total revenue was EUR 14.9 million, which was 97% growth compared to the same period last year. The organic revenue growth was 41% compared to an almost flat 1% in the weak Q1 of 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.

As Jesper mentioned, a significant part of the growth we have seen in this quarter is the result of the strong NDC intake last year, as we mostly work on revenue share whether there is a delay from NDC to revenue. The split between revenue share and CPA was 80-20 when we look at the revenue generated by players, whereas 10% of the total revenue came from other revenues such as advertising, et cetera. You may note that we have had until now a revenue share of around 80% to 90%. This split has changed slightly mainly due to our latest acquisition in Sweden, which brought more CPA and hybrid contracts, and I can also note that while our U.S. business is growing but limited in size, the contracts there are also purely CPA for the time being. We saw record high NDCs with more than 116,000 in the quarter, again, most of which is transferred to revenue share contracts. Looking at other underlying key performance indicators, we also saw all-time high levels.

Please turn to Page 8. Looking at the earnings, Q1 EBITDA was EUR 6.5 million before special items, resulting in an EBITA margin of 44%. We have seen the expected leverage from the organic growth as well as the effect from acquisitions. Looking at the cost base, we saw added cost, of course, from the acquired companies as well as added cost to activities, will have a impact in the future growth and earnings.

Currently we see so many attractive areas to invest in. We

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resources to increase PPC activities. We have invested in market developments such as the U.S., South America and other markets, where we see the regulatory landscape is changing. We’re investing heavily in product development and other new business areas that we hope to present in the near future. All these investments in the future are being expensed as cost whereas we will see the revenue and income in the future. While investing in new activities, we maintained strong earnings and earning margins.

Please turn to Page 9. Moving on to the cash flow and balance sheet. Operating cash flow before special items was EUR 7.6 million resulting in a cash conversion of 112%. Investments related to acquisitions and other investments amounted to EUR 3.1 million in the quarter, most of which was settlement of net working capital adjustments relating to the Ribacka acquisition. Cash and unused credit facilities stood at EUR 54.4 million end of Q1, and the equity ratio was 58%. The strengthened balance sheet combined with the higher cash flow from operations gives us significant room to explore further M&A opportunities.

Please turn to Page 10 and the word’s 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’re focused on being present in markets that have 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 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. We prefer to have local officers and employees with insights into local sports and betting behavior, also allowing for close contact with our partners.

Please turn to Page 11. In general, we can see that many European countries are adapting regulation that allows online betting as it limits black economies, provide national tax revenue and not least, provides the best possible environment for sound betting behavior.

In the Q1 report, we’ve provided a short review of what we see as the most relevant market developments. In summary, Sweden became a regulated market as from January 1, 2019, which we see as very positive. We saw strong performance in Sweden in Q1, and although, there’ve been reports on decreased activity of online gambling, which has generally affected the sector, we believe the market will continue to find a new balance. In the long run, we expect Sweden to be an important and valuable market for online sports betting. U.K. will implement an increase of the taxation on online casino as from October 2019 from 15% to 21%, but not for sports betting. In Germany, there’s a continued unclear situation for online casinos with different frameworks between states. In March this year, the State Prime Ministers agreed on an interim interstate treaty, which has been notified to the European Commission and is pending signature and ratification by each state. There are still a number of controversial elements to this interim treaty, including uncertainty over the future of Schleswig-Holsteins’ casino licensing regime. As the situation seems unsustainable, we expect the German casino market to re-regulate at some point and become a key market. Better Collective’s current exposures to online casino in Germany is limited, whilst holding a strong position within sports betting. We view sports betting as a regulated market, as sports betting is currently operating under a temporary framework that is scheduled until mid-2021, whilst negotiations with EU regarding new regulation is ongoing. Last year, Slovakia implemented a new law that opens for online casino and sports betting in 2019 and 2020, respectively. In Italy, the new government has introduced a ban on online gambling advertising. It is still uncertain what this will entail in practice. In Q1, the Netherlands passed a bill regulating online gambling, while definitions are still pending. The market is expected to open in late 2020 or mid-2021 at the latest. Our view is that the most European countries are moving towards regulated markets with different speed and with some introducing adjustments to balance the different aspects. Based on these macro trends, we expect to see continued strong growth coming from the European markets.

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. There are still only a few operators live within the sports betting, but we expect more to come online during the next 3 to 6 months. Recent developments in the individual states include that 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. Rhode Island is currently not live online and is not expected to go live until late in the year. Pennsylvania has launched sports betting offline and is looking to launch online on July 15, 2019. This could however happen as soon as May 2019, so any day now. Three states have passed legislation in the respective senates and are now pending Governor approval. In Iowa, the Governor is to decide on the bill no later than May 27, 2019. In Tennessee, the Governor is expected to approve the bill, which includes online sports betting no later than May 8, 2019. So hopefully some good news there later in the day. In Indiana, legislation also includes online wagering and is currently pending governor approval. 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 also with different views on individual sports. Some products can work for the entire U.S. market, whereas some need to be tailored to a single state. We’ve launched a number of products that are already driving revenue, and we’re prepared for more states as we open for online sports betting. We’ll launch more U.S. focused products, and we’re shaping the content on U.S. sports for our global brand such as bettingexpert.com. Throughout these efforts, our technology platform allows us big flexibility. We’re teaming up with relevant online operators and seeking necessary licenses. So far, we are all ready on CPA, and the revenue share license we applied for New Jersey is still in process. We have established a U.S. subsidiary, Better Collective, Inc., and we have started building an organization in the U.S. In addition, to the organic strategy, we’re in discussions with potential partners that may provide for U.S.-focused acquisitions and/or collaborations.

Please turn to Page 13. Moving to South America, upcoming regulation in Brazil and in the province of Buenos Aires in Argentina make for new growth opportunities for Better Collective. New regulatory frameworks will be implemented in the coming years. Already now, ahead of the regulation, Brazil is a top five revenue country for Better Collective, not least due to our strong-performing website, apuestasdeportivas.com that we acquired through a BOLI acquisition last year. We have high expectations from the South American markets where sport and related betting are strongly founded. This sums up the market review.

Please turn to Page 14 for a strategic review. During the last year, Better Collective has changed from a successful but yet quite small private Danish-based company with around 100 employees to a public company with more than 300 employees spread over 7 European offices. Revenue and earnings have increased significantly, and we have a totally different financial foundation for future growth. We strongly believe that iGaming and the affiliate marketing within this Dutch com will continue to grow both in mature markets but also, as we’ve seen in the U.S., through changes in regulation. So far this has mostly been a European venture, but I’m sure this will change in the future. In my expectation, we’re going to see fewer affiliate brands that will grow alongside the operators.

Please turn to Page 15. Our strategy for the coming years will stay focused on 3 main themes, organic growth and development by simply having the best product offering for our users. This has always been our key focus. By having that, we will attract high volumes of valuable traffic and thereby, be the preferred partner for operators. We’ve seen success in our first years of taking part in the industry consolidation, and we see so much value in continuing this path. We strongly believe that size matters, and therefore M&A will continue to be a cornerstone in our strategy. Last but not least, the regulatory changes in the U.S. have created a major growth opportunity. We’re already present and have launched multiple work streams to expand with the market.

Please turn to Page 16. Taking part in the consolidation of the affiliate industry is a vital part of our strategy. While we completed no acquisitions in the first quarter, I will briefly sum up our M&A strategy. Since we started acquiring companies in 2017, we have completed 13 acquisitions of various size and strategic purpose. Most of them share the characteristics that they hold strong market positions in regulated markets, and they mainly operate within sports betting. In 2018, we acquired companies for a value up to EUR 85 million expanding our presence in the German-speaking markets, Denmark, Finland, Greece and Sweden. This local presence is important to us, as it provides valuable local insight and understanding. The exchange of knowledge and best practices offer 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 this strategy.

Please turn to Page 17. Expressed in numbers, we have set some financial targets that define how we want to grow and be profitable and how we want to finance our company. These targets remain unchanged from the IPO and will be our current financial framework. Supported by strong underlying organic growth in relevant KPIs such as NDCs, player deposits and sports betting turnover, it is expected that the organic revenue growth will be stronger in 2019, implying that 2018 and 2019 combined with be above the financial target.

Please turn to Page 18. To sum up, I want to leave you with an overview of Better Collective as we stand today. Better Collective was founded in 2002 by Christian Kirk Rasmussen and myself and has shown revenue growth and been profitable every year since we founded the company. Up until the beginning of 2017, our approach was organic development and growth. However, we changed our strategy and decided to take part in the ongoing industry consolidation as from 2017. Since then we have completed 13 acquisitions of various size. To date and including our most recent acquisition, we have surpassed 300 employees working in 7 offices throughout Europe and headquartered in Copenhagen, Denmark. Recently, we have also established presence in the U.S. in order to take part in the new market opportunities there. Revenue has been growing steadily with annualized pro forma number revenue of more than EUR 50 million in 2018. And annualized pro forma EBITDA of approximately EUR 25 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 strategy — sorry, 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’ll 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) Your first question, coming 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 the first one to get some idea of the revenue base here going forward and seasonality in the business. You did almost EUR 15 million now in Q1, EUR 14.9 million, and if we just to go back and look at the historical data that’s available, there was a slight decrease in revenues back in 2017 when there were — was no World Cup or European Cup in soccer, which I imagine has a big impact on the business. What can we expect for this year? Is it reasonable to assume that revenues will — if the seasonality is normal, that revenues will decrease a bit in Q2 versus Q1? Or — yes, please help us with that.

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

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Flemming here. Christian, thanks for your question. You can say, looking at the quarterly graph which we will also displayed where we look at the quarterly revenues, we do have some seasonality. I would say that our exposure to sports outcomes is of course very — you can say, a very important factor. Q1 and Q2 are normally not the strongest quarters. You’ll remember that last year, we had some effect from the World Cup. You can say again, these big events tends to be more of a strong performance on entities rather than the revenue other than we see typically higher advertising fees, et cetera during such events. I would say that the biggest effect we would see this year and throughout the year is likely stemming from the mere volume of NDCs that we sent last year. The underlying betting volume is much higher than we had last year. We can, of course, not be specific on quarters, as they are, as mentioned, also the outcomes of sports that we are exposed to, as we are on — mostly on revenue share contracts. But you can say, a slight dip from no World Cup, but a stronger underlying bank of players than last year, I will mention as the 2 factors you should include in your Q1 future expectations.

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

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Okay, so the fact that historically, revenues have come down in Q2 when there’s been no big sporting event in that quarter, that shouldn’t hold this year because you have this big bank of players, NDCs that you took in last year, that will sort of support sequential growth in Q2?

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

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Yes, we basically have 2 opposite factors this year to take into consideration. It’s difficult to point to the last thesis what that will end looking 1 quarter ahead, but there are at least these 2 counteracting factors.

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Jesper Søgaard, Better Collective A/S – Co-Founder & CEO [6]

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Yet you have to figure — you should probably think of Q2 as that the first 2 months, they are pretty normal because the World Cup started almost mid-June, so it’s mainly the last month where it really kicks in with that effect. And of course, we don’t have have a big championship this year.

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Christian Hellman, Nordea Markets, Research Division – Director of Small and Mid Cap [7]

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Yes. And then on staff costs and the costs in general, is this sort of the base where we should sort of view as a measure of our estimates going forward? Or there’s no unusual items in — for example, stats? That’s rough quite — but I guess that’s as a result of the; Ribacka acquisition, but just wondering if there’s any unusual items or something?

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Flemming Pedersen, Better Collective A/S – CFO & Executive VP [8]

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Yes, as I mentioned in the speech, you can see what we are balancing is, of course, that we have a very firm target of average more than 40% EBITDA growth — EBITDA margins, sorry. And that is what we are steering towards all — at all times. But at the same time, we had mentioned we see so many investment opportunities, I call it investments, even though we’ve changed it, but we have the U.S. market, we have South American markets, we have product development and also, we have as mentioned, invested in — more into the creative media PPCs campaigns, where we typically have an upfront cost and see the revenue later. So there are so many things that we would like to consider investing in while at the same time appearing very hard on our financial targets that we think about.

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Christian Hellman, Nordea Markets, Research Division – Director of Small and Mid Cap [9]

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I understand, but the costs such as the — in Q1, they were normal and sort of they are the base for whatever happens going forward?

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Flemming Pedersen, Better Collective A/S – CFO & Executive VP [10]

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Yes.

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Christian Hellman, Nordea Markets, Research Division – Director of Small and Mid Cap [11]

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Like no reason to think that they will come down in Q2 or Q3?

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Flemming Pedersen, Better Collective A/S – CFO & Executive VP [12]

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No.

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Christian Hellman, Nordea Markets, Research Division – Director of Small and Mid Cap [13]

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Great. And just a final question on the U.S. If you can you elaborate a bit more on sort of ongoing potential collaborations or joint ventures or acquisitions or what have you? I mean, I understand that you can’t disclose everything, but just sort of give us some sort of flavor or paint us a picture of what is going on with your business in the U.S.? And also if you perhaps can quantify it a bit, as you already have some business in the U.S., if that’s 1%, 2% of your revenues — or yes, a flavor?

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

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Yes, Jesper here. Well, at current, we’re not commenting on the numbers for the U.S. and unfortunately, I can’t give too much detail on what we are doing, but rest assured, we do a lot and to put it sort of in a broad perspective, the expertise we have with sports betting affiliation in Europe is second to none, I would say. And such expertise is — we have experience in demand in the U.S., and it’s based on such dialogues that we talk about collaborations. We’ve also mentioned that we look into a pipeline with a target, and we’re also working on that, so unfortunately, I can’t be very specific, but as I said, rest assured, we have a lot going right now.

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Christian Hellman, Nordea Markets, Research Division – Director of Small and Mid Cap [15]

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That’s a — I understand that. That’s a good enough answer for me. And then in Europe, what is going on in Europe at the moment? I mean there is, yes, it’s a — it’s a tougher market situation in some markets, Sweden, for example, U.K. another one, but what do you think about M&A in Europe?

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

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We are still seeing a nice inflow of new targets in our pipeline. And we feel that we are in a very good position with regards to M&A that the competition isn’t very strong right now. So we have, of course, a lot of dialogue going with various targets, but we’re also in a position where we feel that we can be picky and really make sure that we do the right ones. When we look at the past 13 we have done, we’re really pleased with how they have developed and performed. And of course we use that as a benchmark for the pipeline, that targets having similar traits as to the previous ones is interesting, but also if there are some expertise we feel that we could add to our business, that’s also interesting. So it’s a healthy pipeline. Still a lot of dialogue with various targets. And as I said, we feel that we’re really in a strong position as an acquirer without too much competition.

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Operator [17]

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(Operator Instructions) And your first (sic) [second] question is coming from Mathias Lundberg from SEB.

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Mathias Lundberg, SEB, Research Division – Research Analyst [18]

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Two questions from my side. The first one goes into the details. I noticed that the player revenues were up quite a lot sequentially. And I’m just curious to if this was driven by the Ribacka acquisition or the U.S. operation mainly?

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Flemming Pedersen, Better Collective A/S – CFO & Executive VP [19]

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A When you say the player revenues, you can say the underlying player revenues has of course increased significantly. You can see, we commented the this in report on the split, if that’s what you’re referring, Mathias, on the revenue share in the CPA and others. You can see we have seen a slight decrease in the rev share half mainly due to the Ribacka acquisition that has been operating on PPA and high (inaudible) contracts then it relates to historic figures, and then also as you mentioned, the U.S. business that even though is still as much as Ribacka is currently purely on CPA while we are awaiting the licenses in the U.S., the license to work on revenue share.

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Mathias Lundberg, SEB, Research Division – Research Analyst [20]

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Thank you, that gives some clarity. And I’m also curious to — you have 3 months of data now from the newly regulated Swedish market. Has the performance been in line with your expectations? And how do you view that market going forward?

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Jesper Søgaard, Better Collective A/S – Co-Founder & CEO [21]

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Jesper here. Yes, we’re very pleased with the performance of our Swedish business. And we do see what I think is really a general things in Swedish market that the revenue share component is affected, but that was expected because you have a tax coming in and affecting that. There’s also been some operators talking about the deposit limits affecting the players, but all in all, for us, we feel that Sweden has really developed as expected and as we hoped.

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Mathias Lundberg, SEB, Research Division – Research Analyst [22]

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Yes, I heard in many of the operator statement regarding the first quarter and going forward, that many of them are now diverting marketing resources away from classical TV and radio promotion back to data-driven affiliation. Is that something you have seen?

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Jesper Søgaard, Better Collective A/S – Co-Founder & CEO [23]

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Well, what we can say is that we do experience high demand for our services. So but it’s not like there’s is a big change, but an ongoing strong demand.

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Mathias Lundberg, SEB, Research Division – Research Analyst [24]

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Great and one last question. I guess you tracked the sports results over the different markets and looking at Q1, do you consider that being a good quarter or a normal quarter, a weak quarter in regards of the sports results?

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Jesper Søgaard, Better Collective A/S – Co-Founder & CEO [25]

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It’s probably in line with the expectations, so pretty normal. And what we also see to some degree now is that we have players from so many areas and in such big volumes, so I think we experienced larger swings some years ago because we’re more dependent on single markets whereas we gradually will even more out. But that being said, we can definitely like whenever big favors, they win with a lot of goals that will affect us negatively. And when you see a lot of surprises, well, that’s good for the sportsbook, so that mechanism is still in place.

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Operator [26]

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(Operator Instructions) Your next question is coming from Mikael Johansson from SEB.

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Unidentified Analyst, [27]

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(inaudible) from SEB. I have a follow-up on the competition in terms of M&A. You’re saying that they’re not — well, you are doing well here in EU, while you are probably still the preferred buyer. What about the U.S. Is that the same case over there? Or what do you see?

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Jesper Søgaard, Better Collective A/S – Co-Founder & CEO [28]

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I think we, Better Collective has established a pretty strong name in the American sports betting market, so people know us over there, and I think because of that, we see inbound for the pipeline and whether we would be then the preferred acquirer in the U.S. I can’t really give an answer to that, but we definitely feel we have good dialogues going.

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Unidentified Analyst, [29]

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Okay, thank you. And then a question on the Ribacka acquisition where you will pay some of the acquisition in shares. Is that to keep the management incentivized and well I believe that they will stay on board then following this announcement?

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Jesper Søgaard, Better Collective A/S – Co-Founder & CEO [30]

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I cannot — of course, not say what these guys decide. But you are absolutely right, that we’d like to get them the share component now, because we believe that will incentivize them for Better Collective.

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Operator [31]

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We don’t seem to have any further questions on the phone line. Please continue on the webcast.

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Flemming Pedersen, Better Collective A/S – CFO & Executive VP [32]

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Flemming Pedersen here. We have 1 written question from the audience. I will read out the question as written. How much of the increase in NDCs between Q4 ’18 and Q1 ’19 is coming from the Ribacka acquisition? And the question was placed by (inaudible).

We do not give a split of the indices, but I would stretch and comment that it is fairly limited in the totality. So we are not really giving the split of NDCs from different sources. But it’s in the low percentages of the total growth.

I hope that’s all.

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Jesper Søgaard, Better Collective A/S – Co-Founder & CEO [33]

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Okay, Flemming

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Flemming Pedersen, Better Collective A/S – CFO & Executive VP [34]

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With that reply to the written question, we do not have any more questions from the audience. So thank you for your participation and have a nice day.

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Operator [35]

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