Betsson AB (publ) (OTCPK:BTSBF) Q2 2024 Earnings Conference Call July 19, 2024 4:00 AM ET
Company Participants
Pontus Lindwall - Chief Executive Officer
Martin Öhman - Chief Financial Officer
Conference Call Participants
Oscar Rönnkvist - ABG Sundal Collier
Georg Attling - Pareto Securities
Martin Arnell - DNB Markets
Operator
Welcome to Betsson Q2 Report 2024. For the first part of the conference call, the participants will be in listen-only mode. [Operator Instructions]
Now I will hand the conference over to CEO, Pontus Lindwall; and CFO, Martin Öhman. Please go ahead.
Pontus Lindwall
Thank you very much. Hi, everyone, and welcome to Betsson's earnings presentation for the second quarter of 2024. My name is Pontus Lindwall, and I'm the CEO of Betsson. With me today is also our CFO, Martin Öhman.
This slide shows some of the key figures for the second quarter. The high customer activity continued throughout the entire quarter, and as expected, the Euros and Copa America contributed positively in June. It was great to see the active customers increased by 25% and that deposits increased by 15% year-over-year. We saw continued good revenue growth and improved profitability with new records in both revenue and operating income in the quarter. The growth in the quarter was primarily driven by the B2C operations.
Revenue increased by 15% year-over-year to €271 million and operating income increased by 18% to €64 million. The operating margin strengthened to 23.6%, and worth mentioning is that this was our 10th consecutive quarter with increasing operating income. I'm particularly pleased to report a stronger operating margin in the quarter and the highest ever operating income, given the increased share of revenue subject to local gaming taxes. Revenue from locally regulated markets amounted to 55%, up from 36% last year, and includes Peru for the first time, where local gaming tax was accrued during the entire second quarter.
For several years, Betsson has been positioning itself as the leading brand for sports betting in Peru. In June, the group obtained its first local licenses for the newly regulated market in the country, for the Betsson and Betsafe brands, and in July, licenses for the Inkabet brand has also been obtained.
Moving on, I'm pleased to say that Betsson's commitment to sports partnerships continues. In July, an agreement was announced with the Italian Serie A Champions and last year's Champions League finalists Inter, which means that for the next four years, the Bettson.sport brands will be displayed on the front of the team's jerseys. Inter is one of the world's most successful football clubs ever, as well as a global brand with hundreds of millions of fans. The club has special ties with Latin America, a key region for us with a long list of historical club icons, as well as the current star striker and team captain Lautaro Martinez, who scored the winning goal for Argentina in the Copa America final. We now look forward to following the club's pursuit of new titles together with the team and their fans.
Since June last year, Betsson is the official sponsor of Boca Juniors in Argentina. In April, the club celebrated its anniversary by introducing a new third jersey inspired by the flag of Sweden, which can be seen on the picture on the right-hand side of this slide.
The main focus during the quarter was the major football tournaments, Euro and Copa America, and substantial resources were invested in various market activities such as dedicated ad campaigns and PR initiatives. Looking at the strong indicators, such as new customers, deposits, gaming turnover, as well as actual financials, like reported revenue and profit, as I mentioned on the first slide, it's very clear that these activities paid off.
This slide shows the growth in sportsbook revenue on a gross basis, including all gaming solutions isolated for the major football tournaments this summer. Compared to the Euros and Copa America back in 2021, gross sportsbook revenue was up 92%, and compared to the World Cup in 2022, the increase was 19%. This growth demonstrates how Betsson has grown as a company in the past years, entering new markets and attracting new customers, and consequently handling larger betting volumes than ever before.
In the second quarter, Betsson hosted a sustainability track at the well-known iGaming event NEXT: Valletta. During the day, topics such as responsible gaming, investor relations, employee experience, climate, and social responsibility were discussed. On this picture, you can also see Martin on the left-hand side of the top picture.
At the end of June, Betsson was awarded an AAA rating by Morgan Stanley Capital International, MSCI, ESG ratings an upgrade from the previous AA level. The AAA rating is the highest possible and confirms our dedicated efforts in environmental, social, and governance ESG matters, which we see as a prerequisite for running a profitable business long term.
Like the rest of the organization, the product and tech team put a lot of effort into the preparations for the major football tournaments, Euro and Copa America, in the second quarter. And I'm pleased to say that the platform was up and running and able to handle even the most critical moments during the tournaments with high volumes and betting taking place.
Geographical expansion also continued to be a focus area, especially preparations for licensing on the newly regulated market in Peru. As always, strengthening of the product offering continued to be a top priority. For the sportsbook product, a new Bet Builder function was launched on all brands for pre-match and live betting. New native apps were developed and launched during the quarter, for example, in Italy. Also new payment and authentication solutions were launched in a few markets.
And now, I will hand over to Martin for a closer look at the financials.
Martin Öhman
Great. Thanks, Pontus.
The combination of a company showing revenue growth over time and at the same time constantly increasing the profit margin is a rare combination. When reviewing the Betsson performance in a longer perspective, we can conclude that the temporary step down in revenue in the first quarter in 2024 is now back to growth with a stable growth trend over time.
EBIT is now the highest EBIT ever, and the second quarter is the 10th consecutive quarter with EBIT growth. On top of that, the EBIT margin in this quarter is the highest since 2018. This, although, the percentage of locally regulated revenue has increased significantly in the quarter, and following that, materially higher cost for gaming taxes.
The scalable business model that is now the foundation of the Betsson operation is based on a dedicated strategic approach, focusing on sustainable and long-term profitable growth through geographic diversification and supported by our in-house technology.
The second quarter was yet another record quarter with growth and all-time highs in total revenue, sportsbook revenue, as well as casino revenue. The Q2 result is supported by a year-over-year growth of 15% in deposits, which is also the highest deposit levels ever for a single quarter, and growth of 25% in active customers.
Reported revenue for the second quarter amounted to €271 million, an increase of 15% year-on-year and 38% organic growth. Growth is mainly coming from the B2C business in the quarter, which contributed to the growth with €201 million in revenue, while some €70 million came from the B2B operations. Revenue from locally regulated market increased by 75% compared to last year and now constitutes 55% total revenue in the second quarter.
The gross turnover in sportsbook across all Betsson gaming solutions was almost €1.5 billion and represents an increase of 17% compared to the second quarter last year. Sportbook margin was 8.6%, which is higher than 8.2% margin in the second quarter last year and also higher than the two-year rolling average margin of 7.5%.
The combination of high turnover and somewhat higher margin resulted in increased sportsbook revenue by some 13% compared to last year, and amounted to €78 million, which is the highest sportbook revenue ever. The graph on the top right corner displays that the sportsbook margin has somewhat fluctuated from quarter-to-quarter, but regardless of that, the sportbook revenue has increased steadily over time.
Casino turnover increased by 7% year-on-year, and casino revenue increased by 16%, which is the highest revenue for an individual quarter. Casino revenue represented 70% of the group's total revenue in the quarter and sportsbook jumped 29%.
Categorizing revenue by region, we see growth compared to previous year in all major regions, except for the Nordics. The decline in the Nordics in this quarter compared with last year is primarily driven by lower activity in the casino products. However, the Nordic region has showed quarter-on-quarter growth for the past three quarters. The Nordic region represented 17% of the group's total revenue in the second quarter.
Revenue from Western Europe increased by 62% year-on-year or by €17 million, where the addition of the betFIRST revenue as from beginning of July 2023 contributes to the growth. Revenue from Belgium increased compared with previous quarter, mainly driven by the updated casino offering launched on the back of the A-plus license in the end of the first quarter. The Italian market is also contributing to the growth in the Western Europe region, driven by both the sportsbook and the casino products. The Western Europe region represented 16% of total revenue in the quarter.
The CEECA region increased by 11% year-on-year, driven by strong underlying activity in both sportsbook and casino. Croatia, Estonia, Lithuania reported all-time high revenue in the second quarter, driven by the casino product. Greece and Latvia reported growth compared with the corresponding period last year, also driven by the casino product. Georgia reported decreased revenue compared to last year following a lower sportsbook margin and lower activity in the casino product. The CEECA region represented 42% of the group's total revenue.
Revenue in the Latin America region amounts to €63 million, which is a new all-time high, representing an increase of 22% compared to the same period last year. The increase is mainly driven by the casino product in Argentina and Colombia, this although a strong currency headwind in Argentina. The Peruvian market is now a locally regulated market where Betsson has received licenses for the Betsson brand, the Betsafe brand and Inkabet, and pays local betting duties as from April. The Latin America region represented 23% of the group's total revenue in the second quarter compared to 18% in the first quarter this year.
Changes in EBIT year-on-year is impacted by increased revenue by some €35 million and following that also increased cost of services provided. The increase in cost of sales and decreasing gross profit margin is mainly explained by higher gaming taxes following increased revenue from locally regulated markets. However, gross profit increased by €14 million compared to the same period last year and amounts to €177 million, which corresponds to a gross profit margin of 65.1%.
Marketing spend is in line with past quarters and also in line with the same quarter last year. Marketing cost in percent of B2C revenue amounted to some 16%, and 22%, when including affiliate marketing as well. Personnel expenses increased by some €5 million in the second quarter compared to the same period last year due to increased number of employees, yearly salary revisions, geographic expansion, and increased investments in product and technology development. Depreciation and amortization cost increased by €0.5 million, driven by increased depreciation from the acquisition of BetFIRST that was consolidated as of July 2023. Other items consist mainly of sportsbook-related costs for consultants, software licenses costs, and effects from foreign currency fluctuations.
EBIT amounts to €64.1 million, which is all-time high and an increase of 18%. EBIT margin was 23.6%, compared to 23% last year and 22% in previous quarter.
Operating cash flow amounts to €76 million, which is an increase of 52% compared to previous quarter. Operating cash flow is driven by EBIT of €64 million, and positively impacted by changes in working capital and negatively impacted by increased paid taxes. Compared to previous year, the positive impact on working capital is lower due to temporary buildup of payment provider balances in the end of the second quarter following the increased volumes from Euros and the Copa America.
Cash flow from investing activities sums up to €14 million, where the majority relates to investments in owned technology and product development.
Cash flow from financing activities impacted the cash flow by almost €36 million, where the first of the two dividend payouts had an impact of almost €46 million, which was somewhat counteracted by a release of a guarantee related to the inter-sponsorship.
Betsson has, as of end of June, a net cash position of €93 million and an equity ratio of 61%.
And now back to you Pontus to present the trading update.
Pontus Lindwall
Thank you, Martin.
Now, let's have a look at how the third quarter has started. The average daily revenue in the third quarter of 2024 up until and including the 15th of July, has been 20.5% higher than the average daily revenue of the full third quarter of 2023. The football tournaments, Euros and Copa America, have contributed to the high activity during this period.
So now, let's summarize the Q2 report. Customer activity continued to be high throughout the entire quarter, supported by Euros and Copa America in June. This resulted in strong KPIs, such as growth in active customers and deposits. The main growth driver was the B2C operations. New all-time highs were recorded for group revenue and EBIT. This was the 10th quarter in a row with sequentially growing EBIT.
The business continued to generate solid cash flows and the balance sheet remains robust with the net cash position. And as shown on the previous slide, the start of the third quarter has been positive, with average daily revenue up 20% in the first 15 days of the quarter compared to the entire third quarter last year.
Thanks everyone for listening to the presentations. We can now move on to Q&A. We welcome your questions.
Question-and-Answer Session
Operator
[Operator Instructions] The next question comes from Oscar Rönnkvist from ABG Sundal Collier. Please go ahead.
Oscar Rönnkvist
Good morning all. Thanks for taking my questions. My first one, which should be on the regulatory environment. So, I think that we have seen sort of a step change in the regulatory environment or at least in the communication. So, we can see, for instance, Netherlands being quite forward-leaning, I suppose, suggesting a ban on high-risk gambling, not a big market for you. Now with the acquisition, maybe have some sort of exposure, but not too much, and also some increased taxes in Sweden and US states and so on. Just on the trend or the development, do you have any comments on what your thoughts are on the regulatory environment at the moment?
Pontus Lindwall
No, I think the regulatory environment will always change in different directions and it's -- I think we will see things maybe swinging back in the future as well, because in some regions or countries, we have seen that too much forward-leaning regulatory initiatives kind of takes away the whole idea with regulating. So, at some point of time, I think it will swing back, but of course, there will be changes in the regulatory environment also going forward.
Oscar Rönnkvist
All right, thank you. Then just my next question would be, I know this has been asked before, just on sort of any update within your sector peers can be and evolution, now also starting with the new capital distribution policies with buybacks for all of the excess cash? So, is it anything that have changed in your mind on the capital allocation policies, or is it still M&A that is still first in line on the agenda?
Pontus Lindwall
I think Martin will kind of drill down a little bit more on that, but I can encourage you to say that this is something that is being discussed in every single Board meeting. So, it's not something that we are not aware about. This is something that we have on our radar as a possibility. Maybe Martin, you want to comment more deeply on it?
Martin Öhman
No, I can just echo that. I mean, we are in a growth phase. We like M&A, and if you find good M&A opportunities, that's kind of the first priority. But of course, we have share buybacks and dividend as tools in the toolbox to use for looking at the distribution of our capital or the capital allocation.
Oscar Rönnkvist
Got it. Thanks. Just a follow up. Are you -- I mean, just on the -- you have a very strong balance sheet. Are you sort of in favor of taking up some leverage to do either M&A or buybacks, or are you planning to stay at a net cash position?
Martin Öhman
I mean, we have had a net cash position for quite some time now, but nothing is kind of written in stone. If the right opportunities arises and we need to take up more debt, that is also a possibility and a tool in our toolbox. I think we have previously communicated that we can have a certain leverage if needed.
Oscar Rönnkvist
Understood. Thank you very much.
Pontus Lindwall
Thank you.
Operator
The next question comes from Georg Attling from Pareto Securities. Please go ahead.
Georg Attling
Good morning, guys. I just had two questions. So, starting with the sponsor deal here with Inter, the figures that I've seen in media of how much that will cost you a year is obviously quite a lot of your marketing spend a year. So, I'm just trying to get a feel for, if you're trying to balance this with decreasing marketing in other parts of -- in other markets or other channels, or if this is a step up in marketing structurally?
Pontus Lindwall
It's a good question. And of course, sponsoring a team like Inter, which is one of the world's most famous teams, doesn't come for free, even though we are an attractive brand. But I think if you look, historically, we have been very stable in how much of our revenue line that we allocate towards marketing. And without giving too much detailed guidance, I think you should not expect too much deviations from our historical figures.
Georg Attling
Okay. That's helpful. And that would obviously mean that you decrease marketing in other channels and markets. Is there any particular markets or channels that you can point out that you feel like you could decrease the marketing spend there?
Pontus Lindwall
I can't comment on that really.
Georg Attling
Yeah. Fair enough. And then, on the trading update, obviously strong numbers, but we know we had these knockout stages of very strong sporting schedule. Do you have any feel for roughly the tailwind that has come from these championships in the trading updates?
Pontus Lindwall
As we write in the report, it's an active period of June from the championships. And I think everyone who follows this sector knows that now we go into a little bit calmer period for a short time, but then it builds up when the big leagues open up again and it's not far away. So it's quite a normal pattern. But, of course, the activity in the first part of June was strengthened by the fact that we had the tournaments.
Georg Attling
Yeah. Okay. That makes sense. And then just a final question, if I may on the B2B development here in the quarter. Growth, obviously, slowing quite a bit. Is there anything you can point to that's happening here or just facing tougher and tougher comps?
Pontus Lindwall
We have no comments on that really. It's going up and down over time, the B2B revenues, and there's nothing that stands out in this quarter.
Martin Öhman
We are really pleased with the growth as such. And I mean, part of our business model is being diversified. That means geographic diversification, that means diversification between B2B and B2C. So, we are equally happy if the growth comes from B2B or from B2C.
Georg Attling
Okay, good. That's all for me. Thank you very much.
Pontus Lindwall
Thank you very much.
Operator
The next question comes from Martin Arnell from DNB Markets. Please go ahead.
Martin Arnell
Hi, guys.
Pontus Lindwall
Good morning or good day.
Martin Arnell
Good day, yeah. So, my first question, your start to Q3, you had almost 50% growth and 20% reported. It's a big deviation here when it comes to FX. Is the performance broad, or is it like specific to one market? If you could comment on that?
Pontus Lindwall
The performance is broad in the first part of June. So, it's not one market that sticks out really.
Martin Arnell
Okay. And I want to ask you on LatAm as well, which was a bit above our forecast. Could you highlight what stands out there? What did well? Is it casino in Argentina behind the strong numbers or...?
Pontus Lindwall
We don't really go into the markets as such with detailed comments, but obviously, we have obtained licenses in three different regions in Argentina. And this is a country where we put a lot of effort. So that is, of course, one part that is driving the LatAm business.
Martin Arnell
And when you look ahead into the second half, it can be quite lumpy in LatAm depending on your activity and sports margins, et cetera. Are you confident that it will be double-digit growth region also in the second half?
Pontus Lindwall
This we can't really go into details on, because we can't comment on it. It's tough for us.
Martin Arnell
But you're a growth company in LatAm and you're hoping that will stay the same in the second half?
Pontus Lindwall
Yeah, I mean, LatAm is a huge region. I think we have conveyed to the market our ambitions for that very large opportunity, and that ambition remains. So, we will put a lot of efforts to grow there. But then again, everything goes in steps. We'll see how it plays out and when, but we definitely have the tools, we have the ambitions, and we have a lot of new opportunities and measures coming up to increase or -- increase the growth in LatAm.
Martin Arnell
And can you say anything on the preparations in Brazil?
Pontus Lindwall
Not really, no, I can't.
Martin Öhman
No. I think it's -- there's been so many turns back and forth, so I think it's better if you don't say anything until it's properly in place.
Martin Arnell
Okay, fair enough. My final question, I think you had a 25% active player growth in the quarter. And these events, usually the effect from it is in the coming quarters when you sort of capitalize on the intake. Should we expect a similar situation as before in the past or anything different this quarter?
Pontus Lindwall
We haven't made any major changes. So, in general, I can say that we should expect a similar pattern as before. And as you know, these kind of tournaments, what we have seen now kind of attract the general players more there. So that's why we get a good growth in active players. And now we will try, of course, to keep them active into the next quarter and see how we succeed with that.
Martin Arnell
Okay, excellent. Thank you, guys.
Pontus Lindwall
Thank you very much.
Operator
[Operator Instructions]
Unidentified Company Representative
We have received some questions from the web audience. First off, it's about the revenue increase, the difference between the reported 15% year-over-year increase and the organic revenue growth of 38%. If we can elaborate on the difference and how the organic revenue growth is calculated?
Martin Öhman
Yeah, I mean, I think we have stated in the past report that the FX implication is only coming from direct impact, meaning it's only from direct currencies. And in the back in our report, we present a more detailed table, where we kind of explain how much of revenue and EBITDA is coming from acquired growth and what is coming from currency fluctuations. And you can also see in the back of the report the kind of main currencies that is impacting. And there you see that the Argentinian Pesos is one of the currencies with the highest changes in the quarter.
Unidentified Company Representative
The next question is about the tax rate, in Q2, it was 22.2%, which is well above the 15% that's required by the Pillar 2 regulation. If we can explain why that is, and what also what to expect going forward in terms of tax rates?
Martin Öhman
I mean, you can never give a guidance on the exact rate going forward, but what we have seen here is, I think a fair estimate of the levels that we will see going forward as well. And the reason for the step-up is that, firstly, you have the Pillar 2 effect, which is a minimum tax of 15%. And on top of that, you also have -- or at least we have more revenue coming from countries where we have local companies, such as Belgium and other countries, where you pay higher -- much higher taxes, local taxes than the stipulated 15% in the Pillar 2. So, this level is a fair indication on where we will head going forward.
Unidentified Company Representative
The rest of the web questions are -- I think have been already asked by the analysts and in general covered throughout the presentation.
Pontus Lindwall
Okay. Then there are no more questions I guess. If that's the case, thank you very much for listening in today. It's been nice to present again a great report. We are really happy with what we have achieved for the second quarter and the company is obviously doing well and we are trending well. So, we are looking forward to the autumn and the rest of the year, and we will see what we can achieve there.
Thank you all for listening in, and see you next time. Bye-bye.