Sportradar Group AG
NASDAQ:SRAD
Earnings Call Analysis
Q3-2023 Analysis
Sportradar Group AG
Sportradar, a leading sports data and content provider, presented its performance for the third quarter of 2023 in the context of a dynamic and challenging market environment. Despite expectations to reach the high end of the previously set adjusted EBITDA guidance and improve adjusted EBITDA margins, the company has tempered its revenue outlook. The revision reflects a revenue range between €870 million to €880 million, projecting a 19% to 21% year-over-year growth. Adjusted EBITDA is estimated between €162 million to €167 million, marking a significant year-over-year increase of 29% to 33%, with an anticipated EBITDA margin between 18.4% to 19.2%.
For the third quarter, Sportradar achieved revenues of €201 million, a 12% increase year-over-year, with an impressive adjusted EBITDA of €50 million, up 38%. They ended the quarter solidly, with net cash from operating activities at €76 million, showing a 19% rise, and a cash balance of €290 million. The quarter also featured strategic workforce reductions aimed at streamlining operations, improving product ROI, and enhancing future operating leverage. These changes should result in a 10% decrease in 2023's labor cost run rate, making the firm more agile and strategically focused.
Sportradar underscored its strategic partnerships, notably with the NBA and the Taiwan Sports Lottery, set to enrich the company’s growth trajectory into 2024 and beyond. The NBA partnership, starting with the 2023-2024 season and spanning until 2031, is expected to be a considerable revenue contributor, surpassing initial profit estimations. The Taiwan Sports Lottery partnership, marking the company as the official technology and service solution provider through 2033, will extend services to over 2600 retail outlets in Taiwan. These partnerships, along with industry recognition through awards, signal Sportradar’s potential for sustainable profitability and growth while enhancing the value for clients with innovative data-driven solutions.
Sportradar's strategy in the U.S.—where they provide analytics and intelligence for 95% of professional sports events—focuses on leveraging their vast content portfolio to ascend the value chain and seize a larger portion of the U.S. gross gaming revenues. This approach highlights the company's ability to monetize its offerings effectively and positions it as a leader in the sports data industry, poised for robust profitability and scaling.
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Good day, and thank you for standing by. Welcome to Sportradar's Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Christin Armacost, Manager of Investor Relations. Please go ahead.
Thank you, operator. Hello, everyone, and thank you for joining us for Sportradar's earnings call for the third quarter of 2023. Please note that the slides we will reference during this presentation can be accessed via the webcast on our website at investors.sportradar.com and will be posted on our website at the conclusion of this call. A replay of today's call will also be available on our website. After our prepared remarks, we will open the call to questions from investors.
In the interest of time, please limit yourself to 1 question plus 1 follow-up. Please note that some of the information you will hear during this discussion today will consist of forward-looking statements, including without limitation, those regarding revenue and future business outlook. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast.
For more information, please refer to the risk factors discussed on our annual report on Form 20-F filed with the SEC in March and Form 6-K furnished with the SEC today, along with the associated earnings release. We assume no obligation to update any forward-looking statements or information, which speak as of their respective dates. Also during today's call, we will present both IFRS and non-IFRS financial measures. Additional disclosures regarding these non-IFRS measures including a reconciliation of IFRS to non-IFRS measures are included in the earnings release, supplemental slides and our filings with the SEC, each of which is posted to our Investor Relations website.
Joining me for today's call are Carsten Karl, our Chief Executive Officer; and Gerard Griffin, Chief Financial Officer. And now let me turn the discussion over to Carsten.
Thank you, Christin, and good morning and good afternoon to everyone. We have a lot to share with you today on our performance for 2023 strategic actions we are taking to improve profitability as well as our growth expectations for 2024 and beyond. In a dynamic time of our organization, I'm impressed by the focus and execution exhibited across our teams. In particular, our ability to unlock greater profitability from our growing revenue base. This collective effort is laying a durable foundation for our continued growth and success in 2024 and beyond.
While we remain on track to deliver strong year-over-year growth in 2023, we are updating our outlook to reflect the financial performance to date and address some recent market headwinds. While we expect to deliver adjusted EBITDA at high end of our previous guidance, and stronger adjusted EBITDA margin, we are reducing our revenue outlook to reflect some of these short-term challenges.
Now we expect to deliver revenue in the range of EUR 870 million to EUR 880 million, representing year-over-year growth between 19% and 21%. Adjusted EBITDA in the range of EUR 162 million to EUR 167 million, representing year-over-year growth between EUR 29 million and EUR 33 million and improved EBITDA margin in the range of 18.4% and 19.2%.
We have lowered our full year revenue outlook mainly to reflect 2 factors: first, the euro has further strengthened, creating pressure on our U.S. dollar-denominated revenue relative to our initial expectations; second, and more recently, in Q3, betting operators, especially those outside of the U.S. have experienced margin pressure primarily to live betting and soccer due to winning streak of betters with more favorites winning and Gold Ridge games during the start of the European football season.
This contributed to softness in our Q3 MTS results and our outlook for the rest of the year. where we participate in our sports betting clients revenues. Our strong outlook for adjusted EBITDA and adjusted EBITDA margin reflects improving operating leverage through both cost management and ongoing strategic initiatives to streamline our business operations, which we will walk you through shortly.
Turning to the third quarter. We delivered revenues of EUR 201 million, up 12% year-over-year. This was lower than our expectations, primarily due to the noted softness in MTS revenues. Outside of this, our portfolio results were broadly in line with our expectations. We delivered record quarter profitability with adjusted EBITDA of EUR 50 million, up 38% year-over-year and adjusted EBITDA margin of 25%, an improvement of 471 basis points year-over-year.
We also generated net cash from operating activities of EUR 76 million, up 19% year-over-year, and we ended the quarter with EUR 290 million cash and cash equivalents, up EUR 26 million or 10% quarter-on-quarter. As a leader in our industry, we work to ensure that we consistently deliver value to our clients and shareholders. This week, we initiated a reduction in our global workforce. This action is part of a broader set of strategic initiatives to better position the company for growth, which we aim to simplify and streamlining the company's operating structure, improving product out and portfolio optimization.
When completed, this reduction in workforce should result in an approximate 10% reduction of the company's 2023 labor cost run rate and contributes positively to future operating leverage. It will also enable us to be more agile, intently focused on our strategic priorities and to capture the market opportunities ahead of us.
Now I'd like to update you on a few new and expanded deals that will help drive our growth and profitability into 2024. First, our teams are well underway with realizing the value of our strategic partnerships with the NBA with our latest lifetime revenue and profitability estimates ahead of our original expectations, when we announced this deal in 2021. With the knowledge of the current trading and newly closed long-term client agreements, we can confirm that this investment remains on track to be a strong revenue contributor and highly accretive to our EBITDA margin goals over the lifetime of the deal.
To remind you, the [ MVAD ] begins with 2023, 2024 season and runs through 2031. With last week's tip off of the season, we have now signed up our U.S. client base to the premium content for the next 8 years, including DraftKings, BetMGM, VT365, [indiscernible] and [indiscernible]. We are also incredibly pleased with the positive engagement for this premium content offering across our international client base that accounts for approximately 40% of the total NBA deal value.
We are just at the beginning of our journey with this great franchise that will be an important innovation and growth catalyst for the company. I look forward to unlock the additional value which we will deliver to our clients and our company over the term of the deal. In addition, I'm thrilled about the partnership with the Taiwan Sports Lottery. We selected as their official technology and service solution provider through 2033. This is our 14th government-approved lottery. We will be providing the Taiwan Sports Lottery with a platform combining multitude of services like MTS prematched Lifewat and the end-to-end sports book and player account management solution.
This rollout, which commenced in quarter 3, will ultimately expand to over 2,600 retail outlets in Taiwan. Last, our value continues to be recognized in the industry, winning several awards, including Sports Betting Provider of the Year, Marketing Service Provider of the Year and top leaders in AI 100. Before I turn over to Gerard, I would like to reflect a little more on where we are in our journey.
I'm excited about the market prospects ahead of us. driving sustained profitability growth on scale by using the power of a worldwide network, together with the growing data opportunity is more than ever fascinating and motivating. We are the industry leader and trusted partner because we have developed enduring and valued relationships with our clients and partners that only deepen with our innovative capabilities. Our best-in-class content portfolio is the fuel which powers our existing products and robust recurring revenues. It's also the catalyst for further core revenue growth, product innovation, deeper monetization and value creation.
Our content portfolio today is a critical -- is at a critical mass and stable level to drive our revenue growth and profitability ambitions for the years ahead. Put it in another way, while we can acquire more rights if the ROI makes sense. we do not need more rights to deliver on our growth targets.
Last, we are operating at scale with an agile organization to drive strong profitability growth in the years ahead. We also have the financial capabilities to enhance our position further should the right opportunities to raise. To put this into context, let me walk you through how this translates into revenue growth and higher margin for the company.
Using the U.S. as a sample, we offer the broadest sports coverage, delivering official analytics and intelligence to 95% of the core U.S. professional sports or over 5,000 games annually based on our partnerships with NBA, MLB and NHL. We leveraged this foundation of assets across our media league and sport partners to move up the value chain with our products and capture a higher share of U.S. gross gaming revenues or GGR/in-play adaptation is the key driver for that in the U.S. Whereas in more advanced European markets in-play adaptation accounts for approximately 80% of the betting revenues. In the U.S., it accounts for approximately 35% of the U.S. GGR.
According to our estimates, closing the in-play gap would result in a 25% to 35% increase in our current U.S. revenue base with a strong margin profile. Last is the strength of our product road map throughout 2024. Highlighting our partnership with the NBA, we intend to drive deeper value within the live betting markets and to bring live an immersive fan experience, next-generation telecasting and AI-driven and 3D analytics for coaching solutions.
You will see us introducing products like micro betting, virtual stadium, mixed reality, augmented AV and real-time states and insights. In summary, we are well positioned to capture the significant growth opportunities ahead by expanding monetization with our existing clients, acquiring new clients leveraging the power of data and drive insights and innovation and broadening and deepening our partner ecosystem. With that, I turn over the call to Gerard to discuss the financial results and the outlook in more detail.
Thank you, Carsten. Turning to the third quarter. We delivered revenues of EUR 201 million, up $22 million or 12% year-over-year. While most of our revenue lines were broadly in line with our expectations, we had a lower-than-expected revenue from our MPS platform, due to the weaker client revenues in which we participate via revenue share. In Q3, betting operators internationally experienced margin pressures, primarily in their live betting in their soccer segments due to a winning streak for sports betters with more favorites winning and gold-rich games during the start of the European football season.
This adversely affected our Q3 MTS results. From a portfolio perspective, Rest of World Betting was up EUR 11 million or 11% year-over-year, with solid performances across the main product lines. In particular, live [indiscernible] data were up 18% year-over-year, despite the softness in MTS was up 7% year-over-year. Rest of World AV was up EUR 5 million or 15% year-over-year supported by the addition of the new Conmebol rights and an uplift in services to existing and new clients. The United States segment was up EUR 3 million or 11% year-over-year as we continue to see growth in this developing market. In U.S. dollars, the U.S. grew 18% in the quarter. All other revenues were up EUR 2 million or 19% year-over-year, primarily driven by growth in our ads business. Net profit for the quarter was EUR 5 million, including EUR 15.5 million in impairment charges resulting from the streamlining of our business operations and product portfolio.
This compares to EUR 13 million net profit in the prior year, which benefited from stronger foreign currency gains. Looking at our adjusted EBITDA, we delivered a strong result -- adjusted EBITDA was EUR 50 million, up EUR 14 million or 38% year-over-year. Adjusted EBITDA margins improved almost 471 basis points to 25.1%. This improvement was driven by more profitable revenue mix and operating leverage across all major expense lines.
In particular, personnel expenses driven by lower run rates as we actively manage our expense base. Personnel expenses were EUR 75 million, up EUR 7 million or 10% year-over-year. Personnel expenses, excluding stock-based compensation, were EUR 64 million, up EUR 3 million or 5% year-over-year. Sports rights were EUR 36 million, up EUR 1 million or 3% year-over-year.
Turning to liquidity. We ended the quarter with liquidity of EUR 510 million -- this was comprised of EUR 290 million in cash and cash equivalents, up EUR 29 million or 10% quarter-on-quarter and a EUR 220 million revolving credit facility with no amounts outstanding. Given our solid liquidity position and our focus on delivering long-term value to our shareholders, we are reviewing several options to enhance our capital allocation.
Before I turn to our revised 2023 outlook and initial views for growth in 2024, I would like to take a moment to expand on Carsten's remarks related to the actions we are taking to better position the company for top line growth and operating leverage in the future. As we've noted in the past, we are continuously challenging all aspects of our business to ensure we are focusing our talent and resources on the most profitable growth opportunities.
Due to this focus, this week, we initiated a reduction in our global workforce. This action is part of a broader set of initiatives -- of strategic initiatives to better position the company for growth, which are aimed at simplifying and streamlining the company's operating structure, improving product ROI and portfolio optimization. When completed, this action should result in an approximate 10% reduction in the company's 2023 labor cost run rates and contribute positively to future operating leverage.
We expect this action to be materially complete by the first quarter of fiscal 2024. In 2024, we expect the operating leverage our strategic initiatives will unlock in personnel, cost of sales and other operating costs will be offset by the pressure in operating leverage resulting from the onetime step-up our sports rights costs expected from the first full year of our NBA and ATP partnership deals.
As we look beyond 2024, there is the potential for all major expense line items to contribute to improved operating leverage as we continue to actively manage our operating cost run rates and a more stable sports rights portfolio cost base.
Turning to our revised 2023 outlook. While we remain on track to deliver strong year-over-year growth in 2023, we are updating our outlook to reflect our financial performance to date and address some market headwinds. Our updated outlook for fiscal '23 is as follows: revenue in the range of EUR 870 million to EUR 880 million, representing year-over-year growth between 19% and 21%. Adjusted EBITDA in the range of EUR 162 million to EUR 167 million representing year-over-year growth between 29% and 33%. Adjusted EBITDA margins in the range of 18.4% to 19.2%.
Our revised full year revenue outlook primarily reflects greater FX pressure on our U.S. revenues than previously indicated, given the strength of the euro versus the U.S. dollar. Lower MTS revenues for the year, given the softness experienced in Q3 and a more cautious estimate for Q4. Our stronger adjusted EBITDA outlook primarily reflects improving operating leverage through the continued active cost management and initial benefits from the ongoing strategic actions to streamline our business operations and product portfolio.
Turning to 2024. as we look forward into 2024, we expect to deliver at least 20% revenue growth from our enhanced content portfolio, which will include the NBA and ATP rights and improved monetization across the product portfolio. We also expect to deliver at least 20% adjusted EBITDA growth with the improvement in operating leverage in personnel, cost of sales and other operating costs offsetting the onetime impact from the step-up in sports rights costs for the new NBA and ATP partnerships.
In summary, we remain on track to deliver robust growth in 2023 and are well positioned for continued profitable growth in 2024 and beyond. With that, we would like to open up the call for your questions. Operator, will you open up the line for questions?
[Operator Instructions] Our first question comes from the line of Ryan Sigdahl with Craig-Hallum Capital Group.
Curious on the U.S. So deceleration in growth, I know a little bit of an FX headwind, but even considering constant currency deceleration in growth there and even relative to the rest of the business. I guess, you commented 19% growth in betting and AV implies there was weaker somewhere else to offset that 8% to 11% overall. So what specifically isn't going as well there? .
Gerard, do you want to take this question as the CFO? .
Yes. No. In terms of the U.S., we actually -- if you take off the FX impact, we feel that we actually had a strong growth in the quarter. I would remind you, it's -- this is our quietest quarter when you look at -- in terms of the fiscal year. Outside of our explanation, there was nothing else material to call out in terms of the AV side of the business. .
Then just on guidance for the year, lowering in part -- smaller part due to the euro strengthening. As I look at it, the euro is trading at the lowest USD conversion this year, and it's actually depreciated versus U.S. dollar since you last gave guidance. So am I missing something there? .
No. Most of the impact was what we flagged back in the last quarter, where you saw that we flagged that versus our original guidance, we felt there was pressure of around $10 million. All we're saying is that, that pressure, which is now reflected in this revised guidance range did increase. The actual blended rate in Q3 did contribute to more pressure. I think as you look into Q4, it shouldn't be an impact. .
Our next question comes from the line of Robin Farley with UBS. .
I had 2 questions, and I apologize if you covered this. We have had some trouble getting on to this call. But for -- on the AAV business for Rest of World, I don't know if you addressed the margin being down 100 basis points there even with the 15% revenue increase. So I don't know if there's any color to add on the Rest of World AV. I know you just mentioned something about the U.S. business, but on the Rest of World AV.
And then the other question is -- on the MDA deal, can you give us a sense of kind of the profitability between your arrangements with them on the sports data side versus tracking technology. It seems like there are a lot of companies that have some piece of a deal with the NBA in different tracking. And so I wonder if you could just help us understand the profitability of the different pieces of your arrangement with the MBA, if there's in general terms? .
Robin, this is Carsten. So looking to the AV revenue, that's a seasonal effect. So it's -- quarter 3 is not a high traffic quarter from AV perspective. You know that we have a portfolio which we bring to the market. So there are always premium rights and behind this, we line up a couple of cheaper rights, for example, table tennis. And that is the effect, which you see here, the growth comes like [indiscernible] stated from CONMEBOL and MLB there. So nothing special to state. -- you will see a readjustment in quarter 4 here, which goes from a profitability, most likely a bit in the other direction. But that seasonal effects and very small. . Looking to the MBA deal, and I'm glad that you asked, I'd like to remind everybody that those deals are accounted from an accounting perspective, treated in a way there is the lump sum. And in this case, it's split it in equal proportions over 8 years. We all, I think, can follow that during the term of a deal, it gets more profitable for us as the distributor because we can line up more products and more clients behind. So this deal gets only more margin accretive for us during the term. The second half of such deals are significantly more profitable. Combining this with our strong outlook, which we gave for 2024, shows you how good we leverage our business and how good we leverage our worldwide operation and the client base.
Looking specifically to the data piece in the United States, which we mentioned accounts for 60%. It's only data. It's not AV. Worldwide, there is an AV component in there, and there is a blended mix between the data and the AV deal on a worldwide basis. Worldwide, we are very satisfied with how we are tracking from the U.S. We signed every operator for the next 8 years on the extended deal, which includes deep data and innovative solutions where we highlighted a few of them.
There are not 2 tracking providers for the NBA. There is 1 tracking provider on a facial tracking provider, nothing else. There is a small side deal in place with some teams which refer to get also a solution from another tracking provider. That's on discretion of the NBA teams. It doesn't extend to the woman NBA and that is a team-by-team based deal. We have a deal with the league with the NBA on this, and we are providing those solutions, which we highlighted. I hope that answers the question, Robin.
Our next question come from the line of David Karnovsky with JPMorgan.
Gerard, maybe just following up on the 2024, the 20% revenue growth, and I think you had said EBITDA as well. just while we have you on the call, I want to see if you could break that down a bit in terms of where you think that growth will come from by segment? And then Carsten, you noted the importance of in-play betting for future growth. Just curious with the start of the NFL and BA and HL Seasons how the uptake looks there relative to early last year?
Carsten, do you want me to start? .
Yes, please, start Gerard.
So David, in terms of the actual growth next year, we believe that the growth is going to be broad-based in the sense that we obviously will see the contributions from our enhanced content portfolio. So both directly and indirectly through obviously, cross-selling and packaging. That's going to obviously help our U.S. growth. But if you -- as you saw in our notes, your 40% of the NBA business is outside of the United States. So we expect it to be a major contributor internationally, similarly with the ATP.
Beyond that, we've been investing, as you know, in enhancing the overall potential of our portfolio. So we do believe that there's opportunities to introduce new products next year, but also enhance our existing portfolio to enable us to upsell and continue to drive on what is already a very strong and recurring revenue base. So broadly speaking, it's going to come across the board in terms of the existing portfolio, but obviously, the addition of new products and new content is going to help amplify our growth in 2024. .
And for the second part, with the in-play, we see a pick up 10%, sometimes 15% on the operator base, a shift into live betting from 30% in average 35% or a little bit more. These are numbers which we get from the operators. I think more important is that we are supporting this trend with our products, the AV products are stimulating. We have that for baseball and for NHL now. And what is also stimulating is all the visualizations based on the data, which you saw in the slides, which we do and where we launch a couple of new products for the NBA.
What we want to do here is we want to create that experience for the betters to follow the match in running and, of course, stimulate them for place some bets. A testament that we are right on track is the interview, which Amy and Jason from FanDuel and DraftKings as the CEOs did on G2E and they stated there, and we moderated that panel that live betting is high on their agenda. And the products around this are products which they are looking into.
So I think all this together shows you, we are all working very solidly that we move into the live betting. And the last piece maybe is the leagues, they are supporting this a lot. They see the opportunities with that life experience. So we think the trend will continue. We have nothing to think against it. If it reaches the 80%, which we see in Europe, that's still open, but we see a solid trend from prematch into live betting.
Our next question comes from the line of Michael Graham with Canaccord Genuity. .
I wanted to ask 2. The first 1 is on the sort of cadence of the negative sports outcomes that you mentioned? I know you reaffirmed guidance at the end of August. I'm just wondering if maybe some of that stuff happened pretty late in the quarter or just maybe talk about specifically the month of September? And then I just wanted to ask if you had any updated thoughts on the long-term profitability road map in the U.S. I know you're solidly profitable. I'm just wondering if you have any updated thinking around how long it takes the U.S. to get closer to your corporate average? .
Good. So I'll take the first part, and then I'll leave the U.S. piece to Gerard if you allow -- looking now into the correction and MDS. The mechanism here is that we have a revenue share from the gross gaming revenues of the operator. So when the operator has more profitability because we manage the risk better for them, we have a higher proportion on the share. Now it is from a risk management perspective, you're looking to the biggest pools from a liquidity perspective. So we said this has happened in Europe or the rest of the world, not in the U.S. because we are speaking about favorable soccer results.
Favorable soccer results means favorites are winning. so we had that effect. And we are not the only one. All the companies reporting public had the same effect. Think of it as if you're giving a loan to the better, so the better we'll win this. But sooner or later, the operator will win it back if they offer consistently the risk management, which we provide to them.
And yes, favorites winning is something nobody can avoid. It happens. It happens quite frequently in this business. It's nothing to be worried about. It's simply a winning streak, which we are facing. And it comes together with goals in the last minute, which is not good from a risk management perspective and the number of high goals. We adjusted our algorithms. We think we have taken well care of this effect. But as I said, it's a revenue share base. So that has an effect on our NPS results.
And we faced this with the beginning of the soccer season, which is in quarter 3. And maybe the very last piece of this is, if you compare this quarter soccer to the quarter in the last year, you will see that in the last year, we had the World Cup, a lot of matches have been shifted. So proportionately, we had significantly more soccer matches in quarter 3 last year than we have in this year. So the year-by-year comparison is also affected partly because of this. I hand over to you, Gerard for the second part. .
Yes. When you think about the U.S. and some of what I'm going to say actually applies to our broader business, if you think about some of the major content deals we have in place like Carsten talked about the NBA in his prepared remarks. As that deal evolves over its lifetime, the back half of that deal is significantly more accretive from an EBITDA point of view than the earlier years when we're dealing with a straight line of the amortization costs, but obviously, a growing revenue base.
So when you think about the U.S., given the size of the U.S., that will have a meaningful impact on that business over the coming years as we think about more long term. The other aspects of the business, we have the content portfolio today to serve that business and grow that business. We talked about that in our prepared remarks. But as more states open up and as live betting evolves, that's obviously going to deliver a stronger revenue contribution of what is essentially a fixed base of business. from a cost point of view.
So there's going to be operating leverage that will be triggered. So from a U.S. perspective, we feel confident that the growth opportunities there both structurally and what we're doing to enhance our product portfolio. And that will lead to an expanded margin profile and we'll definitely bring the U.S. up over the coming years. And more broadly, it's the same concept, if you think about Rest of World, whether it's the ATP deal or whether it's the NBA deal. The structure of these deals are such that they are going to be very nice contributors to margin expansion as we think through the lifetime of the deal.
A little bit of a weight at the start, but they're obviously going to enable us to drive better margins outside of what we've said already, which is keeping a close eye on our operating structure and making sure we're driving the right kind of product innovation to deliver more value add to our client base.
Our next question comes from the line of Jason Bazinet with Citi. .
I just had a quick question on that faster than 20% rev growth, greater than 20% EBITDA growth next year. I think that means consensus estimates have to move up. And so I was just wondering if you could maybe highlight what are the 2 or 3 most notable risks to achieving those sort of growth rates? .
Gerard, would you take up that question from Jason? .
Yes. Obviously, I'll start with profitability. And I'm going to give you an essence so apology. But if we decide to not focus on managing our operating costs and we see a gradual creep back in our employee base in terms of our labor costs, that would obviously impact the level of operating leverage that we believe we can deliver in 2024 and beyond. The actions we're taking this week, while difficult to position us for strong operating leverage over the coming years. . From a revenue perspective, again, the content portfolio is in place and the product offering is in place. So it would have to be more macro factors. Does the U.S. open up at a slower pace. Is there anything else structurally wrong, which we don't believe in any of our markets. I don't see any material issues. Obviously, if the world changes and it's -- the better is continually on a stronger winning streak, which has not historically been the case, that could impact some of our revenue shares. But as I stand here today, looking at our assumptions for 2024, we feel good about delivering at least 20% and given the strength of our content and what we're doing to enhance the monetization of the product portfolio. .
That's great. And if I could just ask one follow-up. You guys mentioned that you don't need any more rights, you may buy more rights, but you don't need them. Would you say that that's a new chapter in the evolution of your company? Or could you have said that a year ago or 3 years ago? .
What I -- sorry, .
No, no, go ahead, Gerard . So I think you can do this perfectly. .
Yes. What we've said at least during my tenure, and I know it's been said in the past, we take a very strong ROI approach to sports rights. And it's 1 of the reasons that we walked away from from certain rights that in a world where you're not worried about profitability, you'd probably say, let's add them to the portfolio. What we see right now with the addition of the NBA and ATP is that we have the portfolio that is basically the foundation for our long-range planning right now. It's not to say that if we found another right that would actually amplify our revenue growth at the right profitability, we wouldn't execute against it.
But I think there's been a perception in the past that it's always up until the right. We have to keep buying more rights to drive revenue growth. The answer is it's not that case, at least not from our perspective. If you look at the breadth and depth of our portfolio, it can more than serve the needs of our client base in the U.S. and our client base internationally. So from our point of view, it's not necessarily a change, but it's something I think we have to say very clearly because I think there's a concern, which if you want to take the bear case that sports rights are always going to go up.
Our sports rights right now, when you look at the larger rights, their long-term rights are locked in. And as we said, as it relates to the NBA, it's also a commitment from our client base to engage in that deal. So from our point of view, the structure of sports rights, the only way that your sports rights will materially grow from where I stand here today is if you do add another major ride or you have a major adjustment to it right.
But right now, we feel good about the portfolio rights. And that portfolio, we believe, can sustain. And so from our point of view, we have stability in sports rights. And that's an important factor because it will allow us to focus on the rest of our P&L from the point of view of managing obviously, our run rate in terms of our personnel costs and our other external costs.
Our next question comes from the line of Stephen Grambling with Morgan Stanley. .
And this is maybe a clarification on some comments at the beginning, but it's not that often that you see a company talking about 20% plus top line growth that's above consensus, but then also announcing a global workforce reduction of this size. I mean, basically, you've got some temporary top line hits, but still talking about strength in the future. So maybe you can just clarify again what the impetus for the workforce reduction was? And also just any other details you could give on what the new org structure might look like?
Stephen,..
I'll take that 1 quickly. I can't give you an update about new org structures. We are constantly reviewing the process that we are more efficiently, that we are more client-centric. And and that is a constant process, which I think every company needs to do. Looking to why we did the reduction in the workforce, which is -- which is a tough step, which we did in the last days. we believe that it's the right thing to do to prepare our business to be fit for the future growth. And it's a plan which we're executing now since a couple of months. So those things have to be well planned.
We know and we announced this, that we have 2 major big deals with the MBA and with the ATP with amazing opportunities for us, but we're going to need to handle also the cost aspect for this -- and that's what we are doing. So we are focusing on client centricity. We are streamlining the processes. We are looking that we allocate our resources on the right products -- we took a couple of products out, and we took a couple of our products into a maintenance mode to focus on those, which are driving our growth. And there's the last sentence. the team follows this amazingly, even if these are more difficult decisions, we all understand it's necessary for the future acceleration of our growth.
That's the reason why we did it. And we want to deliver this return to our shareholders and to all the stakeholders in the company.
Our next question comes from the line of Jordan Bender from JMP Securities. .
Two for me. several operators called out in the U.K., just some of the friction relating to the regulatory environment. During the quarter, I was wondering if that had any impact on your results during the third quarter and could that be a potential risk into the fourth quarter with just some of those changes ongoing. And then second, flow through for next year, plus or minus 20% as well. You kind of talked about rightsizing the cost structure. So -- how should we think about that flow through past '24? I guess, what's the right way to think about that on a mature business?
Jordan. So I take the first question, and then I leave the outlook into 2025 plus to Gerard . U.K. regulators, yes, they tightened the regime, which we welcome a lot because it's the aspect of player protection. -- it's responsible gaming. And we believe that's the only way to really grow and to be accountable with this. So that's a measurement, which some of the operators might suffer. Some of them might not. It's very much depending on how you're interpreting this and how you're using it also as an opportunity. from our base, we have the recurring revenue model with all the U.K. operators. So there is a little component in with the revenue share but usually, we're running a SaaS business there. We don't see any weakness here. And thanks to our worldwide distribution base, we have not a significant risk in the U.K. that we have too many client accounts there, we are well spreaded and well distributed around the world. Now to the second piece, outlook 2025. Gerard, please? .
Yes, I'm going to talk more broadly than '25. I think it's '25, '26, '27. Jordan, the way to think about it is, if you look at 20% growth, at least 20% growth in top and bottom. That implies that the -- we're holding EBITDA margins broadly flat. And the reason for that is we believe that we're going to deliver meaningful -- we will unlock meaningful operating leverage from personnel cost of sales and all other operating costs. And that's true, a variety of initiatives around our product portfolio, the actions we've announced today and continually challenging every aspect of the business.
But in '24, it's covering a step-up a onetime step-up in sports rights. When you look out into '25 and '26 and '27 on the assumption of continued strong revenue growth, all of those line items in a stable environment should be growing at a lesser pace than your revenue. And that is absolutely the objective we have in mind. So you will see margin expansion and stronger operating leverage across most likely all of those line items as we evolve '25, '26, '27.
So from our point of view, the business is structurally set up in a way that if we can continue to do what we've been doing for the last years, in other words, continuing to drive value for our client base, drive revenue growth, you're going to see a change in dynamic where whether it's your personnel costs, whether it's improved premium flow-through from our revenue base or from a stable sports rights portfolio, you're going to see operating leverage. And that's essentially what we've been saying up until now.
We just tried to make it a little bit crisper and clearer at this time because essentially '24 is a transition year when you bring in 2 material premium rights like ATP and MBA. But given the actions we're taking, you will clearly see in the P&L a different profile from an operating expense point of view that is set up for unlocking further operating leverage as we grow the company over the coming years. .
Our next question comes from the line of Stefanos Crist with Needham & Company. .
This is Steph calling in for Bernie. Just wanted to ask on the NBA and the extra products or capabilities that you're bringing to the MBA in the new season. And then -- have you been able to sign up any other sports books to reflect the new NBA deal in addition to the BetMGM last week? .
We signed up all of them. So it's on our account at the moment, 40 operators in the U.S. There might be 1 or the other tribe, which we do not count here, but all of them are signed up for the additional content package and for the new deal for the next 8 years. So that's the whole United States and all operators there. The interesting piece here is we are moving up with this deal from a data provider into a solution partner with the NBA and with our clients. and that unlocks in the future, much more potential around this immersive gaming experience, live betting experience things which were highlighted there. but the deal is consistently deployed over all operators in the U.S .
Our next question comes from the lock of Shaun Kelly with Bank of America.. .
So 2 for me. First would be on just as we look out to the fourth quarter and we kind of moved past the hold or sports outcome-related issues. Just trying to kind of think through the guidance, as laid out still implies revenue to reaccelerate. So if we didn't have the sporting outcome-related issues, would that be enough to hit sort of what you're -- the roughly 20% growth rate that your 4Q outlook implies? Or -- are you also expecting to see some seasonality and some uplift from the start of the NBA season? I know seasonally, some of these contracts kick in. So is that part of why revenue should reaccelerate in the fourth quarter? That's my first question. .
So the guide Go ahead, Go ahead. Gerard.
From a -- we do expect seasonality will kick in, in Q4 -- and also, as Carsten indicated in his remarks, we do have the rollout of the Taiwan lottery, which will be more of a benefit in Q4 than it was in -- so while we still expect some pressure against the business as it relates to MTS, and we've taken a more cautious view as we look at Q4, we do expect to see a reacceleration of growth.
[Audio Gap] So when you look at it from a year-over-year perspective, you're back into the '20s -- so maybe
Let me add 1 thing because I think it's very important. The guidance says we are midpoint 20% top line growth for 2023, and we will deliver this. The guidance says we are midpoint on a 31% year-over-year from an EBITDA perspective, and we will deliver this. So I think it's a strong growth business. and we managed and showed that we have leveraged from a profitability perspective. With that, please, your second question, Shaun. .
And my second question is really just on free cash flow conversion. I know this is an area you've been working on a little bit with payment terms and some other things with vendors. But can you just remind us maybe medium or long term, what's the right kind of way to think about your EBITDA to free cash flow conversion for the business broadly? .
Gerard, please? .
Yes. We -- as we said in the past, we're targeting to drive to at least a 50% conversion. And while we don't disclose that metric, you have the details to help you figure it out for both year-to-date, which it's around 43%. And actually, for Q3, it was above 50% because it was a very good cash quarter. Q4, we expect to be a bit more compressed. But overall, we're progressing through the year to a stronger cash conversion. .
Our next question comes from the line of David Katz with Jefferies. .
Thanks for squeezing me in. This has been asked a few different ways because it is unique or it's not all that common that we would get a high growth outlook, coupled with a kind of a cost cutting or, call it, cost cutting or restructuring or however, you want to characterize it. the way that these 2 -- should we look at those 2 in a discrete fashion? Or does the restructuring enable for better growth? Or does it, in some way, dial back the growth opportunities? Or are these just completely separate issues and the cost side is just symptomatic of how the business has evolved? .
David. [indiscernible] is connected with each other, the revenue and the costs. Restructuring is not a restructuring. A company like Microsoft is taking out 10% of the workforce every year, and I can give you many more examples of this. I think what we are doing here is we are getting a more mature business. We are focusing on delivering returns for our stakeholders. We are focusing to prepare us for the next level of growth. We are strengthening our cash abilities, which we have.
So we are growing this. We are converting cash. And for me, that belongs to how you operate and run the business in a responsible way. I would not call it restructuring, but we are reviewing our products and our processes and organization structure. And we came to the conclusion that we can deliver what we just announced with this workforce. And then I think it is responsible from us for the workforce, but also for our stakeholders to install these measurements. So that's how we see it. I think a 10% is not something totally out of the line if I'm looking to many other businesses in the tax base.
I apologize for the word, Gerard, refinement is probably a better choice. For my follow-up, what I wanted to ask about is all of us, just industry-wide are so focused on product because at least at the operator level, product is what's winning. If you could just share some insights in terms of how you might be positioning yourselves to enable operators for that next big thing, right? The past year, it's been so much of same being parlays and the like. Talk about what's next to the degree that you can and how you're positioned there? .
If you look now to our cash cow, which I think we all agree that -- that's the global betting business. That's EUR 112 million revenues, and it delivers a 50% profitability in this quarter. That's done by upselling and cross-selling, lifting the clients up the value chain. So meaning we are going from a data into a product stage with the live [indiscernible] or the trading services or finally than the platform services, which you see now with the Taiwanese lottery deal. And yes, partly also a little bit with some overbookings on data content, but that's not the bigger proportion. Where is that going? It's going very clearly into the products. It's going very clearly into the platform direction.
So directionally, you will see now after the risk management that goes more into the platform. We acquired a company called [indiscernible] a year ago, which is working with the users and trying to optimize the user journey, trying to optimize the churn of the users, trying to understand what can you push on a platform to use it to motivate him to cross-sell this into different channels, but also to optimize the growth in the sports betting performance.
And that gives a variety of options in the platforms, look to the U.S. tribes in the future, what kind of solutions might they want to have? Is it more solution, which is managed by a provider with the platform and with all the elements, which is in there? Or is it more a big platform business, but they wanted to knowing that it's 350 tribes. I think -- it is more the thing which I mentioned first. So that's a good opportunity.
There are good opportunities with major broadcast businesses around the world going into this direction. So it's consistently what we're telling from the beginning. We start with the content, but we're putting it into products, and that's a clear journey. And that's a clear mission and vision that we have.
And our final question comes from the line of Ryan Sigdahl with Craig-Hallum Capital Group.
Just 1 quick follow-up that I think might help us sum up kind of next year and the years forward. But can you quantify how much rights costs will be up year-over-year next year with those 2 new deals that you know the cost to and how they'll be accounted for? And then kind of what assuming the similar offset from the operational efficiencies? .
Yes, Ryan, I'll characterize it in operating leverage. We look at -- we believe that we're going to unlock somewhere between 4 and 5 points of operating leverage in 2024, and that will be offsetting the growth in the sports rights. So if you can work into the back -- if you work in to reverse into that, you're talking about somewhere between 37% and 42% growth in sports rights. .
This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.