Better Collective A/S
STO:BETCO
Earnings Call Analysis
Q3-2023 Analysis
Better Collective A/S
In the latest quarter, revenue soared by 26% to EUR 75 million due to robust media partnerships and an expanding paid media business. Recurring revenue, indicative of stable and predictable income, jumped by 49%, reflecting a strategic shift towards more sustainable earnings. This transition to revenue share models, particularly in the lucrative North American market, while dampening near-term revenue and earnings, is hastened to position the company for a more stable value creation in the long term.
Operational earnings outpaced revenue, climbing a notable 35%. The acquisition trail was particularly active, with the company purchasing four sports media brands, and making its second-largest acquisition to date by taking over Playmaker Capital, which will not only expand the company's content production capabilities but also enhance its engagement with sports fans across the Americas.
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) grew by 35% to EUR 20 million, reflecting an EBITDA margin of 26%. This impressive growth came amidst what is traditionally a low season, bolstered by strategic investments in growth markets such as North America. Moreover, the cash flow increased by 8%, and a remarkable year-to-date cash conversion rate of 95% was achieved, demonstrating the company's operational and financial efficiency.
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Good day, and thank you for standing by. Welcome to Better Collective Third Quarter 2023 Presentation. [Operator Instructions] Please be advised that today's conference is being recorded. I'd like to hand the conference over to your speaker today, Better Collective CEO, Jesper Sogaard. Please go ahead.
Thank you, and good morning, everyone. Thanks a lot for joining us today for our webcast. My name is Jesper Sogaard, and I'm the Co-Founder and CEO of Better Collective. As always, I'm joined by our CFO, Flemming Pedersen, who will help me walk you through our Q3 performance. Please follow me to the next slide. We ask you to pay attention to this slide where we display our disclaimer regarding any forward-looking statements in today's webcast. Please turn to the next slide.
You see today's agenda on this slide. I'll start by taking you through the highlights of Q3. Hereafter, Flemming will take you through the financial performance before handing the word back to me for a business review. And then we, of course, end the call with a Q&A session. Let's get going. Please turn to the next page. Q3 was an eventful quarter with solid development across the group. We grew revenue 26% to EUR 75 million, which was primarily driven by our media partnerships and the continued strong development in our paid media business. Our recurring revenue grew 49%, which means higher quality of earnings as the bigger share of revenue came from revenue share income versus upfront CPA payments. I'm encouraged to see our move towards recurring revenue share in the North American market is moving faster than expected. At Better Collective, sustainable long-term value creation is in our DNA, and our commercial team in North America has been able to fast forward the revenue share transition, which will provide strong value in the long run while having a short-term dampening effect on revenue and earnings. This essentially means that we are able to invest in the long term while still delivering strong growth in the short term. We'll dive more into these mechanisms later in the presentation.
I'm also pleased to report that we increased our operational earnings by 35% and which was faster than our top line. Q3 was a very acquisitive quarter during which we acquired 4 new sports media brands. And after closing of the quarter, we made our second biggest acquisition ever by acquiring Playmaker Capital. Lastly, during Q3, we also announced our intention to carry out a dual listing of Better Collective's shares on Nasdaq Copenhagen in addition to our current listing on nasdaq.com. Yesterday, we could proudly announce that the first day of trading is expected to be tomorrow on Friday, November 17. Please go to the next slide where I hand over the word to Flemming to take us through the financials.
Thank you, Jesper, and good morning to you all. Let's dive into the numbers and walk through the financial highlights for Q3. So please follow me to the next slide.
Following the exceptional performance during the first half of this year, Q3 landed more in line with our expectations. Group revenues grew by 26% to EUR 75 million, of which 16% was organic growth. Our EBITDA grew a bit faster to EUR 20 million, equating to 35% growth and an EBITDA margin of 26%. During the quarter, we recorded a normalized sports win margin following more favorable sports win margin in the first half of the year. However, we managed to deliver solid results despite, a, it being a low season; and two, our continued investment into the future growth in the North American market in particular. The quarterly revenue growth was broadly driven by our media partnerships, which continues to be a solid growth driver globally and a strong development in our paid media business. Our cash flow grew 8% with a lower-than-normal cash conversion due to some payments falling into Q4. Over the course of the year, we expect this to normalize around the usual cash conversion of around 90%. Year-to-date, the cash conversion has been 95%. Please follow me to the next slide. We continue our strong focus on recurring revenue that grew to EUR 46 million, implying a 49% growth. The recurring revenue made up 61% of our total group revenue, which is a number I'm very satisfied with. Please note that we have reclassified our hybrid contracts in the U.S. These have been classified as CPA previously, but are contractual revenue share, hence reclassified accordingly. The reclassification has moved EUR 3.8 million and EUR 12.7 million of CPA revenues to revenue share for Q3 and year-to-date, respectively. For comparison, last year, 2022, EUR 5.9 million where we show the numbers can be compared.
At Better Collective, sustainable long-term value creation is within our DNA, and I'm very pleased to see that -- how our commercial team in North America have been able to fast forward the revenue share transition, providing strong value in the long run, while it being short-term dampening on revenue and earnings. Allow me to dive a bit into this mechanism on the next slide.
Ever since the PASPA repeal in 2018, we have been pushing for revenue share agreements in North America, just like in most of our operations in the rest of the world. Last year, we succeeded in either fully or partially transitioning the first of our partners to this way of collaboration. Remind you, we favor revenue share agreements as this model puts us in the same boat as our partner in sportsbooks, allowing us to deliver more strategic and long-term partnerships. In short, we succeed when they succeed. Further, we estimate that the customer lifetime value on revenue share customers is higher than the upfront CPA, although it requires that we must wait a bit longer before we can harvest the fruits. Zooming in on North America, we are very satisfied to see the significant growth in revenue share customers. Across all of the North American region, we sent more than 65,000 NDCs during Q3, which implies a growth of 73%. Out of this, 64% was sent on revenue share agreements, implying 42,000 NDCs, which equals a 159% growth. In the beginning of the year, we incorporated this transition into our financial targets, and we are pleased to see that this transition is now moving faster than we first anticipated. Even though the focus during this year has been on advancing the revenue share transition, our North American business has already delivered year-to-date growth of 30%, leaving me even more confident in this decision, seeing that we can generate short-term growth while investing in the future of Better Collective. I would like to stress that this transitional phase will continue to have a short-term dampening impact on our financial performance in the coming quarters, also heading into next year. However, this is something we must seek through, as it simply is an opportunity we don't want to miss out on.
Please turn to the next page, page and then I give the word back to Jesper.
Thank you, Flemming. Please follow me to the next slide where I'll do a brief business review of Q3.
M&A is an integrated part of our strategy. Allow me to start with anchoring this in our vision of becoming the leading digital sports media group. We are well underway with this transformation and acquiring leading global and national sports media with a strong brand is an important pillar in being able to realize this vision. We firmly believe that Better Collective is the best home for quality sports media. We have proven that we can make better businesses out of the many digital platforms we have acquired over the years that cater to large audiences of sports fans and further improve the quality of the content for our millions of daily visitors. June Q3, we completed no less than 4 acquisitions, taking us further in fulfilling our ambition. In the beginning of the quarter, we acquired Playmaker HQ, an acquisition which provides our group with social media and content production capabilities needed for long-term success. By acquiring Playmaker HQ, we also broadened our user base towards more generalist sports fans, which subsequently increases the value offering to our existing partners. Currently, Playmaker HQ is only active in North America, and we therefore see great potential in being able to scale content and know-how across our global presence and in particular, South America, which is an exciting region with enormous growth potential. And in this region, content is primarily consumed via social media. To further solidify our foothold in the Swedish market, we acquired 4 Swedish strong sports media brands, SvenskaFans, Hockeysverige, Fotbolldirekt and Innebandy Magazinet in a deal made with every sport media group. We also acquired Tipsbladet to leverage Better Collective's position as a key partner for advertisers in the Danish market. And lastly, in a strategic move to strengthen our presence in the Brazilian sports media landscape, we also completed the acquisition of the national sports media, Torcedores, an acquisition that allows us to deliver more comprehensive and captivating content to Brazilian sports fans. Please follow me to the next page.
After the close of the quarter, we took a major step towards fulfilling this vision by making our second largest acquisition to date. We acquired Playmaker Capital, a leading digital sports media group operating a strong portfolio of sports media brands across the Americas. Joining forces means that we can now establish an even more structured entry and presence in the South American market, while also strengthening our leading position in North America.
Over the years, Playmaker has built incredibly strong sports media brand and excited sports fans across the Americas with high-quality sports content to cultivate a loyal and dedicated following. Combined, its portfolio attracts more than 200 million visits a month and commence a social media following of more than 180 million. This means that Better Collective's global monthly reach now exceeds 380 million, up from 7 million in 2018. This impressive development is truly a statement to the high-quality brand portfolio we have built over the past 5 years. With the acquisition of Playmaker, we also get a highly skilled management team bringing unique media competencies that undoubtedly will boost our organization even more. The acquisition fits perfectly with the strategy of owning and operating leading national sports media brand and further strengthens our position as a preferred partner for businesses aiming to activate their brands in a relevant and engaging sports context. We now expect to utilize our core competencies in growing the audience even further as well as utilizing our full toolbox of business models to boost revenues. And as always, our expertise in performance marketing will be key for this acquisition. We are in unique position to consolidate the fragmented digital sports media industry. And through this latest acquisition, we position ourselves in the very top globally. Please follow me to the next slide.
So to summarize it all, we saw solid growth across the group. Our recurring revenue grew 49%, implicitly meaning that our earnings was of higher quality than last year. The North American revenue share transition has been moving faster than we expected and 64% of North American NDCs were sent on revenue share agreements. Despite this, our North American business has still grown 30% year-to-date. We had a highly acquisitive quarter with 4 acquisitions, which were followed by our second largest acquisition ever of Playmaker Capital. All acquisitions will help us in realizing our vision of becoming the leading digital sports media group, currently reaching an audience of more than 380 million monthly visits from sports fans.
October revenues came in at EUR 24 million, heavily impacted by a weak sports win margin favoring players. This impacted our revenue and earnings by an estimated more than EUR 8 million. Normalizing this, we are very satisfied with the October developments, also factoring in our revenue share transition in North America. In terms of the sports win margin, we expect the normalization as we have seen in previous months and quarters where there has been a negative sports win margin. A few months ago, we announced our intent to list on the Nasdaq Exchange in Copenhagen, which I'm happy to say, will commence tomorrow the 17th of November. We look very much forward to bringing the bell.
This concludes our webcast presentation. I'll now pass the word back to the operator and open for questions from the audience. Thank you for listening in.
[Operator Instructions] And now we're going to take the first question from the phone and it comes from the line of Sebastian Gray from Nordea.
Jesper and Flemming, Sebastian here. Congrats with the Copenhagen listing. I look forward to hearing you ring the bell tomorrow. I have a couple of questions here. I will take them just one by one. First off, Jesper as you alluded to, I mean, given the nature of your revenue model, I think it's sensible to make the distinction between quarterly P&L fluctuations and the underlying operational momentum in terms of NDC acquisitions, which obviously supports future P&L performance. So in October, sales not too impressive, but can you give us an idea of the underlying momentum in NDC acquisitions and in the U.S. in particular?
Yes. And thanks a lot for the comment, Sebastian, regarding our listing. We're excited. So answering regarding October, the underlying business performance has been good. We are pleased with the development in October. And all in all, I think this fall is living up to our expectations. As you allude to, the impact of the Sports win margin is something that can happen because it's based on the sports results. We gave a figure in order to sort of let all stakeholders understand the estimated impact from our view. But to be honest, it's something we're used to in Better Collective and it's not really affecting how we run our business. And as I also just stated, this will normalize over time. We have seen it several times. So we continue business as is and are pleased with the developments.
Okay. Next, I guess I am at the market today trying to get a handle on what is the actual impact from this transitional phase towards revenue share going forward. So I mean, given that transition has been going on for a while now, is there any reason to think that the margin should differ materially from what has been at historically in the quarters ahead? Or how should we the interpret your CEO letter comments here, Jesper? And also a follow-up to that, how long should we expect the carryover into 2024? I mean, where is the inflection point as you see it?
Yes. Perhaps I can take that. The transition started last year, and the contracts that we are seeing in the U.S. and the deal making partially some on full revenue share and also some on what we call hybrid contracts where we received a partial revenue share upfront. So that's the mix we're looking into and some still being on CPA. We expect more partners to move in on this contract received also in the first part of next year. So it is something that we will try to incorporate in our guidance as we have done this year. So we don't expect to see a lot of different margin impact, but I think it's important to understand that if we just continued on full CPA, clearly, the revenue and earnings would have been higher year on year now. And what we are looking into when seeing all these NDCs going into these revenue share type contracts is that we are actually, just for this year, pushing revenue and earnings ahead of us. And here, you should think in double-digit millions of euros that we are basically banking, if you like.
And could you remind us, Flemming, what is sort of the usual lag time between -- I mean you're taking the upfront costs from acquiring revenue share NDCs and then do you sort of get the cash flow effect?
Yes, I think you should think here, of course, if you get something upfront, we need to sort of be above that before we then see the revenue share kick in. But for -- in this situation, you should see a trailing at least 12 months effect from beginning to where we see a positive impact.
Okay. Very clear. And then I just have a last question here. So some changes in the U.S. sportsbook landscape over the last months, most recently with ESPN BET joining the party as late as this week. So could you just remind us what are sort of the dynamics? How does this dynamic affect your line of business? Does more competition in sportsbooks mean more appetite for affiliation marketing? Or could you maybe share some thoughts on this?
Yes, in general, competition is good for us as we cater to all the players in the market. The more players, the more potential customers for Better Collective. And concretely related to ESPN BET, we saw Barstool Sports being pulled because of the deal of ESPN BET. So in Q3, as an example, we had lost revenue with Barstool, whereas we now, as ESPN BET has on live, are doing business with them. So that's, of course, something we are pleased to see and off to a good start with them.
And the next question comes from the line of Hjalmar Ahlberg from Redeye.
Maybe just a few more on the October trading update there. Is it correct to understand that -- I mean, you gave us the number EUR 8 million impact from sports win margin. Is that compared to what normalized margin would have? Would that have been EUR 8 million higher, so to say?
Yes. It's basically according -- we try to forecast the margin based on historical performance. So this is the impact that we are seeing compared to expectations just for one month.
Right. And then, Jesper, on the mix, Europe versus North America in Q4 based on this sports win margin, I guess that is more impacting Europe, Rest of World and U.S. Is that a fair assumption as well?
Yes. That's a fair assumption.
Yes. And then looking into November, December, I mean, we had the World Cup last year, which, of course, is strong. But would you say seasonally that November and December in a normal year are stronger or more similar to October in general?
Well, in general, all of Q4 is high season for us. And obviously, the effect of the World Cup is typically very strong on the number of new depositing customers that we deliver. And on the revenue, it's -- we expect a lot of activity because there will be many games ongoing. So maybe sort of not as big an effect compared to NDC effect from the World Cup. But in general, Q4 is the exciting quarter for us with high activity. And actually, we believe that October was a good October and sports results are not something we can affect. And when we sort of -- for the effect of sports results, we're actually pleased with the October performance. So we remain positive about Q4. And as we have also stated, we have kept our guidance. So basically, things are progressing according to plan for us.
Right. And it would also be interesting here if you could elaborate a bit on the U.S. market with the NFL start. How the different states performed? I mean comparing maybe New Jersey, which has been around for a few years with the newer regulated states. And which were the growth drivers were all driving growth, so to say?
Yes. I think actually, we see growth across all states. Clearly, newer states have higher growth because of when it's new there's a spike, obviously. But we actually see a solid GGR growth, underlying betting volume growth also in the states that came out earlier after the PASPA repeal with New Jersey being the first one. There, we still see solid online -- growth in the online wagering. So it's across the board.
All right. And then just a question on costs. I mean stack costs were up in the quarter and then you did increase employees quite a bit. But I think you also mentioned that you had some costs for warrants. And did that impact -- I think you said like EUR 1 million, is that correct? Or was it less or more than that?
Yes. I think for our long-term incentive programs, we have to cost them in the P&L on basically relating to previous programs. So they are expensed over the vesting period.
All right. And regarding the question of Playmaker Capital, do you -- I mean how confident are you that it will be closed in Q1? Do you see risks of delays so that it's being later in the year?
We definitely expect that to close in the first quarter. Since it's a public company, there are process now where there will be, hopefully, shareholder approval. And also there are certain regulatory allowances that we need to get. We think that we will close the transaction in Q1 at the latest.
[Operator Instructions] And the next question comes from line of Oscar Ronnkvist, ABG Sundal Collier.
So the first one, I would just like you to expand a little bit on the comment you made about North America contractual transition towards revenue share has been moving faster than expected. So, if I remember correctly, I think we saw a steep acceleration in the share of revenue share NDCs in North America in connection with the CMD you had earlier this year. And then we saw a figure of 63% being sent on revenue share. Now you arrived at 64%, which is kind of similar to February levels. So I would just like you to expand on how you think about the number in comparison to the beginning of the year with regards to your comment about it moving faster than expected towards revenue shares? So -- yes.
Yes. So it relates to the structured deals with the different partners, whereas as Flemming earlier on in the call alluded to how we try to balance it with part of the revenue share like as an upfront, a hybrid payment, and that varies in size from different partners. So that's an effect we have seen in Q3 with a high influx where the upfront hybrid was a bit lower than what we have seen early on with different partners. So that's where we see a bit of a change. But that also means that since we have not taken as big a hybrid, the revenue share effect and commissions should then kick in earlier than compared to a bigger hybrid. So that's sort of the change we've seen there.
Okay. So just a follow-up -- sorry?
No. And I think it's something that we try to steer and manage within our guidance, obviously. So it is, I would say, something that we have tried to steer through. And we can say with the ambition and pushing as much towards revenue share as possible and still keeping revenue and earnings within the guidance.
Understood. So we could expect that 64% to grow as a share of the total in the coming few quarters. Is that how to interpret it?
I think that's a difficult question to answer. It is down to where the traffic is going, and that is obviously something that we cannot see it fully. So I don't think we can just say that.
Okay. Got it. Just another question on -- you made a couple of smaller acquisitions and asset deals recently. So obviously, you're targeting top line synergies to expand the asset monetization. So if you could just say anything about how they have progressed thus far? So I know that they have not been consolidated for too long under your ownership. So just wanted to ask if you're comfortable in reaching the top line synergies ambitions that you have in the previous acquisitions?
Yes, it's, of course, early days, but performance is as expected, and they are already integrated into our European organization for the European brands. And we are basically now executing the playbook we have for the sports media brand in terms of improving the business models applied and then on the back of also growing audience. So it's going according to plan, but it is early days since they were closed in Q3.
Understood. All right. I think my final question would be sort of more on the short-term side. Just wanted to get a sense of the impact in October in Q4 and then in Q1. So starting off with October, you had a launch, I think, late September in Kentucky, which should have supported October revenues. And then you're entering a Q4 or the latter part of Q4 in November, December with a very tough comparable figures, I assume. And then also in Q1, you have pretty tough comparable figures. And correct me if I'm wrong, but we don't expect North Carolina to launch in Q1, right, that would be rather in Q2. So I'm just trying to get a sense of the -- because you're reiterating the guidance, right? So it implies that Q4 will be a pretty sharp slowdown. So I'm just trying to get a sense of the underlying activity versus the sort of, yes, tough comparable figure that is weighing on short-term revenues or short-term growth, I would say.
I think for Q4, obviously, with October coming in at EUR 24 million affected by the sports win margin, that is, in comparison to last year, weak. And as you rightfully say, we have the World Cup as a fairly strong comp. That said, we still see good performance in the business, again, alluding to the fact that we have stated that we keep our guidance. For Q1, also, you're right that we had the Ohio state launch this year in Q1 that there was a very strong state launch. So again, a tough comparison from there. But to be honest, Oscar, we are focused on the long term and executing the business and we think we're really developing according to plan. So there can be quarters with tougher comparisons. But for the long term, we definitely think we are in a very good position and are building on the strength we have. So in on the back of the closing of Playmaker Capital, we'll be very focused on a good integration there and harvesting the synergies with Playmaker Capital, and that's a big opportunity for us. So again, we have our sort of head down focus on execution and are excited about the future.
Dear speakers, there are no further questions on the phone. I would like now to hand the conference over to any written questions.
Yes. I think there is some questions from Miguel Diaz. I read the question loud. Hello, the cash flow from operating activities was significantly lower than in previous quarters. Do you expect the operating cash flow to improve in the coming quarters? We can say, yes. And also as commented in the webcast, we see some revenue payments coming into Q4 being postponed. So we expect a normalized cash conversion and year-to-date, it has been 95%.
Then we have a question from Mr. Henrik Larsen. I read the first question. Last year, you had a slide about sports win margin, which was around 78. October seems to have been very low, how low?
We have given a figure in the report commenting on the revenue and earnings effect to a normalized margin, and that is more than EUR 8 million of impact. So it has been a very low margin from impacting our revenue share counts. As Jesper alluded to, that is something that we see as transient and typically will normalize.
Then there is a question again from Mr. Henrik Larsen. Could you elaborate about the EUR 8.3 million calculated interest expenses on certain balance sheet items?
I believe that the EUR 8.3 million mentioned, that is the total interest expenses. So in that, there is a smaller calculated interest due to the IFRS treatment of certain balance sheet items. So the vast majority is interest and adjustment of public shares in Catena Media. Then there is a question from [indiscernible]. How have you managed to strike a deal with the newly launched betting company ESPN BET in the U.S. whereas your competitor Catena Media has not? What do you do differently from them? I think I'll pass that to you, Jesper.
Yes. Thanks, Flemming. I'll comment on our position in the U.S. And we have a very strong position. We have some strong brands with a very engaged audience and also significant audience in terms of size. So we are very well positioned to both deliver exposure for retention for the existing sports books, but definitely also for the newer ones that are launching, that had an interest in building a position in the American sports betting market. So there, we can deliver new depositing players at high volumes and significant exposure towards their core demographic and audience. And that is exactly the position we've been focusing on building since the repeal of the PASPA Act. And why we have acquired quite a lot of strong sports media brands in North America with that intent of becoming the #1 in the market. And I do believe we have that position, which is why we are also able to strike attractive deals with the important players in that market. And with that, we will conclude this webcast. Thank you very much for listening in and asking questions. We wish you all a great day. Thank you.
That does conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.