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Ladies and gentlemen, welcome to the Evolution Gaming Group Q2 Report 2019. [Operator Instructions] Today, I am pleased to present CEO, Martin Carlesund; and CFO, Jacob Kaplan. Gentlemen, please begin.
Thank you, operator. Welcome, everyone, to the presentation of Evolution's interim report for the second quarter 2019. My name is Martin Carlesund, and I'm the CEO of Evolution Gaming. With me, I also have our CFO, Jacob Kaplan. As we used to, I will start the presentation with some general comments on the quarter and after that, I will hand over to Jacob to take us through the financials. And then, I will -- we will round off with some comments on what we see ahead, followed by questions.Next slide, please. We are very pleased with the development in the second quarter, which is a result of all the hard work performed of our teams over the past year. The main highlights of the quarter is, of course, all the new games that we have launched and the great reception that they have had among operators and players.You can see how the games not only contributed to Evolution performance but also to the Live Casino vertical as a whole. We can now also clearly see that we are expanding with our new product into new player segments expanding live. Let's have a look at the numbers. Revenue growth of 45% amounting to EUR 85.7 million compared to EUR 59.3 million in Q2 2018. EBITDA increase of 63% amounting to EUR 42.7 million compared to EUR 26.2 million Q2 2018. EBITDA margin of 49.8% compared to 44.2% same period last year. And an EBIT increase of 69% compared to the same period last year. I'm particularly happy to see that with the revenue growth of 49% in the first half of 2019, we even outperformed the revenue growth of the same period last year amounting to 35%. I'm also satisfied with the margin in this quarter. We're constantly working hard to restructure the cost base to reach effectiveness and cost awareness. Also adjusting and optimizing our studios together with investments in our new scalable games creates an efficient operation and the margin for Q1 -- Q2 is a good sign of this work. Looking at revenues. Live Casino really continues to be the strong vertical of online gaming, and we see good growth across market. We continue to invest in studios and game development to meet demand, and we have also started to build a new studio in Pennsylvania in this quarter.During the quarter, we have also went live with our first table in our fantastic new studio in Malta, and we continue to migrate tables throughout 2019. Next slide, please. We show bet spots as an indicator of activity in the Evolution network and had about 5.6 billion bet spots in the second quarter, which is equivalent to an increase of 56% compared to last year. As has been the case for several quarters, bet spots continue to be higher than revenue growth, which is because of the latest games attract smaller and more numerous bets and new softer player types. This development underlines our strategy to develop games that find new players in new parts of Live.Next slide, please. We continue to recruit the best talent in all our markets, and we are now 6,600 employees equivalent to about 5,000 FTE. Our aim is to be an attractive employer for both the young people who enters the labor market for the first time as well as for the super talented tech developers and best product people in the market. No matter the age or experience, everyone in Evolution family shares a winning mindset that plays a crucial role for the company's performance. Evolution's success is built off thousands of young, ambitious and fantastic persons. That is very important and well worth to remember. Next slide, please. I've talked about innovation and all our game launches for several quarters now, and this will remain the main theme for 2019. 2019 is the year of innovation, where Evolution increases the gap to competition even further. It's the year where all our customers will get an even stronger competitive advantage, reaching new player segments and gaining market shares by using Evolution. In the second quarter, we went live with all our new titles of this year and reception has simply been amazing. The game shows are a big hit and Live MONOPOLY continues to deliver way beyond our expectations. It's actually already bigger than Dream Catcher. As we have aimed for the game shows, the game shows find new player types and thus they contribute to overall growth of the Live vertical. We're also very pleased with the reception of our dice games. Even though there have been some dice games in the market before, we've clearly seen a gap and players love our take on the Lightning Dice as the main attraction.In addition to the new game categories, we also continue to focus on table games, which is -- with new innovations, Deal or No Deal, [ Free Blackjack ], Side Bet City have also been off to a strong start. Innovation is key for our long-time growth and continued leadership in the market. However, not to forget, our core games continue to perform and Live is closely connected to traditional casino players and their preferences. That's why we continue to optimize our core offering as Roulette, Blackjack and Baccarat will likely remain our main games in terms of revenue for many years to come. All in all, Live continues to grow and our portfolio is the one to have if you want to leverage on this trend. We see how the operators really are putting a lot of effort into their live offerings and how live players increasingly -- how live is increasingly important and plays strategic role for the brands and attraction.Evolution expects to deliver the best Live Casino experience out there, and we will continue to innovate the industry going forward.Next slide, please. Let's look at our markets. As you can see, the relative share is quite constant quarter-on-quarter at the moment. Rest of the world increased slightly its share of total GGR, where Asia and North America both are growing faster than the group average. As mentioned, we are now working on a new studio in Pennsylvania, together with a substantial investment in the studio in New Jersey, which both will contribute to the growth in the U.S. market. The Nordics have grown at a somewhat slower pace, following the intense first quarter connected to the Swedish regulation. We continue to see a stabilization in U.K., which -- with a healthy growth year-on-year. I will now hand over to Jacob, who will guide you through the numbers.Next slide, please.
Thank you, Martin, and good morning to all of you listening. I'm on Slide #7 titled financial development. Revenue amounts to EUR 85.7 million in the second quarter. That's a 45% increase year-on-year. Adjusted for the business acquired at the beginning of this year, organic growth is 40% in the quarter. This is in line with the growth rates achieved in the same quarter of last year, which was a quarter supported by the World Cup. So strong top line development in this quarter, which we are very happy with. The main event for us during this quarter has been the launch of our 10 new games. As Martin mentioned, the games themselves have contributed to growth as many of them attract new players into the network and also the launch events themselves have attracted traffic to other existing live games. There's a natural -- a lot of focus on the new games and should be since they're new, but from a revenue point of view, the core table games, Roulette, Blackjack and Baccarat will continue to be the most important ones. And we still see a good development for all the core games in this quarter. Three months ago, we stated that many of our clients have a good momentum in their Live business, leveraging investments made in tables during 2018. That continues to be true. Also this quarter, we have added new tables also during Q2 but at a more even pace than during 2018. This helps efficiency in our production of table environments and in the studio operations in general. As we grow top line, we also see effects of economies of scale in our administration and product development. In all our supporting functions, we constantly look to increase efficiency and lower cost. We believe a tight cost control gives us room to invest and add resources quickly when the need arises.EBITDA amounts to EUR 42.7 million for a margin of 49.8% in the quarter, a very strong margin. It exceeds also our own expectations from earlier this year. As you have seen in the past, margins still vary quarter-to-quarter. This quarter, we see a lot going our way. I mentioned the positive revenue momentum coupled with the improved efficiency, and also many of the smaller one-off items that come every quarter. So they're not really one-off, but a lot of that is going our way this time as well. It should also be noted that compared to 2018, margin is positively affected by IFRS 16. Adjusting for that, the EBITDA margin in the quarter would be 48.1%, so still very strong. We signaled already at our previous interim report that we would be in the upper end of our previous margin guidance for the year, and based on the strong first half of the year and where we are right now, we think we can maintain the margin achieved during the first 6 months, which means that we increased our margin expectation to 47% to 49% for the full year.Adding the caveat as we always mention when discussing margins that our main priority is revenue growth and we will sacrifice margin for revenue if there is such a trade-off. Operator, let's go to the next slide, please. Looking at the more detailed P&L for the period. We can again see revenues for the quarter at EUR 85.7 million. For the first 6 months of the year, revenues are just over EUR 165 million, a 49% increase compared to the previous year. That is helped by acquired business during the year. Organically, it's 45%. And this is a higher growth rate than achieved during the full year 2018 when we grew 38% for the full year. Moving down. Personnel expenses totaled EUR 30.4 million in the quarter, up 26% compared to the same period last year. The increase in staff mainly driven by increase in game presenters, but we're also recruiting actively on the engineering side. Depreciation is EUR 6.1 million in the quarter, up 37% compared to the same period last year, similar increase for the 6-month period with depreciation up 38% comparing the January to June periods. This includes the effect of IFRS 16 of about EUR 0.6 million per quarter. Other expenses include, among other items, consumable equipment, communication costs, consultants and royalties. The line amounts to EUR 12.5 million, an increase by 42% compared to the same period last year.Summing up, total operating expenses increased by 31% year-on-year in the second quarter and 38% for the 6-month period, January to June. Further down, tax is at EUR 2 million in the quarter, it's a tax rate of 5.6%. All this sums up to profit for the 3-month period of EUR 34.5 million, equal to an earnings per share of EUR 0.19 per share. For the rolling 12-month period EUR 0.6 per share -- earnings per share.Since our Q1 report, our share has been split 5:1, which, of course, affects the EPS figures shown here compared to what we have shown in previous quarters. We can go to the next slide, please. Showing cash flow and financial resources. To the left in the slide, we have a chart showing capital expenditure. The light gray part of the bar shows CapEx in tangible assets that mainly relate to investments in our new studios. It amounts to just under EUR 4 million in the quarter. The main projects this year are the new studio in Malta, as Martin mentioned. We're live with the first tables during this quarter. Further expansion to this is also ongoing. And the second half of the year, we plan the studio in Pennsylvania and also expansion in New Jersey as the major projects. Also in the second half, we expect CapEx related to new studios for new games to increase. In general, CapEx for the game show style games are -- is significantly higher than for our previous games. The blue part of the bar represents investments in intangible assets, and it's related to development of new games and features to the platform. Normally fairly stable, a bit lower in this quarter at around EUR 2 million. We mentioned it before but in Q4 of 2018, the intangible figures were boosted by licenses for some of the newly launched games. Altogether, given our plans for expansion in production studios and also in dedicated game studios, we now see that our total CapEx for 2019 will be slightly higher than 2018 in euro terms. We have previously said it would be the same, so we're increasing our estimates of CapEx slightly. CapEx in relation to revenue, we still expect to be at a lower level in '19 than in 2018. Moving on. In the middle of the slide, we see -- we show cash flow, operating cash flow almost at EUR 30 million in the quarter. Cash conversion for the 12-month period is more or less unchanged from the previous quarter at 73%. And to the right in the slide, a look at the balance sheet. Dividend has been paid out during the quarter. Apart from that, no big changes. It shows a continued strong financial position.That was the end of my prepared remarks. I'll hand back to Martin for some closing words. And we'll take questions after that. Martin?
Thank you, Jacob. A few words on the next slide then -- looking ahead, a few words to conclude this report and the presentation before questions. Live games continued to take market share. We continued to support this with our new games, many of which have only been out in the market for a couple of weeks. We will also continue to invest. As I mentioned earlier, Pennsylvania is a project we're working on right now. We're also expanding in other studios. We showed strong margin in this quarter and have an increased -- and have increased our margin expectation to 47% to 49% for the full year. And as always, we will do our utmost to continue to increase the gap to competitors and improve our offering to operators a little bit every day. Thank you all for listening. Enjoy the rest of the summer, and we'll speak again in a couple of months. Now, let's move to questions.
[Operator Instructions] Our first question comes from Aurore Tigerschiöld of DNB.
I was wondering if you could maybe talk -- you have increased your expected margin, as you mentioned, the range to -- from 47% to 49% for the year 2019. And I was just wondering if you could shed some light on how sustainable you think that this margin is in a long-term perspective.
We increased the guidance to 47% to 49%. We expect that for the full year. We don't have any guidance for the coming period after that. We see the level that we now guide on as sustainable for the full year.
Okay. That makes sense. And then moving on to my next question. Regarding the development of the U.K. market in general, we see that there's been sort of a slow growth. However, you keep to be staying at a stable level. And I was just wondering if you could talk about your presence there.
Sorry, I didn't really get the question. Could you please repeat it? I'm hearing you a little bit difficultly.
Okay. I was just wondering if you could talk about your presence in the U.K. market. We've seen that market, in general, has been slowing down in growth, but you keep to be -- you state -- you seem to be keeping a stable level.
We're keeping a stable market share in our opinion. The U.K. markets have been under pressure. I think it's important to remember that it's still growing. It's not so -- it's intensively growing. I don't have any estimates for the future, but we maintain our market share.
Okay, perfect. And then a final question. Could you just talk a little bit about your capacity in terms of studios? You are growing, and you're investing in growth [indiscernible]. And I was just wondering when -- are there any future or close up decisions of another studio.
We haven't communicated any decision regarding new studios. We have communicated that we're expanding in Georgia. We're basically doubling in New Jersey, and we are -- initiated the build in Pennsylvania. We built the new studio in Malta. And as we continue throughout 2019, we will look into exactly how to dimension and in an effective way increase the studio space further. And as soon as that is, we will inform and comment it to the market.
Our next question comes from the line of [ Erik Sanderson ] from ABG.
Yes. Good morning, and congratulations to a good quarter. So I will be asking these questions for Erik Moberg, am unable to attend. So in terms of Asia, the aggregators we have spoken to all indicates that the volumes are higher than Europe, but the commission levels are lower. So just how sustainable do you foresee the current commission levels in Asia to be?
In general, we don't comment on the commission level.
Okay. But do you think it's -- will be on the same level? Or you don't comment on the development?
We don't comment on the commission level.
Okay. And in terms of the competitive landscape in Asia, what is your comment on that? How is the competitive landscape?
There are numerous of live providers in Asia. The competitive landscape is different from Europe. There is -- they are the market leader. It's a very, very big market with a number of significant live providers.
Okay. And looking at the personnel costs per employee, it has been relatively flat the last 8 quarters. But since you already expand in North America, which should have like significantly higher minimum wage than in Latvia or Georgia and obviously -- how is that possible? Could you give some flavor of what is the native language of your recent hires?
On the wage cost, it's -- I think you outlined it -- you answered it almost yourself. I mean, it's, of course, varying in different parts of the world. And we are growing in North America, which has relatively little bit higher wage costs, and we're also expanding in Eastern Europe, where wages are a little bit lower. So the mix in total has been fairly stable. But, of course, as we continue to expand in North America, that -- it will have a little bit higher wage cost in that sense. But there is no dramatic shift in the kind of the -- or the position of the workforce right now.
Okay. Thanks. And last question from me. In regards of the rest of Europe, we have a hard time understanding what regions are driving growth there. Could you give us some color on the growth around Russia and various Bitcoin casinos were relating to growth?
We haven't broken it down that way. I think in Europe, with almost all markets still growing. And, of course, not exactly at the same pace. But I think all the developments where Live Casino takes increasing share out of online that's -- we see that in many markets. So I would say that's probably the main driver, same as everywhere else.
Okay. But in terms of regulated markets versus unregulated markets in Western Europe, which -- what do you think grows the most?
We haven't broken it down like that. I'll just say the -- in the quarter, about 35% of GGR is from regulated markets. So that's...
And our next question comes from the line of Lars-Ola Hellstrom of Pareto Securities.
Congrats on a --
Sorry, we didn't get you. We lost you a little bit.
Do you hear me now?
We hear you now.
Now we hear you fine.
Perfect. To start on the strong margin. Jacob, you explained it a bit, but can you give some flavor how much of the effect that is increased efficiency in the Tbilisi studio? And how much that is -- that the new games is actually affecting in Q2? It can't be that much of an effect to the margins in Q2.
They're all contributing. And, of course, increasing or increasing volumes in Tbilisi and the good efficiency there is definitely part of supporting the margin. But so is also kind of the scalability, in general. And also not just in studio operations. As I mentioned, I think also when we look at supporting functions and administration, also there, we constantly look to place those functions in the most cost-efficient places and to be -- we don't want to starve ourselves. But we also think that it's kind of a lean diet is good even when you're growing. And I guess we'll grow a little bit in phases. I think maybe in this quarter, it's a quarter where we -- a lot of these things are kind of going in our direction. I think we will, of course, have periods where we need to add more resources in a more rapid pace in administration. But all in all, we think that we can -- sort of looking over the full year, we think that we can keep roughly the level that we've had during the first 6 months, also during the second half. And that's -- it's not a one-off effect. But I guess, it could -- I think I put this way earlier. It's -- in every quarter, you have a number of things that are one-offs. And there's always one-offs. We don't make adjustments for them. And sometimes, you have a quarter like this one where kind of a lot of that goes your direction. We had a similar quarter in Q3 2017 when also kind of a lot of things just went our way in the quarter. So we do have a very -- the margin varies quarter-to-quarter, that should be remembered. But we do see possibility for -- our expectations are higher on margin right now than they were 3 months ago.
And comparing Tbilisi with the Riga studio, is it as efficient as the Riga studio now? Or is it even higher margins in Tbilisi?
The Tbilisi studio is now growing significantly. It's reaching a scalable point. If you remember, we talked about during 2016 that would prove the business model, and it became scalable. And now we have grown so much in Tbilisi that it's reached a scalable point. So Tbilisi, as a studio, is more efficient now and contributes more to margin now than it did earlier. So that's very positive.
And also on the new games. As all of the new games is fully scalable. As they increase the share of revenue, it should be supportive for a margin?
Yes. It will be supportive to the margin. Important to remember that some of the games have only been live in the network for a couple of weeks and some a little bit longer, but mainly during Q2. So it contributes. And it's growing. And it has been an amazing reception and we're really fulfilling our strategy to expand the Live vertical in our market. All in all, that is fantastic. But we see that this contribution will, of course, increase during Q3 and Q4.
It should be said, though, that in that context, I'll just add to that, that even though the new games are all scalable and a little bit more -- less staff intensive. The investments in them are substantial, and that's part of why we slightly revised upward our outlook for investments in the second half. So you can say, we put more into this -- the studio build, but then that doesn't show up immediately in EBITDA.
And the final question on margins. I ask this question every quarter. In New Jersey, do you see -- is it more similar to Europe still than you initially thought in terms of game mix? Or has it more turned out to be as you expected in the U.S.?
I would say that it's -- the game mix in New Jersey is still as we -- what we expected. It's exactly like what we expected, and often it's more -- it's more -- it's a Blackjack heavy market. It will continue to be so. But we are also adding other games to the mix. But it's more as expected.
And when will you try to launch Infinite Blackjack there?
Soon is the -- I don't want to give you an exact date, but soon.
Also -- okay. Also on growth in rest of Europe. If the Dutch weakness that we have seen from -- for operators, is that reflected in your numbers as well? And moving on, what do you expect from the marketing done in Italy?
It's a -- as you know, we don't break down the market indeed. But yes, I mean, I think we commented on that also last quarter that the Netherlands even though it's still growing, it's relatively slower within the rest of Europe category. So that still holds true. The marketing done in Italy, I think, less dramatic. We have no real strong views there. Italy is still doing well.
And the final question from me is your customer GVC. As far as I have understood, Playtech is let into the bwin brands. How is your negotiations going with GVC regarding Ladbrokes and the Coral brand?
We naturally don't comment on the negotiations. I can comment on the competitive landscape a little bit. I believe in competition. I believe that we will -- as we are strong, we are growing, we are the market leader by far, and we are increasing the gap to competition. There will be -- we will see competitors on more and more of our brands. We're not particularly worried about that. We see that as a challenge. It keeps us on our toes. So that's it.
Our next question comes from the line of Mikael Laséen of Carnegie.
My question is on your new games. Can you talk a bit about the reception? You mentioned that this has been really good? Can you maybe say something about sort of what type of games that have performed the best? Is there some stronger start? Or do you have some more color on these new games that you have launched in Q2?
Yes, that's -- the easy comment is that our flagship release of MONOPOLY is fantastic. The reception has been amazing, and we see really interesting player numbers. So the one that stands out will be MONOPOLY. And then it's a bit early for some, and it's -- it's early for every game. And all of the others have been received very well. Both the dice games, Deal or No Deal, Side Bet City, they are all performing and finding their player categories and the players. And as you saw on the bet spots, we are also driving now constantly the number of smaller bets up. And you can see that by that, we find the new players.
Okay. Great. And how have they been adopted by your network, your customer base, so far?
We are doing -- we are much better in releasing. And we are, of course, not to 100% of the network, as you understand, it's still early. We're working on it. But we have had good releases and they have been adopted well so far.
So there's still quite a lot of operators that so far not yet started to market them or...
We don't comment on the penetration of the new games to the market. It would be too detailed and it would be a competitive advantage.
But I think it's fair to say that, I mean, the games have been rolled out quite broadly from the start. Of course, with kind of step-by-step approach. But it's not that they're only on a -- from a couple of operators in a [indiscernible] launch or anything. But they -- all the 10 games are launched. And that's actually been a big event for us this quarter that we have managed to do that. It's gone well from a technical perspective. Collaboration with operators has gone well. I mean, we've never launched 10 games in this short period of time before. So that's something that we're -- as from a -- [indiscernible]. But it's kind of -- just from an operator point of view, it's worked well, and we are really happy with that.
Okay. And you mentioned that you will invest in a new studio for new games. Can you say something about that?
Yes. Let me clarify there. When -- what I mean is when the new games, they are, you could say, a game like MONOPOLY, it's a little substudio within our Riga studio in that case. So just meaning that -- the game studios themselves become -- they're like small, quite extensive build in themselves, each of these new games, which is a larger investment than adding one more Blackjack table or a few more roulettes. So that's what I meant. So it's not a new location. It's studios within the current studios, put it that way. So thanks for that question so I could clear that up.
[Operator Instructions] Okay. As there are no further questions at this time, I'll hand back to our speakers for the closing comments.
Okay. Thank you, everyone, for listening. I'm happy with the report and have a very nice end of the summer. Thank you. Bye.
Thank you. Bye.