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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to the Evolution Gaming Group Q4 2017 Report. Today, I'm pleased to present CEO, Martin Carlesund and CFO, Jacob Kaplan. [Operator Instructions] Gentlemen, please begin.
Thank you, operator. A very warm welcome to those of you on the call and also to those following us over the web. My name is Martin Carlesund, and I'm the CEO of Evolution Gaming. With me today, I have CFO, Jacob Kaplan. I will start by giving some comments of our performance during 2017 and also the fourth in particular. I will then hand over to Jacob for a closer look at our financials. After that, I will round off with some outlook for the future, followed by questions. Next slide please. Q4 was a very good finish of an exceptional year for Evolution. During 2017, we achieved 54% revenue growth, while at the same time improving margins. We have also improved our position in many other ways and increased our gap to competition even more. Lots of hard work but naturally also external factors supporting our development. We established ourselves at the higher margin level, and clearly proven the scalability of Evolution's business model. I think that is very important.We are really working hard. Our management is performing and we are staying ever so paramount on our mission to continue increasing the gaps to our competitors. So let's look into the figures and highlights of Q4 2017. We had a revenue growth of 48% increasing to EUR 50.7 million. EBITDA increased by 74% to EUR 22.6 million. EBITDA margin up 44.6% in comparable to 37.8% last year. [ EBITDA ] increased by 86% to EUR 18.8 million. Just to close on the period, we went live with our studio in Vancouver, Canada. I'm very happy with that. We went live 1st of February. We still on plan for our launch of our new fantastic studio in Tbilisi, Georgia. It will go live during Q2.We are increasing the efforts and the focus and effectivity of the product development and continue to with that mission increase our gaps to the competitors. We participated in ICE, Europe's major B2B gaming event, where we in total released 7 new products which is really a record in comparison [ what we have done in the quarter ]. Even with this fantastic year [ down about ], I want to reiterate. We are paranoid. We want to achieve more. 2018 is a New Year while 2017 gives us a great foundation, we will have to own our success again this year, every day. We have to make Evolution better every day. Next slide, please. We have a continuous strong increase in activity across the network. We'll give you [ best support ] as an indicator. While we see they have increase of [ 66% ], I am happy with that, with the development during 2017. Our liquidity in the network, that largest in the Live industry is very valuable asset in many ways. These with our BI to understand player behavior and what the player likes or dislike. As we introduced more soft games and also turning during buildup phases, we will see a healthy higher increase in activity in the network than in revenues. This liquidity is also very important and unique to Evolution when creating for example Jackpots on our products.Next slide, please. Q4 was [ very tough ]. We delivered many new table and as a consequence, we continue to increase the number of employees during the quarter. We also foresee this development continuing during the first half of 2018. And most likely peaking just before FIFA World Cup starting in June. As we at the same time operating -- just opening the studio in Tbilisi, start development of new studio in New Jersey and increase our efforts in product development, we are coming into an investment credit revolution.Next slide, please. We are full speed ahead with the Tbilisi studio step-up and we are on plan for Go Live in Q2. Tbilisi studio with an 8,500 square meters will be our next major delivery hub and the best studio we've built so far. It will cater for the expansion in the coming 2, 3 years. There are multiple challenges to set-up a studio of this magnitude in a new country and I am proud of how our EVO team and management takes on this task. At the moment, we are about 30 employees but within 1 month, we will be 100. I simply want to share the excitement I feel for this expansion. It's simply amazing. In parallel with the Tbilisi project, we have set-up our first new American studio is Vancouver, Canada. It went live on 1st of February. We are still in the [ tune ] phase with our customer BCLC and I look forward to good developments on that market.We will do in the second half of 2018, start building our second studio in North America, New Jersey. At this moment, I also want to highlight the importance of Evolution is being able to handle several large projects in parallel. We not only have got the business model scalability but we also have the real delivery of physical scalability. I'm very happy with that, and it has been a big challenge.Next slide, please. During ICE, 6 to 7 February, the largest European B2B show as you already know. We released a record-breaking 7 new products. I would like to highlight the groundbreaking new Lightning Roulette, which is a Classical Roulette with an RNG generated multiplier hitting 1 to 5 numbers each time. It's world news, and I believe it will be attractive to both new segment, as well as existing Roulette players. I as well want to mention that we now enter into the RNG table games with this [ first out ] Roulette. We have the ambition to make the world's best table games also in RNG and head down this lot to make our offer in table games complete. As the last highlight, I would also like to mention our fantastic new [indiscernible], where the most valuable players can experience a very exclusive and private game. In total, this marks our increased focus on product development and our ambition to increase the gap to competition here and more. As mentioned, we commit an investment phase during 2018 to deliver more and completely new games to the market. We also aim to make more soft games as our Dream Catcher during 2018, which by the way have been a great success.With that, I will leave over -- give --- leave it over to Jacob Kaplan. Next slide, please.
Thank you, Martin, and good morning to all of you on the call and also those of you following via the web. Yes, we are on the next slide please. As you heard Martin state earlier, Q4 was a good finish to a very good year. Revenues amount to EUR 50.7 million in the fourth quarter up 48% year-on-year and up 11% quarter-on-quarter. EBITDA as you can see in the gray bars in the chart, EBITDA amounts to EUR 22.6 million for the quarter significantly up comparing to the same quarter last year and slightly up also compared to Q3. EBITDA margins, while higher than the same period last year at 45% is slightly lower than that in Q3 when it was 48%.Costs are up in Q4 mainly driven by expansion in number of tables and studio space. Our expectation from last time we spoke after the Q3 report of around 400 table at year-end turned out correct. During 2017 growth in number of tables has been tilted towards the second half of the year. This has put pressure on our recruiting and its cost driver in the fourth quarter as mentioned. As we also said in Q3, we feel that we have established ourselves at the higher margin level towards the end of this year compared to where we were coming into 2017. For the full year 2017, EBITDA margin is 45% that compares to 38.6% for full year 2016.However, also as stated previously margins will vary quarter-to-quarter. In the short-term for Q1, given the investment in new studio capacity if anything, I'm expecting slightly lower margin compared to Q4. Also in terms of growth, 2017 has been exceptional with the normal underlying seasonality pattern grounding in the overall growth. In Q1, '18, top line growth will be slightly lower than in Q4 as we faced tougher comparables. So in percentage terms that development continues.Our increasing size of course also makes keeping the growth rate more difficult. This is interesting to note that during 2017, we have added business basically the size of an Evolution from 2 - 3 years ago. So somewhat normalized growth coupled with investment in studios and new product launches. As if Martin outlined, will affect financial result during the coming months. That said, growth prospects for the year remain very strong and we are extremely excited about the new product that Martin just mentioned and we believe they will also support increasing growth and margin during the second half of 2018.Let's go to the next slide for a closer look at the P&L in the period. Thank you. As seen in the first column and commented on the previous slide, revenues in the 3 month period, October to December totaled EUR 50.7 million up 48% year-on-year. For the full year revenues up 54%. So moving quickly down to expenses. Personnel expenses totaled EUR 20 million in the quarter, up 25% compared to the same period last year. Mainly driven by increase in new tables, but we have also increased resources in IT and product development compared to the same quarter last year. For the full year, personnel expenses are up 36%. Depreciation is EUR 3.8 million in the quarter and EUR 13.8 million for the full year, increasing 33% and 41% respectively compared to the previous year.Other expenses include rent, consumable equipment, consultants other advisory cost also up year-on-year. Summing up, total costs increased by 32% year-on-year for the quarter and 38% for the full year compared to full year 2016. As mentioned a couple of times now, we are in a period of investment for the future both in terms of studio space and also when it comes to product development. All this to meet future demand and make sure, we keep increasing the gap to competition. We were in a similar situation in 2016, where we laid the groundwork for a great 2017. Of course, circumstances are not identical but I can see similarities between the start of 2018 and what we were facing then.We're taking important steps now that we will benefit from in the quarters and years to come. Moving down from expenses. Tax for the period is just EUR 0.7 million. Well, we have been slightly conservative in some of the estimates used for tax calculations during the year and when doing the full calculation now at year-end, we get a positive effect. So hence unusually low tax rate in Q4. Full year tax rate is close to 7% similar to what we had in 2016 and going forward. Yes, 7%, 8%,9% is a better estimate than the Q4 level of course. That brings us to profit for the period EUR 18 million equal to earnings per share of EUR 0.50 per share and for the rolling 12-month period EUR 1.71 per share. Operator, you can go to next slide, please. Graph to the left shows CapEx is EUR 6.5 million in the quarter whereof EUR 3.3 million is CapEx in intangible assets mainly related to our studios. It's roughly in line with what we had in Q3. As mentioned previous quarters, we will remain at this level also in Q1 and likely also at least part of Q2. And the share of revenue, total CapEx is significantly down 2017 compared to 2016 as we can also see in the slide. Operating cash flow and cash conversion both slightly up in the fourth quarter. To the right in the slide, a look at the balance sheet. At the end of the year, it shows we maintained a very strong financial position. The board has proposed a 100% increase of annual dividend proposing EUR 0.90 per share, meaning we pay out EUR 32.4 million to shareholders in a few months. I think, 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. Over to you, Martin.
Thank you very much Jacob. The next slide of the last one, look ahead. As mentioned earlier, 2017 was an exceptional year for us, both in terms of growth, but also moving our position forward. Lots of hard work behind that success but also naturally many external factors going our way. I'm truly happy with 2017 and Q4 and I look forward with excitement to 2018. We see good opportunities with continued growth in 2018. We have a long growth runway left with lots of opportunities in the coming years. Live Casino is still a relatively small product making up maybe 10% to 15% for the casino market in EU and less in the global context. 2018 would be a year with a new enhanced products in focus. [ Glove's ] 7 record-breaking new products aside, groundbreaking world-leading new products. I'm very, very proud of that. I believe that we with those products as well as [ comings ] stand a good chance to expand the Live vertical even further. We're very excited about that and I look forward to it. At the same time, we will continue to build new studios and we also see large demand of new tables together with our customers. We will continue to take market shares and increase gap to competitors. But we stay ever so paranoid and hungry and we will fight to make Evolution better every single day. With that, I would like to thank everyone for listening and let's move to the next slide and questions, please.
[ Operator Instructions ] Our first question comes from Rasmus Engberg from Handelsbanken
Can I ask you, you say that you see the margin declining in Q1 compared to Q4. With regards to the full year, how do you think about that? You talk about the new level here about 45%. Is that something that you think you can defend this year or increase or decrease?
Yes, I think 45% is probably a decent estimate for the full year. It's the level for 2017 and as we said, we feel that we kind of established that level which is higher than we had coming into the year. So that said, I mean, we've not given any new firm guidance or sort of launch any new long-term objectives when it comes to margin. So it will still vary quarter-to-quarter, but I think yes, as a starting point that's probably reasonable point.
Can you repeat what you said about what you think a good tax assumption was? Was it 9% or 7%. What was it for the year?
We have 7% for 2017, maybe slightly higher. But yes, 7%, 8% somewhere there.
And our next question comes from Martin Arnell of DNB Markets
My question -- my first question is this, you're talking about this investment phase and we see, we can see it in the costs. And I guess, it's lot of recruitment here. Should we see this as a similar sort of situation that was the case end of 2016 in the second half and then it resulted in payoff 2 quarters afterwards. Is that -- is this a similar situation, is my question.
Okay. I will answer it like this. I think that there are similarities. I think that it's not, you shouldn't say that it's all similar. What we are coming into right now is that we are focusing on product enhancement, new products, that importance we're really pushing to increase the gap to competitors, and I'm very proud of the ICE and the 7 new products there which we understand is a mark above. That comes out of, of course, some investment, but also efficiency. At the same time, we have the World Cup which I know will drive the increase of number -- of tables to the first half 2018. So that is -- that's in the cards and that are similar to the situation that we had, 2016, where many tables need to go live at the same time. In parallel with that, we are building the studios to cater for the growth for the coming expansions in Georgia. And that of course naturally drives a bit of cost and we are going to go live there in Q2. And in parallel with that, we are entering in the second half of the year, New Jersey. So there are -- I mean, we added basically roughly a 2016 Evolution on top of 2017 Evolution to create 2018. So that even though there are similarities, we are a different company, we're doing much more at the same time at the current than what we did the. But yes, there are similarities.
And talking about the World Cup tournament. Have you already received a lot of orders or how does it work when the operators order from you ahead of such an event?
There is an increasing demand, yes. I would say that we are current monitoring our delivery capability in comparison to the orders, but there are demand right now. Yes.
Okay. And in Georgia, when you go live in Q2, roughly how many tables, would you have up at the end of Q2, do you think in Georgia, specifically?
I don't comment on that number of tables per geography, but I gave you a hint of the size of the studio, where I indicated 8,500 square meters. And it's a large studio. And if we cater for a lot of tables, naturally as since it's going to cater the growth for 2 years or 3 years. It won't go live with that huge amount initially.
Yes, just to clarify there. I mean, it won't of course be sold from, I think your question was end of Q2. So it starts more like everything else, so -- but there's lots of room to grow there.
Sure. And of these products, 7 new products presented at the ICE. If you would have to choose one of them as sort of something you expect a lot from what would you choose? What do you think we should look out for in terms of products?
If I would choose 1, I would actually take 2, and then I would take. I mean, the Lightning Roulette, it's a world new type of Roulette. Never been seen in neither land-based or online. It's a RNG multiplier on the numbers and you can win up to 500x per number. It's a fantastic mix of RNG where we add that little thing to it which will thrill both new players as well as the current, I'm sure. It's a fantastic one. I'm very proud of that. The second one, which I will mention or the one that I am mentioning would be the RNG table game. We're rereleasing First Person Gaming Roulette which means that we have -- I would say, in my opinion revolutionized the table games. We will be doing something completely new with RNG table games and we intend to also take and make the world's best RNG table games. To make our offer in the table games complete. Those 2 is something that I would mention. [indiscernible]
That's fine. That's a good flavor. And finally, can you tell us more about this studio in New Jersey, the sort of, could you summarize the business case, I know you've been a little bit skeptic towards entering New Jersey before and what's changed and what should we expect from there?
We are planning to -- we are in the plans to initiate the studio build in New Jersey. We're looking to it right now, and I indicated it will be during second half of 2018. I'm still, you should be realistically [ definitive ] when it comes to the business case of New Jersey, don't expect any -- it's still only 9 million people, and it's not the largest market in the world. And the indications I have is not that, but it's still the first entry into U.S. and why we choose to do it right now is also that Pennsylvania are coming. If it's now or little bit later we will see, but we need to prepare for that. So I think the right moment to go in is right now.
And you can cater Pennsylvania from there if you would like, do you think?
It's not up to me to decide, and it's not 100% clear but opportunity of that is there. Yes.
Our next question comes from James Goodman of Barclays.
And my first one is on Evolution's industry leadership and I guess the assumption that the growth primarily comes here from market expansion. But I wanted to ask you, if you look beyond say your key #2 competitor in the market. Are there still material pockets of market share that you think you could win and if so, could you call out a few countries perhaps where you think or regions where you're underrepresented. That's my first question.
I think that we are driving the growth of Live in total. And I believe there are pockets of growth still there. As I said, we have a long growth runway ahead. We are Live still in Europe. Only it's like 10%,15% and I think that it will increase quite a lot from those levels. And we are driving that. We are leading right now when it comes to -- to competitors and the product and I can't point out any specific geography, where I think that we can actually gain more on the competitors than others. But in general, I -- with these investments that we are doing on in the product, we will continue increasing the gap and I believe that the players will choose, continue to choose our products before our competitors.
The other question, I wanted to ask was around the opportunity you see for potential acquisitions or mergers in either the sort of content or technology space. Are you taking some steps yourself towards the [ purest ] of RNG offering or be a tentative steps. I mean would there be opportunities for you to acquire any sort of studio content or to initiate any JV type relationships with any RNG type supplier. I wanted to ask, are you thinking about that?
When it comes to M&A. We are, as we have stated before constantly evaluating, we are looking. We want to do some mergers or acquisitions, but we are not stressed about it. We have a fantastic growth path ahead of us with our core product and we want to do the right deal, and the right deal to the right price or the right deals to the right prices. So we're constantly evaluating, we're looking. We haven't decided or communicated it. It will be content -- technical, so it's constantly evaluated. Then the M&A is a little bit sarcastic in its stochastic in its nature and we're not -- we haven't revealed anything, and it is what it is and we will continue to look for the right targets.
Our next question comes from Mikael Laseen of Carnegie.
Yes, I have a question about Q4 and in connection with Q3, I think that you said that margin should be in the range of maybe 45% to 50%, you had reached another level. And now, I guess, that you are below 45%, not long ago, not long time after that comment, and you are signaling even lower margins in Q1. What has happened? Can you talk about the other expenses and personnel expenses and what happened late in the quarter, was it a sales phenomenon?
Yes, hi, Mikael. No, nothing dramatic, really. I think, we were -- you're right. We were higher in Q3 close to 48% and I think when we talk about the level is more also for the full year that the margin is 45% and up from 38% previous year. So we will vary quarter-to-quarter for the reasons we've talked about, mainly that the pace of expansion of tables, but also sort of the pace of product development and also studios, of course. So no real shift there. I mean, of course, we always want to have a little bit higher margin. We will work hard to do that of course, but not being, nothing dramatic towards the end of the quarter.
Okay. And when it comes to seasonality and Q1 start of 2018. Can you say something about that on the top line?
Yes, I think what we said, as we said during the presentation that growth in percentage terms likely to come down a little bit. I think of course the comparables are tougher like we talked about, but so little bit more. I mean, we don't see any real blockers to growth, as we talked about in the past. We feel that there is lots of opportunity left, and as Martin highlighted, Live is still a small product and sort of really, really excited about the new products, but just sort of for Q1 in the short-term, yes, the growth rate comes down a little bit. 2017 was really an exceptional year for us. We have to sort of remind ourselves of that, and we work on hard to have another year like that, but we won't -- we can't just extrapolate the development from '17 directly. So I won't say maybe then for Q1, at least my expectations are maybe little bit lower than previously.
Okay, that in combination bit lower top line, you are not talking about them in well below 40% in combination with the investment comments that you made earlier today. That mean that the margins will be significantly lower quarter-on-quarter or can you explain the dynamics?
No, I don't have that much more grab really. What we said was that margins vary, if anything right now, I'd say probably they could vary little bit downwards in Q1, for the full year I don't see a big shift. And same when it comes to growth, what we said is that in percentage terms it's probably lower in Q1 than it was in Q4. So that -- those are the statements we made. So nothing else.
Right. Do you think that consensus expectations for your sales growth in 2018. I think it's around 30% is a fair assumption or are there other things that could I mean stimulate this what you have done recently at ICE for example and World Cup.
I don't have any direct comment on the consensus. That they -- it constantly moves also. But I couldn't really say anything about that. We are excited about our new products, as we said, a few times here. We think that there are -- we're [ revising ] the gap to competition. We think that this won't be immediate effect, of course. It takes a little bit time to launch, but towards the second half of the year, we think they will all contribute, so yes.
Our next question comes from Lars-Ola Hellstrom of Pareto Securities.
Just one follow-up question on the other cost development in the fourth quarter. First I wonder if there is some extra cost or is this a new level, this cost also including rents for the Tbilisi facility. And my second question is, have you decided on any CapEx budget for the New Jersey expansion?
I take the middle question first. Yes, there is rent cost for Tbilisi. We are there right now. So it's already included. There isn't any one-offs in that sense in Q4. On the other hand, naturally we're expanding quite drastically in the end of the year, driving the cost up but then on the other hand, we continue to expand, so we will grow into that. So maybe there are some timing things that it comes a little bit earlier. That's about that. What was the third question?
It was CapEx.
Was it CapEx or New Jersey?
New Jersey.
There hasn't been any decision on New Jersey CapEx.
So in Q1 and Q2 in absolute term, we shouldn't expect to see as high steps as we saw between Q4 and Q3, in other costs?
We won't comment that detail on other cost in particular. I have no statement there really.
[Operator Instructions] One further question coming for you so far, that's from Mathias Lundberg of SEB (sic) [ Swedbank ].
My question relates to a trend we have seen in many operator reports that Nordic casino market was a bit weak in Q4, did you also see this trend or can you perhaps give some more flavor on geographies in general?
I wouldn't say that we, in particular see it. But there is very -- which have been mentioned by operators. There is a very high [ sport ] margin right now, which is then, of course, lowering the growth and the actual casino market a little bit. And it’s been mentioned by other operators and maybe we even underestimated that affect, but it's an underlying thing.
[Operator Instructions] As there are no further questions at this time, I'll hand back to our speakers for the closing comments.
Thank you all for listening. I appreciate all your questions, and I hope that you found the telco informative. Looking forward to see you all and listening to the next quarter in a couple of months. Thank you.