Gambling.com Group Limited

Greetings, and welcome to the Gambling.com Group Third Quarter 2022 Earnings Results Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Peter McGough, Vice President of Investor Relations. Thank you, Mr. McGough. You may begin.

Thank you. Hello, everyone, and welcome to Gambling.com Group's third quarter 2022 earnings results call. I'm Peter McGough, Vice President of Investor Relations. I am joined by Charles Gillespie, Chief Executive Officer and Co-Founder, and Elias Mark, Chief Financial Officer. The call is being webcast live through the Investor Relations section of our website at gambling.com forward slash corporate forward slash investors. and a downloadable version of the presentation is available there as well. A webcast replay will be available on the website after the conclusion of this call. You may also contact investor relations support by emailing investors at gdcgroup.com. I would like to remind you that the information contained in this conference call, including any financial and related guidance to be provided, consists of forward-looking statements as defined by securities laws. These statements are based on information currently available to us and involve risks and uncertainties that could cause actual future results, performance, business prospects, and opportunities to differ materially from those expressed in or implied by these statements. Some important factors that could cause such differences are discussed in the risk factors section of Gambling.com Group's filings with the Securities and Exchange Commission. Forward-looking statements speak only as of the date the statements are made and the company assumes no obligation to update forward-looking statements to reflect actual results, changes in assumptions, or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. During the call, there will also be a discussion of non-IFRS financial measures. A description of these non-IFRS financial measures is included in the press release issued earlier this afternoon, and reconciliations of these non-IFRS financial measures to their most directly comparable IFRS measures are included in the appendix to the presentation and press release, both of which are available in the Investors tab of our website. I'll now turn the call over to Charles.

Thanks, Peter, and welcome, everyone. This afternoon we report our third quarter results with all-time record revenue and free cash flow of $4.9 million. Our results clearly highlight the continued strength of our core business and the benefit of our Q1 acquisitions. What's also clear is that we are delivering record operating results now based on the unique moat we have built in performance marketing. macroeconomic headwinds are not stopping us from delivering on our forecast for revenue growth and that our prospects for continued high growth over the near and long term remain unchanged. I'm now on slide four for those following the presentation. Revenue grew 94% to $19.6 million with almost 300% growth in North American revenue. With this revenue growth, we generated $6.4 million in adjusted EBITDA and $4.9 million in free cash flow. Our strong profitability continues to differentiate us from most other online sports betting, media, and iGaming companies that the investment community follows closely. We delivered over 68,000 new deposit customers, an increase of 152% over Q3 2021 when we delivered 27,000. The increase in NDCs continues to be driven by our expanded portfolio of websites, as well as ongoing growth in existing websites. Slide five. Progress with our strategic objective to grow our North American presence was again evident in Q3. After growing more than 500% year over year last quarter, North American revenue grew nearly 300% year-over-year to $9.1 million in the third quarter. The increase includes our strong first month of performance in Kansas following the successful launch of online sports betting on September 1st and the broad uptake of sports betting in the month of September at the start of the NFL season. With our continued momentum and positive outlook, There is no change to our prior expectation that the North American sports calendar will drive growth for the balance of the fall and winter season. And the launch of new regulated markets in the U.S. will continue to be a key driver of our growth in future years. Our McClatchy Media Partnership performed well in the quarter, boosted by the start of the NFL season and its in-market properties in Kansas. Similarly, BonusFinder.com continued to perform ahead of plan in the quarter, providing a great platform to expand in the Canadian market and beyond. Our performance marketing efforts on Rotowire are also gaining momentum, yielding results, and positioning us for key upcoming state launches. The increase in Rotowire's performance marketing revenue this quarter has validated our investment thesis for the acquisition. Our digital teams have also optimized Roto-Wire's subscription business, which has driven substantial revenue growth. Business in the UK and Ireland continued to be strong in the quarter and increased 58% compared to last year, despite material currency headwinds. And despite over 15 years of regulated online gambling in the UK, we delivered an all-time record revenue performance. On to slide six. Our growth in North America, along with strong revenue in our more mature markets, continues to demonstrate the breadth, quality, and effectiveness of our portfolio of websites and technology platforms. We will continue to invest in our portfolio to strengthen our cash-generating websites and to ensure that we are well-positioned with additional websites to win new markets as they launch. In addition to our established cash-generating websites, we own and operate a number of additional websites which are ready to be monetized as soon as the respective states launch, including betmaryland.com, betohio.com, and betmassachusetts.com. These sites on these premium domains have been developed in-house on our technology platform, which will maximize our return on those investments. On to slide seven, Kansas is a great case study for our strategy to invest in premium domains ahead of the launch of sports betting in a new state. We had a very successful launch in Kansas driven by our property, BetKansas.com, which led the way among our assets in terms of delivering new depositing customers to our partners in Kansas. In-market media outlets by the McClatchy Partnership also helped to deliver great initial contributions from Kansas. The timeline for Maryland has now come into focus, and we expect multiple operators to go live next week. Ohio remains on track for a January 1st market launch, and we are well positioned there with BetOhio.com. Now, I'd like to turn the call over to our CFO, Elias Mark, to discuss our third quarter and year-to-date financial performance in greater detail.

Thank you, Charles, and welcome, everyone. As Charles mentioned, we saw another strong quarter of financial results during the third quarter. On a constant currency basis, revenue on $19.6 million increased 128% compared to the prior year, or 94% inclusive of currency headwinds. that impacted reported revenue by 1.5 million. The increase in revenue was driven by strong growth in NDCs in both North America and the UK and Ireland. The strength in the UK and Ireland was partly offset by the weakening power in Europe against the US dollar. New depositing customers in the quarter grew 152% to more than 68,000 compared to 27,000 in Q3 of last year. The increase was led by strong growth in North America and the UK and Ireland. As a reminder, we began recognizing cost of sales during the first quarter as a result of our new media partnerships and the subscription business of roadtoire.com. In the third quarter, this amounted to $0.6 million. Our total operating expenses were $18.9 million, which was an increase of $11.2 million. Total operating expenses were inclusive of 3.7 million of fair value movements in contingent consideration related to the BonusBinder.com acquisition. Adjusted for fair value movements, adjusted operating expenses were 15.2 million. On a constant currency basis, adjusted operating expenses increased by 8.6 million. This increase was driven primarily by additional headcount across marketing, products, sales, and technology function, public company expenses, as well as increased amortization related to our Q1 acquisitions. During 2022, we expect to incur amortization of approximately 4.7 million related to these Q1 acquisitions, with 3.6 million of that incurred through the first nine months of 2022. We continue to prudently invest and hire to help build out our growing organization. Our pace of recruitment moderated in the third quarter as we're nearing the stopping levels necessary to support our near and longer-term growth objectives. Our profitability and free cash flow will continue to organically support our investment needs going forward. Net income totaled 2.3 million. or $0.06 per diluted share compared to net income of $4.7 million or $0.13 per diluted share in the prior year. Adjusted for fair value movements in contingent and deferred consideration, adjusted net income in the quarter was $6 million and adjusted earnings per share was $0.16 per diluted share. Net income and adjusted net income benefited from $2.8 million of net forex gains in the quarter. We will continue to adjust operating profits and net income in this manner until the end of the R&D period for BonusFinder.com at the end of 2023. We generated third-quarter adjusted EBITDA of 6.4 million compared to 4.9 million in the prior year. This 32% growth represents the benefit of the top-line growth, partially offset by higher operating expenses. Adjusted EBITDA margin was 33% compared to 48% in 2021, reflecting the increased operating expenses from our investments in the organization to drive organic growth, as well as the inclusion in our revenue mix of the lower margin profile of rotowire.com and the McClatchy partnership. Total cash generated from operations of 5.6 million increased from 1.4 million in Q3, driven in Q3 2021, driven by strong year-over-year revenue growth. We generated third-quarter free cash flow of $4.9 million as capital expenses were scaled back as planned after having invested in our portfolio of U.S.-focused domains. I will reiterate that we remain able to entirely fund our organic growth initiatives from operating cash flow while continuing to generate positive free cash flow. With respect to capital allocation, in addition to investing to grow our business, today we announced the share repurchase program that's authorized to buy back up to $10 million of our outstanding shares. That's $10 million worth of outstanding shares. Cash as of September 30th, 2022, totaled $35.1 million, a $4 million quarter-on-quarter increase. Turning to the financial results for the first nine months of the year, revenue grew 94% on a constant currency basis to $55.2 million or 72% inclusive of a $3.7 million impact from currency headwinds. We delivered over 191,000 new depositing customers, representing growth of 115% compared to the first nine months of 2021. We recorded net income of $6.8 million, or $0.18 per diluted share, compared to $11.6 million, or $0.34 per diluted share, in 2021. Adjusted net income was $13.6 million, and adjusted earnings per diluted share was $0.37. Net income and adjusted net income benefited from $6.4 million of net forex gain. Adjusted EBITDA increased by 7% to 17.2 million, reflecting an adjusted EBITDA margin of 31%. Free cash flow in the first nine months of the year was 9.1 million compared to 10.3 million in 2021. The decrease was primarily a result of a higher capital investment. Turning to our outlook, we are now in the heart of a seasonally stronger period the fall and winter sports calendar which is expected to continue through q1 of next year it is worth noting that q3 benefited from a particularly strong performance of the business during the kansas state launch we expect the first operators in maryland to go live next week which has the potential to be another great sports betting market over the next two quarters The weakening of the pound and euro against the US dollar negatively affected reported revenue by 3.7 million and positively affected operating expenses by 2.4 million in constant currency terms in the first nine months. Our guidance assumes a euro to USD parity for the quarter of 2022. We continue to see no deterioration of consumer demand for online gambling here today. we continue to monitor consumer behavior closely in Europe and North America. From our perspective, the demand for performance marketing services for the online babbling industry remains strong and is even more valuable to operators as they come under pressure to deliver tangible ROI on their marketing spend. As we continue to gain additional scale, particularly through increased delivery of NFCs to our customers, that scale gives us additional pricing power. Given these factors and notwithstanding adverse currency movements, we are reiterating our 2022 guidance for revenue in the range of 71 to 76 million, representing growth of 68 to 80%, and adjusted EBITDA between 22 and 27 million, representing growth of 20 to 47%. With that, I'll turn the call back over to Charles.

Thanks, Otis. Before we wrap up for questions, I'd like to provide some additional perspective on the market today and going forward. The business continues to be well-positioned for the remainder of the fall and winter sports seasons. We are looking forward to the expected start of regulated sports betting in Maryland when the first operators go live next week, as well as the scheduled Ohio launch on January 1st. The 2023 legislative season kicks off in January, and we believe that sports betting legislation could be considered in North Carolina, Georgia, and Texas. We also believe that iGaming could come up for a vote in the legislators of New York, Indiana, Illinois, and Iowa. Our long-term outlook on broad-based expansion of regulated online gambling in North America remains unchanged. We continue to expect states to regulate online sports betting where retail sports betting exists and states that have online sports betting to move towards regulated iGaming. To continue to best position ourselves for the future of iGaming around the world, we recently completed the acquisition of a superstar marquee domain, which in our view is the single most desirable and valuable domain name for companies in our line of business, casinos.com. The addition of casinos.com to our already best-in-class domain portfolio enables us to build another powerhouse global brand alongside gallon.com using our existing teams, technology, and know-how. We look forward to sharing more details on this exciting project with this irreplicable domain name as we get closer to formally launching a new, fully featured website. With this addition, we have largely completed our portfolio of premium domain names for the North American market. We continue to strengthen our ability to deliver performance marketing services to online operators by growing our traffic and expanding our portfolio of brands. Our low-risk, high ROI value proposition for operators is more relevant to U.S. operators than ever before as they continue to drive toward EBITDA-positive results. I will end by once again thanking the brilliant team at Gambling.com Group for their exemplary efforts in delivering yet another record quarter. With that, we'd be happy to open up the line for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Our first question is from Barry Jonas with Truist. Please proceed with your question.

Hey guys, just a couple of questions. I wanted to start on the European business. I was hoping to drill down into some of the underlying trends you're seeing there. And is it possible to get the constant currency growth in Q3 for UK and Ireland and other Europe?

We haven't broken it out exactly, but the quarterly effect on FX was about 1.5 million, and that naturally relates to our European business.

Got it. And then just any – maybe just talk about some underlying trends you're seeing across Europe.

Yeah, I think the strength in this quarter was largely driven by the UK and Ireland. We've seen incredibly strong trading that's driven by us taking market share predominantly. We've just had very good execution in that market. Across other markets in Europe, we've been doing okay in places like Germany and Sweden, but the predominant growth driver outside of North America has been the UK and Ireland.

Got it, got it. And then curious if you could talk about the M&A environment and if you could kind of bucket it between Europe and the U.S. would be helpful. Thanks.

Hey, Barry. We're still very focused on M&A, but the bars you need a hurdle to make a deal worthwhile are kind of higher than they've been in a while. Cost of capital is up. Macroeconomic risks are up. So being prudent, we're continuing to have lots of conversations, some of which are fairly interesting, but for us to really pull the trigger on something, we're going to need to be extremely comfortable and you know historically we've been very picky with our acquisitions even in a kind of normal market so conversations definitely ongoing still have a preference for us or north american assets but we don't feel like we're under any pressure to do the next deal and we're being quite cautious with how we run the business given some of the you know larger uncertainties out there

Understood. And if I could sneak one more in, you know, I wanted to talk a little bit more about margins, specifically as we think about 23 and beyond is, you know, how should we think about the long-term margin profile here? Do we get back to 40% plus or is some of the M&A just compositionally changed where to think about where you wind up? Thanks.

Yeah, I think our revenue mix has changed with the acquisition of RotoVR and with the addition of media partnerships. And for that reason, the mid-term at least margin profile would be under the 40% mark. It's still a high margin business, but it's not at high margin as you see in our organic traffic-driven businesses. We also see, like everyone else, their cost inflation that puts a little bit of pressure on operating margins.

Understood. All right, guys. Thank you so much. Appreciate it.

Thanks.

Our next question is from Jeff Stanchel with Stifel. Please proceed with your question.

Hey, great. Thanks. Afternoon, guys. Thanks for taking the questions, and congrats on a nice quarter here. You know, I just wanted to start, if possible, on guidance. You know, it looks like the midpoint implies about $18 million of revenues versus close to $20 million just reported for Q3. Can you just frame some of the puts and takes there? It seems a bit conservative when you consider tailwinds from the North American sports calendar, plus we've got the World Cup kicking off soon, which should support the European business, and then Conversely, on the margin side, if you think the midpoint of both revenues and EBITDA, it implies about 40% margins, which, you know, based on Glass's comments to Barry's third question, you know, seems a bit ahead of kind of where you see margin stabilizing out longer term. So can you just help us kind of marry those two? Thanks.

Sure. I think if we look at the third quarter, we had – a very strong start in the Kansas market, which drove the outperformance on revenue. As I touched upon before, we have seen a little bit of pressure on the cost side, so we're operating on slightly lower margins than what the analyst forecasts were suggesting. If you look into the fourth quarter, we're in a seasonally stronger quarter overall, but we don't have the big bang state launch that we saw in Q3. Maryland is launching, and this was confirmed, I think, this morning. It's a little bit difficult to know how that will play out. We're currently being cautious. in our assumptions on Maryland for the fourth quarter. We expect the biggest impact to come in the first quarter. Great. That's helpful. Thank you. On operating expenses, I think Q3 adjusted operating expenses is a good ballpark number. You will see possibly a small increase on that, but we have scale down the pace of borrowing as we don't grow operating expenses in the same way that we did in the first half of the year.

Okay, understood. Great. That's helpful. Thank you. And then for my follow-up, could you just frame how you're thinking about the repurchases here a little bit more? I think you kind of answered this in the prepared remarks, but is this going to be more opportunistic versus programmatic and kind of how do you marry kind of, you know, spotting dislocations and valuation and leaning into the repurchase program to exploit that versus, you know, making sure there's enough liquidity in the stock for shareholders? Thanks.

Yeah. We, you know, we do see some risks on the horizon in terms of the economy and geopolitical markets. And, you know, if the shares come under pressure and there's an opportunity to opportunistically buy back our shares, then we want to be able to do that for the benefit of all of our shareholders. And that's, I think that's the thinking behind it.

Okay, great. Thanks. That's helpful, Charles. And then if I could just squeeze in one more, one of your competitor's you know, talk today in their earnings release about making much more of a kind of a marked push to switch to more of a rev share model here in the U.S.? Can you just talk about how you think about pricing strategy in the near term and if you think it could make sense to start to push more rev share or hybrid models versus, you know, predominantly CPAs as the market stands? Thanks.

Yeah. We run the same calculations that they do. and we are increasingly interested in monetizing with RepShare in the United States, but we are not pushing as hard as they are.

Perfect. That makes sense. That's all right. I'll pass it on. Thank you both.

Thank you. Our next question is from David Katz with Jefferies. Please proceed with your question.

Hi. Afternoon, everyone. Charles, if you could just talk a little bit about what we've seen from operators with the narrowing losses and the degree to which that is good for you or neutral for you or in some way does it make them less inclined to ramp up their affiliate business. If we could just talk about the puts and takes and issues around that.

I think it's great for us. The more focused on ROI they are, the more they will invest into the affiliate channel, the performance marketing channel, because it's just basically guaranteed ROI. And to the extent the overall U.S. landscape improves its profitability, then it creates kind of warmer waters for more operators to enter the u.s you know there's been some kind of high-profile exits and i think that's in part due to this uh you know the the incredible amount of non-performance marketing that these operators were doing for the last couple of years and everyone felt like they had to do that to compete i think you know the market will dare I say, move in a slightly more European direction, where the marketing and advertising will be more performance-driven, and thus everybody's bottom line will improve, and the entire kind of, the attractiveness of the entire endeavor will improve, and that would potentially see more people entering the space, which is a good thing for us.

Understood. And if I can just go back to the repurchase, which, you know, is a nice surprise. If you could talk about that decision in comparison to other acquisition opportunities that may be out there and, you know, whether this, you know, implies anything about the lack thereof. You know, is this an and rather than or? Just help us think that through.

Yeah, it's definitely an and situation. Look, obviously a company called Gambling.com Group likes the name names, right? And we've built an absolutely brilliant business off of Gambling.com. And for the listeners that may not know the full story there, we bought that domain in 2011 for $2.5 million. And the business behind that website now is You know, just incredible. And we see an opportunity to not only do the same thing with casinos.com, but do it faster with all the lessons we've learned in the past 11 years and do it, frankly, with more laser focus because, you know, gambling.com covers everything, right? Gambling.com touches anything related to gambling, poker, bingo, sports betting, casinos. Whereas casinos.com, it's just casinos. And casino is, you know, as I'm sure everyone on the call knows, the most lucrative gaming product. You know, the slots and the casino games are simply where the money is made in this industry. And by having casinos.com, I mean, we just couldn't think of a better domain name than that. So when the opportunity came up to buy it, We didn't hesitate, and, you know, it's a very exciting project, and, you know, it has the potential to play well with M&A in the future also. You know, it honestly opens up even more options for us as we look at, you know, what we're going to do with casinos.com and how we achieve its full potential. Thank you very much.

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Thanks, everybody, for joining us today. It's been a pleasure. We look forward to finishing the year strong and updating you with our full year results next year. Thank you very much.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.