Super Group (SGHC) Ltd

All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on your telephone keypad. To withdraw your question, please press star, then 2. Please note, this event is being recorded. I would now like to turn the conference over to Lisa Kemp, Vice President of Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining our call today to discuss Supergroup's results for the first quarter of 2023. During this call, we made comments of a forward-looking nature that are subject to risks, uncertainties, and other factors discussed further in our SEC filings that could cause our actual results to differ materially from our historical results or from our forecast. We assume no responsibility to update forward-looking statements other than as required by law. Additionally, on today's call, we may refer to certain non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for measures of financial performance prepared in accordance with GAAP. We have provided a reconciliation of the non-GAAP financial measures to the most comparable GAAP figures in the press release issued earlier today and available on the Investor Relations page of Supergroup's website. In addition, we will speak to our financial results and metrics for the first quarter of 2023 in two parts, highlighting our profitable and cash-generative global business separately from our investment in the U.S. This aligns with the annual guidance that we have provided for 2023 and is consistent with both how we view our business internally and how we will report going forward. We recommend that investors refer to our supplementary presentation posted to our website. On this call, I am joined by Neil Menashe, Chief Executive Officer, Richard Hessens, President, COO, and Alinda Von Weick, Chief Financial Officer. And now I would like to turn the call over to Neil.

Thank you, Lisa. Good morning, everyone, and thank you for joining us. Today, we reported strong first-quarter financial results with net revenue excluding the U.S. of €332 million and operational EBITDA of €51 million. Separately for the U.S., our net investment for the quarter was €17 million. Year-over-year comparisons for our non-U.S. business are difficult this quarter for three reasons. Firstly, our business in Canada in quarter one, 2022, was still benefiting from COVID lockdown. Secondly, in 2023, many of the local currencies in which we trade, including the Canadian dollar, depreciated meaningfully against the Euro, our reporting currency. And thirdly, our brand B has materially reduced. So it's hopeful to look at our results sequentially to appreciate the progress we have made. Net revenue for the fourth quarter of 2022 was boosted by the FIFA and Cricket World Cup. So it's an achievement that quarter one of 2023 managed to have additional net revenue growth on top of that. Even more impressive, our operational EBITDA increased significantly, up 21% from the fourth quarter of 2022. And Linda will go through our financial results for the first quarter in greater detail in a moment, and Richard is here with us today to guide you with an update on the U.S. Our efforts to strengthen the company continue, as evidenced by ongoing discussions with our software partner, Apricot, towards bringing even more of our tech back in-house, and our continuous evaluation of growth opportunities in current and new markets around the world. Operationally, we remain focused on achieving economies of scale in a targeted manner towards our goal of a medium-term operational EBITDA margin in excess of 20%. Our largest expense line item is marketing. Currently, we are spending 27% of net revenue to support the long-term growth of the business. This is a conscious decision to spend more than the sector average, and I'm watching it very carefully to ensure we are seeing returns. On economies of scale, I want to point out that this is a market-by-market objective. Key costs, such as regulatory, staffing, and technology, do not generally rise directly in line with revenue. Therefore, as revenue grows, disciplined spending ensures that operating leverage kicks in. This is key to our business model. Once our fixed costs are covered, then incremental revenue is far more profitable and significantly improves our EBITDA margin. I'm very pleased to say this was well illustrated in the month of March, where record numbers for customers, polls, and net revenue resulted in operational EBITDA margin of over 20% for the month. So far this year, we have set multiple records, one after the other, for daily active customers, with March constantly breaking the monthly record when it exceeded 3.8 million for the month. For the quarter, average active customers significantly increased to 3.5 million per month from 2.6 million in the prior quarter, a 34% increase. Financially, we remain strong and flexible. There is 246 million euros of unrestricted cash on our balance sheet, which we're using to support the expansion of our U.S. footprint and other markets, as well as for gaining further control of our tech stack in support of the continued growth of our business. In addition to this, our consistent profitability and cash generation also allow us to explore potential M&A opportunities, as well as flexibility in returning capital to shareholders. Now, turning over to some of our key markets. Firstly, after much anticipation, the UK's proposed gaming reforms were released at the end of April. We are pleased that this results in a further clarity for the industry and a level playing field for all operators. Supergroup took steps early on to actively prepare for this, so expect that proposed reforms will have minimal impact on our UK business. Overall for Supergoop, European markets are looking up. The UK in particular has seen strong growth in Betway's Willow Spin, which has benefited from the inclusion of Jumpman Gaming. In Canada, revenue has reduced year-on-year due to unfavourable currency fluctuations and the short-term impact of Ontario's regulatory transition. Trends in Ontario are encouraging, and Canada's business remains robust and profitable, including in Ontario. Africa has to continue to perform very well. The African markets are a great example of where we have quickly realized lasting spend efficiency, led by our worldwide global brand awareness for Betway, complemented by targeted, localized marketing. This has resulted in multiple new records in customer numbers in both sports betting and casino, and record net revenue in EBITDA, despite negative currency fluctuation. Africa's strong performance highlights how business continues to evolve and diversify. Together with growth in Europe, this has given us an improved global geographic balance. Overall, I'm very happy with the competitive progress globally, and I'm proud of the record results achieved in March, all of which, I'm pleased to say, were exceeded in the month of April, even with one day less in the month. I'll now turn the call over to Richard to discuss our progress in the U.S.

Thank you, Neil. Good day, everyone. The acquisition of BGC closed at the beginning of quarter one, and we're very excited about the opportunity that the U.S. presents. To recap, the Bedware brand is currently operating in eight states, with market access in two and up to a further five. The size of the U.S. market, a TAM of $54 billion, is, of course, very attractive, and one that is way too big to be ignored. With BGC still in its early stages, The next three to five years are going to require significant investment, including an estimated 70 million euros for this year and around 80 million euros for next year. Some of you will look at this investment and ask if we have ever spent that much in a single market, but we don't look at it that way. For us, each state is a market, and in that context, this is quite normal and exciting for us. Why? Because this investment is very manageable for us and easily funded by our existing cash flow. This sort of expansion on a market-by-market, state-by-state basis is how we've grown this business for more than 20 years, and we see it as a great opportunity for upside on top of our highly profitable existing global business. We will only enter states where we see a realistic path to growth and profitability. States that offer both online sports betting and gaming are more attractive to us, and we continue to buy towards those. Same as we do everywhere else around the world, we will continuously evaluate our returns and will not be afraid to put out of markets where this path is not clear. Around the globe, casino is a key focus for us. It makes up over 60% of our revenues, and we will maintain this focus in the U.S., implementing the same dual offering strategy wherever we can. We have therefore secured second iGaming skins in both New Jersey and Pennsylvania, where we aim to launch our leading spin brand, Jackpot City, later this year. For now, within DGC, the focus is very much internal and on our existing states, with a key priority being migration onto the Betway Global technology platform. During this time, we expect to keep localized marketing relatively small and ensure that the per-state unit economics stack up. On a state-by-state basis, from the date when we roll out our Betway Global Tech and begin significant investment into marketing, we expect that we will need about 18 months in order to fully assess viability for that state, after which we aim to reach breakeven within another 18 months. Overall, as of now, we expect our first EBITDA positive quarter for the U.S. to be in 2026, and we expect 2027 to be our first EBITDA positive year. Of course, should the footprint of live or accessible states expand, then these numbers will change accordingly. And that takes me to our investment thesis. In our view, the best way to see DGC is essentially as a call option on the U.S. Our global business will continue to run as before. We expect it to continue to grow and to generate cash, and the DGC acquisition is an opportunity for upside on top of that. We've shown all over the world that we do not require significant market share to achieve profitability, and the U.S. is no different. We look forward to updating you through our journey. I will now turn the call over to Linda, who will discuss our financial results in more detail.

Thank you, Richard. I will now take you through our financial results for the quarter, where we have seen continued momentum from quarter four last year. I will start by discussing our global financial results separate from our investments into the US. Excluding US results, total revenue for the quarter was €332 million. Net revenue, which does not include brand licensees, grew to €321 million, a 2% increase from last year. As Neil mentioned, the current quarter is not directly comparable to the first quarter of 2022 due to COVID, currency fluctuations, and the change in our brand fee. Sportsbook revenue increased by €9 million in the first quarter, growing 8%. In casino, net revenue decreased by €3 million, or 1%. The key drivers behind the overall increase in net revenue include A strong hold boosted by a record month in March, following the worst fourth hold during February. Strong customer acquisition and retention in Africa and continued positive growth in most European markets, including the UK, which was positively impacted by the addition of Jumpman Gaming. This growth was partially offset by lower revenues from Canada due to the Canadian dollar weakening against the euro, as well as Ontario's ongoing transition to a regulated market. The impact of the euro strengthening against other local currencies that we trade in and lower revenue from the APAC region. Customer numbers for Sportsbook increased 33% compared to Q1 of 2022. We are pleased to see this continued momentum of strong customer numbers from the first quarter of 2022 with month-on-month growth during the first quarter of this year. This was largely due to effective marketing strategies, strong buyback results, and good retention initiatives. Even though we saw a slight decline in the casino revenue numbers, our customer growth remained impressive, up 45% in the first quarter compared to last year. The increase in customer numbers was due to strong acquisition of new customers, which grew 29% year-on-year, helped by solid retention marketing and a good uplift in Canada, including Ontario. Looking at the bottom line, we achieved operational EBITDA for X years business of €51 million for the first quarter of 2023. Compared to the first quarter last year, operational EBITDA was impacted by lower brand license fees, high cost of revenue, which includes regulatory fees and taxes, as well as agency fees in Ontario, and an increase in general administrative costs, which was mainly due to inflationary increases in high infrastructure expenses. This was offset by lower and more effective levels of investment in marketing. Our marketing spend sits at 27% of net revenue, which is a result of conscious decision that we have made to invest in the long-term growth of the business. While we could reduce this marketing by 5% to 7% of net revenue, which would result in our EBITDA increasing substantially in the short term and align us much more closely with what our competitors are spending, we don't believe that this is in the best interest of our business in the long term. To contextualize this, if we would reduce our marketing in quarter one by an amount equivalent to 5% of net revenue, then an additional €16 million would have dropped to the bottom line. EBITDA margin was over 15% for the quarter. We remain focused on both growth and cost-saving strategies to drive margins back to higher levels in 2023 and beyond. Our EBITDA margin has already improved sequentially from 13% in the first quarter of last year, despite some customer-friendly sports results and early days in the delivery of our expected cost efficiencies. In March, we comfortably proved how operating leverage worked in our business, reaching a level of scale that resulted in an EBITDA margin of greater than 20% for the month. Turning now to our U.S. business, our net investment for the quarter was €17 million. Funding our U.S. expansion from internal reserves remained very manageable for us, and we ended the quarter with an unrestricted cash balance of €246 million. Our balance sheet continues to remain strong following the acquisition of DGC. The acquisition resulted in DGC's debt of $129 million coming onto the Supergroup's consolidated balance sheet, which is directly offset with a restricted cash balance of the same value and has been accounted for separately since we announced the DGC acquisition. We are in the process of settling the debt with the restricted cash, and the balance sheet will therefore remain debt-free. To conclude, here's how I think about it. Our record-breaking numbers of customers is one of our key engines for revenue. We continue to invest for growth in the business around the world, and driving cost efficiencies throughout the business remains a key focus. We are therefore confident in our outlook for the year, and we are reaffirming our guidance for both the U.S. and non-U.S. business for 2023. I will now turn the call back to Neil. Thank you.

Thanks, Alinda. Supergroup has delivered another solid quarter and remains profitable and financially strong. We have many avenues of future growth across the globe to be cited about. To wrap up, let me summarize where we are. March was a record month and April was even better. Key global markets such as Canada, Africa, and Europe are growing well in their local currency, some of them really strongly. Our U.S. business is developing according to plan. It's a marathon, not a sprint, and we've got the legs for it. We have a firm hand on our cost synergy, and operating leverage benefits are coming through strongly, as we saw in March and again in April. We'll continue to optimize our tech, which we'll add to our upside in the long run as we take better control of product and cost. Overall, we have done well in this quarter, and I'm optimistic for the future. But I'm a glass-half-empty kind of CEO. I don't waste any time looking back at what we've achieved. I'm far more interested in all the work that we still have to do and the great opportunities that lie ahead of us. I'll now turn the call over to the operator to open the call up for questions. Operator?

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Jed Kelly with Oppenheimer. Please go ahead.

Hey, great. Thanks for taking my question. Just this first one on the outlook on the guidance. So you're reaffirming your guidance. If I understand you correctly, April was a record month. Can you kind of tell us how May is trending and I mean, do you expect to see sequential growth in 2Q? And then on the U.S., just, you know, we are seeing sort of market access, you know, the cost for market access go down. We are seeing some consolidation. Just when you think about the U.S., I guess the one thing to highlight, well, there are 50 different regulations with all the states. How do you think about competing against the players that can actually leverage brand advertising and amortize that spend across 50 states as you think about it? Thank you.

Thanks, Jed. I'll start off and then I'll hand over to Richard for your question. Yes, so April 100% looks really good and promising as a good start for quarter two. May is not looking bad either, but, I mean, regarding our guidance, we feel comfortable that obviously these targets that we set for ourselves is going to be reached, but it's really only four months into the year, so very early to say, you know, to make a projection about... You know, the quarter three are still results, and then they're beyond, but it's looking promising.

Thanks, Elinda. Hi, Jed. So coming on to sponsor the U.S., the way we look at it is applying the same toolkit that we have applied to other markets across the world. In terms of our branding, we have, as you know, the single global online sports betting brand, Betway, where we have the ability to spend for global eyeballs and then actually amortize that spend across the world, so not just in the U.S. And then, of course, similar to other markets, complementing that global spend with very localized marketing.

Got it. And then as a follow-up, Just on the regulatory front, I know last year there was some regulatory headwinds with Germany and the Netherlands. I mean, as we think about this year in terms of, like, the regulatory comps, you know, you have what's going on in the U.K., but will the regulatory comps be easier or tougher this year? Thanks.

Okay. Well, certainly Germany obviously has been dealt with significantly. And there still are casino licenses which you can apply for. Netherlands, we are still waiting for our license there. But compared to the other markets, the UK white paper and the other markets, it's no different to how it's been before. I think actually this year it's got a brighter outlook. So the tuna in the UK, as I mentioned earlier, it's about we just wait for the final legislation to come back and we're in a very good position.

Thank you.

The next question comes from Bernie McTernan with Needham and Company. Please go ahead.

Great. Thank you for taking the questions. Maybe just to start following up on Jed's last question, the really strong results in March and into April, anything to peel back the onion in terms of what's from either geographic standpoint or product standpoint in terms of what's driving the strong results?

Well, as Linda mentioned, it's good customer numbers, it's obviously good sports hold, and our continued focus on casino. And what happens in these businesses, when all of these things come together, your revenue obviously increases and then you get this huge operating leverage. And that is key to what we saw in March and our thing in April. And for us, it's about every country making up our global portfolio, our global revenue. And it's about each country now being operationally, a vast majority of them being operationally profitable per region. So it means every extra bit of revenue we get is at very high margins. And this is key, key, key, key to our business. And it's true for each of our countries. Thank you.

Understood. And then following up on the comments on the medium-term operational EBITDA getting to 20% or above, how much of that is just sales and marketing coming down versus revenue growth versus U.S. investment coming down? Just trying to think about some of the large moving pieces of being able to get there, especially in the context of March being above 20%.

Thanks, Bernie. That is why, you know, I tried to put in an illustrative kind of scenario to say if we cut potentially 5%, that will straight go down to the bottom line. That's not how we run our business, and that's what we're trying to illustrate. We don't want to cut marketing for short-term gain. We want to really make sure that we hone this marketing spend And reinvest, like Neil just said, in countries where we can see the returns, reinvest in those countries for the long-term gain.

Understood. And then just last one for me. The comments of getting to first quarter profitability in the U.S. in 2026 and a full year basis in 2027, what does that contemplate from a regulatory standpoint or market access in terms of new states coming online?

Hey, Bernie. So those timelines are based on our current geographic footprint, plus an additional state to be launched in the next three months. And as we said, as additional markets come online, we will reassess that, again, very much on a state-by-state basis and finding the path to profitability in each of those states.

Understood. Thank you all.

The next question comes from Michael Graham with Canaccord Genuity. Please go ahead.

Hey, thanks. Just on the customer growth, you know, it was a really strong growth, you know, sort of unseasonably, I guess. And so I know you mentioned that you had some more efficient marketing, but can you just maybe go a level deeper there? Were there geographies where you saw, like, good customer growth? And, you know, what did you unlock on the marketing front? and did the customers come sort of in a linear fashion during the quarter, or just how should we think about what you were able to accomplish there?

Hi, Michael. Yes. Obviously, we share the high-level geography growth on the website, which you can just go and review there as well. But it's predominantly the customer. I mean, the marketing strategy is starting to work because I've also mentioned, like, the newly acquired customers is also growing, which is a good element for us, up to 29% to see now. But the growth is in jurisdictions where there is, as the market is changing and the world is changing, it's higher volume customers but with lower value input. We've seen it in Europe and Africa predominantly. UK obviously as part of Europe, and that's mainly due to the responsible gaming measures. We've also added Jumpman, which has a whole different business model with more recreational lower value kind of customer base. And then just a big comparative between quarter one 2022 to 2023 is remember in quarter one we had Ontario as a non-regulated part of our business, which is obviously transitioning, had the impact also on the numbers, but the growth is forthcoming in the customer base.

Okay, thank you. And I actually wanted to ask about Ontario just, you know, sort of a year into it. Can you comment on how that's going in particular, how the competitive landscape is shaping up for you there?

Sure, Neil. So again, it's optimization of our customer experience. We're still making good money in Ontario. We are very happy with how we transitioned there. It's been since August and September last year, so it's six to eight months, nine months, ten months. So it's making good progress. And for us, it's all about similar to other markets. We understand regulation. We understand what the product has to do in these regulated markets. And we compete with everyone across the globe. So Ontario is no different for us.

All right. Thanks a lot.

This concludes our question and answer session and the Supergroup results for the first quarter of 2023. Thank you for attending today's presentation. You may now disconnect.