Evolution AB (publ)

Ladies and gentlemen, welcome to the Evolution Gaming Group Q2 Report 2021. Today, I'm pleased to present CEO Martin Carleson and CFO Jacob Kaplan. For the first part of this call, all participants will be in a listen-only mode, and afterwards, there will be a question as a session. Please begin your meeting.

Good morning. Welcome, everybody, to the presentation of Evolution's interim report for the second quarter of 2021. My name is Martin Karlsson, and I'm the CEO of Evolution. With me, I also have CFO Jacob Kaplan. As usual, I will start with some comments on our performance in the quarter. I will then hand over to Jacob for a closer look at our financials. And after that, I will round off our presentation with an outlook for the rest of the year. Now we are happy to take questions. Next slide, please. I'm happy to present the fantastic development of evolution in the second quarter. As usual, it has been a quarter with extremely high operational activity, and the great result is an outcome of the hard work performed by all employees. The combination of global demand for our products, a constant pursuit of cost efficiency, together with the energy, hard work and high ambitions of all employees all sums up to the fantastic numbers. All together we reach EBITDA of 174.7 million euro and an EBITDA margin in the quarter of 68%. Our live business continues its exceptional growth from the first quarter, For the second quarter in a row, we grow close to 60% compared to previous year. We're also continuing to reshaping the roadmap for RNG, and RNG revenues increased slightly from Q1, but are 2% lower than Q2 of 2020. The reshape of the roadmap has, among other things, created Starburst Extreme, which was released after the second quarter ended, but it's the strongest phase ever made in the history of NetEnt. Opportunities in the U.S. market are also promising, with states becoming more and more positive towards regulation of online casino. Next in line for our U.S. expansion is Michigan. The studio is fully ready and was approved for launch during Tuesday this week. We are now in the practical startup for Go Live, which will happen tomorrow. A new studio will always get attention, but let me assure you that we are expanding in all our studios at the moment. as demand of our product is increasing worldwide. Expanding our student capacity means that we need to recruit a lot of new employees. The recruitment base is high in the quarter, and we hired over 1,000 new fantastic talent, the highest recruitment number ever in a quarter. At the end of the quarter, we're close to acquisition of Big Time Gaming. The acquisition was announced early in the quarter, actually in April, And BTG are one of the most innovative slots creators in the world, and we are very much look forward to stop working on what we can do together. In the quarter, we also announced that we start a US rollout of Lightning Roulette in the land-based casinos together with Scientific Games. I'm also very happy for our five wins at this year's EGR B2B awards. We took home awards for both our Evolution, NetAnt, and Red Tiger brands, including live casino supplier of the year. And this is actually the 12th consecutive time we win that award. Now let's move to the coming slides and see the effect of numbers and products on all our efforts. Operator, next slide, please. After the phenomenal first quarter, I'm very pleased to see the continuing strong development in the second quarter, with the growth in live casino almost reaching 60% again. Let's look at the financials. Revenue in the quarter is almost €257 million, an increase of 100% compared to Q2 of 2020. With live revenue growth of 59%, RNG increased slightly from the first quarter, but declined 2% comparing to the net worth reported figures of 2020. The reshaping of the slots roadmap is going well, and I look forward to the second half of the year. EBITDA increases from 81 to 175 million euro in the quarter, a good increase of 115% year on year. I'm also satisfied with the EBITDA margin of 68% in the quarter. With the margin in Q1 of 67.9%, followed by a margin of 68% in the second quarter, we can conclude that the guidance we gave for the year of 65% will be exceeded. I expect we can maintain the current level also during the second half of 2021. Second quarter is a strong follow-up for the first quarter, where we now act as one company after acquisition of NetEnt. We are definitely well-placed to further strengthen our market share and continue to widen the gap to competitors in the second half of 2021. But as always, we need to work hard and become better every single day. Next slide, please. As I think most of you know by now, BetSpot is to be seen as an indicator for the activity in our live network. So this has not changed and only shows the live part of the total level network. The positive trend of best sports continued in the second quarter. The number of best sports from end users amounted to 17.5 billion compared to 11.9 billion the same period last year, which is a growth by 47%. Also compared to Q1, there is an increase of 2%. The effect of lockdowns, canceled sports activities, and closed land-based casinos on the demand for our products will level off as pandemic circumstances improve. At the same time, we will be able to operate with full capacity and get back to efficiency and catch up the pent up demand in life. Many of the new players that have been introduced to Life Casino during the recent year will continue to accelerate the growth in the long term. Next slide, please. It continues to increase headcount, and at the end of the period, we exceeded 11,000 in staff. We have high demand on expansion right now. There's still demand lagging from 2020 as operators have increased their traffic, but we were limited in our supply of tables. In the second quarter, we added over 1,000 people and expanded in basically all of our locations. We will continue to expand both in existing studios as well as new studios. As stated, Michigan will go live tomorrow, and we will add two new studios in Europe by the end of this year and also expand and also add one new delivery studio in Canada during the beginning of next year. While stating these ambitions, it's worth reminding ourselves that the pandemic continues to impact our expansion plans. We continue to follow guidelines set by the countries that we act in. The overall situation is improving, but it's still very hard, and I must stress the fact that the pandemic is not over. Next slide, please. Our RNG business amounted to 21% of our total revenue in Q2 and live represented 79%. To continue to widen the gap to competitors, no one else has the product portfolio to match ours and no one adds as many high quality games. In addition to new titles, an important part of our product development is to constantly improve the gaming experience in our existing games. Securing the long-term quality through continuous improvement is essential in our ambition to increase the gap to competition. Recently, we have done enhancements for Baccarat, Dreamcatcher, Monopoly, and Blackjack, always with the focus to create a richer gaming experience. Blackjack is a good example, for we have fine-tuned our interface and implemented a zooming feature on all our Blackjack tables. It enables the player to clearly see the real cards dealt when playing in portrait mode on their phone. It's a neat feature that we provide as a service to our players and operators. About a week ago, we launched Starburst Extreme, a new slot title based on the iconic Starburst slot game. We've been working hard to keep the classic features of the original Starburst that made the game so popular, and then we incorporated them into an extreme version. It has been well received by players, and it's so far the strongest release in Nathan's history. Both our Red Tiger and NetEnt brands have strong lineups for the operators and players during the second half of this year. It's important to point out that we continue to innovate. An example of that is our agreement with Scientific Games to make our multi-award winning live online lightning roulette game available in land-based casinos worldwide. As mentioned earlier, the combination with NetEnt will create opportunities for game development in RNG as well as live, and in combination of the two. I'm very excited about the new games that we will launch during the second half of the year, as well as the roadmap for 2022, both in R&D as well as in live. Next slide, please. On the slide, you will see some of the live games that we are launching during the second half of this year. Like previous year, we'll do some new traditional table games, titles, as well as more game show style games. At Evolution, we're working hard to evolve the casino industry. That has been in our DNA since the beginning. In the game show category, an overarching theme this year is to add more decision-making to the player. In the early game shows, players placed the bet and then waited for the result. This year, we're adding player control to the games, games where the player can make choices during the game. Already in Crazy Time, we introduced some player choices in the bonus rounds, but this year we give the player more choices and control, providing a more active player experience. I've already seen this in Gonzo's Treasure Hunt that we released in June, and it will also be a large part of our next game show, Cash or Crash, that will be launched later this year. With these games, we are further developing the game show category and think it will also expand to audiences for these expanded audience for these games. There will be four new live games with an Asian flavor to them this year. Baccarat Red Envelope is already launched, a variation of traditional games that adds multiplayer, not multiplayer, some pair and tie-bath. And later this year, there is another variation of Baccarat called Golden Well Baccarat. Furthermore, in Q3, we will launch Backbow, a dice game in the spirit of Baccarat In the Q4, we'll release Phantan, a simple, very beautiful, ancient game. It has been around for hundreds of years, and it's now coming to Evolution Live. Also in the traditional table game space, later this year, we'll release Lightning Blackjack, and this is the third game type on the Lightning brand, a brand players have gotten to love through Lightning Backaround. I won't give you the details of the game away here, but But it's an enhanced Blackjack experience, and it's out later this year. These are some of the gains that will come during the coming months. Operator, let's move to the next slide, please. This slide shows the breakdown of our revenues by geographic region, and it's evident that demand is truly global. We see very good growth year on year in all regions and markets. This is naturally partly by acquisition with the addition of methane, but also our live business growth rate. Looking at the fully organic development for Q1, we see that European regions are stable and slightly low in UK. As we have seen during the past year, Asia and North America are growing fast. Year-on-year growth amounts to 133 and 220% respectively. Also compared to Q1, both regions grow with over 20% growth quarter-on-quarter. It's a good potential in both these markets and expect a continued high growth rate going forward. Other, including South America, Africa, and the remaining part of Russia, shows a good growth of 23% compared to Q1. Revenues from regulated markets shows a growth of over 100% compared to last year and is stable from previous quarter at 40% of group revenues. I will now pass on to Jacob, who will speak more about financial details. Next slide, please.

Thank you, Martin, and good morning to everyone. We'll now move on to a couple of slides with a closer look at our financial development during the period. I'm on slide number nine. Revenue amounts to 256.7 million euro in the second quarter. That's made up of 203.7 million related to our live casino product and 53 million from our RNG games. As Martin mentioned earlier, the live casino growth has been very strong the first half of this year, with close to 60% growth. It's a high growth rate for us. As a comparison, our full year 2020 growth in live casino was just under 50%. So the pace has picked up during this year. There's no one factor to explain the increased growth rate this year. Mainly it shows the strong underlying growth in live casino with players. Then, of course, we try to do our part by continuously broadening our product offering and making the games as entertaining as we can. Also, many players found our games during last year, many new players found our games, and this in combination with our ability to add more tables this year also supports growth. So all in all, many factors contribute. Our R&D revenue is 53 million in the quarter. This is slightly up from Q1 of this year, but down 2% compared to the net and reported numbers in the same quarter of 2020. Netdemp did have a pronounced spike in volumes when the pandemic kicked in during the second quarter last year, so comparable figures were high for R&D in this quarter. Our reworking of the product roadmap is ongoing, and as Martin mentioned, we're clearly moving in the right direction with both the Netdemp and Red Tiger brands, so good outlook. EBITDA for the quarter amounts to 174.7 million euro, and an EBITDA margin of 68% in the quarter. The margin level is in line with what we reached in the first quarter. Our guidance for full year 2021 at the start of this year was that we would reach 65% EBTA margin for the full year. Of the two quarters with margins around 68%, we see that we can maintain that level also during the rest of the year. So we are adjusting that original guidance from February. As you can see in the chart, we have a good scalability in our operations. We've been able to, over time, improve margins as top line has increased. Right now, we're seeing a very high demand for tables and we'll expand our operations as fast as we can during the rest of the year, naturally considering what the development of the pandemic will allow. But this expansion will drive costs in the near term, but also contribute to future growth. All this is in line with what we've often stated, that our first priority is growth. Should we see an opportunity to take on cost now to capture revenue in the future, we will prioritize that, even if it means some pressure on margin in the short term. To sum up, revised margin guidance for 2021 around the current level of 68%. Operator, let's go to the next slide, please. This slide shows our P&L in a bit more detail. Walking through the table from the top, we see live revenue, again, 203 million euro, This is comparable to the 128 million euro in the second quarter of 2020. RNG amounts to 53 million in this quarter. And like you saw on the previous slide, when we compare year-on-year growth for RNG, it will be against reported net end figures this year. So the reported net end figures from 2020. So this slide is not to perform upward 2020, just to be clear on that. Total revenue, 256.7, an increase of 100% compared to reported revenue, same period last year. And looking at the half-year figures, revenue amounts to almost 493 million euro, an increase of 250 million euro, also up just over 100%. We're over 105% is through the acquisition of Netdem. So organic growth is 59% for the first half of this year. Moving down to expenses, also here the comparison figures 2020 do not include the acquired Netdent business. Personnel expenses amount to 51.6 million euro, an increase of 21 million compared to the same period last year. Includes increase in staff in operations where there's high pressure on adding tables at the moment. And also in engineering and business support functions where also staff from Netdent is added this year compared to last year. Depreciations amount to 18.8 million euro, includes about 9 million in amortization of intangibles related to the net end acquisition. Other operating expenses include items such as consumable equipment, communication costs, consultant royalty fees, and the line amounts to 30.4 million euro in the quarter. So summing up, total operating expenses, total €100,000. 100.8 million euro, an increase of 86% compared to the reported figures of the same period last year. Moving down, operating profit sums up to 155.8 or .9, I guess it's round two. Tax is at 8.7 million in the quarter for a tax rate of 6%. This sums up to a profit for the three-month period of 144 million euro equals an your earnings per share of 65 euros per share for the quarter, and for the rolling 12-month period, 2 euros and 11 cents per share. Operator, we'll move on to the next slide. Thank you. Before I hand back to Martin, a quick look at cash flow and financial position. Starting to the left in the slide, the chart shows development of capital expenditure. The gray part of the bars represent investment in tangible assets. This is mainly our studio construction. It's just over 5.5 million euro in the quarter. Martin commented earlier on our plans for new studios and also continued investment in current studios. We are about to launch in Michigan, but we'll also continue to expand there in the coming quarters. Other ongoing projects include two delivery hubs for the whole network in Europe and also a new studio in Canada. In addition, we're expanding in almost all current locations at the moment. The blue part of the bar is investment in intangible assets, and it's related to development of new games and features to the platform. It's 7.1 million euro in the quarter, up a bit compared to the same quarter 2020, but now also includes development of Netdent and Red Tiger games, of course. Year-to-date total capex is 26 million euro, The slightly lower run rate than our estimated capex for the full year of approximately 60 million euro. So we expect the slightly higher capex for the second half of the 2021. In the middle of the slide, we show operating cash flow. Cash flow was good in the quarter, over 100 million euro. The cash conversion percentage on the rolling 12-month basis is down from Q1, but still on a good level at just over 70%. To the far right in the slide, a quick look at the balance sheet. We do add big time gaming at the end of the period, and also have paid dividend, 145 million euro during the quarter, as well as the payment for the cash part of the payment for BTG. So the remaining cash balance at the end of the quarter is 200 million euro at the end of the period. I'll stop there. I'll hand back to Martin for some closing words, and we'll take questions after that. Okay. Thank you.