Evolution AB (publ)

Good morning. Welcome, everyone, to the presentation of Evolution's interim report for the third quarter of 2021. My name is Martin Karlsson, and I'm the CEO of Evolution. With me, I also have our CFO, Jacob Kaplan. As usual, I will start with some comments on our performance this quarter. I will then hand over to Jacob for a closer look of our financials. And after that, I'll round off our presentation with an outlook for the rest of the year. And then we're happy to take questions. Operator, next slide, please. I'm very satisfied to report consistently strong results for the third quarter. Our investment in new games and studios are having an increasingly strong impact, which is reflected in both the high growth as well as the stronger margins. It has been another hectic quarter where much of our folks have been about investing and building capacity for the future. We see a continuously increasing demand for our products, which means that we must expand in existing studios and build new ones to keep up with that demand. The growth is a natural part of our business, and you will never see us slow down, even if the pandemic still continues to somewhat impact the pace of our expansion plans. We've launched and are rolling out our one-stop shop, enabling a truly global reach of evolution's casino products. This is a true masterpiece created in a short time inside evolution engineering teams. With OSS, all our operators will reach all our content through one seamless backend and integration. This will enable a much faster rollout of new products, faster regulatory adjustments, and a global reach for all products. At the same time, also making it easier for operators to access and handle all products. In the third quarter, we launched our studio in Michigan, Evolution's 11th live casino studio worldwide. And we are now in the rapid expansion phase with both new products as well as volume. After the end of the period, we launched RNG games in Connecticut with live games to follow soon. We are now building our fourth US studio in Connecticut and look forward to an as soon as possible launch. Since yesterday, we're also live in newly regulated Canadian, Ontario. The Canadian market also successfully launched, together with the Ontario Lottery Gaming Corporation, OLG. The Ontario market is exciting, and with a population of close to 15 million people, surpasses the size of any US state where iGaming is regulated. Currently, this market is only open for OLG. as the state lottery, but in December, the commercial market is planned to open, and we're already working with operators who plan to obtain a commercial license. The North American market is developing rapidly, and I'm proud and excited to further expand our North American footprint. That being said, we are confident that there will be more North American states that will follow. We're prepared to move quickly. I would also like to comment the newly regulated Dutch market has opened on the 1st of October. We went live with the Nederlands Lotterij, as well as several other operators that got one of the first 10 licenses. However, some of Evolution's largest customers in the Dutch market did not get one of the initial licenses and had to wait until 2022 to get one. We, of course, very much look forward to add also those as soon as possible. The opening of the market was stronger than expected, and we see a very limited negative effect of less than 1% during Q4, and in the long term, we see the Netherlands as a growth catalyst in Europe. As I stated before, the demand of our products is truly global, and we're expanding our studio capacity everywhere. Right now, we're building new studios in Spain and Armenia, as well as expanding, essentially, in all existing locations. was the first one with big-time gaming consolidated. Our long-term ambition is to become a world-leading provider of online casino, as you know, and we have a high expectation that BTG will be an important piece to achieve that ambition. Now, let's move to the coming slides and see the effect on the numbers and the products of all our efforts. Operator, next slide, please. In the third quarter, we continued the momentum from the first half of the year with a strong development. Revenues increased 97% to €276 million. EBITDA increased by 113% to almost €193 million, corresponding to a record margin of 69.9%, exceeding our guidance for the year. Life has seen a delivery growth of 53% compared to Q3 last year, albeit a lower growth than previous two quarters. It still exceeds all the quarters during 2020. R&D revenue, now including BTG, in the quarter amounted to 61.5 million euro, with a growth of 7.8% compared to the combined revenue of Nestland BTG during Q3 2020. At that time, not part of evolution. If I isolate our Nestland and Red Tiger brands, growth is about 3% or not higher compared to Q3 2020. It is in line with our base expectations, however, we do have a higher expectation for the growth going forward for these two brands. We're in the process of reshaping our R&D roadmap, which have led to fewer new releases this year, which in turn has had an effect on the growth. In addition to that, we have rebuilt the technical platform, which I've already mentioned, which will have a positive effect going forward. Albeit fewer new Netman titles so far this year, the ones that we have launched, which is much more important, have been embraced well by the players and a strong contribution to the result. The lineup of coming slots 2022 is strong and I look forward to see the performance within this vertical as we move forward. All in all, fantastic numbers and I'm very pleased with our financial performance in the third quarter and we're off to a strong start of Q4 and definitely well-placed to deliver a strong finish of the year. And as always, we will relentlessly strengthen our market share and continue to widen and get to competitors. Next slide, please. Betspots is to be seen as an indicator for the activity in the live network, the evolution of live games. The number of betspots from the end user amounted to 18.1 billion, an increase from last quarter with 3.3%, and compared to the same period last year, a growth by 4%. Increase in our volume that you can see in the increase of bet spots every quarter is a result of that we have been able to attract new players and at the same time been able to keep the players we already have. While it's important for us to keep the players that we already have, we are almost obsessed with the players that we don't have. That is why we have to continue to innovate, always refine the playing experience and be the leader that develop new groundbreaking products for the future. Every year, we have to develop totally new games that can attract completely new groups of players. Next slide, please. Expanding our student capacity means that we need a very high recruiting pace. In the quarter, we hired almost 1,000 new employees. The increase in staff year-on-year amounts to almost 5,000 people, corresponding to an increase of 66%. At the end of the curve, we were over 12,000 revolutionaries, And we have to continue to increase headcount to support our rapid expansion. Improvement is one of our key processes, especially in new markets where our company and products are not always well known. Because of that, we have to show that we are one of the best companies to work for and that we take care of our employees and that everybody that steps into Evolution Studio office or engineering hub feel that they are seen and that they are appreciated. Evolution is about working as a team, and the success of the company depends on everybody's contribution. Everybody should feel that they are an important cog in the evolution machinery, regardless of where they are placed or what they do. Since the pandemic is still not over yet, I would once again stress that our main priorities are to minimize the risk of spreading the virus and to create a safe workplace for our employees, as well as to maintain the operations for our operators. We follow all the requirements of the authorities in countries where we operate, but in many cases, we are taking more far-reaching own actions. The well-being of our employees is, of course, the well-being of evolution. I'm very proud of all our employees that make up this fantastic company, and it's important to me that the people in the companies that we recently acquired feel that they are welcomed and that they are appreciated. Next slide, please. Our R&D vertical amounted to 22.3% of the total revenue in the third quarter. It is at similar level to previous quarters, and as mentioned earlier, our growth is higher in live casino, but in Q3, we also added B2G for the first time. Big time gaming further strengthens our already world-class slots offering and IT. We've lost fewer slots this year, which I mentioned, compared to what happened historically, but the ones that we've launched have been successful and well-received by players. An example of that is Starburst Extreme, the new slot title based on the iconic Starburst slot game. With the addition of brands such as NetEntred, Tiger, and Big Time Gaming, Evolution has become a powerhouse that now offers incredible array of best-in-class solutions for operators and their players across live casino, RNG table games, and slots, not to mention a new generation of live online game shows. Very few doubt that we are the most innovative developers of live casino, but we still have to prove ourselves in RNG. That's why it's so rewarding that we at the EGR B2B awards won the innovation in RNG casino software award for our first-person range of RNG-based table games. Natant and Red Tiger were also joint winners of the innovation in slot provision award for the collaborative development of Gonzo's Quest Megaways, among other games. Next slide, please. Innovation and the best games will always revolution. We continue to innovate substantially and refine the play experience and user focus as always. In the quarter, we have continued to expand our range of immersion and engaging game shows with the launch of Casual Crash, an exciting ball-drawing game. The game allows the player to make choices during the game with enhanced play control of the outcome. Casual Crash appeals to an even broader spectrum of players. Games that give more decision-making for players is something you will see more of during 2022. Another launch quarter was the Santan, a classic Asian favorite that has traveled the world and is now set to join the Evolution live casino lineup. In the quarter, we have also announced that we have acquired DigiWheel, developers of the world's first HD spinning gaming wheels. The deal will further strengthen our online gaming portfolio with DigiWheel's unique and innovative digital technology being blended into our online live casino games and game shows during 2022. In the fourth quarter, we will launch Golden World Baccarat. It's very similar to Lightning Baccarat, but a luckier version, offering more frequent wins. Another launch I look forward to is Lightning Blackjack, an electrifying blackjack with enhanced payouts, which is launching in November. The game is a unique blend of a scalable blackjack and add lightning multipliers. In addition to new game launches, an important aspect of our product development is to constantly enhance user interfaces. In the quarter, we have implemented a new zooming feature to our blackjack that enables the player to clearly see the real car's belt, which increases the playing experience. With technical innovations coming rapidly, continuous improvements and existing games, it is essential in securing long-term quality and keeping the games up to date. Now, we are currently in full preparation for the roadmap of 2022. Development is going on at full speed, and I can assure you it looks very good. I'm very excited. 2022 will be a year of innovation and product development. Come to ICE 2022 and have a look. Operators, operator, please, next slide. This slide shows the breakdown of our revenue by geographic region. We see very good growth year-on-year in all our geographical markets, and it's evident that demand is truly global. The Nordic makes up about 10% of total revenue. It's very rewarding to see the growth of 18% from the second quarter. The growth year-on-year can, to a large extent, be attributed to Natant, which has a strong position in the Nordics. UK is about the same size as the Nordic. Natant and the Tiger Games have contributed significantly to the increase compared to the same for 2020. The rest of Europe is about 37% of the total, so together with UK and Nordics, about 51% of revenues comes from Europe. Compared to previous year, all the regions in Europe show good growth, but compared to the second quarter, both UK and rest of Europe are slightly lower, while Nordics show an increase. I received many questions on the effect for us of society's opening after COVID, and it's difficult to say anything decisive on this topic. In Europe, where many countries have started to open during the quarter, the picture is mixed. And as you can see, with UK and the Nordic, both societies have reopened, moving in different directions compared to Q2. As we have seen during the past year, Asia and North America have grown very fast, with year-on-year growth amounting to 120% and 246% respectively. We see good potential in both these markets and expect a continued high growth rate going forward, particularly as we see still our small actor in Asia, with more and more states regulating our products in the U.S. Other including South America and Africa and the main part of the world shows good growth of almost 70% year-on-year. Revenues from regulated markets, as you see, constitutes about 38% of revenues. And now, I will pass over to Jacob, who will speak more about financial defects.

I'll play the next slide, please. Thank you, Martin, and good morning to all of you listening. We'll now move on to a couple of slides for the closer look at financial development during the period. I'm on slide number nine. So as you heard earlier, revenue amounts to $276 million in the third quarter. That is made up of $214.5 million related to our live casino product and $61.5 million from our R&G games. Like Casino continues to develop really well. Growth in this quarter compared to the third quarter of 2020 is 53%. This actually exceeds the pre-pandemic growth rates from 2019. It's great to see that many of the new players from the past year are staying on the network. Our R&G business consists mainly of two acquired businesses, NetEnt, which was consolidated from December 2020, and Big Time Gaming, which is consolidated for the first time in this quarter. This quarter, our R&D revenue is 61.5. It's a 7.9% increase if I compare to the performer numbers of NetDent and BTG in Q3 2020. They were then not part of the evolution group. Big time gaming adds just over 10 million, 10.6 million to revenue in this quarter. And isolated, it has a growth rate of over 35% compared to its corresponding quarter in 2020. The growth comes both from the continued success of the Megawaste game mechanic, as well as increased volume of play on the BTG games. Consequently, the remainder and the larger part of our RNG business relates to our Netdent and Red Tiger brands. As Martin mentioned earlier, performance growth for those brands compared to the same period 2020 is just over 3%. And also, as we talked about earlier today and also in previous quarters, it is worth pointing out that we have made a large restructuring of our R&D business during the year, both on the product side where the roadmap has been reworked and also on the technical side where the infrastructure has been rebuilt. And the side effect of this restructuring is that there are two NetEnt games released this year, and the games that have released overall have been very strong, but it adds up to 3% growth. So while in line with our expectations and plans, we do have ambition to increase growth in RNG during next year. EPPA for the quarter amounts to 192.9 million euro and an EPPA margin of 69.9% in the quarter. Again, this is a quarter with very strong margin. I have to admit, it exceeds my own expectation from just three months ago and the guidance we gave in connection with the second quarter report. As most of you know by now, we prioritize top-line growth. And while we do give guidance on margin, we don't steer to specifically achieve it. We are in a period of heavy expansion, and we'll continue to invest and add tables in the fourth quarter as fast as we can. This can have an effect on margin in the short term, but overall, margin looks good. I'll refrain from guessing on the margin this time, and I'll leave it at concluding that we are at 68.7% margin year-to-date, and we will exceed our guidance of 68% for the year. All right, let's move on to the next slide, please. This has the P&L in a bit more detail. Going through from the top, we have live revenue again, €214 million, comparable to €140 million reported in the third quarter of 2020. So organic growth is 3%. And the R&D revenue is €61.5 million. And like explained on the previous slide, this was not part of the group in Q3. So on this slide, you see no performer figures for 2020. Total revenue, 276 million, increase of about 97% compared to reported revenue of the third quarter 2020. And looking at the year-to-date figures, revenue amounts to 768 million euro. It's an increase of 100%, where of 166 million euro done is through acquisitions. So you could say organic growth is 57% for the first nine months of this year. Moving down to expenses, personnel expenses amount to 51.5 million euro, an increase of 20 million euro compared to the same period last year. It includes increasing staff in, I would say, all our teams, commercial operations, engineering, business support compared to last year. Depreciation amounts to almost 21 million euro, including 11.5 million euro in amortization of intangibles related to the acquisitions of NetBank and now also then Big Time Gaming, which adds about 1.5 million in the quarter. Other operating expenses include items such as consumable equipment, communication costs, consultants, royalty fees, and this line amounts to 31.5 million euro in the quarter. Summing up, total operating expenses totaled 104 million, an increase of 84% compared to the reported figures of the same period last year. And that brings us to operating profit of 171, almost 72 million. Taxes at almost 12 million in the quarter for a tax rate of 7%. It's about 1% higher than previously this year. Then all of this brings us to a profit for the three-month period of 157 million euro, equaling an earnings per share of 71 euro cents per share for the quarter, a 66% increase compared to the same quarter last year. For the rolling 12-month period, EPS is 2 euro and 39 cents per share. Let's go to the next slide. Before I hand back to Martin, look at cash flow and financial position. So we start to the left in the slide, development of capital expenditure. The gray part of the bars represent investment in tangible assets. Mainly, this relates to our studio constructions. It's up a bit in the quarter, just over €7.3 million in the quarter. Martin commented earlier on our plans for new studios and also the continued investment in current studios. Ongoing projects include... Spain and Armenia, as mentioned earlier, as well as the fourth US studio in Connecticut. And in addition, I would say we're expanding in almost all current locations. So a very hectic period that's behind us, but also in front of us. The blue part of the bar is investment in intangible assets, and it's related to the development of new games and features to the platform. It's 5.3 million euro in the quarter, up a bit compared to the same quarter 2020, but now, of course, also includes the development of NetEntra, Tiger, and BCG Games. Year-to-date capital expenditure total 39 million, so our run rate is a lot lower than our estimated capex for the full year of approximately 60 million euro. We are in a busy period, as mentioned, but I think we might not reach all the way to 60 million euro this year, but... There will be, you know, continued high investment pace also in the fourth quarter. Moving on to the middle of the slide, we show operating cash flow. Cash flow very strong in the quarter, over 180 million. The increase from the second quarter is due to both operating profit increasing, some improvement in working capital, and also a tax refund on our tax receivable from Malta. So cash conversion percentage relatively stable, just under 80% for the 12-month rolling number. And then finally, to the far right in the slide, a quick look at the balance sheet. We have added big-time gaming in this quarter, which affects Goodwill with about 400 million euro. In this table, Goodwill is included in the non-current assets. And also, there's an increase in non-current liabilities also related to the BTG acquisition of this earn-out component to that deal. Those were my prepared comments. I'll stop here. I'll hand back to you, Martin, for some closing words, and we'll take questions after that.

Thank you very much, Jacob. A few words to conclude this report presentation. I already mentioned ICE 2022, and we're in full focus and full speed to prepare right now. At ICE, we will release a record number of new innovative products, and we will also release a record number of new games 2022 in total. It will be a year of product and innovation with the potential of global releases through OSS. This would be all possible because of the fantastic persons in Evolution and the teamwork between all of you. This is when we display why we can pride ourselves on delivering an exceptional and flawless player experience. It is where we show what makes us unique and how we own up to our name, Evolution. ICE 2022 will also mark the first time where all six product brands of our group will come together under one roof to meet the industry. Very exciting. In October, we launched in Michigan. We were first to the market in Connecticut, and yesterday we went live with the Ontario Lottery. It's hectic times, to say the least, as I started this presentation with. But remember, demand of our products is global phenomenon, and we need to invest in products and studio capacity in order to reach all corners of the world, and we have to stay on our toes and never be laid back and content in order to keep increasing distance to our competitors. Ever so far paranoid, trying to run faster every single day, do something better today than yesterday, constant focus on end-user satisfaction. Thank you all for listening, and we'll speak again in a couple of months. Now, let's move to questions, please. Thank you.