Evolution AB (publ)

Good morning. Welcome, everyone, to the presentation of Evolution's interim report for the third quarter of 2022. My name is Martin Carlesund. I'm the CEO of Evolution. With me, I also have our CFO, Jacob Traplan. 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'll round off the presentation with an outlook for the rest of the year. And then we are, of course, happy to take all of your questions. Next slide, please. I'm very satisfied to report consistently strong results for the third quarter. The great result in the quarter is an outcome of our investment in the new games and studios and all the hard work performed by our employees. We see a continuously increasing demand for our products and no signs of consumer slowdown. After landing in North America, evolution has significantly growth in the market. The opportunities there are very promising and we will continue to substantially invest in North America. In the quarter, we launched a new studio in Connecticut, our fourth studio in the US. Recently, we have also launched several dedicated live dealer environments in our Michigan studio. These environments are customized areas of live studio that are assigned to specific operators. The dedicated studios look amazing and will uniquely incorporate each operator's branding to give players experience that is unique to the operator's brand. The construction of a second studio in New Jersey to cover for increasing demand there goes well, and I'm looking forward to launch it in the not-too-distant future. In the quarter, we have also launched live crafts in Pennsylvania, and after the end of the period, on the 18th of October, we also launched crafts in New Jersey. Crafts is another step for Evolution in expanding its portfolio in the U.S. and giving players in Pennsylvania and New Jersey a full suite of live casino options. This game is the very first online live craft game in the industry, and the launch of the game is a landmark moment for evolution. We're very proud to be able to offer it to our operators and their players in the state of Pennsylvania and New Jersey. To predict the next state that will pass legislation to allow iGaming is difficult, but as I see it, it's more a question of when and not if for many states. The positive news is that we will still have a large catalog of products that haven't been released in the US yet, so while waiting for new states to legislate, growth will continue as we introduce more of our products, driving the share of live upwards. All in all, we have great momentum in North America, and we are well prepared to continue that development. This quarter was the first one with No Limit City consolidated. Our long-term ambition is to become the world leading provider of online casino and we have high expectation that No Limit will be an important piece to achieve these ambitions. We of course very much look forward to add No Limit as soon as possible to our one-stop shop making them available for all customers worldwide. The high demand for our product means that we must expand in existing studios and build new ones to keep up keep the pace with that demand. In the second quarter, we launched one in Madrid, one in Armenia, and we are right now expanding both studios in past days, as well as expanding in essentially all other existing locations. I also want to mention that we are delighted to have Bing Crown, the best live casino supplier at the 2022 SBC Awards in Barcelona, and digital industry supplier at the Global Gaming Awards 2022 in Las Vegas. We feel very honored and want to say a big thank you to all of our people who made this happen. Now, let's move to the coming slides and see the effect on numbers on all our efforts. Operator, next slide, please. Q3 2022 is a strong quarter for evolution. Revenues increased by 37% to €378.5 million. EBITDA increased by 35% to €261 million, corresponding to a margin of 69%. There is more cost inflation than we expected at the start of the year, and energy prices, transport, service, and almost any supply is increasing fast in cost. However, we reiterate our guided margin for 2022 as being 69-71%. We have not seen any apparent signs of consumer slowdown, but we need to acknowledge that the world is in a very unstable situation. In this context, it's important to state that the investments will continue to be high, margin might vary quarter on quarter, and if there is a trade-off between growth and margin, we will always prioritize growth and market share. Our R&D business amounted to 18% of total revenues in Q3, and live represents 82%. R&G revenue, now including no limit city, this quarter amounts to 68.1 million euro, a growth of 2% compared to the performer revenue of Q3 2021. Without NSE, our old R&G bands had a growth of slightly above 2% for the first nine months of the year. This is yet not satisfactory. We have delivered to few slots gains during the last curve. However, we remain fully committed to the target of double-digit growth. We see great potential in RSS and are now focusing on accelerating rollouts. On the other hand, momentum in live is strong. And within the vertical, the growth amounted to 45% compared to Q3 last year. High sum, fantastic numbers in live and focus on accelerating rollouts on RNG. But overall, I'm pleased with the financial performance in the third quarter, and we are definitely well-placed to deliver a strong finish to the year. And as always, we will relentlessly further strengthen our market share and continue to widen the gap to competitors. Next slide, please. At the end of the period, we were close to 16,000 evolutionaires. Expanding our studio capacity means we need a high recruiting base. And in the quarter, we increased the numbers of employees with 620 persons. The increase in staff year-on-year amounted to over 3,600 employees, corresponding to an increase of close to 30%. We will continue to increase headcount during the year as we expand in our new studios in Spain, Armenia, and Connecticut, as well as expanding in other existing studios. With the fast growth of the company, we need to have an equal high pace of our recruitment. Therefore, recruitment will continue to be one of our priorities and one of our key processes. Hiring and retaining the best people is tough. The best way to hire and keep top people is to create a company culture where the best people want to work. You can't buy culture. It's something that you create. Therefore, a great culture is key when growing at such a pace that we are doing. And we will always try to improve ourselves as an attractive employer. Next slide, please. I mentioned last quarter that we wanted to replace best spots as a measure of player activity on our network. Best spot slide was only related to live games. It did not cover the whole network. It also represented an uneven distribution of different game types and simply had played out its role as a performance indicator. This slide is an attempt at a new measure of activity on our network. It shows development of game rounds. A game round is what it sounds like, one round of a game. One round of roulette, one hand of baccarat, or one spin of a slot. They all count as one game round. There are still differences between games. For example, since one hand of blackjack takes longer than one spin of a slot, each game round of blackjack typically carries a higher bet, so all game rounds are not equal in value. In the short, the index value for game rounds from live and RNG are weighted according to the revenue contribution. This gives us a joint index that includes all games and the complete network worldwide. I think that the game rounds index over time will give a much better view of the activity in our complete network. Game rounds will now not always correlate exactly with revenue each quarter. As you see in the chart, we had a nice development of activity this year. In the third quarter, activity as measured by game rounds increased by 70% year-on-year. This is clearly higher than our revenue growth in the quarter. One reason for that is that we are adding many game runs from new markets, like, for example, Latin America. And in the beginning, the bets tend to be smaller for new markets, but typically some markets also have smaller average bet sizes than others. Altogether, this means that game runs doesn't overshort the time where it correlates exactly to revenue. Next slide, please. innovation and the best game will always drive illusion to continue to innovate substantially enhance and refine the playing experience and user entertainment and satisfaction is and will always be the absolute priority going live in early november we have two new exciting football team tables football studio diet and football studio that's just in time to take advantage of the extra interest in football being generated by the world cup Another game in Q4 is the new Freebet Blackjack, a variation of our classic Blackjack, but what makes this version different are exciting freebets. Also, get ready for a gripping experience with Dead or Alive Saloon, a card game set in a fantastic Wild West Saloon-style environment. That environment is the one you saw on the absolute first slide in this presentation. You remember it? It's truly amazing. Go back, look at it. In our RNG vertical, superstars from NetEnt is like an award ceremony. NetEnt has gathered a group of their most beloved star characters and jammed them into single online slots, accompanied each of them with their own feature. This is far from our ordinary slots. The game launches in Q3 have been well received by players. Crazy Conflict is a truly unique game, combines the best of two worlds, slots and live game shows. I'm also delighted to show that Monopoly Big Baller has been an instant success with the players. The players' interest has been used not only now for this novelty, but also then for our Monopoly live game show where the players' count is hitting never-before-seen heights. Lightning Roulette continues its remarkable success story and is rapidly expanding. In the quarter two, new localized students have been launched for Greek and Hindi-speaking players, which means that, like new, Latinau is available in eight different languages. And on that subject, Dreamcatcher, our mega-hit money wheel, will soon also be available as a localized version called the Imperial Quest, launched in 2023. Beyond everything else, our focus has always been to innovate and push boundaries to enhance the player experience. This goes for Live as well as for RNG. And I'm excited about how the new gains that we have in line up with 2020 will further confirm this statement. Operator, please, let's move to the next slide. This slide shows the breakdown of revenue by geographic region. We see very good growth in year-on-year in all our geographical markets, and it's evident that the demand is truly global. Year-on-year, the growth in Asia amounted to 66%, with the highest growth rate of all regions in the third quarter. In North America, we saw continued strong growth of 57% year-on-year. We see good potential in both these markets and expect continued high growth rates going forward. Europe as a whole, including UK and Nordic, showed a growth of healthy 12% year-on-year. Once, UK was our biggest market. Now it's the smallest, amounting to 5.5%. of the revenues in the quarter. Also, the year-on-year growth rate was the smallest amount of the moderate 8.4. The Nordics saw a strong growth of 19%, but it's worth noting that this table does not include performa figures, so the growth year-on-year can, to some extent, be attributed to the northern city. The rest of Europe had growth of 12% year-on-year. The European market is the most mature, and as we see, As we grow fast in the other markets, the share of the total revenue from Europe decreases. One year ago, the whole of Europe amounted to 51.4% of the revenue, and now, a year later, that number is 42%. Of course, Europe is still an important market for us, and we feel there is much we can do still to grow our business, but it shows that the increasing globalization of our customer base makes a difference. Other, including Latin America, Africa, remaining part of the world, shows a good growth over 62% year-on-year. In this market segment, it's Latin America that is the main driver for growth. I will now pass on to Jacob, who will speak more about financial details.

Next slide, please. Thank you, Martin, and good morning, everyone. We'll now move on to a couple of slides with a closer look at financial development during the period. I'm on slide number eight. Revenue amounts to 378.5 million euro in the quarter as you see in the blue bar in the chart. That's made up of 310.4 million euro related to Light Casino and 68.1 million euro from R&G. Light Casino is just over 80% of total revenue as Martin mentioned and reports a very strong development in the quarter. We add on over 30 million euro in revenue from the previous quarter. It's the largest absolute increase we've ever had for live casino in a single quarter. The year-on-year growth rate is 45%, which is roughly in line with the average growth rate from the past two years. So overall, very, very strong. As the base, of course, increases, the percentage growth is harder and harder to maintain. R&G includes No Limit 50 for the first time in this quarter. It contributes €7.5 million. The growth rate for R&G, just looking at the reported figures, is just over 10% in the quarter. That, however, includes the acquired revenue. The growth compared to performer figures is 2% in the quarter. We remain committed to the target of double-digit growth for RNG, and we have communicated in previous quarters that development will not be straight-line towards that goal. I must admit that the development in this quarter is weaker than I expected, let's say, a few quarters ago. As Martin pointed out earlier, the short way to explain the development is that we've not delivered as planned, and we simply have not released enough new games. naturally something that we are working on to improve and we're confident we will get there but it has taken a bit longer and we see the effects of that weaker orangey form in this quarter EBTA for the quarter amounts to €261 million, giving an EBTA margin of 69% in the quarter. Year-to-date EBTA margin for the nine-month period is 69.5%. So we're still in line with our margin guidance of 69 to 71% for the year. We make no change to that guidance. But as you do see in the slide, margins were a little bit higher during the first two quarters of this year. So realistically, I see us at the low end of that guided range for the full year. The general development of the macroeconomy during the year with increasing inflation and cost increases in many areas has affected also our cost levels during the year. Zooming out a bit and taking a multi-year view, we see a continued strong demand for our games and that the development of online casino is really in its early stages in many ways. So while cost levels do put some pressure on margins right now, we will continue to invest in growth, capture as much of this developing market as we can, and as we've said many times, prioritize growth over margins. Operator, let's move to the next slide, please. This slide shows our P&L in a little bit more detail. I'll walk through the table from the top. Again, live revenue, €310 million. That's fully comparable to €214 million in the third quarter of 2021, an organic growth of 45%. So far this year, January to September, live revenue amounts to €853 million, which is a 42% increase over the same period last year. R&G amounts to 68.5 and as covered on the previous slide, the reported number is a 10% growth from previous year, but that includes no limit safety in this quarter and not in the comparison quarter here. It's with us for the first time in this quarter. Total revenue 378 million euro, increase of 37.1% compared to reported revenue Q3 2021. Looking at the year-to-date figures, revenue amounts to 1,049 million euro, an increase of 36.5% compared to reported figures 2021. There are some exceptions during this period, with Big Time Gaming coming into the group from Q3 2021, and No Limit City added this quarter. If I adjust for these acquisitions, make the two periods comparable, I would estimate organic growth at about 32% for the company as a whole in the nine-month period. Moving down to expenses, personnel expenses amount to 76.3 million in the quarter. It's an increase of almost 25 million compared to the same period last year. Includes increasing staff, of course, in basically all our teams, commercial, operation, engineering, business support, all expanding compared to last year. Depreciation amount to almost 25 million euro. That includes 11.4 million euro in amortization of intangibles related to acquisitions of Netdense, Big Time Gaming and No Limit 50, where No Limit 50 adds about 1.1 million euro of that amortization of intangibles in this quarter. Moving down, other operating expenses include items such as consumable equipment, communication costs, consultant royalties, total of 41.2 million euro in the quarter and an increase of 31% compared to the same period last year. Summing up total operating expenses, total 142 million euro, an increase of 36% compared to the reported figures of the same period last year. Operating profit on the next line, 236 million and 658 million for the year-to-date period, increases of 37 and 40% respectively. Tax for the period is at 16.4 million, which gives a tax rate of 6.9%. Similar level looking at the year-to-date period, it's about 1% higher than the same period last year, so a bit of increase on tax, as we talked about in the past. All this sums up to profit for the three-month period of €221 million, equaling an EPS of €1.02 per share for the quarter, increase of 44% compared to the same quarter last year, and for the rolling 12-month period, earnings per share is now €2.85 per share. We'll go to the next slide, please, operator. Before handing back to Martin, a look at the cash flow and financial position. We'll start to the left in the slide, where you see capital expenditure. The grey part of the bars, the top part, represent investment in tangible assets, so that's our studio construction projects. In the third quarter, CapEx in tangible assets is 13.9 million euro, similar level to earlier quarters this year. And as Martin mentioned, we've had a very high activity in studio projects this year, and we expect to continue investment at a similar pace during the final quarter of the year. The blue part of the bar relates to investment in intangible assets, that's development of new games and features to the platform. It's at 9.6 million euro in the quarter, also relatively similar to previous quarters and also here we expect the pace to be maintained. In the beginning of the year we estimated total capex for both intangibles and tangibles to about 90 million euro for full year 2022 and for the first nine months the total is 69 million so the pace is just slightly higher than 90 million for this year. We'll move on to the middle of the slide, where the chart shows operating cash flow. In the quarter, it's over €200 million, €213 million operating cash flow in relation to EBITDA or cash conversion, as we call it here in the slide. On a rolling 12-month basis, it's still on a very good level, around 75%. To the far right in the slide, the balance sheet, we maintain a strong financial position. As Martin mentioned we're debt-free and the strong balance sheet is something that's an asset coming into an uncertain macroeconomic environment like the one we're experiencing right now. Our cash position is 319 million euro at the end of September. During the quarter we have made first payment of the no limit city deal so that was an upfront payment of 200 million. That sort of has already come out of the cash here. That was the end of my prepared comments. I'll hand back to you, Martin, and we'll take questions after that.

Thank you, Jacob. So we are on slide 11 now. A few words to conclude this report presentation. Demand for our product is a global phenomenon, and we need to invest in product 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 the distance to our competitors. What you can expect from Revolution is that we will continue to push boundaries, create the best games with the highest player entertainment value for the future. In addition to product development, we continue to invest for the future in the form of new studios. We're constantly working hard to restructure the cost base to reach effectiveness and cost awareness, and thus I'm confident that we will be able to fulfill our margin guidance for the year. Going forward from here, we are We will have high focus on accelerating rollout and increasing this growth on slots, and I'm confident that our RNG vertical has a bright future. Latin America is still in the infancy regarding online casino, and I expect the market to continue to develop well. We have great momentum in the market, and we are well prepared to continue our expansion here. Our newly launched studios in Madrid and Yerevan are still small regarding the numbers of tables, but we are ramping up in a fast pace, and they will all contribute to continued growth in 2023. We're currently in full preparation of the roadmap for 2023, developing it going on in full speed, and I can assure you it looks very good. Last week we had the official opening of our studio in Yerevan, Armenia, and what you see on the next slide is the entrance of our new state-of-the-art studio early in the morning before we started the ceremony. It's a beautiful, simply state-of-the-art addition to Evolution. Today we have about 200 employees in Armenia, in the Armenian team, but in the coming years the studio will proudly contribute to the local society by creating thousands of jobs for young, talented Armenians looking to start their career in an international environment. The difference evolution makes for these people's lives makes me very proud. Evolution has a great speed forward and it's built on of a 16 000 crew of fantastic talent my core is built of huge desire to win and my job is constantly to push myself and the 16 000 employees to the next level it's actually as simple as that thank you all for listening and we'll speak in a couple of months again now let's move to questions please thank you very much we will not begin the question and answer session to ask a question you may press star and one on your telephone keypad