Evolution AB (publ)

Good morning and welcome to the Evolution Q1 2023 earnings call. All participants will be in the 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 must press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Martin Carlesund, CEO. Please go ahead.

Good morning. Welcome, everyone, to this wonderful day and presentation of Evolution's report for the first quarter of 2023. My name is Martin Carlesund. I'm the CEO of Evolution. With me, I have our CFO, Jacob Kaplan. I will, as usual, start with some comments on our performance in the quarter, where after I hand over to Jacob for a closer look at our financials. After that, I will round off our presentation with an outlook for the rest of the year. And we are, after that, happy to take all of your questions. Okay, let's begin. Operator, next slide, please. 2023 started in a high tempo, and we continue to see strong worldwide demand for our products. There is a slowing of the general economy in large parts of the world, but we continue to attract new players and grow in all our markets. As we have said in earlier quarters, it's reasonable to assume that the general slowdown of the economy also affects us on some level. But we cannot say that we see any clear signs of a slowdown in our business. Of course, we are supported by the fact that we have come into the new year with a fantastic pipeline of new games and a strong momentum from 2022. I want to mention some of the operation highlights in the quarter. The opportunities in North America continue to be very promising, and we continue to expand our offering in both R&G as well as live casinos. We have now rolled out Red Tiger Time jackpots in Ontario, Quebec, as well as in Connecticut and Michigan. And just a week ago, also in New Jersey, with the remaining states in the US to follow. Red Tiger remains the only game supplier to offer timed jackpots in the US. This unique state-of-the-art progressive jackpot mechanic for online slots that allows operators to set progressive jackpots that are guaranteed to hit before a certain time. It's a feature that has been widely popular in other regions and we are excited to bring it to the North American players. Furthermore, in Q1, we launched Megaball with the British Columbian Lottery Corporation, with the other Canadian lotteries to follow. Megaball was our first bouncing ball game a few years ago, and we have now added more games in the category. Megaball appeals to players all over the world, and it's an example of how we extend the product portfolio to include something for everyone. The focus is to bring all of our fantastic products to each state regulated or regulating in the US continuous. And we are constantly investing, building and working with all regulators to achieve this. Also in Europe, we are off to a fast start of the year. I'm very happy that we have agreed to launch our games with Sky Betting and Gaming in the UK. I've known the people at Sky for many years, so we are happy to finally bring our games to their players. I mentioned the development in Latam several times in the past years, and it continues to be a rapidly developing region that is in focus for us. We have had a local organization there for some time, and we are also exploring opportunities for expanding our presence with local studios. In the first quarter, the transition to the new smart lobby was completed for all our customers. Our new lobby is being incredibly well received, and the data from it has been strong. Players can favorite games, search without a field, sort by tables, filter by native languages, speed tables, or limit. All in all, we make it easy for the players to quickly get what they want and also discover new games. Now, let's move to the coming slides and see the effect on numbers and products for all of our airports. Operator, next slide, please. We continue the good momentum from 2022 and have seen a strong start to 2023. The combination of global demand for our products and constant pursuit of cost efficiency, hard work and high ambitions of all employees all sums up to the fantastic numbers. Operationally, it has been a very hectic quarter and I'm pleased to see the financially strong results we present today. Revenues increased by 31.5% to €430 million. EBITDA increased by close to 31% to over €300 million, corresponding to a margin of 69.9%, which is within the guidance of 6 to 8 to 71 for the full year. I'm happy with the margin in this quarter as it is a result of the high demand of our products in combination with the constant that we constantly work hard on cost efficiencies. we show that we are able to increase efficiency and strengthen the margin from Q4 2022, even in the very difficult circumstances as we see in the world today. Light Casino delivered a good growth of 36% compared to Q1 last year. R&D revenue amounted to 69.5 million euro, with a growth of 11.6% in reported numbers. The growth in report compared to the combined revenue evolution and no limit for Q1 2022, the former growth, amounted to 0.6%. As earlier communicated, we have a target of double-digit organic growth of RNG. As we stated already in the end of last year, the path to our goal within RNG will not be a linear, but we look forward to 2023 where we will double the releases of our NetEnt brand, add new bonusing tools for slots and increase the distribution of slots through OSS. Increased growth within RNG will remain a high priority throughout the year. All in all, I'm very pleased to be able to present yet another very strong port for evolution. We're definitely well-placed for further strengthening our market share and continue to widen the gap to all our competitors. But as always, we need to work hard and become better every single day. I constantly also want to remind you that all numbers you see is the creation of the thousands and thousands of fantastic evolution employees working hard and a little bit better every day. Next slide, please. As we grow our business, we also expand the headcount. In this quarter, the increase is about 300 MET, a bit smaller addition than what we saw per quarter 2022. The increase of headcount can be a little bit lumpy. We added a lot of stock in Q4, so we are benefiting some from that also in Q1. The increase in stock year-on-year amounted to close to 3,000, corresponding to an increase of 21%. We will continue to increase numbers of employees during 2023 as we expand in our students, and we will continue to consider diversity as a strategic advantage and a key asset. It is a condition for evolution's operational excellence. I'm proud of all employees and the work ethos they show in their daily work. They make up a fantastic company. Next slide, please. The Game Rounds Index shows the development of the whole evolution network and includes all games. A game round, as I pointed out earlier, is what it sounds like, one round of a game. Even so, I want to reiterate that one round of a bet, one hand of Baccarat, and one spin of a slot all count as one game round. Also important to note is that there are differences between games since one hand of Blackjack takes longer time than one spin of a slot, as well as that each game round of Blackjack typically carries a higher bet compared to the slot spin. And, as a result, all game rounds are not equal in value. In the chart, the index value for game rounds from live and RNG are weighted according to revenue contribution. This gives us a joint index that includes all games based on equal revenue contribution. With this as a backdrop, we need to notice that the true activity and entertainment of a player comes from a game round. And the health increase of close to 70% we see in Q1 2023 is very good. Right there, next slide, please. As a group, we are committed to creating the best gaming experience for every player in online casino. For 2023, we are planning to release over 100 new games across all categories. Our roadmap this year is nothing but fantastic. Another year of the product. We need to constantly increase entertainment factor and push boundaries to be relevant for the players in 10 years from now. Online casino industry need to understand that doing and delivering the same as today in 10 years will not be satisfactory for the much more fluent younger online generation. Evolution knows this. Evolution acts on this. Evolution gets energy from this. Evolution constantly moves forward towards the future. We do not stand still and wait for it to happen. During the first quarter, we released 18 RNG games, which is similar to last year, and we will see a ramp-up of releases in the second half of 2023. During Q1, we presented two of our big live games this year, even though both will be available to players first in the second quarter. Extra Chili Epic Spins is a unique online game that brings together live and slots in a game show style game. created around the hugely popular slot Extra Chili from Big Time Gaming. It's a fresh way to enjoy slots, adding a community feeling, social aspect, and we are excited to see how it is received by players. I think it is a theme that we will explore further in the future. In 2017, we launched the first ever game show in online casino, Dreamcatcher. It was a first attempt at a live game that would appeal to players who were not in traditional table games. We wanted to increase entertainment. We wanted to expand live to other players within online casino. And we wanted to expand live to new players outside classic online casino. After that, we released Deal or No Deal, Monopoly Live, Mega Ball, Monopoly Big Baller, and of course, Crazy Times. and a few more games that have reshaped the gaming industry and made it more fun. That is something to be very proud of. We have learned a lot developing game shows, and we have had a few failures too. That's all in part of the process. We've now taken all of that knowledge and put it to work on our latest creation, Funky Time. It's the most complex game that I think anyone has ever seen, in the gaming industry, and it's going live in May. The game is built around our own patented technology, the DigiWheel. There have been hundreds of persons who have worked on bringing this game to life, and additional dozens of people who contributed to the concept in various ways, from bonus works, the master sign, the studio, the DigiWheel, and all the magic it does. We are very excited about Funky Time, and I think it will be A wonderful compliment to Crazy Time and the rest of our family of game shows. Our group's product roadmap for this year is the strongest one ever, with great variety and innovation amongst existing releases from all our brands. Needless to say again, I am very excited about the new games that we have in line up for 2023, the second year of the product. Operator, next slide, please. This slide shows the breakdown of revenue by geographic region. From this quarter, we have made a change to better reflect how we work with the different regions. As mentioned earlier, Latam is a region that has seen a strong development in recent years, and we now break it out as a separate region in the table. We also group UK and Nordics into Europe, as that better reflects our current structure for addressing the region. We have a true global demand for our product, which is also reflected in the spread of revenues of the geographic regions. Now, let's look at the development in the regions. Europe reported strong growth of 40% in the first quarter compared to last year. As a whole, it represents some 40% of total revenue. Europe overall is a more mature market in comparison to some of the other regions, but there is still much development and and we see that it has a large potential for evolution in the future to come. It's great to see the quarterly growth rate improving during the past quarters, but I don't expect we return to the growth rate in the region from three, four years ago. Asia has been our fastest growing region in the past years and will likely surpass Europe as the largest region during this year. It reports strong growth of 49% compared to last year. That said, I expect growth rate in Asia to come down as our size simply gets bigger, even though the potential in market is very large. North America grows 56% in the quarter, and as I mentioned, at the top of the call, there is much going on here. We have little impact on the political process for further regulation of the USA, but we foresee that new states will regulate in the coming years, which again will expand the market further. And Latam currently makes up 7% of the total revenue in the quarter, and we believe it is a region with great potential and positive momentum. Remains the other region, which mainly consists of Africa. It stands for nearly 3% of the group revenue, and it's a future growth opportunity for us. Share revenues from regulated markets amount to 40% in Q1.

With that, I'll hand over to Jacob. Next slide, please. Thank you, Martin, and good morning to all of you listening. Now for a couple of slides with a closer look at the financial development. I'm on slide number eight, titled Financial Development. Revenue amounts to €429.6 million in the quarter. That's made up of €360.1 million from our live casino business and €69.5 million from our RNG games. Light Casino has a very strong start this year, as Martin mentioned, continuing a nice momentum from 2022. Year-on-year growth is 36%. Growth in Light Casino has a quite broad base on most metrics. Looking at products, both recently released games from 2022 contribute, but also the big traditional table games like Baccarat Roulette and Blackjack show very nice growth. Similarly, as you saw in the previous slide, year-on-year growth is widespread across most regions, naturally with varying pace of growth. But the shift into online casino and live as a central part of the user experience online is widespread. We think we have a long runway for growth and see good opportunities in many areas. However, as we have pointed out also during last year, we do expect growth rate to continue to slow down as our base continues to increase. That is to be expected. R&G revenue amounts to 69.5 million euro in the quarter. It's a step back from Q4 and only very slightly up compared to performer figures for the first quarter of 2022. Our message has been the same since Q1 of last year, that we remain committed to reaching double-digit growth in R&G. We have not set a time on that goal and we have also pointed out that the development would not be linear. And sometimes it hurts to be right. So while not surprised by the result in Q1, I admit it is disappointing compared to my expectation from one year ago. As Martin pointed out, lots of work is going on, but it will take some time before we see the financial results. So I'm confident we will reach our ambitions, but I don't see a quick turnaround in Q2 or Q3. EBITDA for the quarter amounts to €300 million. giving us an EBITDA margin of 69.9% in the quarter, well within our guidance of 68 to 71, set at the beginning of this year. The margin level in Q1 is a step up from Q4. Growing revenues is, of course, a large part of that increase, but also our whole team has shown a great awareness to cost during the past two quarters. Our cost base naturally increases as we grow, but we are now spending deliberately and where it makes a difference. So going forward, we maintain the 68% to 71% range as guidance. And I'll take the opportunity to remind you that margins can still vary both up and down, quarter to quarter. The increase of inflation levels seems to have leveled off in several markets at the start of this year. But we're still talking about 10% or even higher increases in price levels in many markets. So cost increase will continue to affect also us. But overall, we are very happy with the improved margin in the quarter. Please take us to the next slide, operator. This slide shows our P&L in some more detail. From the top, again, we have live revenue, €360 million, and R&D at 69.5%. and growth rates of 36 and almost 12% respectively compared to the reported figures in Q1 of 2022. But that includes acquired growth when it related to RNG. So growth versus comparable business is 0.6% as discussed on previous slides. Total revenue 429.6 million euro. That's an increase of over 100 million euro compared to the first quarter of last year. Moving down to expenses, personnel expenses amount to 82.9 million euro. That's an increase of 31% compared to the same period last year. We have increased headcount by about 20% since last year. Compared to the first quarter last year, there's an increase in cost per headcount. And this is due to slightly less overstocking, but also wage increases and the mix of stock between regions play a role. The depreciations amount to 28.7 million euro, that is up a little over 6 million euro compared to the same period last year, but more or less in line with the previous quarter. Depreciations include 11 million euro in amortization of intangibles related to the acquisitions of NetEnt, Big Time Gaming and No Limit City. Moving on, other operating expenses, that includes items such as consumable equipment, communication costs, consultants and royalty fees, The line amounts to 46.5 million euro in the quarter, which is up almost 13 million euro or 38% compared to the same period 2022, but also here flat compared to the previous quarter Q4. Summing up, total operating expenses totaled just over 158 million euro for the first three months of this year, an increase of 32% compared to the reported figures of the same period last year. Operating profit sums up to €271.5 million in the quarter. Financial items, that includes costs related to the right of use assets, according to IFRS 16. And also on this line, we have currency-related effects from revaluation of balances on bank accounts in non-euro currency, as well as some intragroup loans. That also ends up here. Tax is at €18.9 million, and the tax rate is 7% in the quarter. This item brings us to a profit for the three-month period of €251 million, equaling an earnings per share of €1.14 per share for the quarter of the dilution. And that's an increase of 26% compared to Q1 2022. Operator, let's go to the next slide, please. Before I hand back to Martin again, a look at the cash flow and financial position. Starting to the left in the slide, there's development of capital expenditure. The gray bars represent investment in tangible assets, which is mainly our studio construction projects. In this quarter, CapEx intangible assets is almost 11.5 million euro. We continue to invest heavily in current studios, although in this quarter the amount is a notch lower than previous quarters. This is more due to timing of projects and how they progress rather than any slowdown in the actual pace of work. The blue part of the bar is investment in intangible assets and is related to development of new games and features to the platform. Relatively stable the past four or five quarters and amounts to 10.7 million euro in the three-month period. In total, CapEx is 22 million euro, so slightly lower than what our guidance of 120 million euro for the full year would imply. We are, however, expecting investments to increase during the second half of the year, so I will keep the estimate of 120 million for the full year for now. In the middle of the slide, we show operating cash flow. In the quarter, it amounts to just over 221 million euro. Operating cash flow in relation to EBITDA on the rolling 12-month basis is maintained on a very good level at around 75%. And to the far right in the slide, quick look at the balance sheet. We have a very strong financial position. No debt and almost €760 million in cash at the end of the period. Since then, however, since the end of the period, €426 million has been paid as dividends. So the balance is lower today. That was the end of my prepared comments. I'll hand back to Martin and then we'll take questions after that. Martin?