Evolution AB (publ)

Good morning. Welcome, everyone, to the presentation of Evolution's report for the third quarter of 2023. My name is Martin Carlesund. I'm the CEO of Evolution. With me, as usual, I have our CFO, Jacob Kappa. I will start with some comments on our performance in the quarter, as usual, as well, and thereafter, I will 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 then we are happy to take all of your questions. Okay, so let's begin and move to the next slide. Non-blind growth drives of our business remain solid. There is a global audience with excitement and entertainment that online casino brings, and we continue to see strong global demand for our games. During the third quarter, we have released more games than in any earlier quarter, and we are on track to exceed our target of 100 new games in 2023. There is more to come in the fourth quarter, with games like Crazy Pachinko and Red Door Roulette, shown here in the slide, and I'll come back to that for the upcoming games later in the presentation. During Q2, and now also Q3, we see higher demand for our live casino than we currently can deliver. which is very positive as our games have phenomenal traction and demand. Even so, we need to expand our studio space as well as increase the speed of recruitment. We are addressing this with full force and at the moment, in parallel, building new studios in Europe, Latin, and also planning to add new studios in North America as well as expanding existing studios. We have faced some delays in build-out, but even more importantly, we need to increase the recruitment pace as the new students and more tables get ready to be added to the Evolution Network. We are in an investment phase, and we will continue to invest as fast as we can during the end of 2023 as well as during 2024. Notable projects this quarter include a new small studio in Colombia, which went live just after the end of the third quarter. A larger studio is also initiated in Colombia as the next step during 2024. We also aim to open one new studio in Europe later this year, and three, four new studios are planned both in Europe, North America, and Latin America for 2024. Now, let's move to the coming slides and see the effect of numbers and products on all our airports. Let's look at financials. Revenue in the quarter increased by 19.6% to 452.6 million euro. For the year-to-date period, growth amounted to 26.1%. EBITDA in the quarter increased by 22.1% to 318.6 million euro, corresponding to a margin of 70.4%. For January to September, we reached a margin of 70.3%, which is in the upper part of our 68% to 71% guidance for the full year 2.3. I'm pleased with the margin level, considering the cost levels in the world have increased significantly during the year. Our focus on continuously increasing efficiency in our operations, as well as good cost control throughout the organization, has helped us achieve this. For live casino, we grew revenue with 24.3% compared to Q3 last year, summarizing the total revenue of 385.8 million euros. In the third quarter, RNG revenues amounted to 66.8 million euros, corresponding to negative growth of 1.9%, and our RNG business amounted to 14.8% of total revenue. For the first nine months, though, we grew RNG with 4.9%. Overall, financial results in the quarter is solid. We prefer to concentrate on factors that we have control in explaining our results, and in general, we continue with this approach. However, this quarter, the impact from external factors are on a higher level than ever before, so I think we'd be wrong not to mention it at all. The strengthening of the euro against most currencies compared to Q3 last year affects our top-line growth during this year. Quantifying those effects, in the third quarter, we calculated 6 to 8 percent points negative headwind on growth from currency effects on revenues when comparing to the same quarter last year. Without this headwind, figures would have been very strong. Now let's move to the next slide. With the fast growth of the company, we need to have an equal high pace in our recruitment, and recruitment will continue to be one of our priorities and one of our key processes. At the end of the period, we were close to 18,000 evolutionaries, working hard to delight players every day. The increase in stock year-on-year amounts to 1,900 employees, corresponding to an increase of 12%. As said at the beginning of the presentation, we have not added headcounts fully as we would have liked. Together with Studio Buildout, we are now in full force focusing on expansion. Hiring and retaining the best people is tough as it's ever been, and we're working with this continuously, identifying inefficiencies, improving our recruitment process. Challenges with recruitment are not new to us. It's just a reality in the business that is dependent on continuous high-income people. Equally, this is the reason why it's very important to have the right incentive programs in place. Now, move to the next slide. The game round index shows the development of the whole evolution network and includes all games. It can be seen as a general indicator for activity in our network. Over time, more game rounds means more activity leads to increased revenue. This quarter, game rounds increased 36% year-on-year, so a higher growth rate than our total revenue. Game rounds growing faster than revenues is a development we have seen in the past few quarters, and it's natural as the volume of new players from new regions coming in with a lower bet cycle. Looking at the absolute level of the index in Q2 and Q3, you can see some flattening, which to some extent reflects what we discussed in the previous slide regarding that we see a higher demand of our product than we currently can deliver. Next slide. Move to products. The width of our product portfolio is already today unmatched in online casinos, and there are many more games to come. This year we launched a record number of exciting games to inspire our current as well as future players. Let me mention a few of the games recently and soon to be launched. Two of the strongest brands in our portfolio are the Lightning franchise and Chris Time. Both will expand in the coming months, and even a combination will be added to the product portfolio. This fall, it's time for the additions to the CrazyTime family. In both of them, we continue to combine the world of live casino and R&D. Red Door Roulette combines the award-winning Lightning Roulette with the exhilarating experience of CrazyTime's most popular bonus game. The CrazyTime game is going to be Crazy Pachinko, based on the CrazyTime bonus round with the same name. This new addition to the CrazyTime family really shows the outstanding play experiences that we can create when mixing live and RNG together. Lightning Lotto is not just any game. It's a live game. It's a bouncing ball live game that takes the traditional Lotto game players that know and love this game to a new level. We change it up with an electrifying twist and a two-ball drawing machine, completed with a live game host. It's a fast-paced, immersive, high-energy game that's sure to keep the players entertained. With Evolution, players can always find what suits their taste when it comes to gaming experience. The breadth of offering is a major distinguishing factor for Evolution. Remember that an operator in online casinos today is not just competing against other suppliers of online casinos. It's competing against the rest of the entertainment industry. We as Evolution need to add products that will go up against streaming services and social media platforms for players' time. End-user entertainment is the only true long-term measurement that matters. You need to be able to ensure that you constantly increase the entertainment factor and push boundaries to be relevant for the players. Our games are on the edge, immersive and entertaining. We constantly develop and move forward and earn the player's attention. Innovation and the best game will always drive evolution. We continue to innovate, substantially enhance and refine the player experience. We are currently in full preparation for the roadmap 2024, and yes, it will be the best roadmap ever. 2024 is yet another year of the product. Move to the next slide. This slide shows the breakdown of our revenue by geographic region. We have a true global and strong demand for our product, which is also reflected in the spread of revenues over geographic regions. Europe continues to have a healthy growth with amounts of 10% in the third quarter compared to last year. For the first nine months, the growth amounted to 13%, which is a good sign that we still develop and grow in our most mature markets. In Asia, we saw continued good growth, which amounts to close to 35% year-on-year. We still see rapid growth in Asia, but the growth rate in percentage terms continues to come down as our size simply gets bigger. Even so, the potential in Asia remains huge, with 7 billion people per population. Also worth mentioning is that earlier this year, the Philippines became the first country in the region to have a regulation for online gaming in place. North America is growing year-on-year by about 9%. For the period of nine months, the growth amounts to close to 26%. The decline in revenue from Q2 is due to step-back in R&D revenue, while our live offering has steady growth in the quarter. We're working hard to launch new games in the U.S., and we have a fantastic lineup of games, including Crazy Time. soon to be launched, and I have high expectations that they will perform well. It's a good potential that there is a long growth runway in the existing state, and over time, we will also see more states to regulate. The North American region is still in its early stage of development. Latam currently makes up about 8% of our total revenue in the quarter and with a growth in the quarter of close to 39%. We believe it's the region with a great potential and good momentum. In addition to already launched studios in Argentina, we initiated construction of a state-of-the-art studio in Colombia to cover the demand we see in the market. We see that the regulatory trend in Latam continued earlier this year, a repass legislation for online gambling, and also Brazil has taken some steps forward towards to regulate online gambling. Remains the other region, which mainly consists of Africa. It stands for nearly 3.5% of the group revenue, and it's future growth opportunity for us. Share of revenues from regulated market continues to be stable as we see growth on all markets and amount to 40% Q3 2023. With that, I'll hand over to Jacob and move to the next slide.

Thank you, Martin, and good morning to all of you listening. I'll now cover a couple of slides with comments on our financial development. Revenue amounts to €452.6 million in the quarter. It's made up of almost 386 million, rated live casino, and 66.8 million from our R&D games. Live casino is about 85% of our group revenue in the quarter, and has year-on-year growth of 24.3%, with an increase of 75 million euro from the same quarter last year, and 14 million euro increase from the previous quarter this year. I'll come back to this slide in a minute, but I actually added this slide to show our live casino development in a slightly other perspective over time. This slide shows the increase quarter on quarter for our live casino. The dashed line is the average increase per quarter during the past five years, about 70 million euro per quarter. It's a period that, of course, includes the pandemic years, but also a few years which I would see as more normal. In this slide, you can see that our increase to most recent quarters is much lower than the average for this period. As Martin mentioned, we focus our energy on factors that we control in expanding our financial development. And right now, as you also heard Martin mentioned, we're not expanding our table capacity as we would like to, and that's affecting our revenue growth. It's not possible to exactly quantify the financial effects of this under supply, as we call it. So I don't have a straight answer to that question, but clearly it's something that's limiting us at the moment. So that's what we can control and what we work on, and I'm confident that we'll be able to fix. But to understand the financial result in the quarter, there are also factors outside of evolution to address. I'll now spend two minutes talking about currency rates. I think both Martin and I will have full understanding. If you'd rather not listen to it, and if you want to do something else for a couple of minutes, please go ahead. But anyway, during this year, we have seen large movements in currency rates. It's understandable as shifts in interest rates and the general economy have also been on levels not seen for many years, positive ethics. As a result of this, the Euro has strengthened significantly versus most currencies compared to the third quarter 2022. This affects our revenues negatively as players wager and generate gross gain revenues, GDR, in many different currencies with our operators. That GDR is converted to euro and is the basis for our commission revenue. Stronger euro means that the GDR generated in local currency equals fewer euros. We have to make the changes in euro rates affect our total growth negatively by six to eight percentage points in this quarter compared to Q3 last year. This indirect effect that I just described is not captured in the currency effect that is more direct in our accounting, meaning we convert our non-euro invoicing and our non-euro expenses with another rate from a previous period. That's reported separately. Of course, it's also not a new thing, but during this year, the movements have been larger than what we have seen previously. So that's why I mentioned it today. However, it doesn't change anything. I can adjust the adjustments until I get completely lost and everything actually looks good, except for the fact that maybe it's not good. all of this talk of currencies, that the interest in the quarter is still 14 million euro. We need to recruit better. We need to add more tables. We're in a very good position to do so, and that's what we're focused on. All right. I'll now go back to the previous slide and move on to a few comments on our R&D business. R&D revenue amounts to 66.8 million euro in the quarter. It's a 1.9% decline from the same quarter last year, and 2.5 million euros lower than the previous quarter this year. Naturally, we're not happy with our financial delivery in this area. However, as I stated earlier, we're making step-by-step improvements. The output of new games is now satisfactory level. All our new games are released on our OSS, and the roadmap ahead is full of strong games. Our earlier communicated goals for growth still remain, but we've already moved into what I would call show territory rather than tell. So for the next quarters, I'm first of all looking for incremental improvement from where we are today. Also, as I said already in the Q2 comments, the last quarter, while it's not growing as we want, the R&D business, it's very profitable. very good cash generation, and we definitely see a lot of potential in this area going forward. EBPA for the quarter amounts to €318.6 million, giving us an EBPA margin of 70.4% in the quarter. We keep our guidance of 68% to 71% margin for the full year. That was set at the beginning of this year. And as you can see in the chart, we have been within that range each quarter this year. For the year-to-date period, the margin is 70.3%. We're very pleased with the margin level. Some of the pressures to margin we saw in the beginning of the year have materialized, but have been offset by hard work and a very good cost awareness in all our teams. This next slide shows our team in a little bit more detail. We'll, as usual, walk through from the top. In the three-month period, July to September, live revenue, as we just talked about, 325 million, and R&D, 167 million. This adds up to total revenue of 452 million. That's a growth rate of 19.6%. That is fully organic, as all the most recent acquisition of Limit City was included also in the third quarter of last year. For the first nine months of the year, growth in total revenue is 26% compared to the same period last year. Moving down to expenses, personnel expenses amount to 91 million euro. That's an increase of 19% compared to the same period last year. We are adding to that in many locations, but as we have mentioned several times now, we think that we should be able to increase even more going forward. Appreciations amount to 31.4 million euro. That includes 10.9 million euro of mortization in intangibles related to acquisitions. Next line is other operating expenses. This includes items such as consumable equipment, communication costs, consultants, and royalties. The line amounts to 43 million euro in the quarter. It's up 4% to the same period of 2022. It's also up compared to the previous quarter by a little over 1 million. Summing up, total operating expenses total just over 165 million euro for the period, an increase of 16% compared to the same period last year, and for the first nine months of the year, expenses totaled 483, which is an increase of 24%. Operating profit sums up to 287 million in the quarter. Financial items amount to 5.3 million euro. This includes interest rate income, interest rate income, which is picking up with the higher interest rates. Financial items also include a negative accounting charge for interest on our right of use assets. And also there are ethics differences related to intra-group transactions and revaluation of bank balance as important currency. So there's a bit more than just a short interest rate income that goes here, but that is the major item of the quarter. Tax is at 19.7 million euro for the quarter. This is a tax rate of 6.7% for the nine-month period. Sorry, 6.7% for this quarter, and for the nine-month period, the rate is 6.8%. Tax rate for this year will be around 7%, also in Q4. And from 2024 next year, as has been communicated during probably the past two years, tax rate will increase with about 10 percentage points to 16, 17% after the regime comes into effect. So that's most of you know that. We'll move to the next slide before I hand back to you, Morten. We'll start to the left in the slide with the capital expenditure. The great part of the bars, that's investment in tangible assets, mainly art studio projects. In the quarter, the capex in tangible assets is €8 million. It's lower than earlier this year. We have had a slightly lower pace of studio expansion than what we planned at the beginning of the year, but also capex can vary quarterly depending on how projects develop. a little bit lower than what we've been earlier. The blue part of the bar is investment in intangible assets. It's related to development of new games and features to the platform, slightly increased throughout the year. It's at the 10.9 million euro in the quarter. So total capex year to date is 63, almost 64 million euro. It's now clear that we will not reach the 120 million euro for the full year. That was our guidance at the start of the year. But that's not clear. And as you've heard earlier today, we continue to have ambitious plans for studio expansion going forward. I expect some increase in capex during Q4, but also going into next year. So we should pick up here. In the middle of the slide, moving on to the next chart, we show operating cash flow. Continued very good cash generation in the past period. In the quarter, operating cash flow amounts to 265 million euro. Operating cash flow in relation to EBTA on the rolling 12-month basis is still maintained on a very good level, just under 80%. Outside of operating cash flow, we have during the period paid the first tranche of the earn-out to BTG, Big Time Gaming. In total, that was 67 million euro, of which 47 million was cash. So including that, cash conversion would be around 75% for the rolling 12-month period. So it's still very good. Finally, to the far right in the slide here, a quick look at the balance sheet. No big changes. We have a very strong financial position, 813 million euro in cash at the end of September. Out of that current cash balance, roughly 400 million is according to our dividend policy. That's the Q-related dividend so far this year. So that's one you will see later. That was the end of my prepared comments, Martin. I'll come back to you for some closing words.

Thank you very much, Jacob. A few words to conclude this report presentation before we open up the question. Evolution offers an unparalleled portfolio of unique games, something that pays for the whole industry with new groundbreaking releases. And currently in full preparation of the roadmap for 2024, development is going on at full speed and I can assure you it looks nothing but fantastic. In 2024, we'll take yet another step towards expanding online casino to new players and increasing entertainment and excitement even further. Investments for the future will continue in form of new studios and in constant innovation of new products and, of course, in our people in order to fulfill the worldwide demand. As the leading innovator in online casinos, together with a record number of new products released every year, we continue to relentlessly increase the gap for our competitors. We are well equipped for a strong last quarter of the year and indeed exciting times ahead. That was my final remarks and now we move to the next slide and your questions.