Evolution AB (publ)

Good morning, welcome everyone to the presentation of Evolution's second quarter of 2024. My name is Martin Karlsson and I'm the CEO of Evolution. With me I have our CFO, Jacob Kaplan. I will start with some comments on our performance in the quarter, where after I will hand over to Jacob for a closer look at our financials as usual. After that I will round off the presentation with an outlook for the remainder of 2024 and then we'll open up the call for questions. Before we move on, I would like to highlight that the picture that you see on this slide, which is from the actual rooftop bonus round, where lightning strikes from the skies in our latest, largest ever game show, Lightning Storm. It's a beautiful picture and I just wanted to highlight that. Next slide, please. The past quarter has been a period of high activity within Evolution, maintaining the high pace from the past two quarters, and as you also see from the slide, the momentum of activities continuing into Q3. During the past nine months, we have heavily increased our delivery capacity, and right now we are in the middle of bringing our products to new markets that are about to regulate or have recently regulated. such as Czech Republic, Brazil, and Philippines. Long-term regulation of markets is positive and one of the key drivers for growth in our industry. During the quarter, we have further expanded our offering in the U.S. by launching our live casino games in Delaware and also added some of our most successful games in several additional states. More is yet to come in that category. Another step in further strengthening our presence and licensing in the U.S. market took place after the end of the period. through that evolution entered into an agreement to acquire Galaxy Gaming, and I will come back to that on the later slide. Online casino games exist to generate excitement and entertainment for players, A large part of that excitement comes from the fact that we as players can win, and win really big, on one single stick. This past quarter, Crazy Time paid out over 35 million euros to over 5,000 players, the biggest payout ever in an online casino in one single game now. Events like this brings excitement to the games, and resonates with players. Long-term, the margin of the game levels out, but short-term, a big payout like that affects our revenue share negatively. Well, we have a truly great roadmap for 2024, and I actually think it outshines 2023. The roadmap is also 2024 a bit tilted towards the second half of the year, and we will, during 2025, work towards releasing more games earlier. This week we have the early adopters release of the biggest game show, as already mentioned, in the history of online casino, Lightning Storm. That's the biggest launch ever for Evolution and nothing but perfection is enough for this game. And I'm very excited about how this game will be received by our end users. I also look forward to the wide release of two players in a few weeks. Further, I want to comment on the two items that took place after the period. One is the announcement of the capital allocation framework set by the board of directors. It further clarifies our priorities when it comes to how we invest and distribute cash generated in our business. We have a strong track record of returns to shareholders during the past 10 years since our IPO. The new framework is no deviation to the way we have acted in the past, but it provides further clarity going forward. In the light of that framework, the second part is that the board also decided on a repurchase of shares to the amount of 400 million euros, all in accordance with the new framework and our earlier actions. It shows the strength of our business as well as the strength of our balance sheet together with cash flow. On the basis of this, Evolution can maintain an ambitious agenda for growth without limiting our investments in the business, while also returning significant capital to shareholders, both through dividends as well as buybacks. Before going to the next more regular slide, I want to show you something from our day-to-day work at Evolution and what a comment that Czech Republic is regulating really means. So let's have a look at the next slide. I thought I'd deviate a little from our performance slides and share something from our work lab. This is some pictures from the emerging Czech studio that we are about to launch in August. These pictures are basically one to four weeks old, and you can imagine this is a hectic time in Prague right now. Setting up a new studio is exciting and brings many parts of the company together. Building crews, operations set up, recruitment, training, the first game presenters coming on, etc. Almost every part of the company is involved in some way. We are in a great building in Prague and the bottom left you see what would be the canteen and break area. Top left is the studio floor in development and to the right in this slide is our office area and administration. And at the bottom right the first group of game presenters are going through our academy in a temporary academy. We're now in the final month of preparations before going live. The Czech studio will be a relatively small part of the network initially but we are happy to enter and a new regulated market. And I want to show something from reality of building a studio. This is what creating a flawless entertaining world class playing experience for players looks like. And this is what gets us really excited in Evolution. Next slide, please. When it comes to financial highlights, we do see a bit of a slower quarter in terms of top line, which also affects the margin. And even though the quarter shows solid results and is affected by a large crazy time payout, it's not fully reflecting the operational performance. However, when looking further into 2024, we see a market that provides us with excellent opportunities and good momentum, as well as a company really well prepared for that journey. Revenue amount to EUR 508 million corresponding to year-on-year revenue growth of 15%. Revenue growth at common stem currency is estimated to 19% for the quarter. EBITDA margin is 68% in the second quarter. As mentioned earlier, we have had a very rapid expansion the past nine months, and it's natural that it's followed by a period of consolidation, which we see in this quarter. Our margins are a notch lower. We maintain the guidance for the full year of EBITDA margin in the range of 69-71%. For our live segment, revenues amounted to 438 million euro for the quarter, corresponding to year-on-year growth of 18%. R&G revenues land at 70.3 million euros, corresponding to a growth of 1.5% year-on-year. We continue to make incremental improvements to our R&G business, adding new games as well as new functionality to OSS. During the quarter, as already mentioned, we are affected by the large first-time payout. Even though this short-term effect results, it's important to remember that payouts like this also increase demand for the game, paving the way for more players in the future. That said, most regions are showing a bit of slower development in the quarter. Nothing else are the usual cycles within sectors, but like I said, the results from the regions are not quite as good as we'd like to see them. Overall, I'm pleased with the progress. We have made several of our initiatives throughout the quarter, as I have started many times before. If we need to choose between margins and increased market share, we will always opt for top-line growth and market share. I look forward to the rest of the year. We have a fantastic game release coming up, and we continue to enjoy strong market momentum, and we are well-positioned to deliver a strong second half of this year. Next slide, please. Last night we entered into an agreement to acquire Galaxy Gaming. Galaxy is the premier provider of table games and side bets, both for online as well as land-based casinos. Games like 21 Plus 3, Lucky Ladies and Perfect Pairs are all in their catalog. We have known the company for many years and are already today licensing games from Galaxy as other main online B2B providers do as well. They have an experienced and very skilled team in place, mainly based out of Las Vegas, and our intention is for Galaxy to continue to operate as an independent company and business also under Evolution's ownership. By joining the two companies, we accelerate and solidify our presence in the US market, where Galaxy is licensed in 28 out of 29 possible states. On top of that, Galaxy holds a number of private licenses. Through Galaxy, we gain a relationship with regulators and regulated states that are not yet open for online and fast track all future licensing at the same time as Evolution as a group will have two independent subgroup licenses. Galaxy holds over 130 licenses worldwide. Galaxy will further strengthen our game portfolio and secure access to fantastic titles our players are accustomed to already today. There are also games in the portfolio where we see an opportunity to create new online games. I see the acquisition of Galaxy as an important step in creating promotion for future growth in the North American market, but also in other parts of the world where we now, without direct costs, can expand their already existing brands further. Our cash offer values Galaxy 2.0 plus value 1.24 million. The offer is supported by the board of directors of Galaxy and naturally subject to closing conditions. We expect the transaction to close in about 12 to 15 months. Again, very excited about this combination. I'm pleased to say that the challenges we experienced in 2023 in terms of recruitment and table capacity have been addressed and our recruitment base remains high in the quarter. We have added 3,700 new evolutionaires from Q2 last year, constituting a third of a very rapid expansion. I would like to remind all of you that expansion and recruitment comes together with cost and time-wise cost before revenues. We continue to make great progress in our student development and all according to plan. The game running shows the development of the whole evolution network and includes all games. It can be seen as a general indicator of activity in our network. I'm very pleased to see that activity increased during the quarter, maintaining the healthy pace presented in the first quarter. Increased activity could not have taken place without all efforts and increase of table capacity as well as ensuring high delivery out of our studios. Playing game rounds does not always correspond to revenue, which we see in this quarter, where the game rounds grow faster than revenues. Also, larger wins on a game get publicity and often attracts many players, however with smaller bets. For the long term, this trend is very positive. The fact that the players are curious and wish to test our games will bear fruit further down the line, even though it does not always drive revenue in the short term. Next slide, please. We're now in month six, into what we call the product leap years of 2024 and 2025. Our ambition is just as high as always, striving towards bringing unique player experiences and lift excitement to new levels. Let me first mention a few of the games that have been launched in the quarter, or about to be launched. We already mentioned Lightning Storm Q1 as it was planned to release by the end of H1. The Lightning franchise is one of the strongest brands of our portfolio. Lightning Storm is our most ambitious game show ever and the newest, most thrilling and extravagant member of our Lightning family. Lightning Storm masterfully combines instant payouts, bonus games infused with experimental twists and sizable multipliers to deliver unique gaming journeys. And although very slightly delayed, we will settle for nothing but perfection for this game as it's one of the biggest releases to date. This game is truly spectacular and I dare promise it is something that the market has never seen before. To further our Lightning family, we have added two new installments. adding lightning versions to our popular games, Dragon Tiger and Zippo. Lightning Dragon Tiger is a classic Asian card game with striking multipliers, set in a sophisticated studio and features dramatic effect, thrills and suspense. Lightning Zippo adds an extra excitement to the traditional dice game well known by players. Another thrilling game that we have already released is the latest generation online live slot game combination game show. Features with a simple and easy to play slot game. Balloon Race was very well received by the end user and with its unique combination of different player experience it also attracts many new players and it's part of a whole new type of genre appealing to even more people. It's a combination of live and slots which we have been talking about for quite some time. On the R&D side, we have released 26 titles in the quarter, all very good games with a defined trademark of quality and innovation of all four individual R&D brands, No Limit City, Red Tiger, Madness, and Big Time Gaming. We are game changers and game creators. Through our innovation, not only do we offer unique player experience and state-of-the-art game, but we're also transforming an industry. And with our R&D and investments in studios and mentality of never settling, we constantly defend and expand our market-leading position. I'm very happy with the outcome of the roadmap. Next slide, please. When looking at our product, it's a truly global audience with a global and ever-increasing demand. All our regions are growing year-on-year. Europe had a steady growth trend around 10% the last year or so, and continues that way, coming in at 9% growth compared to Q2 last year. Demand in the region remains high, and with additional supercapacity added in 2024, we see good potential of expanding even further. Asia is the fastest-growing market, and for the quarter reported growth of 22% year-on-year. It's a smaller increase from the previous quarter than in Q1. However, Q1 was a relatively big step from Q4, and quarterly variations are to be expected. Given the size, population, and underlying size of the market, we consider the region with great potential. In North America, we continue to make steady progress with a growth of 8% year-on-year. Our live offering is growing in line with the overall market, however, we are losing market shares in RNG offering compared to last year. I believe that we are improving our RNG offering. In the quarter, we started introducing our No Limit City lineup, and we have made a number of improvements to our organization that I expect to bear fruit later in the year. LATAM is reporting healthy growth for the quarter, coming in at 70%, even as Brazil continues to be a bit in the waiting room as regulation is still pending. Other regions, consisting mainly of Africa, have a nice increase in the quarter. Again, the relevance can be lumpy, as is seen in the table. Last year, we were flat for a few quarters before growing nicely these past two quarters. The share of revenue from regulated markets continue to be stable at just under 40%. With that, I will hand over to Jacob for a closer look at our financial. Please, next slide.

Thank you, Martin, and good morning to all of you listening. Revenue in the second quarter of this year amounts to 508.4 million euro for a growth rate of 15.3% compared to the same quarter 2023. Revenue in the quarter is made up of €438 million from our light casino games and €70.3 million from the R&G games. In the comparison to Q2 2023, there's a negative effect from changes in currency rates estimated to about 3.5%. Light casino revenue in the quarter of €438.1 million gives us a growth rate of almost 18% year-on-year. Compared to the previous quarter, Q1 2024, the increase is about 7 million euro. Increase of revenue from one quarter to the next can vary a bit. We saw a big step up in live revenue in Q1 compared to Q4, as Martin mentioned. But Q1 to Q2 is a smaller increase compared to the trend. As earlier mentioned, we are negatively affected in Q2 by large wins on some of the games. Also, sport book margins in some regions have favored operators in this quarter, which tend to be negative for Casino. So there are some factors to point that, but there are also things within our control where we can improve and simply perform better. Overall activity levels and player numbers have been good in the network. There's some great product launches coming up, as you saw. So we feel good about the rest of the year. But Q2 does come in a little lower on live casino revenue than what I expected three months ago. R&D revenue amounts to 70.3 million euro. That's one and a half percent growth year-on-year and also a slight increase from the previous quarter. We continue to have a good release tempo for games and will gradually, during the year, add more functionality to OSS, like live spins, spin gifts, and also our AI software commander. I'm pleased to see the trend of incremental improvement on revenue from the previous quarter continuing within R&G, even though it's not by big steps. And while it will not always be a straight line development quarter to quarter, we can do more in the R&G vertical going forward. EBITDA in the quarter totals €345.8 million for an EBITDA margin of 68%. As mentioned already at the end of 2023, We are in a period of heavy expansion during this first half of the year, and that has an effect on margin. For the first six months of the year, margin is 68.5%. And for the full year, we maintain our guidance of the day margin in the range of 69 to 71%. I'll move on to the next slide. This has a closer look at our profit and loss statement. We'll start with revenue. The three-month period, April to June, live and R&D revenues increased 18 and one and a half percent, respectively, compared to the same period, 2023. Fully organic growth in both of those verticals. A little bit further to the right in the table, we compare the first half of 2024 to the first half of 2023, and growth for the six-month period is almost 90% for live casino and just over 1% for R&D. We just covered comments on revenue development in the most recent quarter on the previous slide, so I'll continue down to expenses. Personnel expenses amount to 111.4 million euro in the first quarter, an increase of 27% compared to the same period last year. We have added almost 4,000 headcounts since Q2 last year, so it's quite a big expansion for us. This increases personnel costs, but also affects other functions in the company. with increasing costs. We will continue to increase stock during the rest of the year as we open new studios in Latin America and expand also elsewhere. Depreciations amount to 34.6 million euro. That includes 11.5 million euro in amortization of intangibles related to acquisitions made. It's relatively flat compared to the previous quarter this year and up 15% compared to the same period 2023. The next line, other operating expenses. This includes a number of items, such as the consumable equipment, communication costs, consultants, royalties, all included there. The line amounts to 51.2 million euro in the quarter. This is a line item that is a bit lumpy. It's up 2.3 million, I should say, from Q1 this year, and up 9.3 million, or 22%, compared to the same period, 2023. Summing up, total operating expenses, total 197.3 million euro for the period. That's an increase of 23.6% compared to the same quarter last year. Operating profit sums up to 311 million euro in the quarter. And moving down, financial items, 6.8 million euro. This includes interest rate income and the revaluation of bank balances. That's included there. Tax in the quarter is at 48.8 million euro. That is a tax rate of 15.3%. As we've previously communicated, our tax rate increases 2024 as the Pillar 2 regime comes into effect. Still not fully clear exactly how the Pillar 2 top-up tax will be handled. We continue to follow the development during the year and accrue tax to our best knowledge. We will work to achieve a tax-efficient structure of our operations as long as that makes business sense. I'll move on to the next slide for a look at cash flow and financial position. Starting from the left, we have capital expenditure. As mentioned a few times, we are in a heavy expansion phase this year, and that's reflected also here in our CapEx level, which is up compared to last year. We've estimated 120 million euro in CapEx this year, and for the first half of the year, we're slightly ahead of that pace. In Q2, CapEx in tangible assets, that's the gray part of the bar in the chart to the left, totals 16.1 million euro. It includes both expansion in existing studios, as well as several new studio projects that are coming up. The blue part of the bar represents investment in intangible assets. That's development of new games and features on the platform. CapEx and intangible assets total 16.4 billion euro in the quarter. So total CapEx in the quarter 32.5 million euro and for the first six months 69 million euro. So slightly ahead of the pace. The estimate of 120 million for the full year I would say still looks like a good estimate for me. Moving on to the chart in the middle of the slide, this shows cash flow in the period. We see operating cash flow of investments of 280 million euro. The cash conversion, operating cash flow in relation to EVPA is on a very good level, well over 80% for the rolling 12-month period. The last quarter we mentioned an increase in accounts receivable in that quarter. That is down to normal levels in this quarter, and the overall cash flow is very strong. Moving on to the right-hand side of the slide, that's a summary of our balance sheet at the end of the period. We remain in a strong debt-free financial position. At the end of the period, cash balance was €689 million. During the quarter, we have paid a dividend for 2023 amounting to €564 million. I'll go to the next slide and then I'll comment on the capital allocation framework that's been communicated and also the buyback that's been initiated. So as Martin mentioned at the top, the board has communicated the capital allocation framework. The framework clarifies our thinking around capital allocation without boxing in the board to act programmatically without consideration of the company's long-term strategic objectives. In summary, the framework is the following. We aim to be in a net cash position over time. Still, we reserve an ability to use short-term leverage for unique opportunities that will add value to shareholders. The number one use of capital will be to invest in our organic growth. Studios, staff, games development. We have a highly profitable business in a market-leading position. with a work-class product and an industry with secular growth plans. To continue that development will be the number one priority and the main use of capital. We have a dividend policy in place since the IPO in 2015. It states 50% payout of net profit and that policy will remain. In addition, we continuously evaluate M&A opportunities that can support our long-term vision. But there's not a set amount of capital allocated to M&A, and possible M&A should be on value-enhancing terms. Without the right opportunities, there will be no M&A, and that's perfectly fine also. And last, historically, we've had free cash flow remaining after the items I just described, and the new framework states that 100% of this excess cash will be returned to shareholders. Generally, this will be through a repurchase of shares, or if more value enhancing, it can also be through an extra dividend. So that's a quick summary of this framework. It's very much in line with our actions in the past. Still, I think it adds clarity to how we plan to allocate capital going forward. As the graph to the right in the slide shows, capital returns to shareholders have been substantial during the past 10 years. In fact, returns through dividend and buybacks have been consistent, and they total well over 10 times the IPO value. With this capital allocation framework as a backdrop, the board has also decided to initiate the buyback of 400 million euro, also announced today. All right, that was the end of my prepared comments. I'll hand back to you, Martin, for some closing words.

Thank you, Jacob. Thank you. Last slide for questions. And a few closing words from me. We are in a period of heavy expansion and investment right now. Expansion in our studio operations, expansion in our games portfolio, expansion in new markets like Philippines, Czech Republic and Brazil. It's a very exciting time. To be able to push this growth agenda while at the same time distributing significant capital back to owners is a sign of the strength of our business and market position. It's a sign of the strength of evolution. As those of you who have followed us for some time know, we are always excited about our product roadmap and the next game. We have been working on Lightning Storm for a long time and I dare say it's some of our best work yet, building on so many things that we have learned from previous games. I very much look forward to bring it to players in the coming months. In terms of new live games, there is more to come later in the year and also on the RNG exciting things I had. At the same time, the roadmap for 2025 is taking shape and that looks amazing with an ambition level higher than ever. I really look forward to the rest of 2024 and I can't wait to start 2025. With that, we open up for questions.