Kambi Group plc

Good morning, everyone, and welcome to Canby's Q2 2022 report presentation. My name is Mia Nordlander. I am Senior Vice President, Investor Relations, and today I have our CEO, Christian Nyland, and CFO, David Kenyon, with me. They will present the quarter for you, and thereafter, we will have time for questions. So if you have any questions, I suggest that you either call in or that you write them in the web here on the page. So over to you, Christian. Please present the quarter for us.

Thank you, Mia. And good morning. So today I'm planning to go through the highlights first and then hand over to David to run through all the numbers. And then I come back and talk more about the Q2 in detail. So, the highlights. I would say we had a very robust financial performance against very demanding 2021 comparatives. A tough comp. I think, first of all, last year it was a European Championship and... Normally we would have expected a World Cup this year but that is moved to December so the sporting calendar is quite slow this summer. We also don't have the same kind of revenues from Netherlands since Our operators pre-regulation, nearly re-regulation in Netherlands is still not operating. Of course, we have, as I will talk about later, Kindred coming back into the market early in Q3. And the largest factor, of course, is that all numbers were still including draftings last year. So our operator turnover this year is up 16% if we exclude the DraftKings number. During the quarter, we also achieved a key milestone with the first phase completed of separating our pricing from a core platform in what we call the trading gateway, which I will talk more about later. We strengthened our partner network by extending our relationship with Bat Parks. We have a longer contract and we also signed Mohegan Gaming in Ontario. And finally, we expanded in America, our America's reach with day one launches in Canada or Ontario with four partners and then one more later on. We also have done quite a few launches in other countries, mainly in US and Mexico. With that, over to you, David.

Thanks, Christian. Good morning, everyone. So overall, this quarter, we saw a very strong financial performance. We continue to be profitable. We see underlying operator turnover growth, and we have a powerful balance sheet. As Christian mentioned, we saw 16% growth in that operator turnover, excluding DraftKings. And that's despite the impact of the Netherlands regulation and the Euro soccer tournament last Q2. So very strong numbers there. And that strong turnover, allied with a margin of 8.6%, led to revenue of 34.7 million. Costs pre-FX of 32 million were in the forecast range, and they were offset to the tune of just over 2 million on foreign exchange gains relating to the revaluation of our US dollar assets. This gave an operating profit of 4.9 million at a margin of 14.1%. And our net cash position of 74.2 million gives us five power to continue using our balance sheet to drive our strategic growth. The next slide here is the Canby turnover index. It's an aggregation of the entire Canby network's results quarter by quarter. The blue columns are an aggregation of the operator turnover index, originally set at 100 when we span off the business. And the orange line is an aggregation of the operator trading margin every quarter. This quarter, the margin was 8.6%. And when we look at the comparatives, that was pretty high this time last year at 9.3%. The operating turnover on the index is 6.56. As Christian mentioned, it's a very quiet Q2. It's typically quiet from a sporting calendar perspective for many of our key sports. But of course, this year there will be a World Cup taking place in Q4 and a condensed football calendar before and after that World Cup. So, you know, some strong months ahead. In more detail then on the operator turnover versus last year. So the turnover went from 9.11 on that index to 6.56. Firstly, there were some big headwinds we should talk about. Firstly, and by far the biggest in terms of financial impact, was the DraftKings migration, which we saw after Q2 last year. DraftKings accounted for 20-30% of our revenue Q2 last year. In the Netherlands, of course, there was no activity with Kindred here in Q2 this year, but we are delighted to see them obtain their license and launch in early July. And Euro 2020 was delayed to 2021, and the majority of the matches took place in Q2 last year. And again, we are very much looking forward to the World Cup taking place in Q4 this year. Those headwinds have been offset, though. There have been some growth factors here. We have new operators since this time last year. They include BetCity, JVH and Rawa. We've moved into new markets, including Arizona, Connecticut, Louisiana, and most recently, Ontario. And we've seen growth from some of our existing operators, both in their organic growth, but also in their geographical expansion into new markets. This then feeds into the waterfall of the Canby revenue conversion. which sets out how our operator turnover movement resulted in our revenue movement versus last year. So at constant exchange rates, operator turnover was down 32% on Q2 2021 for the reasons I've outlined. Due to the dollar being stronger than last year versus the euro, this decrease was reduced to 28%. The operator trading margin of 8.6% compares to the very high 9.3% last year. And there in the other column, you see a big positive impact on our revenues. There's quite a few drivers behind this one. Firstly, and most importantly, our customer contracts often include tiers which charge significantly less on the upper bands of activity. So the lack of DraftKings and other factors impacting the NGR results in a relatively higher effective revenue share across the network overall. Secondly, we have more live event income this quarter and other fixed revenues which are not driven by the levels of operator turnover. We also have revenues from our settlement with Mohegan Sun, which is a fixed revenue each quarter. And we have revenues from the ABOS business which we acquired at the end of last year. The net effect of all these factors is a 19% decrease in our revenue in total to £34.7 million. Lastly, I'm going to talk about the cash flow. There's a few particular points to note this quarter. Firstly, the capex is slightly higher than we usually see. We've had some fit-out costs in a couple of our offices. The tax impact you see on the right-hand side there is higher than normal. So we're due a tax refund as part of our year-end tax position, and that's expected to be received in Q3. But that magnifies the effect of the tax outflows here in Q2. And in terms of inflows, we received 2.6 million in relation to the option price on share options settled earlier in the year. The net effect to all these various cash flows is an increase in our cash position to 81.6 million. With that, I hand you back to Christian.

Thank you, David. Okay, so as I mentioned earlier, we have, of course, kept on working on our strategic work with modernization. And we have done one key milestone that was achieved during the quarter. And that is the trading gateway interface where we have completed the first phase. So for the first time we have some standalone pricing for lower league soccers that are not done through the normal way that we have done for many years. Where pricing and trading and technology was heavily intertwined. And it has served us well for many years. With a new setup, it will give us a lot of new benefits and also our customers that I will talk a little bit more about. So with the creation of this standalone pricing functionality, we now have a setup where we can much faster develop new algorithms for different sports and events. tweak them and change them much, much quicker. So we will have much faster pace on our internal development. It also gives us opportunity to package and sell products outside of the normal fully managed service. So that's a very positive modernization effect. Also, it gives us another crucial element and that is that our existing partners or future partners can now in the future be able to trade some of the sports themselves if they would like to. And we can also give opportunity to our third parties that we ourselves or our partners want to add to the pricing. So very crucial step for us and we're very pleased to see that it worked very very well and there's still a lot more work to do on this gateway but a very crucial and important first step. Another thing that we have managed during this quarter is a new betting market where we can bet on if a server in Tannis is making an ace within a game. This is unique for our network, we believe, so it gives our operators a great differentiation from the rest of the market in a very popular sport in tennis. And this feature, we update the odds after every single point, up until, of course, if an ace is being served within the game. And with that we would like to show you a promo of this. Thank you. So yeah, I hope you enjoyed that little promo. So now I would like to talk a little bit about some commercial updates. During the quarter, we strengthened our presence more in Ontario with signing an agreement with Mohegan and its Falls View Casino. The Falls View Casino is the largest gaming resort in Canada. We have a very nice brand, so I think and hope that we'll strengthen our presence with a great local partner in Ontario. During the quarter we have also extended the Greenwood Gaming and Entertainment Agreement and its Beth Parks brand. They are currently operating in three states and we hope and are quite positive about us being able to support them in their expansion into new additional markets. As every quarter, we have been very active with a lot of new launches. I think the total number this quarter was 18 new launches. And the major ones here, we went live in Ontario on day one with four of our partners. And after that, we have added a fifth during the quarter. On the final day of the quarter, we relaunched in Mexico with Rush Street entering the market. Rush Street has built a very prominent position in the Colombian market and we hope they will be able to do the same in Mexico. Online launches in the U.S. we have done with Rush Street in West Virginia and with Soaring Eagle in Michigan. And on the U.S. retail side, we have done several launches, I think three in total with Kindred in Arizona and also with Churchill Downs in Louisiana. So yet another busy quarter, and we hope there is plenty more to come. At the moment we are preparing for Kansas for the start of the new football season in September. And we hope Ohio is next in turn. We are still hopeful for sports betting regulation to get green light in Brazil very soon. So that would be an absolute major market for us, of course. And a lot of attention for us will be on California in November when two sports betting bills will go to the ballot. In June, it was great to see us winning another three awards at EGR Awards. We won the Sportsbook Platform of the Year for the third consecutive year. So I think we are cementing our position as the premium supplier of sports betting in the industry. We are also especially proud of winning the sports betting software innovation of the year with our BetBuilder product. We have been talking a lot about our BetBuilder product in the last quarterly report and about the possibility to combine across games and sports, which is fairly unique with Cambium. So it's very pleasing to see the recognition it deserves from our peers. and also recognition for all our people internally who is continuously improving the product. After Q2, or in July, I would say, Kindred has re-entered Netherlands with its Unibet brand. So, yeah, we hope that that will be very positive for us going forward in Q3 and Q4. And with that, I think we have strengthened our position significantly in Netherlands, where we already have Bed City and JBH active since the market reopened, re-regulated. And we also expect additional partners that formerly was in Netherlands will re-enter the market in the coming quarters. So to summarize the Q2, as I started with, it was a quieter than normal quarter from a sporting calendar perspective. I think we have made some great progress on our strategic plans. We have achieved a key milestone with a successful completion of phase one of our trading gateway. When it's all finalized, it will deliver multiple benefits both for Canby and for our partners. We have during the quarter expanded to support more partner launches in several different markets. And looking ahead, we expect things to happen in Ohio and Brazil, and as I mentioned, We're really looking ahead for November and the ballots in California. These free markets would definitely increase our time. We are a very profitable business with a strong financial performance. And we have a very strong balance sheet. So I believe we are very well positioned for the future. With that, I think it's time for questions. Thank you very much.

Yes, thank you, Christian and David. We will start with the questions on the telephone, so over to you, operator.

Thank you. We will now begin the question and answer session. To ask a question over the phone, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. Again, to ask a question over the phone, press star then one. At this time, we will pause momentarily to assemble our roster. The first question comes from Oscar Ronquist with ABG. Please go ahead.

Thanks. Good morning all and thanks for taking my questions. I have four if that's okay. So starting on the recruitment pace, I noticed you only hired 10 people net in the quarter, had quite a steep decrease comparing to the six previous quarters. So I was just wondering if you had any comments on the recruitment pace and what we can expect going forward.

Yes, sure. I think we are recruiting quite well. I think as many other companies after COVID has had a much higher staff turnover than we are used to see. So net, it's looking a little bit tougher at the moment. Having said all of that, I think we also see that there is quite a few of the larger competitors when it comes to tech people here in Stockholm who are decreasing their staff. So I think it looks very positive going forward.

All right. So can I interpret that? that pace should increase a bit in Q3, Q4?

Yeah, definitely hope so.

Okay, thanks. I had a question next on your OPEX and OPEX guidance. But first, David, could you explain, you had a positive FX impact on the OPEX, is that correct?

Yeah, as you can imagine, with the majority of our business now coming from the U.S., we do have a lot of cash inflows in U.S. dollars, and the dollar has strengthened significantly, both versus Q1 and equally against Q2 last year. So, yeah, that's kind of a one-off, unrealized revaluation in the books on those U.S. dollar accounts.

All right. But on your OPEX and OPEX guidance, we have seen both Q1 and Q2 coming in well below your guided midpoint. Yet your new OPEX guidance midpoint is raised slightly. So just looking at the midpoint of your Q3 guidance and the applied Q4 OPEX, that would be a Q over Q increase of 12% and 14% respectively. So can you just share your explanation of what is driving the slow costs in in H1 and why H2 increases massively?

Yeah, I think a lot of this is actually FX related, back to your first question. So actually when you add back the FX, the real underlying OPEX this time is actually towards the top end of the range, probably 32 million pre-FX. And when we've set that full year guidance, we've tried to strip out all FX because we don't want to speculate what's going to happen there. So actually, you know, we've probably done, adding back that affects 62 million first half of the year, and then the midpoint of the guidance is probably 68 for the second half. So it's, yeah, it's probably lower percentage growth quarter on quarter than it looks.

Okay, yeah, that makes sense. So next one on your net cash position, it remains quite large. So can you say anything about your M&A pipeline, like Is that the main explanation behind keeping 80 million euros in cash?

We are definitely looking at M&A as we always are. Can't of course comment if we are close with anything, but we are definitely open to do M&A. And if we can't do that at some point, I think we will look at other ways of distributing the cash.

Okay, understood. Christian, just a final one. The last sentence in your CEO word explains your excitement for H2, for instance, mentioning partner signings. So just given your previous communication of a strong pipeline, if it has, how has that changed over the last few months? And should we expect the signings to be tier one operators solely?

I don't want to comment about the signings before we happen, but I am still very excited about the pipeline and I definitely hope we will see some signings happening. As I said many times before, signings are often very tied to new regulations so it's hard to know when when timings will be but but I feel very good about our opportunities going forward okay just a follow-up can you share if it's more in the Europe or more in in rest of world or in the US that you did strong pipeline I think in Europe, I mean, it's so many fewer opportunities out there because the market is much more settled. So the opportunities, definitely more of them in the U.S. and in other parts of the world. But yeah, we have some opportunities in Europe as well.

Okay, got it. That was all for me. Thank you very much.

Thank you.

The next question comes from Victor Hogberg with Danske Bank. Please go ahead.

Yes, good morning. Just another question on the operating standards. If you would put it this way, is the underlying operating standards the same for the top end? It's 133 now, it was 135 before. The difference between the positive 2 million affecting Q2, is that how you should read this?

No, not really. I think we've narrowed the range. So we've taken it down to a 5 million range. Obviously, we get closer towards that full year position. Yeah, that guidance, again, is completely excluding FX. So we've had 2.7 million in the first half of the year. So, you know, that's the guidance is excluding that. So, you know, that 2.7 million in our world will reduce that number. But again, we're trying to guide without FX.

We've narrowed the range down into the middle. Without the effects we have seen in H1 already, is that how we should read it as well? Or is it that you won't speculate on FX movements in the second half?

No, it's without the effects we've seen in H1. So yeah, the 128 to 133 would be completely excluding that 2.7 million that we've seen in the first half. So that would actually reduce that 128 to 133 on the books.

Okay, yeah, I sort of get it. If it were to come in at 133 then reported, what would that mean if FX were, we wouldn't see any FX movements in the second half, just the ones we've seen in the first half. If we see a reported FX number of 133 for the full year, what does that mean?

Then you'd see 133 less 2.7 in the books, so 130.3 in that case. if there's no other FX movement from here.

Okay, thank you. And on the customer signings, on the previous question, this is for Christian maybe. On the CMD last year, you talked a bit about the potential to sign a mid-size or decent-sized European operator that might have come to RoadSend when it comes to technical development today. Might be looking at outsourcing. You talked a bit about that. We haven't seen it. Is that opportunity still there? Have that potential signing decided to do something else? Or is that opportunity still there?

It's still multiple. It's not only one. But the same ones I was talking about then is still there.

And have you... Would you say that the potential or the prospect to sign them is better or... worse or the same as last year I will not comment on that Did you say, maybe for David, did you say anything about ABOs, how much they contributed in revenues in Q2?

I didn't, but yeah, they contributed around half a million this quarter. Small net profit for them. But I think they're looking forward into H2 when they launch the odd product, which could be hopefully in Q4 now. That's probably when that profitability is forecast to increase for them.

Okay, but Q3 may be revenues at the same level?

Yeah, you can expect that. It shouldn't be lower, at least.

Okay. And on the modularization strategy, we previously said that it's reasonable to expect the first potential signing on this one in the first half or the early parts of 2023. Is that still... The same timeline you would say? Or any revisions to that potential timeline for adding customers in this one?

I mean, as usual, it's hard to know when we do signings, but we still believe that there is an opportunity for us to be able to market and sell it in Q1 next year.

Okay. Speaking of It was really slow now in the latter parts of the second quarter. It's still slow now during the summer, but it's going to ramp up. And then we have Kindred live in the Netherlands as well. What do you expect in terms of sequential movement in revenues? Potential to see revenues having crossed now in Q2?

I don't think we can give a – and we won't give a sales forecast, but, I mean, you can say that the football season is starting a little bit earlier than normal. So, you know, and with Kindred as well, as you mentioned, in Netherlands at Q3, yeah, we're looking forward to a busier sporting schedule, and hopefully that comes through into the revenues in Q3. But, yeah, I can't give you a number.

Okay. And last question for me. On the regulatory movement side, would you say on a net basis that it has improved or – Is it at the same level as when you did the QAnon call?

I don't think it has become long-term better or worse, but I am a little bit disappointed about especially the pace in Brazil, which I definitely thought would happen during the year when we talked last time. And I'm starting to doubt that it will happen in 2022 now.

Okay. Thank you very much.

Thank you.

Again, if you have a question, please press star then 1. As there are no further audio questions, I would like to turn the conference back over to the speakers for any written questions.

Thank you very much. I think we start with one for you, Christian. We've seen competitors seeing major growth in Latin America. What can be the position in Latin and are we seeing any possibilities in the region?

Absolutely. I mean, this is a region we look at very positively. I mean, we have a very, very strong position in Colombia. We have partners in Peru and in Argentina already. And we keep on looking at more and more partners in Latin America. But I think The big thing that is a big focus for us now is to find the suitable partners for the opening of Brazil.

Thank you. One for you, David. Are we considering buybacks or what will we do with a big cash position and low valuation of the stock? That's one question.

Yeah, that's a good question. I mean, in the last 12 months, you've seen that we've done both M&A and shared buybacks, so they're absolutely on the radar and the agenda. In terms of M&A, there's some key areas that we've talked about before where we think which could really strategically drive the business. So I think M&A is absolutely on the agenda, but also buybacks. We've done it recently, and it could well be that we do it again.

Thank you. One question for you, Christian, with our new modernization strategy. We're saying that offering operators greater control over pricing will drive broader operator appeal, particularly among those that wish to trade one or more sports in-house. Have you had any specific interest from operators regarding this?

We have. And I think that has been something we have had interest for many, many years. But we have not felt that that has been something we have been able to prioritize until now. So there are definitely a few opportunities out there already now. But yeah, it will certainly increase our addressable markets going forward.

Okay, I think that was the last question from the web as well. Thank you very much, Kristin and David, and thank you, everyone, for listening in to us. We will be back with our Q3 report 26th of October, so I look forward to seeing you then again. And if you have any questions, always feel free to reach out to the IR department. Thank you very much and have a good day.