Codere Online Luxembourg, S.A. Q4 FY2022 Earnings Call

Good afternoon. My name is Abby and I'll be your conference operator today. At this time, I would like to welcome everyone to Codere Online's Fourth Quarter and Full Year 2022 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. Mr. Guillermo Lancha, Head of Investor Relations, you may begin your conference.

Thanks, operator, and welcome everyone to Codere Online’s earnings call for the fourth quarter and full year of 2022. Today, you will hear from our CEO, Moshe Edree, and CFO, Oscar Iglesias. Before turning the call over to Moshe, I’d like to remind everyone that during this call we will be referring to a presentation that we uploaded to our website earlier today, which includes non-GAAP financial metrics such as Net Gaming Revenue or Adjusted EBITDA, for which you can find reconciliations in the appendix of the presentation. Let me also remind you that our accounting information is prepared under IFRS Accounting Standards and that throughout this presentation all monetary figures will be in euros unless expressed otherwise. Finally, please note that a replay and transcript of this call will be available on our website at codereonline.com, where you can also sign up for our Investor Email alerts. With that, I will go ahead and pass the call over to Moshe.

Thanks, Guillermo, and thanks everyone for joining the call. Starting with the highlights of the quarter on Page 7, we have been able to deliver a strong set of results in the fourth quarter with an impressive 70% net gaming revenue growth versus last year to nearly 38 million, confirming the acceleration of the revenue growth trend that we anticipated when providing our initial outlook for 2022. From a mix point of view, our full year revenue was split 50/50 between sports betting and casino games, versus a higher 56% contribution from sports betting in 2021. We expect that the trend toward increased relative contribution from casino will continue into 2023 as we continue to leverage opportunities to both cross-sell our casino product to sports betting customers, but also to target and acquire higher value customers in casino. Turning back to the fourth quarter, the significant growth in net gaming revenue was driven by a 54% increase in our active customer base to nearly 142,000, together with a 10% increase in average monthly spend per customer to €88 to €89. This increase in active customers was mainly due to Mexico, where we almost doubled our customer base. In terms of customer acquisition, the World Cup brought a vast global audience and generated better than expected interest in our offering, allowing us to increase first-time deposits to 222,000 in the quarter, an increase of 90% versus the year before. Although we stepped up our marketing spending in the quarter to over 30 million versus an average quarterly spend of about 22 million, the $179 average cost per new customer in the quarter was below that achieved in the first three quarters of that year. As we close out our first year as a public company, we have achieved better than expected results with the full year NGR at $123 million, which is above the higher end of our guidance of between €120 million to €160 million stated last quarter. We are particularly proud of our execution in Mexico, where we believe we have efficiently and effectively deployed marketing spend, resulting in a significant increase in our customer base. Additionally, we have experienced significant growth in Spain with revenue up more than 20% despite the limited marketing spend due to regulatory restrictions in place. In terms of recent developments, we continue to seek several licenses in Argentina, where we see potential to build a significant and profitable business in the Province of Cordoba. We expect to begin operations there this year. We are also pursuing a licensing process in Buenos Aires, and we've recently participated in a standard process for the province of Mendoza. Finally, we're announcing today a change in leadership at our company. After careful consideration and for personal reasons, I have decided to step down from my role as CEO and transition to a new role as Executive Vice Chairman. This decision wasn't made lightly, but I feel that it is the right choice for me at this time. In my new role, I will be focusing on a number of strategic initiatives and otherwise supporting the team where needed. Aviv Sher will be taking over as the CEO. He has been an integral part of the company since we started and has played a key role in our success. Aviv and I have worked together for over a decade, and in addition to his tenure at Codere Online, he brings over 15 years of experience in the industry, having previously served as the CEO of NeoGames and Prime Gaming. With Aviv at the helm, I am confident that we will continue to drive and reach new heights. This is an exciting time for the company, and I look forward to working with the team in my new role to support Aviv in his responsibilities. I also want to take this opportunity to thank our employees for their hard work and dedication over the years. It has been an incredible privilege to lead this organization and to work with such a talented and committed team. Likewise, I would like to thank the board of directors and our chairman for their help and support during my time as CEO. Looking forward to closing with our Chairman again. Last but not least, I want to express my gratitude to our investors for their support and confidence in our company. We remain committed to delivering on our promises and generating substantial growth for our shareholders. With that, I'll return the call to Oscar to cover the financial highlights for the quarter.

Thanks, Moshe. Turning to Page 9, consolidated net gaming revenue grew 70% to nearly 38 million in the fourth quarter, driven by our Mexican business, which more than doubled in the period to over 16 million, together with a 42% growth in Spain to nearly 18 million. Colombia also performed well with over 2 million of net gaming revenue in the fourth quarter, 56% higher than last year. The World Cup played an important role in our revenue uplift in the quarter, not only because of the engagement from both existing and new customers but also due to a better than expected sports betting margin realized throughout the tournament. Adjusted EBITDA was negative $14.6 million in the quarter, in line with our expectations given the higher level of planned investment around the World Cup, as discussed by Moshe earlier in the call. The negative EBITDA generated in Latin America in the quarter, mainly from Mexico, was partially offset by Spain, which generated 3.7 million positive EBITDA in the fourth quarter. For the full year, our net gaming revenue increased 48% to nearly 123 million, almost 40 million more than in 2021. From a mix point of view, Mexico represented 42% of our revenue, up from 34% last year, while Spain contributed 49%, down from 60% in the prior period. Turning to Page 10 and taking a brief look at our P&L, the adjusted EBITDA loss in the quarter was mainly driven by the $31 million in marketing investment, along with increases in other operating investments made in platform and content. We will discuss our outlook for 2023 later, but as a reminder, our marketing spend is highly discretionary and can be adjusted or curtailed at any point to reduce losses and cash burn, ensuring that the company has the financial resources needed to reach profitability. In terms of the Spanish operating and financial metrics, net gaming revenue in the fourth quarter increased 42% versus the prior year quarter despite a lower 8% increase in active customers, due to the significant increase in spend from customers in the quarter. This improvement in spend per customer is partly due to our growing casino business, which we believe will continue to be the driver of growth in this market. In Mexico, net gaming revenue exceeded 16 million in the quarter, an increase of over 100% year-on-year and 26% sequentially. This strong performance was driven by a 93% increase in the number of active customers, along with a higher spend per customer. Moving to Colombia, net gaming revenue increased 56% in the fourth quarter, crossing the 2 million mark. Again, this was driven by a higher number of active customers, which grew 48%, in addition to higher spend per customer. Turning to the balance sheet, as of December 31st, we had approximately $49 million in available cash on the balance sheet, having utilized approximately $42 million throughout 2022. In terms of our net working capital position, we ended the year at a normalized level of negative 24 million. On Page 16, you will find further details regarding the cash flow statement and the variation in net working capital in the quarter. We finished the year ahead of expectations in terms of cash, driven not only by better operating performance but also from a generally stronger U.S. dollar throughout the year. That's all from my end; I will now hand it back to Moshe to cover our outlook for 2023 and closing remarks.

2022 was a year in which we deployed a significant portion of our proceeds raised in our public listing, with our primary focus being revenue growth through a significant increase in marketing investment. We believe we were successful in what we set out to achieve. However, in 2023, we will slowly but surely begin shifting our focus toward profitability. This transition is driven by current investor preference for cash flow generating businesses over high growth, low margin ones. As such, in 2023, we will be taking our foot off the pedal regarding marketing investment, prioritizing certain geographies over others. With that, we expect our revenue growth to slow in 2023 to around 20%, resulting in between €114 million and €150 million of net gaming revenue. More importantly, we expect to reduce our EBITDA loss by half to between €20 million and €30 million. This will allow us to turn the corner in 2024, a year in which we expect to be both EBITDA and cash flow positive. I am confident that we have the balance sheet to get us there. Let me finish my remarks by stressing that our strong performance in the fourth quarter of the year demonstrates our ability to execute our plan and deliver growth. We are confident that we will be up to the task of turning Codere Online into a profitable company. With that said, we'll turn it back to the operator to open up the call for Q&A.

Your first question comes from Jeff Stantial from Stifel. Your line is open.

Moshe, thank you for everything these past couple of years and Aviv, congratulations. I look forward to working together more closely moving forward. Just a handful of questions from me here. Why don't we start off on guidance; net gaming revenue $140 million to $150 million, the midpoint is about $10 million below the last guidance previously disclosed, I believe that was the Q2 earnings. Could you just talk a bit more on the drivers of variance between the two? Is that pretty much just a function of prioritizing profitability more in Italy's sale and any color helping bridge the two would help?

No, I was just going to say for starters, on your question about the guidance, to make it apples-to-apples, the $155 million would have included Italy. I think looking back at prior three year plans that we have, it was probably $4 million to $5 million of Italy that $155 million number for 2023. So, I think the apples to apples number would be more like $150 million, the high end of the range that we've put out to the market. But I'll defer to Moshe to talk a little bit more about what he's seen in the business.

That is correct. I mean, that’s part of it. The other part is that we are starting in Argentina later than we thought we would be able to start. We will not see the impact of the revenue from that province until the third quarter of this year. So, we'll only have about six months of revenues coming from Argentina, which I think accounts for the majority of the decrease in revenues.

And then maybe just a follow-up on that just to be crystal clear here. So, I guess between those two, you’ve fully accounted for the variance implying that any revenue impact from marketing reinvestment was already contemplated in your prior guidance. Is that fair to say?

Yes, I think that's fair, Jeff. I think if Argentina would have come online, if some of the other regions in Argentina would have come online earlier, we would probably have wrapped more around that $150 million number. But getting some of the timing delays and getting launched in other regions in Argentina versus what we would have thought, let's say a year ago, I think that's a fair statement.

And then if I can squeeze a couple more in here. The World Cup, is there any way to kind of quantify how much of a tailwind that was during Q4?

That's probably something Oscar can quantify better than I, but I can say that although the World Cup was strong for everyone, it contributed not just to our brand, but across the industry because it was a very successful tournament. I think that we came into the last quarter with a strong tailwind from the first three quarters. We saw that we were able to achieve the growth in contribution per customer that we anticipated at the beginning of the year. Specifically, about how much the World Cup contributed, maybe Oscar has the figures.

Yes, well, I think that in general, Jeff, we were always planning to have a significantly greater investment in the fourth quarter leading up to and during the World Cup, and we did. The EBITDA performance, even though the $14.5 million negative is a little bit more negative than what we were tracking throughout the first three quarters, which was around $12 million negative, it still performed better than what we were expecting. And the last comment that I would make is that we are seeing some benefit here in the first month and a half, two months of 2023 from some of that investment we made in the fourth quarter. It is benefiting us more than we would have otherwise expected in terms of performance starting off 2023.

Okay, great. That's helpful. Thank you. And then moving to the same region, I believe some incremental marketing restrictions came online around year-end, if that's correct. Have you noticed any impact thus far year-to-date? Is there anything in guidance or no real impact?

Sorry Jeff, what market? I didn't catch the market that you're referring to? Do you say Spain?

In Spain, yes.

Yes, are you referring to the safer gambling regulation that is expected to come into effect shortly or something else?

I believe there's a couple; I think, yes, there's the one coming up and I thought there were some other restrictions that came into play earlier this year, but perhaps those were deferred out as well.

Yes, I think the big one is the legislation we're expecting over the next month or month and a half in terms of safer gambling regulation; there will be a number of different impacts on our business in Spain, which we believe we will be able to mitigate. This is legislation that will come into effect, there are some provisions that will be enforced immediately, even though as I understand it, there will be a three-month grace period. The balance of the provisions established will have up to a 12-month phasing period to comply with those additional rules and requirements. However, we feel comfortable that we've been preparing for this for some time. We've done a significant amount of work, especially on the development front, to ensure that our systems are prepared to manage and comply with the new regulations. We believe that we can mitigate the impact of this on our business. So that would be baked into our guidance for the year and our expectations for Spain going forward.

Okay, great. And if I could just close with one quick housekeeping item, which new market launches are factored into your guidance for timing to reach profitability? If more markets launch, is there any way to think about implications there?

Yes, the two that we have in our internal planning, although both are still a work in progress, are really two additional regions in Argentina: first and probably most importantly, the Province of Buenos Aires, and the second is the Province of Cordoba, where we've been pre-awarded a license but are still working through the process to get that license issued and to get up and operating. So, those are the two that we have baked into our internal plan and that would be contributing partially to the numbers and our guidance for 2023. But beyond that, we don't have any additional expansion markets included.

Your next question comes from the line of Michael Kupinski from Noble. Your line is open.

Thank you. First of all, congratulations on your quarter and a successful 2022. A couple of questions. I was wondering if you could talk a little bit about Brazil because I know that you were thinking about entering that market and seeing some success there, but in terms of legislative issues. Can you just kind of give us an update on that market? And how that might play into maybe 2023 or 2024?

Hi, Mike, it's Moshe. As I mentioned in previous calls, we are definitely looking carefully at the market and the legislation there. Obviously, there hasn't been any substantial development in terms of regulation. Therefore, both in terms of legislative difficulties and our focus right now is on the core markets in 2023 and 2024. To turn inward towards becoming cash flow positive and EBITDA positive, we will remain focused on Spain, Mexico, and Argentina. Having said that, we are monitoring the conditions, talking to those operating in Brazil, and while big brands are able to acquire players, they aren't currently seeing any return on investment from those investments. So it's not something that is on our agenda right now. We're taking a very low-profile approach, possibly looking to enter with a local partner, preferably a marketing agency to help us accelerate our marketing. But as I said, in the next year, we will focus on core markets.

And of course, there's been a restriction of capital for a lot of companies in your industry and they've been burning through cash. Have you noticed that your competition has backed off on certain markets that you're extremely competitive in? I was wondering if you could give us the competitive landscape. Are you seeing companies pull out of some markets that make it more beneficial for you?

So, we definitely see some transitions in Spain; some brands are reducing marketing spend as legislation gets tighter and harder to advertise. For instance, we see brands like William Hill and others cutting back their investments in Spain. In Mexico, however, we note that our main competitor, Caliente, is still investing massively in marketing, so we do not see any reduction there. However, some other brands that are not local and lack a retail presence are struggling to grow, which is beneficial to us. In Colombia, we are observing some changes in the competitive landscape as well. It is a market that is growing more challenging to create player value with fraudulent activity. Thus, some brands that started investing in 2022 to build their presence saw growth challenges. To summarize, good news is we are not just maintaining our market share; in some instances, we are increasing our market share, and we see that as a positive development.

Your next question comes from Mike Hickey from The Benchmark. Your line is open.

Thanks guys for taking my questions here. Just a few. If you could talk about your focus on profitability, when do you expect to be profitable and how you're thinking about your cash balance? I think you ended around €54 million year-end. I think you've burned about €46 million in cash from operations in '22. Where do you think you're going to end up in '23 with your cash position? Are you thinking about being cash flow positive, and do you think you'll need to raise capital here?

Hi, Mike. Thanks for the question. Yes, so Mike, I think, as Moshe mentioned in the prepared remarks, we are expecting full year 2024 to be both EBITDA positive and cash flow positive. That does reflect a shift toward profitability versus growth. In terms of 2023, I would say that our EBITDA guidance serves as a good proxy for what we would expect in terms of cash burn for the year. So, depending on adjusted EBITDA forecasts, that would give us a good estimate for cash utilization throughout the year.

And Moshe, can you just talk about your transition here a little bit? Whether or not the Board considered an external search versus internal? How did that shake out? Did you think of strategic alternatives for the Company at all, maybe a potential sale? I know you've sold your tie-in business, but just curious about the process you and your board went through regarding your transition and your focus going forward?

Yes, hi. So yes, we've had a challenging five years, including COVID-19, the shutdown of the mother company's retail, and the merger. After almost 15 years in the industry, I've decided it’s time for me to step back into a more strategic position rather than manage day-to-day operations. I have a lot of confidence in Aviv and the team, who I’ve worked with for over a decade. I feel comfortable letting Aviv step up as CEO and allowing myself to work with the Chairman and Oscar on the strategic overview of where Codere Online will go in the next five years and how to create value for investors. We have discussed various strategic alliances and opportunities as we work towards profitability.

Last question from us here is just any updates on what you're seeing with your consumer given macro conditions. Obviously, conditions continue to be challenging, particularly in some of the regions you operate in. I'm curious if you can provide an objective view of what you're seeing from your players and any impact on the macro environment on spending?

It's a good question, Mike. The experience throughout last year, especially in the back half, shows that our market investments helped us acquire customers and build a strong customer portfolio that will benefit us going into this year. More importantly, the quality of our customer base has improved, as seen in the increase in spend per active customer across all geographies. Some of this shift can be attributed to the fact that we've been able to cross-sell sports first customers into our casino product. While maintaining a balance, we expect to see relatively equal contributions from sports and casino betting moving forward but do anticipate potential increases in casino business moving into 2023.

Your next question comes from the line.

A couple of questions. In '23, can you maybe augment the guidance a bit on the total marketing spend you are budgeting? If you would share that with us?

We are a bit hesitant to give guidance specifically on our marketing spend, even at an aggregate level. It's sensitive information, but it’s safe to say that versus what was €97 million in total marketing spend in 2022, it will be materially lower than that. However, it’ll still be consistent with the plan we set out to deliver, especially concerning some of the higher growing or emerging markets where we operate.

In light of the model shifting around a bit in '23 versus '22, I understand we won’t have a World Cup in Q4. Can you share with us the projected cadence for EBITDA losses in 2023?

The losses in the first half from an adjusted EBITDA standpoint are expected to be greater than in the second half. However, it will be a gradual decline throughout the year. We don’t expect to be EBITDA positive in any quarter in 2023, but the losses should decrease steadily.

Regarding the guidance for '24, is the thought that EBITDA would be positive in the first half of the year or would it be negative and then turn positive in the back half, allowing for a full year of positive EBITDA for '24?

Right now, we are only comfortable stating that we will be positive for the full year. Specifics on which quarter we expect to be EBITDA positive won't be announced until we see better performance by the end of this year.

Can you share at all the parent company's perspective on the retail side of the business? How do they view online, and how does it fit into capital needs going forward versus continuing to build versus some sort of monetization?

Moshe, do you want to tackle that or do you want me to?

Look, the mother company holds around 60% of the online, and they have a representative on the board. Currently, we are operating completely independently and will not depend on the mother company and vice versa. We are managing our operation and overall business separately from what's happening at the parent company. We don’t foresee interventions affecting our omni-channel strategy and the services we receive from them.

There are no further questions at this time. I would like to turn the call back over to the presenters.

Thank you. We have a few questions coming in from the webcast. I'll start with a discussion on burn rate. The cash balance gives us a little more than one year of run rate. I understand that your marketing expenditure is somewhat discretionary. What other levers besides decreasing marketing do you have to increase liquidity?

That’s a great question. Given how choppy the capital markets are, I don’t think we can plan around any external fundraising over the next year or two. We are managing the business with a strong emphasis on utilizing the balance sheet and cash available to execute our two-year plan. This plan focuses on maintaining a minimum cash level to cover unforeseen challenges in some markets, and we believe that we can execute the granting guidance we shared for 2023, while aiming for a positive cash flow and EBITDA by 2024.

Another question coming in from the webcast. What can we expect for capital allocation initiatives given the economic environment and our outlook position under very low share price, or any cash M&A or stock buyback plans, or investments in the core business being considered as a priority?

The focus is really on our core markets. We believe there are opportunities, especially given that it's our home market. Spain remains our largest market, and the opportunities in Mexico continue to be attractive. We plan to remain focused there. Meanwhile, Argentina is emerging as an opportunity for us, but we will proceed cautiously in terms of capital initially, until we assess performance in regions outside the city. We don’t see any immediate share buybacks or other inorganic activities, given our priorities and opportunities for organic growth.

In terms of reaching profitability, are there updates on the timeframe? I think we already discussed that. What are you looking at on turnover rates? Any major variations given the economic environment?

So, Moshe, the question was about customer retention from a churn standpoint. From my standpoint, we are seeing improvements across our core markets in terms of retention due to our investments. Since our business combination, we have allocated resources to focus on improving all aspects of retention, which in turn reduces churn. We are witnessing positive internal numbers indicating retention improvements. This includes customer service and user experience enhancements.

We mentioned in the presentation that we see a trend of shifting weight from sports to casino. While we know that casino retention is longer and higher than sports, we believe we are focusing on improving our operational side.

Good point. Next question. During the World Cup, there was some noise about our app crashing while other competitors apparently didn’t experience these issues. What can you expect moving forward regarding these technical problems? Are they being prioritized?

I don’t specifically know what they mean by the app crashing. We specified that in previous calls that in Mexico, we were facing some issues related to a massive DDoS attack on Playtex's third-party hosting service. Various technical challenges were not in our control but were resolved quickly. I am unaware of any crashes during the World Cup from our side, and we can infer that they likely referred to the DDoS attack.

Final question. Given the plan reduction in marketing spending for 2023, what makes you confident about retaining and growing active customers versus having them migrate to competitors?

Moshe, the question is about the confidence we have in acquiring customers despite reduced marketing investment. We are adjusting our spending according to our capacity to maintain an efficient top-line revenue. While this adjustment may impact revenue, we enter 2024 with a larger customer base and greater market share in some countries, alongside developing propositions in Argentina that will help our omni-channel strategy. Thus, we expect that our overall retention programs across countries will become more efficient based on our experience. Therefore, while we expect to acquire fewer new customers, the effectiveness of acquisition costs should not increase significantly.

That concludes today's call. We don't have any further questions on the phone or on the webcast. Thank you everyone for joining us today. If you have any further questions, feel free to reach out to the team. Otherwise, we will speak to you for our Q1 earnings in May.

Thank you for attending today's conference call. You may now disconnect.