Codere Online Luxembourg, S.A. Q1 FY2023 Earnings Call

Hello and welcome to Codere Online First Quarter 2023 Financial Results. All participants are in a listen-only mode. After the speakers' presentation, we will have a question-and-answer session. As a reminder, this conference call is being recorded. I would now like to turn the call over to Guillermo Lancha, Head of Investor Relations. Thank you. Please go ahead.

Thanks, operator, and welcome everyone to Codere Online's earnings call for the first quarter of 2023. Today you will hear from our CEO, Aviv Sher; and CFO, Oscar Iglesias; our Former CEO and Executive Vice Chairman, Moshe Edree, who continues to be involved in the business and is supporting the team on a daily basis, will be participating in the Q&A section. Before turning the call over to Aviv, I'd like to remind everyone that during this call we will be referring to a presentation 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 euro unless expressed otherwise. Finally, please note that our 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 onto Aviv.

Thank you, Guillermo, and thanks to everyone for joining the call. I'm very happy to be addressing all of you today for the first time since taking over as CEO of the company. In my new role, I'm fully committed to building upon the significant progress made under Moshe's leadership and to drive sustained growth and value for our shareholders in what is now our second year as a public company. Jumping straight into the highlights of the first quarter of 2023, on Page 7, we have delivered an impressive 55% net gaming revenue growth versus Q1 of 2022 to nearly €40 million. This was also a sequential increase of 5% quarter-on-quarter, which is no small achievement considering the tough comparison with the World Cup in the previous quarter. As we anticipated in our last call, a trend of increased contribution from Casino continued into 2023 with Casino generating 53% of our net gaming revenue this quarter. This was driven by not only progress in our cross-selling of the Casino product to our sports betting customers, but also, more importantly, by the strong contribution from our acquisition focus on Casino-oriented players. This significant growth in net gaming revenue was driven by a 22% increase in our active customer base to nearly 124,000, together with a 27% increase in average monthly spend per customer to €106. Mexico drove most of the increase in active customers with a 48% increase year-on-year. And together with Spain, we achieved the higher spend per customer. Our customer acquisition numbers remained relatively flat compared to last year with 80,000 first-time depositors in the quarter. The sequential decline in acquisition was primarily driven by the lower marketing spend in the quarter as we took our foot off the pedal a bit following the heavy investments made prior and during the World Cup. As a result, and giving the still strong number of customers acquired, our blended CPA across all markets fell by 21% versus Q1 last year to €161. In terms of recent developments, we were one of five operators awarded a license to operate in the Province of Mendoza in Argentina, where we are working to launch operations in the back half of this year, though our priority in Argentina continues to be obtaining a license in the Province of Buenos Aires. In regards to the Province of Córdoba, where we were one of eight groups to be pre-awarded the license, we made the decision to withdraw from the tender process, given the lack of a viable tax structure and the significant upfront licensing fee, which made operating in that region not feasible from an economic standpoint. Finally, we are happy to announce today the appointment of Debbie Guivisdalsky as COO succeeding me in my former role. Debbie brings a wealth of experience in fraud, payments, VIP, and CRM areas both at Codere Online and with other industry leaders such as Ladbrokes. I am sure she will continue to play a meaningful role in the future success of this company, and we all wish her the best of luck. With that, I will turn it over to Oscar to cover the financial highlights of the quarter.

Thanks, Aviv. Turning to Page 9, consolidated net gaming revenue grew 55% to nearly €40 million in the first quarter driven primarily by our Mexican business, which grew 75% to nearly €18 million, together with a 40% growth in Spain to over €18 million. Colombia also contributed to this increase with over €2 million of net gaming revenue in the quarter, 55% higher than last year. Engagement from both existing and new customers following the World Cup, along with the relative strength of our Casino business, played a significant role in this increase in the first quarter. Adjusted EBITDA meanwhile was negative €2.3 million in the first quarter, including a record €6.1 million positive contribution from Spain. This negative €2.3 million represents a significant improvement versus the negative €13.2 million in the prior year quarter, and reflects the pivot we have made to sustainable growth and profitability as discussed in our prior call. While our focus for this year will continue to be finding a balance between the two, we continue to see significant opportunities to invest and grow in both Spain and Mexico and expect, over time, to establish ourselves as a leading and profitable operator in Argentina. Looking now at our P&L on Page 10, the €11 million improvement in adjusted EBITDA in the quarter was driven not only by the significant net gaming revenue growth and the consequent flow-through to EBITDA, but also by the lower investments in marketing that Aviv mentioned earlier. Turning to the Spanish operating and financial metrics, net gaming revenue in the first quarter increased 40% versus the prior year quarter, despite a flat customer base, due to the significant increase in spend per customer in the quarter. This improvement was driven by both growth in our Casino business where spend per customer is typically higher than sports betting, but also due to a higher than normal sports betting margin in the month of March. In Mexico, net gaming revenue was nearly €18 million in the quarter, an increase of 75% year-on-year, and 8% sequentially. This strong performance was driven by both a 48% increase in the number of active customers, together with a higher spend per customer, driven by the relative strength on the Casino side of our business on the back of an improved product offering, promotional strategy, and strong brand recognition in the market. Moving to Colombia, net gaming revenue increased 55% in the first quarter, slightly above the €2 million mark. As outlined in prior calls, our business in Colombia is sub-scale, and given the substantial opportunities we are seeing in other core markets, we have decided to reduce marketing spend in this market in an effort to reduce losses. As a result, our portfolio of active customers in the quarter grew only 5% versus the prior year quarter. But despite the lower level of investment made in Colombia in the first quarter, we have delivered significant growth in net gaming revenue driven by higher spend per customer. In short, going forward, our focus will continue to be on improving the quality of our customer acquisitions and, as a result, our portfolio of active customers, as opposed to growth for growth's sake. Turning to the balance sheet, as of March 31st, we had over €49 million of total cash on the balance sheet, of which approximately €45 million was available and utilized over the course of the first quarter, approximately €4 million. In terms of our net working capital position, we ended the quarter with negative €23 million, or around 17% of LTM net gaming revenue. This figure included about €2 million of extended accounts payable for services provided by Codere Group, which were subsequently paid in the month of April. On Page 16, you have our cash flow statement for the quarter together with further details regarding the variation in working capital. The weakening of the U.S. dollar throughout the first quarter resulted in a small negative FX impact, but the strong operating results in the quarter resulted in a better ending cash position than we originally expected. Turning to our 2023 outlook on Page 17, we are maintaining the net gaming revenue and adjusted EBITDA guidance we provided in our Q4 earnings call. Given the strong performance in the first quarter, we expect to be in the upper part of the ranges provided, but would like to have more visibility over the second quarter before determining if a revision to this outlook is warranted. As we look out beyond 2023, we are well on track to deliver positive EBITDA and cash flow for the full year in 2024, and our Q1 performance is yet another step in that direction. That's all from my end. I will now hand it back over to Aviv for closing remarks.

Thanks, Oscar. Before we go into the Q&A, I would just like to thank the investors and the analysts that have joined us on this call and who have continued to support us throughout what has been turbulent times in the market. I also want to reiterate that this management team is not only committed to delivering sustainable growth but is also very excited about what we believe is the significant opportunity to create value for our shareholders. With that said, I will turn it back to the operator to open up the call to Q&A.

Thank you. Our first question comes from Jeff Stantial from Stifel. Please go ahead. Your line is open.

Hi, there. This is Jackson Gibb on for Jeff. So you reiterated full-year EBITDA guidance of $20 million to $30 million of losses, so moving to the higher end of the range, contrasting that to the first quarter loss of €2.3 million seems to suggest meaningful reacceleration in marketing investments. Could you just walk us through this thought process and help us think through marketing spend through the remainder of the year?

Yes. Hi, Jackson. I think as it relates to we're not providing guidance in terms of our overall marketing spend for the year, other than what we've guided in our Q4 call in terms of taking our foot off the pedal a little bit and prioritizing and balancing profitability with growth. But I think that we are cautious going into the second quarter until we have a few more months of visibility over the business and how it's trading, especially into a few of the slower sports summer months. We want to be a little bit more cautious in terms of revising guidance, but the first quarter obviously came in strong. April figures are continuing a continuation of that trend. So we're optimistic that this trend will continue throughout the year, that the higher yield we’re getting from customers overall is due to some of the mix changes we've made, and the efforts on acquisition and CRM are now relatively more focused on the Casino side of the business. We're expecting that to continue, but we want to be a little bit more cautious before we revise guidance.

Got it. That makes sense. And then just to follow up with another question on marketing spend. Revenues in Spain and Mexico were up to 3% and 8% quarter-on-quarter respectively, despite aggregate marketing spends down close to 40%, and that’s pretty impressive. Can you just talk a bit more about customer retention efforts post the World Cup? And how sticky you're seeing customers prove to be as you pull back a little bit on that marketing reinvestment?

Yes. So, basically we rode the wave after the World Cup and tried to retain the customers, the new customers that came during the World Cup, and explore our product and our offering. I think lowering a little bit the marketing investment aimed at new customers didn't affect the efforts we've continued to make during the first quarter on our existing customer database and the new customers we acquired during the World Cup. I think those efforts actually yielded good results. We introduced several mechanics that I think, at least in the Casino, made a lot of sense, and our players really liked it. It’s very impressive what we did and were able to grow the revenue even after the World Cup. This indicates that the customers we acquired during the year, not just during the World Cup, are very good customers with the value that we expected and even more.

That's really helpful. And then if I could just switch gears a little bit, there has been some news flow suggesting momentum in Brazil to get online sports betting regulated. Given how you've been executing on the growth opportunities in your core markets, do you expect to be in Brazil day one when online sports betting is legalized? And then Oscar, how much capital would you envision needing to ramp operations there if that were to happen?

Unrecognized.

Understood. And then if I could squeeze one more in. It looks like Mexico continues to be the largest growth driver for you guys. Just curious how you've seen the competitive landscape evolve there, maybe over the past three to six months?

In terms of competition, our biggest competitor is still dominating the market with heavy investment everywhere and we are trying to compete as hard as we can and gain position. I think in terms of market share, we were able to increase our market share year-on-year and maybe even quarter-on-quarter from the fourth quarter to the third quarter. However, the competitive landscape is very challenging. We keep hearing of new competitors coming in, some of them even pulling out after one year. It’s complicated to operate over there. Our business model gives us a good advantage over new players coming in. The infrastructure is solid and helpful, and our brand is growing strongly. We already see that our brand recognition has increased by about 300% to 400% year-on-year according to our research. We are getting our foot in the door and being recognized by more and more people in the states.

Yes, Jackson, I would just add that it's important to note that we're only about a year and a half out from our IPO and capital raise, and we really began ramping the heavier level of investment in the first quarter of 2022 in Mexico. So we're really now just about a year into that investment, the brand building that obviously is key and drives the overall acquisition and retention machinery. We’re happy and what we're starting to see here is momentum. It's being reflected in the numbers, and we obviously don’t want to lose that momentum; we want to keep that going throughout this year.

Got it. Thanks for all the color and congratulations on an excellent quarter.

Great, thanks, Jeff.

Thank you.

Our next question comes from Pat McCann from Noble Capital Markets. Please go ahead. Your line is open.

Hi, guys. Congrats on the quarter. I'll say first I got disconnected in the middle of a call, so hopefully none of these questions are too redundant with what some of the things you've already said. But my first question had to do with Spain, with the cash flow margins really being pretty meaningful in this quarter. I guess I'm wondering to what extent that could be a result of maybe the shakeout of some of the less established players in Spain, given the regulatory environment? And just generally where you see Spain going from here, is there a trend of improving cash flow there? Is there more room for that to continue going forward?

Yes, if I could just start on the unit economics front in Spain. Pat, as you may know, it's the market where we have the lowest gaming tax rate. So we benefit from a special tax subsidy for being domiciled in one of the two autonomous regions in North Africa and Malia. This is where we have the most operating leverage, and obviously every incremental euro of higher net gaming revenue results in a more significant flow-through to EBITDA, especially since there is a considerable portion of fixed expenses. This allows the flow-through to be substantial. While it’s a tough market given the advertising restrictions, increasingly the regulatory environment is just getting more stringent. However, I think that favors incumbents that have the teams, systems, and processes in place to manage through that complexity. This creates a barrier to entry for newcomers and also gets existing smaller players in the market to think twice about their commitment to the market.

Thanks. And then just to piggyback off of the previous question about the competitive landscape in Mexico. I think you mentioned on the last call that Caliente is still spending very heavily, despite maybe the more restricted capital environment we're in, but that some of the other brands are experiencing more challenges to growth. Could you just provide any update on that as far as if you're seeing maybe other brands outside of Caliente continuing to have trouble, where the competitive landscape is getting a little more favorable for you?

Caliente is continuing to invest significantly, and we notice their presence everywhere. We are also making investments. As for new entrants, Rush Street began advertising but seems to have scaled back. Other than Bet365, which is still active through their partnership, we don't observe any major competitors. The competitive landscape remains fairly stable, but we are aware that other companies are at least announcing their plans to enter the market, which makes it challenging to operate. Our retail strategy provides us with a competitive edge over newcomers who are focusing solely on online strategies. Our omnichannel business model helps us maintain brand visibility, and we are heavily invested in the Mexican marketplace.

Great, thanks. I'll let others ask questions.

We have no further questions over the phone. I would like to turn the call back over to Guillermo for any web questions.

Thanks. We have a couple of questions coming in through the webcast. The first one is about the licenses in Mendoza. We were awarded one of the five, and the question is, who was awarded the other four? I mean, I can answer this one. It was mostly local operators with a few exceptions of us and Rush Street, and the rest were local operators. The other question is in terms of Colombia. If Colombia is non-core due to scale, what are your midterm plans for the country?

Yes, that's a good question. I think we're working through. Those are discussions that we're having internally in terms of – we had clear short-term plans, and now there are discussions taking place regarding medium-term strategies. We’re considering how we can establish ourselves as leaders in a sizable market within the context of Latin America. We don’t have an answer today for this call, but we are clear that we want to focus on Spain, Mexico, and continue to prepare for Argentina. We intend to focus on obtaining a license in the Province of Buenos Aires. When we have something to announce on that, we will share it. Right now we're still evaluating options for Colombia. The important point is that we achieved a small positive adjusted EBITDA this quarter, which is a key outcome as we work to cut losses until we find a definitive solution.

We are not receiving any additional questions over the phone lines.

Okay, thank you everyone for joining us today. If you want to follow up on any of the subjects we discussed, you know where to reach us. If not, we will talk again in the back half of August with our Q2 earnings. Thank you everyone.

This concludes today's conference call. Thank you for your participation. You may now disconnect.