Earnings Call Transcript - CDRO Q1 2022

Operator, Operator

Good afternoon. My name is Rob, and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the Codere Online First Quarter 2022 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. Thank you. Guillermo Lancha, Director of Investor Relations. You may begin your conference.

Guillermo Lancha, Director of Investor Relations

Thanks, operator, and welcome everyone to Codere Online’s earnings call for the first quarter of 2022. On this call, you will hear from our CEO, Moshe Edree, and CFO, Oscar Iglesias. Before turning the call over to Oscar, I’d like to remind everyone that during this call we will be referring to a presentation we uploaded to our website earlier today. We encourage everyone to read the disclaimer section, particularly the points around forward-looking statements, non-IFRS financial measures, and preliminary information. During today’s call, we will be referring to non-GAAP financial metrics, such as Net Gaming Revenue or Adjusted EBITDA, for which you can find reconciliations in the appendix section of the presentation. Finally, please note that a replay and transcript of this call will be available later today on our website at codereonline.com, and that if you haven’t done so already, we encourage you to sign up for our Investor Email alerts. Oscar, over to you.

Oscar Iglesias, CFO

Thanks, Guillermo, and good afternoon to everyone joining the call. This is our first full quarter of operating results as a publicly traded company, and we look forward to giving you an update on business trends to add to the information that we have provided in our first annual report, which was filed on Form 20-F on April 29 and which is available on our website. Before moving into details regarding the quarter, I just wanted to remind you that Codere Online is Luxembourg-based, and as a European company, our accounting information is prepared under IFRS accounting standards, and our functional currency is the euro. As such, throughout this presentation, all monetary figures will be in euro unless expressed otherwise. Also, based on the feedback that we have received from a number of you following our fourth-quarter earnings call, in today's presentation, we are providing both consolidated income statements and country-level net gaming revenue and adjusted EBITDA on a quarterly basis throughout 2020 and 2021, in addition to, of course, first-quarter 2022 figures. We hope that this will be helpful to those of you that have either built or are considering building a financial model, but also as further context for everyone that is tracking the performance of our business. Going forward, we will be moving this information to the Annex and focusing more on current quarter and year-to-date results in each case versus applicable prior year periods. With that, I will go ahead and pass the call on to Moshe. Moshe, you may unmute?

Moshe Edree, CEO

Hello? Thanks, Oscar, and thanks, everyone, for joining the call, and sorry for the delay. For those of you who are new to the company, I would like to provide a quick overview of Codere Online. I joined the company in late 2018, when it was a wholly-owned subsidiary of Codere Group, which is a Madrid-based operator with over 30 years of retail gaming operating experience in Spain, Italy, and Latin America. This past November 30, we completed a merger with a NASDAQ-listed SPAC, which resulted not only in Codere Online becoming a US-listed business but also in our raising over $100 million to finance the substantial opportunity we have ahead to grow the business, particularly throughout Latin America. Moving to the highlights of our first quarter 2022, we delivered strong operating results in the period, with net gaming revenue up 24% to nearly €26 million and 15% versus Q4 2021. This growth was driven by a significant increase in active customers in Mexico, with a monthly spend per active at above €100. In terms of customer acquisitions, we continue to see strong volume—our first-time deposit increased almost 50% to 78,000 at an average cost of around €200. Considering that this is the first full quarter where we have had the benefits of a higher level of investment, we are pleased with the performance and confident that we are on track to meet our full-year guidance as net gaming revenue growth accelerates. Over the next few quarters, this is a year we also have a World Cup, which should provide an additional uplift for fourth quarter results. We are quite encouraged by the long-term growth prospects of our markets, not only beyond what we see on the ground, but also based on other industry sources that we have received upwards of the growth forecast for certain markets. For example, in Mexico and Argentina, we are now expecting the total addressable market size to be 20% to 25% higher than our current projections, and we believe that we are well-positioned to capture our share of that growth. Finally, we have put in place a long-term incentive plan for key members of the team, which was approved by the shareholders on March 3. This is a five-year plan that includes restricted stock, stock options, and deferred payment rights, which will not only further align senior management and directors' interests for Codere Online and its shareholders but also strengthen the retention and motivation of CRM management and the rest in the long term. With that, I will turn it back to Oscar. Oscar?

Oscar Iglesias, CFO

Thanks, Moshe. Turning to the financial results for the full year, we see that the 24% growth in consolidated net gaming revenue was driven primarily by an impressive 56% growth in Mexico, and that Spain has recovered to the levels we had in the first quarter of 2021, prior to the regulatory restrictions that came into effect in May of last year. As you know, these restrictions imposed significant limitations on advertising, sponsorships, and promotional activities. So these operating results are not only very encouraging, but the start of what we believe is a positive trend for our Spanish business. Colombia also performed well in the quarter with an 80% increase in net gaming revenues, and our remaining markets contributed positively to the results in the quarter. Regarding EBITDA performance by country and as discussed in our prior earnings call, we had a significant uptick in negative EBITDA in the quarter, primarily due to higher levels of marketing investment in furtherance of our accelerated growth throughout this business. The exception was, as has been the case for some time, Spain, which generated €2.5 million of EBITDA in the period, a level we have sustained for the last few quarters, despite the regulatory hurdles, which prevented us from deploying our promotional tools in this market. We believe there may be a read-across here for our Latin American operations, where we will be seeking to replicate this path to profitability, whereby promotional activity can eventually be curtailed once we have achieved meaningful scale and are otherwise positioned as one of the leading brands and operators in the markets in which we compete. The same example also highlights the importance of our omni-channel approach, as having a retail presence allows you to reach customers in ways that pure online players cannot, especially when marketing and promotional activity is restricted. Adjusted EBITDA in the first quarter decreased to negative $13 million, in line with our expectations, primarily due to this increased level of marketing investment and, to a lesser extent, higher platform, content, technology, and personnel expenses incurred in the period. However, we believe that these higher levels of marketing and operational investment are laying the foundation for the significant growth we are targeting over the coming years. We understand that the recent sell-off of certain technology and other high-growth stocks is partially driven by concerns about the path to profitability and cash burn. However, please remember that a significant portion of our overall marketing spend is discretionary or otherwise uncommitted. As such, we can increase, decrease or, if needed, discontinue marketing spend at any point in time based on what we are seeing across our markets. Furthermore, the upfront investment we make to acquire customers in any given period, what we typically refer to as a cohort, is generally recovered and generates a return over the lifetime of those customers. Internally, we define lifetime as five years following our position, and we will be seeking a relationship between lifetime value to acquisition cost of about three to five times, depending on where we are in the growth trajectory in any given market and the applicable unit economics within that market. Turning to the Spanish operating and financial metrics, we see the recovery in net gaming revenue in the first quarter of 2022 to about the same level we had in the prior year quarter, despite the lower level of active customers as a result of the promotional restrictions in place. On an LTM basis, we are flattening revenue levels, but with 6% more average monthly actives in the period due to the impact of COVID on sports activity in the prior LTM period. In Mexico, meanwhile, net gaming revenues reached €10 million in the quarter, an increase of 56% year-on-year and 27% sequentially. This strong performance is supported by our omni-channel approach, given the large retail presence Codere Group has in the country with nearly 90 gaming halls, and also by the fact that in Mexico, 100% of the retail activity is tracked as required by regulation, allowing for more effective promotions and overall customer management across channels. In Colombia, we have had strong growth in the quarter in terms of both net gaming revenue and actives. But while this continues to be a relatively small business, we are making several adjustments that we believe will allow us to continue growing the business and improving our return on marketing investment. Turning to the balance sheet, as of March 31, we had over $100 million available for deployment. The negative $13 million in EBITDA and adjusted EBITDA in the period was more than offset by a $12 million decrease in net working capital, which has a positive cash impact of $12 million, and a positive $1.4 million of foreign exchange impact on the proceeds from the business combination, which we hold in dollars due to the strengthening of the dollar throughout the quarter. Overall, the net working capital position of the business decreased to negative $28 million by quarter's end, primarily as a result of the $10 million increase in accounts payable, which was due to both the delay in the invoicing from certain of our Mexican media partners, but also the delay in the payment of certain services provided by Codere Group. We expect to get caught up in these payments, which amount to about $9 million throughout the second quarter, and we believe that the net working capital position of the company will return to a more normalized position by closing. Pro forma for the payment of these $9 million, our cash position as of March 31 would have been around $90 million expressed in US dollar terms. On Page 16, we have further details regarding the cash flow statement and the variation in net working capital in the quarter, both of which we are providing for the first time this quarter. That’s all from my end. For those of you who might be interested, we will be attending Stifel's Investor Conference in Boston. We will be there on June 8 and will also be available for meetings in New York the following day on June 9. So feel free to reach out if you would like to meet in person. I will now hand it back over to Moshe for closing remarks.

Moshe Edree, CEO

Thanks, Oscar. I just want to highlight that the first quarter results were in line with our expectations, a trend that continued throughout the month of April, and we believe that we are on track to meet our commitments to investors for the year. We continue to believe that the opportunity we have in front of us is amazing and we are more focused than ever on executing our plan. We look forward to speaking with you again in late August when we will publish our second quarter results, and we’d like to wish everyone a safe, healthy and happy summer. With that said, I will turn back to the operator to open up the call for Q&A. Thank you, everybody.

Jeff Stantial, Analyst

Hi, good morning, Moshe, Oscar. Thanks for taking the question. First off, I wanted to drill into the returns on your ongoing marketing plan. It looks like CPAs were up about 30% quarter-on-quarter, now trending about $200 per customer. Is this kind of the right level in the near term? Should we expect it to keep climbing a bit if you have your marketing plan? And then what are you seeing with respect to the LTV on this CAC? I think when you first went public, you talked about a 4x target; is that consistent with what you're seeing? Thanks.

Moshe Edree, CEO

Hi Jeff. Oscar, I will take it. So yes, you're right, Jeff. I mean we see an increase in the CPA, but that was expected. As you increase the marketing spend and you acquire more customers, the blended cost of the customer—the cost per customer is increased. But at the same time, we are modifying and optimizing our CRM activity. So, overall, what we are doing is stabilizing the formula between the number of customers that we need to acquire in order to accommodate the growth. At the same time, we need to optimize the bonuses at the VIP level. So we will receive the same return that we expected in the business plan. So, all-in-all, we think that we're on the right track. So we see that there is value in growth in the CPAs and if we see that there is some decrease in the lifetime value, we will adjust it on the CPA level as well. So, we're fine on that; that's what we're doing.

Jeff Stantial, Analyst

Okay. Helpful. Thank you. And then I know, I think in the deck you rearranged your goal to be EBITDA positive by 2024. Just curious; how should we think about the timing for peak EBITDA losses, given your plan? I'm assuming sometime in 2022, but just kind of what quarter perhaps should we think about the cadence there?

Oscar Iglesias, CFO

Yes, it’s a good question, Jeff. I think that this is a steady build, and the peak EBITDA loss will be something you see in the current year period, so in 2022. The business will start tracking as we start having the cumulative effect of those marketing investments from all the incremental cohorts that are coming into the mix here. You will start seeing that moving in the direction of 2024 eventually becoming both EBITDA positive and cash flow positive. So 2022 would be the trough year in terms of the low point EBITDA.

Jeff Stantial, Analyst

Understood. Thanks, Oscar. And then just in Spain, it looks like you're adapting really well for the regulatory restrictions that were put in place. Can you just talk about some of the things in more detail that you're doing to navigate these headwinds? And I would assume, take market share. It sounds like you're leaning even further into the omni-channel advantage or just anything else that you're executing just to adapt to some of these changes around marketing? Thanks.

Moshe Edree, CEO

Yes, Jeff. Oscar will take it. Yes, it's challenging. I mean, in markets like Spain, where we are facing a full ban on advertising, obviously, our ability to acquire customers is quite limited in terms of advertising spend. But that said, it’s a matter of branding. And Codere is very well-positioned as a brand in Spain both because of the retail presence. We have hundreds of shops, of which at least, I think, and Oscar can correct me, around 60 or more are branded as Codere shops. So, that omni-channel strategy is a very strong position. At the same time, we see some reduction in marketing spend from our competitors. So just through that, we are gaining some market share. And at the same time, as in any other markets, we invest quite heavily on the product side to add more content, to add more sports events, to optimize the funnel of the player experience. By doing so, it also increases the player value as well. So I think that if you combine everything together—by having a strong branding position on the back of the Real Madrid sponsorship that we had for years, the retail omni-channel strategy, the product, the CRM, and the long-term engagement with players—we should see an increase. Anyhow, the expectation or target in Spain is to increase in a single digit year-over-year. So I think that we're aligned with that plan.

Oscar Iglesias, CFO

Jeff, I would also add that just on the Real Madrid front, that sponsorship is still in effect. Even though we cannot utilize it the same way we could Pre-marketing and promotional restrictions, we still can leverage that sponsorship for hospitality and other things that are useful to us and beneficial to our business, especially with some of our higher-end customers. That's another point that’s a little bit different, I think.

Jeff Stantial, Analyst

Okay. Interesting. That’s helpful. Thank you. And then just on Brazil, we have heard some news flow since the last time we spoke at Q4 earnings. Can you just talk about what you're doing here in terms of timing and any details on structure? And then just how should we handicap the odds that you think this could get passed?

Oscar Iglesias, CFO

Moshe, do you want me to start, and then you can jump in in terms of assessing kind of the...

Moshe Edree, CEO

Okay. Go ahead.

Oscar Iglesias, CFO

As everyone knows, there's been some recent legislative developments on—specifically in sports betting from Brazil. We had understood that this legislation was going to be taken to the President of Brazil for a signature on May 10, but I’m not aware that this has actually taken place. We understand that this contemplates an unlimited number of licenses, but it would be a single license for store settings in both retail and online channels, with a five-year term, and an upfront license acquisition cost of a little over in euro terms, €4 million, I think it's like BRL22 million. The gaming tax rate seemingly will be based on similar to most other regulated markets based on win and not as initially contemplated on announced wager, which is good news. They're also contemplating a window for existing unregulated operators to begin complying within the new regulatory framework. There are also some other components here about a possible—I think some people have referred to it as a sandbox or a pilot program where they may select certain operators to get started with to establish what I imagine is the detailed regulatory framework that will apply going forward to all licensed holders. In terms of what we're doing, we're obviously evaluating options, including one or more local partnerships or, obviously, if Codere Group, as controlling majority-owner, moves forward with retail sports betting, we would obviously be interested in a coordinated omni-channel approach. Codere Online strategy—I think we have to give it a hard think on that. It's not something that's off the table, but maybe Moshe can chime in with his view and what his expectations are for the market?

Moshe Edree, CEO

Yes. So, obviously, Brazil is going to become one of the biggest regulated markets in the world and the third in Latin America—maybe the biggest one in Latin America. So, we will need to be there at some point. I mean, as Latin American operators, our aim is to become the biggest one overall in the continent. The way to do that is very careful. I mean, we have to approach it very cautiously because of the size of the market and the fact that it's a different language that we use in any other jurisdiction—it will have to be well modified both in terms of the product and in terms of the approach to the market. I would say that it’s most likely that during 2022, we will not start any actual operational activity in Brazil. We are more aiming to 2023. We will start, obviously, by preparing for operational activity and the product itself. As Oscar mentioned, our preferred route is to go through a local partnership. There are several options that we are checking right now, but I think it’s too early to go into detail about.

Jeff Stantial, Analyst

Thank you for that.

Oscar Iglesias, CFO

Sorry, you broke up a little bit. Feel free.

Moshe Edree, CEO

Can you hear me?

Oscar Iglesias, CFO

Yes, we can.

Moshe Edree, CEO

So, I think that at the beginning of next year, we'll start with slow marketing spend. As I said, it's a big, expensive market, and we will do it very carefully. We are very committed to our shareholders and to our business plan to stick to the six core markets that we're currently operating in. So we are focusing on that. We will watch closely what's happening in Brazil. From my experience, it’s the same we've seen in other big markets like North America in the past. Those rushes to the market and starting to spend millions in marketing didn’t have much chance to succeed. So, we will proceed very carefully, preferably with a local partner who has a good product and a solid operational team on the ground, and then we'll take it from there.

Jeff Stantial, Analyst

Perfect. That’s super helpful. One last housekeeping one from me. You reiterated your three-year net gaming revenue targets. Just a reminder there. Do you need any new markets to open up to hit those targets? Are those predicated on...

Oscar Iglesias, CFO

It’s a clear—it’s a market plan only, Jeff. It's just the existing markets that we operate in.

Jeff Stantial, Analyst

Perfect. That's all for me. Thank you all for the insights.

Michael Kupinski, Analyst

Yes. I was just wondering if—thanks for the additional financial metrics, by the way. I was wondering, can you talk a little bit about your cash burn and what your outlook is for the upcoming quarter? I have several other questions here.

Oscar Iglesias, CFO

Yes. Hi, Mike. Good afternoon. Yes. Hi, Mike. We've given full year guidance on a net gaming revenue standpoint. We're not yet in a position to give quarterly expectations either on net gaming revenue or EBITDA. But let us think about whether in subsequent quarters we might want to consider including those in our Q2 call. But right now, we're not providing quarterly guidance in terms of EBITDA or cash burn.

Michael Kupinski, Analyst

Yes. It just kind of goes to the question about the cadence of cash burn in upcoming quarters. I appreciate that. And then the other question is, can you talk a little bit about the competition for customer acquisition? At least here in the States, the companies are obviously spending significantly. You mentioned that, Moshe, about how the spending has been. And at least in the States, there's been a shakeout among some of the players that have exited online sports betting or at least significantly cut back on marketing spend because, as you mentioned, the capital markets have kind of closed for some of the smaller players. Can you talk about the trend line in terms of customer acquisition costs, and your thoughts about the trajectory of those costs? Have they increased to a point in some cases where you would necessarily want to cut back on marketing spend just because of the return that is expected? And have you seen competitors exiting any of your markets or reducing marketing?

Moshe Edree, CEO

Hi, Mike. So, yes, it depends on the market. So in Spain, we're quite consistent with our CPA level, and we see some withdraw from big international non-local brand operators like in Spain, for instance, we know that operators like Crisa and others are having to cut back on spend. So, in Spain, we're quite aligned with our spend. We see that we continue to have a steady return on the investment, and the ratio is stable. We don't see any significant issues in terms of new competitors entering the market. In Mexico and Colombia, it's a bit different, and I'll touch a bit on Panama and Argentina. In Mexico, it's—we adjusted the TAM for Mexico. Now we understand that the market, based on the last publication of our competitors like Playtech and Bet365, is larger than we originally estimated. We feel very comfortable with our expectations and our plan. There's a lot of opportunities for growth. Although some small and midsized competitors are entering the market, we don't foresee significant pressure from competition. It's a very complicated market, both in terms of regulations and processes, money transfers, AML, KYC. We're quite confident as local operators with our strong omni-channel approach that we can deliver our plan. We don't anticipate that competition will deter us from progressing as we want. That’s not the case in Colombia. In Colombia, the market is much more challenging. We are seeing the return on investment and value not accumulate as expected. This issue affects all sectors, not just us or Codere. We are adjusting our marketing spend while also modifying our product to better manage certain fraudulent account activities known to be in the market. Our market share in Colombia is improving because we are maintaining our activity while competitors are scaling back. Thus, we hope this trend continues in Colombia. It's the second year following COVID, and many competitors are trying to enter this market. We're carefully navigating these landscapes. In the city of Buenos Aires, where we just started, we believe our local omni-channel strategy will enable quick growth with little disruption from competition. This is also true in Panama. To summarize: in Mexico, we feel confident about our growth potential despite competition. In Colombia, we are making adjustments but still facing challenges. In Argentina and Panama, we feel comfortable with our operations.

Oscar Iglesias, CFO

Moshe, if I could just add, in Spain specifically, based on the latest regulatory data that we have, which is from Q4, we are seeing signs that we're picking up meaningful market share, particularly on the sports betting side, but also on the casino side of the business. We're waiting to see the first quarter data to determine if that is a trend that solidifies here in the first and then hopefully into the second quarter. But we are witnessing some positive developments happening in Spain. We want to verify with Q1 numbers from the regulator to see if the trends continue.

Michael Kupinski, Analyst

Great. Thanks for all the color there. I'll let others ask questions. Thank you.

Oscar Iglesias, CFO

Great. Thanks, Mike.

Guillermo Lancha, Director of Investor Relations

Okay. Before we conclude, we have some questions coming in from the webcast, so I will just read them, and Moshe and Oscar can answer. The first one is around the long-term incentive plan that we just passed, and we are being asked to briefly describe the triggers for the LTIP. So, I don’t know, Oscar, or Moshe, if you want to take this one?

Oscar Iglesias, CFO

Yeah, I can jump in. Yes, as we mentioned earlier in the presentation, the program is a five-year program and has really three baskets—three types of awards. The first being restricted stock units. These are upfront grants that vest linearly over the course of the five-year period, about 20% per year. Those are fairly straightforward. The next basket is stock options. The key there is that they are struck at $10 per stock option, obviously, the $10 being the price at which private investors invested in our transaction and business combination last November 30. The final piece is deferred payment rights; this is effectively a deferred cash payment at the end of the five-year plan. It is based on value creation, the only component of the plan not linked directly to share price evolution, based on a metric similar to the variable compensation bonuses we have annually, and it’s based on the year five performance and the value creation of the business versus a baseline established in our business combination. The target to achieve 100% payment under these deferred payment rights is $300 million of equity value creation, effectively doubling the equity value of the business. That’s the overall view of how directors and managers will align with shareholders.

Guillermo Lancha, Director of Investor Relations

Okay. We have another question on the webcast. The target market—target addressable market increase in Mexico and Argentina, does this refer to H2GC estimates or also to cover online in-house estimates for these markets?

Oscar Iglesias, CFO

I'm sorry, go ahead, Guillermo.

Guillermo Lancha, Director of Investor Relations

I was going to address it to you, sir.

Oscar Iglesias, CFO

Yeah, I think in Mexico, our TAM, we have updated it recently. I believe these are less than a month old, driven primarily by H2GC forecast through 2026, and we take an estimate, we try to anchor around 2027 as the target year from a TAM standpoint. But largely, the evolution in the upward revision is H2GC. In the case of Argentina, it's based on several sources, but it's more accurate to say that it's an internal estimate that we have, as it relates to our expectations. Obviously, these will evolve as we and other operators in the city and the province and elsewhere start learning more about the Argentine customer and the potential for growth in the market.

Guillermo Lancha, Director of Investor Relations

Okay. So we don't have any more questions on the webcast. I don't know, operator, if we have anyone else on the line.

Operator, Operator

There are no further questions on the phone line. The floor is yours, Mr. Lancha.

Guillermo Lancha, Director of Investor Relations

Okay. So if there are no further questions, we will leave it here for now. Thanks again, everyone, for connecting. Of course, feel free to reach out to myself or Oscar if you would like to discuss anything further. Otherwise, we will speak again at the end of August for our Q2 2022 results. Thanks, everyone, and hope you have a nice summer. Thank you.

Operator, Operator

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