Gambling.com Group Ltd Q4 FY2021 Earnings Call

Greetings, and welcome to Gambling.com Group Fourth Quarter and Full Year 2021 Earnings Results Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the conference over to Ryan Coleman, Investor Relations. Thank you. You may begin.

Thank you. Hello, everyone, and welcome to Gambling.com Group’s fourth quarter and full year 2021 earnings results call. I’m joined by Charles Gillespie, Chief Executive Officer and Co-Founder, as well as Elias Mark, Chief Financial Officer. This call is being webcast live within the Investor Relations section of our website at gambling.com/corporate/investors, and a downloadable version of the presentation is available there as well. A webcast replay will be available on the website after the conclusion of this call, and you may contact Investor Relations support by emailing investors@gdcgroup.com. I’d like to remind you that the information contained in this conference call, including any financial and related guidance to be provided, consists of forward-looking statements as defined by securities laws. These statements are based on information currently available to us and involve risks and uncertainties that could cause actual future results, performance, and business prospects and opportunities, to differ materially from those expressed in or implied by these statements. Some important factors that could cause such differences are discussed in the risk factors section of Gambling.com Group’s filings with the Securities and Exchange Commission. Forward-looking statements speak only as of the date the statements are made, and the company assumes no obligation to update forward-looking statements to reflect actual future results, changes in assumptions, or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. During the call, there will also be a discussion of non-IFRS financial measures. A description of these non-IFRS financial measures is included in the press release issued this morning, and reconciliations of these non-IFRS financial measures to their most directly comparable IFRS measures are included in the appendix of the presentation and press release, both of which are available in the Investors tab of our website. With that, I’ll turn the call over to Charles.

Thank you, Ryan, and welcome, everyone. Elias and I are happy to be here in New York this morning to report our fourth quarter and full year financial performance, which was in line with our preliminary results we announced last month. We are thrilled to see our investments in our North American operations paying off, as shown by our strong North American revenue growth in the quarter, and our records starts to the new year, which sets us up for what we expect to be an incredibly strong year of accelerating profitable growth in 2022. Now I’m on Slide 4 for those with the deck. For the full year, North American revenue grew 89% to $7.5 million. For the full year, total consolidated revenue increased 51% to $42.3 million compared to $28 million. And our full year total adjusted EBITDA was $18.4 million, which was an increase of 26% compared to $14.6 million. We delivered 117,000 new depositing customers for the full year, compared to 104,000 in 2020. Through a mix of increased exposure in North America and successful investments in data science, we substantially increased our revenue per new depositing customer during the year. We launched several new US state-specific websites in 2021 and acquired hundreds of domain names to expand our presence and drive organic growth in the US and Canada. We now possess an unmatched collection of premium domain names for the US market. Many domains are already in use, while others are on standby for new state launches. New sites on these premium domains are being developed from scratch in-house, which will maximize the ROI of these capital investments over time. I believe that we delivered the best year among our peers in 2021 in terms of strategic execution and tangible financial results. Our industry colleagues agreed and crowned us the 2021 EGR Affiliate of the Year, the industry’s top award for affiliates in the regulated online gambling industry. We were delighted to win this award during the year of our initial public offering, taking it home for the second time after initially winning in 2018. As we previously announced and detailed on a special call in December, we acquired RotoWire.com, the original authority in American fantasy sports, to help accelerate the group’s sports betting affiliate revenue in the US. The acquisition also diversified the group’s revenue mix by adding both subscription revenue and B2B media services revenue. The acquisition closed on January 1, and so far, our experience with RotoWire has supported our investment thesis. On to Slide 5. So far, 2022 is off to a record start, with our US revenue exploding in January with the launch of sports betting in New York. The State of New York launched online sports betting on January 8, in time for the College Football National Championship, as well as the NFL playoffs and Super Bowl. Our team delivered a barnstorming performance in New York. According to our clients, we have been among the market leaders in terms of the number of new depositing customers delivered to our clients. In anticipation of the launch, we developed two New York-specific websites where sports bettors can find trusted, comprehensive, and up-to-date information on sports betting in the State. These sites, NewYorkBets.com and EmpireStakes.com, complement our flagship US sports betting website, Bookies.com, and the iconic Gambling.com to cover gambling in New York from every possible angle. The significance of New York’s launch cannot be overstated. With over 14 million adults, it is the fourth most populous state in the US and is by far the most populous state where online sports betting is legal today. A YouGov survey commissioned by EmpireStakes.com reported that one in three New York adults were likely to place legal sports bets once legal online sports betting arrived in the State. The State’s launch helped drive a record month for the group in January, and New York will be a critical driver of the growth of online sports betting in the US, if not the world. US performance outside of New York has also been ahead of expectations during the start of the year. Louisiana also launched in January and has helped drive meaningful US revenue, along with the rest of our US-facing assets, which are performing well across several US state markets. Trading in Europe has also been solid and is trending ahead of levels in the fourth quarter. We expect to deliver significant year-on-year organic revenue growth in Q1 before consolidating any revenue from our recent acquisitions of RotoWire and BonusFinder. Our media partnership with McClatchy that we announced in January is now live and is exceeding expectations. Typical seasonality pattern supports strong trading in Q1, and in particular in March. Q2 has fewer major sporting events and better weather, leading to less consumption of digital entertainment products in the northern hemisphere. In addition, we have significantly increased our exposure to the US sports calendar, which has more exacerbated seasonality patterns and is seasonally slowest in Q2. Therefore, we do not expect the full strength of Q1 to continue into Q2, but we remain very confident for the second half of the year and about our full-year guidance. We have also seen strong growth in new depositing customers in Q1, helped by the launch of New York in particular. For 2022, we expect the revenue per new depositing customer improvements we achieved in 2021 to remain steady, and for the revenue growth to be more closely correlated with new depositing customer growth.

Thank you, Charles, and welcome, everyone. We are on to Slide 10. As Charles mentioned, our fourth quarter and full year financial performance were exactly in line with our pre-announced expectations of last month. We delivered record full year financial results that showed strong growth compared to 2020. Total revenue increased 51% to $42.3 million compared to $28 million in the prior year. On a constant currency basis, revenue increased $13.4 million or 46%. Importantly, all the revenue growth was organic. The increase was driven by both a growth in the number of new depositing customers and improved monetization of new depositing customers. Total operating expenses increased $14.1 million to $30.9 million compared to $16.8 million in the prior year. On a constant currency basis, operating expenses increased by $13.5 million or 77%. This increase was driven primarily by increased headcount across sales and marketing, technology, and G&A functions, as we scaled investments in the company’s organic growth initiatives during the second half of the year, as well as increased administrative expenses associated with operating as a public company. Sales and marketing expenses totaled $14.1 million compared to $8.1 million in the prior year. This increase was driven primarily by increased headcount across content, search marketing, and web development functions. Our technology expenses totaled $4 million compared to $2.5 million in the prior year. The increase again was driven by increased headcount across technology platform and business intelligence functions. And this was partly offset by capitalized development costs. General and administrative expenses totaled $13 million compared to $6 million in the prior year. The increase was driven by both increased headcount and professional services and insurance expenses. Operating profit was slightly higher at $11.4 million compared to $11.1 million in 2020, as increased costs were offset by substantially higher revenue. Net income totaled $12.5 million or $0.37 per diluted share compared to net income of $15.2 million or $0.49 per diluted share in the prior year. Net income in 2020 was positively affected by the recognition of deferred tax assets of $5.4 million. The comparative figure for 2021 was $1.8 million. In 2020, there was also a gain from bonds redemptions of $1.4 million, which was of a one-off nature. Adjusted EBITDA increased by 26% to $18.4 million compared to $14.6 million in the prior year, representing an adjusted EBITDA margin of 43%. The increase was driven primarily by increased revenue and partly offset by increased operating expenses. Total cash generated from operations of $14 million increased 28% compared to $10.9 million in 2020. The increase was driven primarily by increased adjusted EBITDA. Free cash flow totaled $8.4 million compared to $10.8 million in the prior year. The decline was a result of increased cash flow generated from operations, offset by increased capital expenditures consisting primarily of the acquisition of domain names and capitalized development costs. New depositing customers increased 13% to 117,000 compared to 104,000 in the prior year. Lastly, our cash balances as of December 2021 totaled $51 million, an increase of $42.8 million compared to the end of 2020. The increase was driven by IPO proceeds, which totaled $42 million before associated expenses, as well as net income generated by the company throughout the year.

Moving on to Slide 11. Total revenue in the fourth quarter remained constant at $10.3 million, as strong growth in the US was offset by a decline in the UK and Ireland. Revenue was also flat on a constant currency basis. Our UK revenue in the fourth quarter was a little softer than expected because of weaker than expected search performance in November, especially when compared to Q4 2020, which saw demand spike correlated with restrictive COVID-19 measures. Towards the end of the quarter, our search performance had recovered, and we exited the quarter on a strong foot. Total operating expenses in the fourth quarter increased by $3.8 million to $9.7 million. On a constant currency basis, operating expenses increased $3.6 million or 58%. The increase was driven by increased headcount across both sales and marketing, technology, and G&A functions. Operating profit in the fourth quarter was $0.6 million compared to $4.4 million in 2020. The decrease was driven primarily by a decrease in adjusted EBITDA, and an increase in share-based payment expenses. Net income in the fourth quarter totaled $0.9 million, $0.02 per diluted share compared to net income of $8.5 million or $0.35 per diluted share in the prior year. Net income in the comparable period of 2020 was positively affected by the recognition of our deferred tax assets of $5.4 million. Adjusted EBITDA decreased to $2.3 million compared to $6.1 million for the prior year, representing an adjusted EBITDA margin of $0.22. The decrease was driven by increased operating expenses as we continued to invest in organic growth initiatives.

Free cash flow was negative $1.8 million as we increased capital expenditures, consisting primarily of the acquisition of domains, along with capitalized development costs. New depositing customers decreased 20% to 28,000. In the comparable period in 2020, we had positive demand effects correlated with the restrictive COVID-19 measures, particularly in the UK. Moving on to Slide 12. We are rerating each of our financial targets for the years from 2021 to 2023. We’re targeting our average annual revenue growth over the period to exceed 40%. In our European business, we target growth faster than the European gambling market over a business cycle. And in the US, we expect to substantially grow our market share. At the same time, we are targeting an average annualized adjusted EBITDA margin of no less than 40%. As we have said before, our adjusted EBITDA margin may deviate from that target from time to time due to seasonality and our investments to support organic growth in the US market. Lastly, we’re targeting a net debt to EBITDA leverage ratio of under 2.5 times. In 2021, we exceeded all three targets, with revenue growth of 51%, all organic, adjusted EBITDA margin of 43%, and no net debt, and having very significant cash balances at the end of the year.

Moving on to Slide 13. Turning to our outlook for 2022, we expect to comfortably exceed our 40% revenue growth target. Our guidance of $71 million to $76 million in revenue represents year-on-year growth of between 68% and 80%, achieved through a combination of organic growth and the previously announced acquisitions. We expect to deliver adjusted EBITDA between $22 million and $27 million, representing growth of $0.20 to $0.47. Our adjusted EBITDA margin is forecasted to be below 40%, as we continue to invest in our organic growth plans. In addition, the acquired RotoWire business has a lower margin profile than our underlying business. However, we expect to gradually expand margins from the Roto assets as we realize revenue synergies, and we expect to exit 2022 with margins more in line with our reported percentage margin targets. The outlook is based on information currently available to us and does not factor in potential new acquisitions. As Charles mentioned, we expect our first-quarter revenue to exceed our previous single-quarter record before consolidating our recent acquisitions, driven by strong organic growth in North America. Lastly, it is also important to note that our growing exposure to the US sports calendar means that we will see stronger seasonality patterns, with Q1 and Q3 being the strongest quarters for the US sports revenue. On the casino side, Q1 and Q4 remained seasonally stronger quarters. Q2 is a decently slowest period, and it is typical to see a sequential decline in revenue from Q1 to Q2. We remain focused on executing on our growth strategy, which includes investing in both organic growth and M&A, with the objective of establishing the group as a leading player in both new and existing US markets as the top priority, while continuing to grow our market share in our more established markets in Europe and elsewhere. With that, we’ll be happy to take questions.

Our first question is from David Katz with Jefferies. Please proceed.

Hi. Good morning, everyone. Thanks for all the commentary. I wanted to just discuss the long-term target for a second. And in particular, I apologize if there’s a footnote in here, but with respect to potential acquisitions, which I think you do note in the ‘22 guidance, what is your kind of leverage tolerance? And when we think about the boundaries and the size and kinds of things you would entertain acquiring, where might that go and how might this look under those circumstances?

Yes. So, the targets that we’ve communicated in terms of leverage is below 2.5x, all interest-bearing debt leverage. We would be comfortable to go above 2.5x if you include some of the owned components that we have in our recent acquisitions as part of that, to be settled with shares.

I see. And for incremental acquisitions, Elias, how high might you be willing to go? And I’d love just some color, Charles, on kind of the size and scale of things that you would entertain buying within this period.

Yes. Just after the IPO, we came out and we said we wanted to do kind of one to two medium-sized deals in the $25 million to $50 million range a year. We’ve done that. The two deals we’ve announced fit squarely within that guidance. I think moving forward, we’re not going to be as specific on the guidance. We’re going to be open-minded, but all things equal, we’re looking for bigger deals. We don’t want to get bogged down in the weeds with lots of small deals. We think we’ve done two very good deals, and those will pay off exactly as anticipated, and thus we’re not rushing to do the third. We’re thinking all things equal, bigger than we were previously.

Understood. And one last one if I may, which is, you make some, I think, powerful arguments about being the profitable alternative and the assured alternative for operators, particularly in the US, who have been foregoing profits in exchange for market share. Is there any math that you can sort of help us to flesh that concept out just a little bit more? And frankly, I’ll just leave it there. I’d love to just get a little clarity or a little better math around how that actually works, and I think it’d be helpful for everyone.

Sure. I think the most compelling and clear evidence of this is, if you look at some of the investment material from some of the publicly-traded US-facing online gambling operators, they’ve put their customer lifetime values in these documents. Casino is obviously higher than sports betting. And on the high end, with casino, it’s many, many thousands of dollars. And on the sports betting side, it is less, but it’s still very significant. What they pay folks like us is a fraction of that. And of course, the affiliates do their best to negotiate the best possible deals. As this market tightens up on the affiliate side, maybe those rates go up a bit. But essentially, the margin between what they’re paying the affiliates and the customer lifetime value that they’re acquiring from these new depositing customers coming to them from the affiliates are very significant. It’s not close. They’re definitely making a lot of money off of these players. Maybe not – it may not be cash flow positive on month one. It takes months or possibly years to capture that lifetime value, but that’s just math.

And very importantly, they only pay for what they get. They only pay for an actual customer, not a potential customer.

Understood. Good enough. Thank you very much.

Our next question is from Barry Jonas with Truist Securities. Please proceed.

Hey, guys. Good morning. Thanks for taking my questions and welcome to New York. At the IPO, you estimated a $4 billion US affiliate market size. Curious if you have any updated thoughts on that number, or maybe the timing of when we could get there? Thanks.

We don’t have perfect data on this. I think the data we published in the IPO is probably the best estimate that we have. What we can say is that the market development in the US has continued to evolve at the quicker end of anyone’s guess. So, we’re probably slightly ahead on that, but we don’t have great data to support that.

Okay. But conceptually, if the TAM is moving nicely, any change on your view in terms of what filters from the GGR TAM to the affiliates, or is that pretty steady from when you issued those numbers?

Nothing since the IPO would compel us to meaningfully change what we said at the time of the IPO. It’s all coming together as expected. And as Elias says, maybe even a little faster on the sports betting side than expected.

Got it. Okay. Then, have you heard any talk from operators in North America about moving from a CPA model to more revenue share? If not, is that something you’d expect to see more of in the future?

We certainly are not seeing it. I think logically it makes a lot of sense for them. It really helps with their cash flow, right? They’re only – if you pay a CPA, you’re paying it out immediately. If you’re paying revenue share, you pay it out over the lifetime of the player. So, it really helps them with financing their growth. But not every affiliate in the States has the licenses to be able to do that. So, it’s kind of – it takes some – every American online gambling operator is absolutely slammed, right? They’ve got a list of 10,000 things they need to do. And new states launching all the time, they’re – everybody is always playing catch-up, and stuff at the margins doesn’t get a lot of attention. So, I’m not sure the focus is there today to set up the systems and the compliance licenses, everything else to kind of – to do it. That’s not to say it won’t happen in the future, but from our side, it still remains virtually exclusively CPA-focused.

Great. Thanks so much.

Our next question is from Jeff Stantial with Stifel. Please proceed.

Great. Thanks. Good morning, Charles, and Elias. Thanks for taking the questions. I was hoping to unpack the organic revenue growth guide a bit more. By my math, on the acquired assets, the midpoint implies somewhere in the high 30% range for year-on-year organic topline growth. Can you just walk us through some of the puts and takes you’re seeing by region, whether that’s maybe some still difficult stay-at-home compares in the UK, new market entry in North America. Just kind of walk through the four main reasons and regions and kind of walk through the puts and takes.

Yes. If we look at our 2022 guidance, it’s – we expect a combination of organic and acquired growth from the acquisitions that we have already announced. A large component of that we expect to be organic, and a very large component of our organic growth we expect to come from North America. That’s largely driven by new state launches but also just underlying growth in our existing markets. We’ve seen – it’s still early in the year, but we’ve seen early solid trading in Europe, but the big growth driver is definitely North America.

Understood. Thanks. That’s helpful, Elias. And then you talked about the acquired RotoWire assets being a meaningful driver of the variance between guided ‘22 margins and your 40% strategic target. Now that you’re going on, call it, three months with those assets under management, just any sense on where margins for that business are trending more recently, and I guess, what blocking and tackling is still left to bring it more in line to your core portfolio?

Yes. So, the logic behind the RotoWire deal was, this is a digital powerhouse, which needs to change strategic direction slightly. We have the capabilities to give them a steer to dramatically expand that business. So, kind of by definition, it’s not going to happen overnight. But when we think that that’s really going to start to fly is with the start of the NFL, so Q3. As Elias has stated, and we’ve put in all of our communications, the kind of historical margin profile of RotoWire is lower than our targets. But as we essentially build an incremental affiliate business on top of their existing RotoWire business, that’ll have – the cost will be relatively low compared to the revenue. We expect that to drive – that’s the investment case, and we’re extremely confident that we’ll be able to deliver that, but that’ll really start to pay off in the second half of the year.

Understood. That’s helpful. Thanks, Charles. And then I might squeeze in one more, if you don’t mind. Just on the M&A market, how does it feel since the last time we spoke? Is there any sense that the recent rerating that we’re seeing more broadly in the online gambling sector is impacting seller expectations in the affiliate business?

Yes. I mean, if we’re talking to some kind of small to medium-sized European affiliate, I’m not sure how much they pay attention to the US equity markets, to be honest. But certainly, for the bigger stuff, people’s – everybody’s expectations must have come in a bit over the last six months.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Charles for closing comments.

Thank you, again, to everyone for joining us today. We appreciate your support and interest in Gambling.com Group. Today, we’ve given a lot of color on how we expect Q1 to go, and we look forward to sharing the full Q1 results with everyone in May.

Thank you. This does conclude today’s conference. You may disconnect your lines at this time, and thank you for your participation.