Gambling.com Group Ltd Q2 FY2024 Earnings Call

Hello, everyone, and welcome to Gambling.com Group's Second Quarter 2024 Results Call. I am Peter McGough, Senior VP of Investor Relations and Capital Markets. I'm joined by Charles Gillespie, Gambling.com Group's Co-Founder and Chief Executive Officer; and Elias Mark, Chief Financial Officer. This call is being webcast live through 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. You may also contact Investor Relations support by emailing investors@gdcgroup.com I would 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 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 earlier this morning, and reconciliations of these non-IFRS financial measures to their most directly comparable IFRS measures are included in the appendix to the presentation and the press release, both of which are available in the Investors tab of our website. I'll now turn the call over to Charles.

Good morning, and thank you for joining us. Strong NDC growth led to record Q2 revenue and adjusted EBITDA. Our year-over-year revenue growth of 18% to $30.5 million and adjusted EBITDA growth of 19% to $11.2 million highlight the benefit of our international diversification. We generated very strong iGaming growth across Europe, including the UK, and our business in North America was resilient in the face of exceptional performance in the comparable period. Stepping back from our phenomenal quarterly results and looking at the bigger picture, our performance in Q2 underscores three key factors that reflect the strong position Gambling.com Group occupies in the online gambling ecosystem, a position we are very confident we will continue to build upon. First, our team is exceptional at addressing in real-time any changes in the operating environment to optimize our performance. As we discussed on our Q1 call, in early May, Google started to deprioritize content from most media partnerships. This had an immediate impact on contributions from our media partnerships, which led to the conservative guidance revision we provided on our Q1 call. The difference in our Q2 performance compared to the expectations we provided on May 16 is primarily due to the fact that our team was able to respond immediately to the changes and recalibrate our portfolio of owned and operated sites faster than had been initially expected. To date, the effects of the Google policy shift have also been less pronounced than originally expected. The second bigger picture factor to highlight is the critical value we continue to create for our B2C online gambling operator clients. For nearly 30 years, performance marketing has proven to be one of, if not the biggest, source of new players for growing operators. We estimate that about 40% of the iGaming and 30% of the sports betting customers and operators as databases in established markets were delivered by the performance marketing channel. While these percentages are lower so far in North America, we expect that they will continue to trend toward the established marks as levels, as players continue to mature, and certainly as iGaming expansion eventually takes hold. Most importantly, as demonstrated by our Q2 results, we are consistently growing our industry's share on a global basis and we are better positioned than ever before with the right assets, technology, and teams to further this growth. And the third factor I want to remind everyone of this morning is the relentless digitization of the gambling and advertising worlds. While in certain established markets, online gambling revenue dwarfs land-based gambling revenue, many of the world's largest economies are still at the beginning of their relationship with this industry and digital advertising continues to grow in importance and influence as it offers marketers the highest level of visibility and certainty for the return on their investments. With our portfolio of platinum brands such as Gambling.com, Bookies.com, and Casinos.com, we are in the sweet spot of this convergence, controlling the valuable high intent audience determined to become customers at our clients' websites. These factors combined with our strong first half performance now give us confidence to raise our revenue and adjusted EBITDA guidance for this year. The mid-points of our new guidance now reflect year-over-year revenue growth of 15% and adjusted EBITDA growth of 24%. This confidence in the business is the reason we have repurchased over 6% of our outstanding shares to date. We also remain as active as ever in evaluating M&A opportunities and will not hesitate to pursue the right targets. Our balance sheet and free cash flow generation enable us to both repurchase shares and fund acquisitions. And finally, we remain confident we are on a clear path towards generating $100 million in adjusted EBITDA given our exemplary execution, high cash flow generation, organic market share gains and disciplined M&A growth focus. Now, let me turn the call over to Elias for a review of the second quarter financial highlights and details on our revised full year outlook.

Thank you, Charles. Revenue of $30.5 million was a second quarter record as we delivered more than 108,000 NDCs to customers, up 19% compared to the year ago period. The 18% year-over-year revenue increase primarily reflects strong growth in iGaming revenue across Europe. Revenue in the UK and Ireland rose 18% year-over-year, out of Europe was up 111% and rest of the world revenue grew 70% following strong performance by Gambling.com and our other owned and operated assets and the initial contributions from the acquired Freebets.com and related assets. Revenue in North America was stable year-on-year when factoring out the typically strong OSB performance we saw in Q2 last year, which we discussed at the time. Inclusive of such performance, North American revenue was down 8% year-over-year. Gross profit increased 16% or $4 million year-over-year to $29.1 million. Cost of sales grew 60% year-over-year to $1.4 million, but was down 36% from the first quarter. Our cost of sales, which are directly related to our media partnership revenues, were higher in the second quarter than we anticipated at the time of our Q1 call as a higher level of this business was sustained through the quarter than expected at the time. Gross margins increased to 95% from 92% in the first quarter. Total operating expenses declined 15% to $20.8 million, reflecting the elimination of fair value movement in contingent consideration and a modest decrease in G&A, partially offset by increases in sales and marketing and technology expenses. Adjusted EBITDA increased 19% year-over-year to a second quarter record $11.2 million compared to $9.4 million in the year ago quarter. The Q2 adjusted EBITDA margin of 37% was up from 36% in the year ago quarter. Adjusted net income for the second quarter of 2024 rose 13% to $7.4 million from $6.5 million in the year ago period, while adjusted diluted net income per share of $0.20 increased 18% from $0.17 per share in the second quarter of 2023. Operating cash flow of $0.2 million includes $7.2 million of the final BonusFinder.com payment; excluding this payment, operating cash flow would have been $7.4 million. Free cash flow was $6 million in the second quarter compared to $8.7 million in the year ago quarter, reflecting working capital movements and increased capital expenditure related to our new offices in the U.S. During the second quarter, we repurchased approximately 834,000 shares at an average price of $8.17 per share. To date, we have repurchased approximately 2.3 million shares at an average price of $8.76, representing more than 6% of the total outstanding shares. Earlier this week, we completed repurchases for the entirety of the previous $20 million share buyback authorization. Yesterday, the Board approved an additional $10 million authorization to continue share repurchases. As of June 30, we had total cash of $7.5 million, a $17.8 million quarter-on-quarter decrease reflecting cash utilized for share repurchases, the final cash payment of $13.6 million for BonusFinder.com, and the initial $20 million cash consideration paid for the acquisition of Freebets.com and related assets. As of June 30, we had drawn a total of $18 million on our $50 million credit facility. This morning, we raised our guidance for 2024 revenue to now be between $123 million to $127 million, with a mid-point representing 15% year-over-year growth. The mid-point of our new higher adjusted EBITDA range of $44 million to $47 million represents 24% year-over-year growth. Looking at some of the factors that comprise our outlook for the year, we continue to see strong demand for consumer signups for new player accounts and operator demand for performance marketing services. As Charles highlighted, we expect to manage our portfolio websites to grow revenues in 2024, despite the impact of a Google policy change on our media partnerships. For the full year 2024 period, our guidance does not include contributions from any new acquisitions. The guidance also assumes no additional U.S. state launches beyond the recent launch in North Carolina. We now expect full year cost of sales of $6.5 million, of which $3.7 million was incurred in the first half of the year. Finally, our guidance assumes an average euro to USD exchange rate of 1.09 throughout 2024.

Thank you. We will now begin the question-and-answer session. The first question comes from Jeff Stantial with Stifel. Please proceed.

Hey, thanks. Good morning, Charles, Elias. Thanks for taking our questions.

Hey, Jeff.

Maybe starting out on the current customer acquisition environment that you're seeing in North America. More specifically, we've heard from several operators this earnings season that the volume of users being acquired is surprising them to the upside, while cost per user acquired continues to decline more specifically for the scaled players. I guess, on that first dynamic, are you also seeing an uptick in new organic searches on your sites recognizing that noisy physical changes in a fragmented affiliate landscape? I'm just curious if you're able to discern all the incremental user cohort as well. And then on the second on the declining tap, are you seeing any big shift away from affiliate channels or pricing pressure? Or is it reasonable to conclude that this comment really more refers to economies of scale on the brand awareness side of operator marketing budgets? Thanks.

From our perspective, operators remain consistent in their approach to affiliates without making significant changes quarter-to-quarter or year-to-year. The primary factor driving our business is supply, specifically the number of people searching for what we provide, and those trends are consistently positive. The volume of searches for high intent keywords in the United States is on the rise, and we are capturing an increasing share of that market. While operators may exhibit varying strategies from quarter to quarter, overall, the revenue we generate with clients is primarily driven by the supply of prospective customers we can connect them with. It’s understandable that their customer acquisition cost is decreasing because, as they have indicated publicly, they have reduced spending on ineffective channels. They’ve cut back significantly on TV, radio, and outdoor advertising, which lacks trackability and attribution, while their dealings with affiliates have remained stable. They recognize the effectiveness of affiliates since it is easily measurable. Thus, there is no incentive for them to reduce their investment in that area. Consequently, the decrease in customer acquisition costs can be attributed to their improved efficiency, leading to a larger share of their budget being allocated to companies like ours.

That's great. Thank you for that, Charles. And then for my follow-up, turning to the comments made on your media partnerships and the raise to full year cost of sales guidance, I think both you, Charles and Elias commented on this a bit, but I'd love to dig in a little bit further. So contribution from media partnerships is surprising a bit to the upside. Do you think this is more of a timing phenomenon, just in terms of taking time for Google to sort of manually push back on some of these media partners involvement and affiliate offers? Or do you think this is kind of more durable with more of these media partners likely to stick around even after these changes roll through? And let me know if that makes sense. Thanks.

That's a great question and we've been contemplating it as well. At this stage, we have a decent understanding of the situation, although it's not entirely clear-cut regarding our position with Google. When we adjusted our guidance in May, we adopted a cautious approach due to the recent changes and our limited visibility. Now that we have more insight, the contribution for Q2 exceeded our previous guidance. Looking ahead, we now anticipate that the cost of sales related to media partnerships will be around $6.5 million for the full year 2024, up from our earlier guidance of $4.7 million. In the first half of the year, we already incurred $3.7 million in costs. From our perspective, there remains a promising future for these media partnerships, provided they are the right ones. We've certainly seen a significant separation between beneficial partnerships and less effective ones. While we do not engage in many of these partnerships, those we do establish are with substantial publishers, which has proven advantageous as these collaborations develop. However, we expect these partnerships to be less frequent than in the past. Our focus continues to be on nurturing strong relationships with our media partners while exploring various ways to utilize our capabilities to assist them beyond just organic SEO. There are numerous avenues we can pursue, and this is an opportune moment to fully leverage those opportunities. As indicated by our Q2 results and increased guidance, our owned and operated sites performed exceptionally well and exceeded our expectations during the quarter.

That's great. Thanks for that color, Charles, and congrats on the strong quarter.

Thank you. The next question is from Barry Jonas with Truist Securities. Please go ahead.

Hey guys, good morning. As we think about newer U.S. states versus more mature, is there a sizable difference in NDC growth? I mean, I guess we hear concerns around slower state legalizations and I just want to better understand that. Thanks.

Yes. One key point we want to emphasize is that there is a substantial and sustained growth opportunity once the new states finish their launch phases. During the first three months, we see a surge in interest and demand, leading to significant activity, but then it tends to stabilize. However, after that initial period, growth continues to increase year over year without limitation. This trend is evident in North America, and it gives us confidence in expecting growth in specific areas of our portfolio this year, as well as overall growth in North America next year. It’s important to recognize the ongoing growth in some of the earlier regulated states, such as New Jersey, which continues to show expansion. While we are eagerly anticipating the next new state launch, we are equally optimistic about the business continuing to grow in the medium and long term, even without new state introductions.

That's great. Thank you for addressing that. And just as a follow-up, curious if you could talk a little bit more about the M&A pipeline, any noticeable changes since Q1 earnings and any areas you maybe are a little more focused on today than others?

Yes, we continue to have numerous productive discussions, but we remain as selective as ever. We look forward to making an announcement at the right time, but with our strong organic growth, we don't feel pressured to act. We’ve already completed a notable deal this year with the acquisition of Freebets.com, which is performing better than expected. As mentioned before, we are dedicating considerable time to evaluating opportunities related to the real money online gambling affiliate business we are familiar with. There are many possibilities for us to offer more products to our current clients or to utilize our existing expertise in complementary businesses within the gaming sector that share similar margins and cash flow characteristics. We will be thrilled to announce something, but we cannot provide further details at this moment.

All right. Fair enough. Congrats on a great quarter. Thanks.

Thanks, Barry.

Thank you. The next question is from Chad Beynon with Macquarie Asset Management. Please go ahead.

Hey, good morning. This is Aaron on for Chad. Thanks for taking our question. Just kind of going back to Google for a second. There was a recent court ruling that Google has been running an illegal monopoly on search. Can you just share any thoughts on how that might impact your business?

Hey Aaron, that's a good question. Reflecting on the Microsoft antitrust case, it took nearly a decade before any significant progress was made in enforcing the government's antitrust objectives. So, I don't expect anything to happen anytime soon. It could take five to ten years before we see any developments. When that happens, we can speculate on the implications of those changes, but five to ten years is quite a long time in the tech world. By the time they reached the conclusion with Microsoft, the browser's significance had diminished compared to when the process first began, and it seemed to have been a wasted effort. What’s more relevant to us is how quickly consumer search habits are evolving. As of now, we haven't observed any shifts due to generative AI or AI-driven search engines. Google's search volume remains higher than ever, and traffic has not changed, which reassures us. More than a year into this new era of generative AI, traditional search and AI search are simply different products serving different needs, and users are continuing to rely on Google as they have for a long time. So if there's a break-up or spin-off of Android, I believe it will be a while before that occurs, and I don't see the search business being significantly affected. But feel free to ask me again in five years.

Got it. Appreciate that. And then with regard to Freebets, I believe we're still in the integration window you talked about last quarter, but can you update us on how the integration is going and whether your expectations for its contribution in 2024 have changed at all? Thank you.

Sure. We are a few months in at this point, and we have been consistently trending ahead of expectations in terms of the revenue produced by the acquired assets. The acquisition included a substantial base of NDCs, previously referred on a revenue share basis, and this is where we have seen actuals exceed our expectations. We've already successfully migrated certain aspects of the acquired portfolio to our technology stack, including our ad tech, and we will continue our integration work across the entirety of the portfolio for another few quarters. But we expect to see benefits from this in Q4 as we drive increases in the number of NDCs produced by these assets, and we now expect that the assets will exit 2024 on a materially higher run rate than what was implied by our initial guidance when we announced the acquisition.

Understood. That all sounds great. Appreciate all the color. Thanks, guys.

Thank you. The next question is from Clark Lampen with BTIG. Please go ahead.

Good morning, everybody. Thanks for taking the questions. Charles, I wanted to see if maybe we could just drill down a little bit more on expectations over the balance of the year for growth, I guess in two ways, I guess one, sports betting versus iGaming, but then North America versus Europe. Should we expect, I guess, most of what we've seen in 2Q and the first half of the year to sort of continue over the balance? And I wanted to, I guess, kind of also follow up on your point around exit rates of growth for the year. If we're thinking about the performance business in general, sort of being back on track right now, Freebets, I guess, really hitting its stride, I guess, towards the end of the year. What does this, I guess, kind of suggest right now about the medium-term organic growth profile of this business overall? And then, maybe for Elias, I guess, as part of that, what does, I guess that medium-term growth rate translate to now, from a cash flow standpoint, we have a pretty good sense of the outflows that are ahead. If we're thinking about inflows and I guess, cash flow conversion off of this business, maybe give us a sense of, in addition to the top-line outlook, what it translates to the bottom line. Thank you.

Hey, Clark. To clarify, some areas of our North American portfolio have experienced year-on-year growth in 2024 and are expected to continue growing in the latter half of the year. However, our media partnership business, which contributed significantly to our North American revenue in the second half of 2023, will be much smaller this year. Therefore, we do not anticipate overall growth in 2024 for North America. Still, we believe we will gain meaningful market share in the region. Looking ahead, we forecast modest growth for North America in 2025 based solely on same-state sales. Additionally, once expanded regulations come into play, particularly in iGaming, we foresee growth accelerating with more new state launches and new operators entering the market. It's important to remember that we are a global business with 18 years of experience operating outside of North America. We achieved an 11.5% growth in the UK and Ireland and a 75% growth in other Europe during the first half of the year. While we haven't provided specific guidance for 2025 yet, we expect low double-digit organic growth in North America even without the addition of new states. Regarding the Freebets acquisition, we initially projected $10 million in revenue and $5 million in adjusted EBITDA for the last three quarters of 2024. The first quarter is typically one of our strongest, so it’s important to consider its impact on our annualized figures. For 2025, we expect to end 2024 with those assets operating at a significantly higher run rate, positioning us for growth especially in other Europe and the UK and Ireland next year.

I could just add, Clark, to the second part of your question on our expectations for the second half of the year. And as you said, the expectation is that the UK and Ireland, other Europe and rest of the world will continue to be the growth drivers in the second half, as we've seen in the first half of 2024. If you look at margins with the current proportion of our media partnership revenue, our H1 margins are indicative of run rate and correlates with the mid-point of our full year guidance. So our guidance, including $6.5 million in cost of sales for 2024 is expected to produce gross margins in the mid-90s. And the mid-point of our adjusted EBITDA margin for the full year is 36%, which is consistent with the first half of the year.

Thanks very much.

Thank you. The next question is from Ryan Sigdahl with Craig-Hallum Capital Group. Please go ahead.

Hey, Charles, Elias. Hi, good day, guys. I want to start with other Europe, really nice strength and acceleration there, I guess. Anything to call it specifically, and then maybe more broadly speaking, the benefit you guys saw from the Euros 2024?

To begin with Euros 2024, our sports betting business is mainly focused in the U.S., and we have a global strategy centered around iGaming. We avoid entering markets without iGaming, with the notable exception of the U.S. due to its significant long-term iGaming potential. Starting with sports betting now positions us well for that promising future. In terms of other European markets, Freebets experienced positive margins that surpassed expectations, aided by the Euros. Additionally, we have obtained new licenses in Greece and Romania, and we are now operational in both markets, which we anticipate will drive growth in the medium term. This will help us sustain elevated growth rates moving forward. The Freebets acquisition contributed to this growth, along with organic development from our own operated assets.

For my follow-up question, Rush Street's BetRivers has announced they are refining their affiliate strategy by discontinuing certain low ROI affiliates starting September 1, while focusing on others in iGaming specific states. I have two parts to my question. First, did Gambling.com sites receive that termination letter? Second, how do you assess the performance of your properties in terms of customer ROI compared to previous years and in relation to competitors as operators adjust their strategies?

Yes. From a customer ROI perspective, we prioritize being iGaming focused and achieving the highest player value. We understand the keywords and search terms linked to the highest player values, which are the most competitive and challenging to secure. We've always targeted those first, and our clients recognize this. They understand that we are one of the best affiliates in terms of ROI. Although it's difficult to obtain concrete data from them due to potential impacts on their negotiating power, we have consistently received positive feedback. Regarding RSI, we collaborate with them and over 250 other operators, and we respect their team. However, they are a smaller client for us, and while we continue to support them in various states, their recent pullback in some areas will not impact us, and we raised our guidance this morning.

Great. Thanks, Charles. Good luck, guys.

Thank you. The next question is from David Katz with Jefferies. Please go ahead.

Hi, good morning, everyone. Thanks for taking my question. We've discussed North America quite a bit, but could you provide some qualitative insight on the long-term $100 million goal? How much of that is expected to come from North America? I assume that segment is projected to grow more rapidly, unless I'm mistaken.

Yes, we are very confident in reaching $100 million in adjusted EBITDA in the next couple of years. However, we won't set a specific timeline until we have more clarity on new state launches in the U.S. and from a mergers and acquisitions perspective. M&A will certainly play a role, particularly in North America. We often get inquiries about Latin America, and while it's not essential for us to reach $100 million in adjusted EBITDA, there are significant opportunities there. Brazil is particularly noteworthy, and once it fully regulates and businesses start paying taxes, the customer lifetime values will change considerably. Although we're not heavily invested in Brazil at this time, we find both Latin America and Brazil to be intriguing opportunities worth considering. Ultimately, I expect us to achieve the $100 million milestone mainly through the markets we already operate in, alongside new state launches and some M&A, without needing to make a massive commitment to regions where we aren't currently active.

Perfect. I think you, Charles, maybe you set up my follow-up question pretty nicely, which is intuition suggests that should U.S. states raise tax rates, that changes the value proposition for operators and works to your benefit. Is that a fair assumption for us to make?

Yes and no. If taxes increase, it reduces player lifetime values, impacting everyone in the ecosystem, including the players. The recent DraftKings surcharge has generated a lot of discussion, and while they retracted it, I found it quite intriguing and a smart move. The method of implementation can be debated, but the reality is that these costs are genuine, and operators will inevitably pass them on to players, even if just partially. This approach of categorizing it separately is a transparent act that draws attention to the issue. It's crucial to focus on this matter because high tax rates are counterproductive. They hinder market growth and weaken the operators' competitive stance against the black market, ultimately reducing the tax revenue for states. I commend DraftKings for highlighting this issue. Furthermore, the impact affects everyone; our ability to sell our traffic relies on its value, and higher taxes do not help.

Longer discussion than we have time for. Thank you very much.

Thanks, David.

Thank you. Ladies and gentlemen, that was the last question for the question-and-answer session. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.