Super Group (SGHC) Ltd Q3 FY2022 Earnings Call

Good morning and welcome to Super Group’s Third Quarter of 2022 Earnings Conference Call. Following management’s prepared remarks; we will open the call for a question-and-answer session. I would now like to turn the call over to Lisa Kampf, Vice President of Investor Relations.

Good morning, everyone, and thank you for joining our call today to discuss Super Group’s results for the third quarter of 2022. During this call, we may make comments of a forward-looking nature that are subject to risks, uncertainties, and other factors discussed further in our SEC filings that could cause our actual results to differ materially from our historical results or from our forecast. We assume no responsibility to update forward-looking statements other than as required by law. Additionally on today’s call, we may refer to certain non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for measures of financial performance prepared in accordance with GAAP. We had provided a reconciliation of the non-GAAP financial measures to the most comparable GAAP figures in the press release issued earlier today and available on the Investor Relations page of Super Group’s website. We suggest that all investors refer to the supplemental presentation posted to the IR section of our website, which includes the financial information that will be referred to during this call and additional information for the quarter. Today, I am joined by Neal Menashe, Chief Executive Officer and Alinda Van Wyk, Chief Financial Officer. After our prepared remarks, we will open the call up for questions, and we will also be joined by Richard Hasson, President and Chief Operating Officer. And now, I would like to turn the call over to Neal.

Thank you, Lisa. Good morning, everyone, and thank you for joining us today. Our results for the third quarter of 2022 demonstrate the benefits of our global footprint and our positioning of the company for the longer term. Total revenue was €308 million, and operational EBITDA was €50 million. On a like-for-like basis, meaning not including Jumpman Gaming, which we acquired on September 1, we entertained on average 2.7 million customers per month this quarter, up 6% from the prior year quarter. Alinda will discuss the financial results in greater detail in a moment. I will first elaborate on the progress we have made this quarter. In Canada, we successfully transitioned Betway and Spin to Ontario’s regulated environment. Performance since then has been in line with our expectations, including the excavation and engagement of historic Ontario customers with the new Ontario-specific platforms. Overall, Canada continues to perform and remains profitable for us. Our African business continues to operate at scale on our proprietary technology, and we recently launched in our eighth regulated market on the continent. In the United States, we hope to close the DGC acquisition in January. Betway is currently live in 7 states through DGC, with Louisiana and Ohio expected to launch during the first quarter of next year. Both will be launching on Betway’s global tech, taking the total number of states using this platform up to 4. I want to now talk about three ways we invest in our business: one, investment in technology; two, investment in our brands; three, investment in expanding our product offering through M&A. Firstly, in line with who we are, an online-only technology business, we remain focused on improving the customer experience with ongoing enhancements to our global platform in order to optimize engagement and customer base. As a result, our demand for dedicated tech resources is high, and our requirements have increased over time. Consistent with these requirements, we have entered into an arrangement with Apricot, a major sports book provider outside of Africa, to increase the resources dedicated to Betway’s platform. To cover the spending, we have provided a funding facility to Apricot in the amount of €42 million, which can be drawn down until March 2023, and we have started discussions with Apricot to explore the possibility of a full ownership of the sports book technology for our Betway global product. While the early data from these talks have come down uncertainly, we remain hopeful about the eventual outcome. Next, we have begun to reinforce the Betway and Spin brand around the world. Spin’s best-known brand, Jack White’s, recently enjoyed its first full sponsorship with the Toronto Maple Leafs and the Toronto Raptors during quarter three and went live in October. On the Betway side, following the challenges faced in Q3, marketing has picked up as planned in the fourth quarter to leverage the international audiences of the T20 Cricket World Cup, which ended last weekend, and the FIFA World Cup, which kicks off on Sunday. The third way we expect to invest in growth in our businesses through M&A. As we have previously announced, we acquired a majority stake in Jumpman Gaming during the third quarter, a profitable UK-focused online casino business, in an all-cash transaction. In addition to the opportunities that we see for Jumpman in the UK, given its focus on a more recreational segment of the online casino market, we are also excited about the future expansion of the business into other markets with this proprietary technology platform. Turning now to our capital structure, just under two weeks ago, we launched an SEC registered exchange offer while publicly held warrants. We are also seeking consent from the warrant holders to amend the agreements to cancel the outstanding private warrants. If the exchange and solicitation are successfully completed, the SPAC sponsor and pre-merger Super Group shareholders will cancel their warrants and rights to receive shares of possible earn-out. The purpose of this exchange offer is to simplify our capital structure and reduce the potential dilutive impact of the warrants and earn-outs. We also expect that eliminating the outstanding warrants and earn-out rights will increase our free float and result in less overall volatility in our quarterly results since we no longer have to revalue those liabilities each quarter. We are pleased with the progress we made during the third quarter, and so far in the fourth quarter of this year, our monthly average customer numbers have picked up from August. During October, even excluding Jumpman Gaming customers, we recorded a daily record in excess of 1.3 million customers and reached 3.2 million customers for the month. Super Group is a global, online-only sports betting and online gaming business with continual opportunities for growth, strong financial fundamentals, and an exciting future ahead. I’ll now turn the call over to Alinda for a detailed discussion of our financial results.

Thank you, Neal. Today, I will provide the financial highlights for the third quarter of 2022 compared to the prior year quarter, referencing the adjusted numbers included in the presentation posted on our website. In the third quarter, our net revenue increased by 2% to €302 million. Taking our brand license income into account, our total revenue was €308 million. With reference to EBITDA, we continue to present operational EBITDA, which is EBITDA adjusted for fair value adjustments on warrants and earn-out liabilities, associated and unrealized foreign exchange movements, and non-recurring items. For the third quarter, we achieved operational EBITDA of €50 million. Looking at the results by business segment, our sports book performed very well this quarter, even with the unforeseen football matches in the English soccer calendar. Overall, sports book revenue increased by €30 million or 14%, primarily driven by strong customer acquisition and retention in Africa and APAC, overall growth in Europe and growth in Canada, excluding Ontario, bolstered by a modest decline in Ontario driven by Betway’s transition to regulated markets. Moving on to the casino, net revenue decreased by €8 million or 4%. The decline was driven by inflationary pressures on Spin, especially in the Canadian and APAC markets, and short-term disruptions in Ontario from customers transitioning into the regulated market. These declines were partially offset by growth in Canada, excluding Ontario, despite some competitive pressures, overall growth in the UK, which included Jumpman Gaming as of September 1, and positive momentum in Africa. As it relates to EBITDA margin, business mix had a downward influence, with Betway increasing to 54% of net revenue compared to 49% last year. As you know, the Betway segment has a lower profit margin than Spin. EBITDA margin for the quarter was 16%; that is not where we wanted to be. We remain focused on growth and cost-saving strategies to push the margin back to higher levels in 2023. Diving deeper into expenses, general and administrative costs increased by €22 million due to similar drivers experienced in previous quarters. The key ones were higher staff costs, public company costs, and increased investment in technology. As it relates to marketing cost, we saw a decrease in variable marketing and an increased investment in brand spend. This resulted in a net decline of €8 million. Looking at our financial position, our balance sheet remained strong with unrestricted cash and cash equivalents of €266 million at the end of September, with no debt. In conclusion, results for the third quarter are in line with our expectations, and we are reaffirming our 2022 full-year guidance of total revenue between €1.15 billion and €1.28 billion and operational EBITDA between €200 million and €215 million. I will now turn the call back to Neal for his final remarks. Thank you.

Thank you, Alinda. In summary, Super Group remained financially strong with solid growth prospects. We continue to explore ways to optimize our global footprint and operate more efficiently to leverage our scale. We remain focused on investing in technology and marketing as well as other opportunities that provide us with long-term growth and profitability. I will now turn the call over to the operator to open the call for questions.

Thank you. Our first question comes from Jed Kelly of Oppenheimer. Please go ahead.

Hey, great. Thanks for taking my question. Just a couple, if I may. Just first on the 4Q guidance, it looks like it’s a pretty wide range of revenue outcomes and we are more than halfway through the quarter. So, can you just give us an update on the visibility into 4Q and then can you provide an update just on how we should be thinking around 2023 with sort of the economy macro pressures? And then I have a follow-up. Thanks.

Thanks, Jed. Thanks for your question. As we are all aware, we are very excited about the World Cup that is now ongoing in quarter four. Even though there are fluctuating results in the sports book, we feel optimistic, especially since our casino is usually very strong during the fourth quarter as well. October had some promising numbers like Neal just made reference to, with a good customer increase to about 3.2 million customers for the month so far, which is a good result. Although, you know that there are some volatilities in the sports, especially around the outcomes, and we have seen some of those volatilities coming through in November already, but we have a very strong customer base, and we keep on engaging our customers.

Got it. Okay. And then just on – just in North America, it looks like the North America casino, the impact seems like you are getting your footing around some of the Ontario regulations. The growth decline was less. So, can you kind of give us an outlook on Ontario and Canada? And then can you just talk about anything you are seeing in the macro? Thanks.

Thanks. It’s Neal. Yes. So, Betway has been obviously live in Ontario with respect to the platform. Obviously, switching to a regulated market has its costs in the short term, but there are long-term benefits. We retain a high percentage of our historic customers activated and continue to engage on the new platform, and early signs are positive in line with our predictions included with our guidance. Outside of Ontario and Canada, we have seen competitive pressures in all the markets we operate in—Canada is no exception. But we have our platforms, we have our customers, and we are constantly working to enhance our marketing.

The next question comes from Michael Graham of Canaccord. Please go ahead.

Hey. Thanks a lot. I had a couple. The first one is just on the U.S. market. Can you – you mentioned some of the states that you have been up and running on your global tech stack in Arizona and Virginia for a decent period now. Just be curious how you would characterize performance there relative to others that are still on third-party tech. And maybe just talk about how those states are sort of trending on growth curves? And then I have a follow-up. Thanks.

Thanks, Michael. Richard here. As Neal mentioned, we anticipate DGC will come into the group in January. At that point, we will obviously be able to dive deeper into the DGC business plan and forecast for growth. At this point, as you correctly pointed out, two of the states are running on that Betway Global technology. But it’s still early days for them as a business. It’s something which we look forward to getting more involved in once they become a part of the group.

Okay. Thank you for that. And then sort of a big picture question. You have outperformed in the quarter; you have had some revenue declines because of regulatory changes. I am just wondering at a high level, when you think about the regulatory landscape and the impact on your business for next year, do you see sort of the setup being similar, or do you see things being different?

As normal, we operate in so many countries across the globe—that’s been our business for the last two decades. It’s basically about navigating each of those countries. Each one has its own business with its own right. It’s about navigating it and getting the software, the tech right, and the marketing returns right. But that’s what we do, and that’s what this business is about.

Our next question comes from Bernie McTernan of Needham. Please go ahead.

Great. Thank you for taking the questions. To start, we would love to see if there is any added color on the 3.2 million MAUs in October. That number has been pretty consistent over the past year in terms of 2.6 million, 2.7 million. So, any way to dive deeper in terms of what was driving the strong results in October?

So, basically, it’s all about the engagement on our platforms, across casino and sports. And obviously, lots of sports events happened in October, so it’s about the game that the customer has been re-engaged in. These are high-quality customers. Our aim is obviously to keep bringing them back and keep increasing that, alongside working on improving our margins and operational metrics.

Understood. And then maybe just a follow-up to the first question on the guidance for the fourth quarter; is there a way to think about the drivers in terms of what would cause you guys to hit the high end of the range versus the middle or versus the low end?

Thank you, Bernie. Like I have said, the volatility of the sports book obviously makes it not so easy to plan towards the end of the quarter. But we feel comfortable that the casino is strong. The results should speak for themselves by the end of the World Cup. As you have recognized, there are fluctuating match results that are unpredictable. So, we just have to ensure that we keep engaging the customers. Luckily, our customer base is strong, mitigating the volatility in the results.

Got it. And then just lastly, the Jumpman transaction; we would love to get your thoughts on the rationale for the deal. And then if you are able to size how big of a revenue generator that asset is?

So, hi Bernie, Richard here. The rationale for the transaction with Jumpman is that it runs proprietary technology and has built a great platform over the past many years. While it is a UK-focused business, it’s an opportunity for us, and we are very excited about helping them expand into additional markets. They appeal to a different segment of the market—much more recreational compared to our existing customers. In terms of size of revenue, we disclosed previously that in the month of September, they achieved around €7 million of net gaming revenue. At present, that is all we can share regarding the transaction.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. This concludes our call today. We thank you for your interest and participation, and you may now disconnect.