Super Group (SGHC) Ltd Q1 FY2023 Earnings Call

Good day. And welcome to the Super Group Results for the First Quarter of 2023. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Lisa Kampf, Vice President of Investor Relations. Please go ahead.

Good morning, everyone. And thank you for joining our call today to discuss Super Group’s results for the first quarter of 2023. 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. In addition, we will speak to our financial results and metrics for the first quarter of 2023 in two parts, highlighting our profitable and cash-generative global business separately from our investment in the U.S. This aligns with the annual guidance that we have provided for 2023 and is consistent with both how we view our business internally and how we will report going forward. We recommend that investors refer to a supplementary presentation posted to our website. On this call, I’m joined by Neal Menashe, Chief Executive Officer; Richard Hasson, President and COO; and Alinda Van Wyk, Chief Financial 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. For the Betway, we reported strong first quarter financial results with net revenue, excluding the U.S. of €332 million and operational EBITDA of €51 million. Separately, for the U.S., our net investment for the quarter was €17 million. Year-over-year comparisons for our non-U.S. business are difficult this quarter for three reasons. Firstly, our business in Canada in quarter one 2022 was still benefiting from COVID lockdowns. Secondly, in 2023, many of the local currencies in which we trade, including the Canadian dollar, depreciated meaningfully against the euro, our reporting currency. And thirdly, our Betway has materially reduced. So it’s helpful to look at our results sequentially to appreciate the progress we have made. Net revenue for the fourth quarter of 2022 was boosted by the FIFA and Cricket World Cup, so it’s an achievement that quarter one of 2023 managed to have additional net revenue growth on top of that. Even more impressive, our operational EBITDA increased significantly, up 21% from the fourth quarter of 2022. Alinda will go through our financial results for the first quarter in greater detail in a moment and Richard is here with us today to provide you with an update on the U.S. Our efforts to strengthen the company continue as evidenced by ongoing discussions with our software partner Apricot towards bringing even more uptake in the second half and our continued evaluation of growth opportunities in current and new markets around the world. Operationally, we remain focused on achieving economies of scale in a targeted manner towards our goal of a medium-term operational EBITDA margin in excess of 20%. Our largest expense line item is marketing. Currently, we are spending 27% of net revenue to support the long-term growth of the business. This is a conscious decision to spend more than the sector average and I’m watching it very carefully to ensure we are seeing returns. On economies of scale, I want to point out this is a market-by-market objective. Key costs such as regulatory, staffing and technology do not generally rise directly in line with revenue. Therefore, as revenue grows, disciplined spending ensures that operating leverage kicks in. This is key to our business model. Once our fixed costs are covered, then incremental revenue is far more profitable and significantly improves our EBITDA margin. I’m very pleased to say this was well illustrated in the month of March, where record numbers for customer hold and net revenue resulted in operational EBITDA margin of over 20% for the month. So far this year, we have set multiple records one after the other for daily active customers with March comfortably breaking the monthly record at well over 3.8 million for the month. For the quarter, average active customers significantly increased to 3.5 million per month from 2.6 million in the prior quarter, a 74% increase. Financially, we remain strong and flexible. There is €246 million of unrestricted cash on our balance sheet, which we are using to support the expansion of our U.S. footprint and other markets, as well as gaining further control of our setbacks in support of the continued growth of our business. In addition to this, our consistent profitability and cash generation also allow us to explore potential M&A opportunities, as well as flexibility in returning capital to shareholders. Now turning over to some of our key markets. Firstly, after much anticipation, the U.K. proposed gaming reforms were released at the end of April. We are pleased that this results in further clarity for the industry and a level playing field for all operators. Super Group took steps early on to proactively prepare for this. So we expect that some pro-reform will have a minimal impact on our U.K. business. Overall, for Super Group, European markets are looking up. The U.K., in particular, has seen strong growth in Betway, as well as Spin, which has benefited from the inclusion of Jumpman Gaming. In Canada, revenue has reduced year-on-year due to unfavorable currency fluctuations and the short-term impact of Ontario’s regulatory transition. Trends in Ontario are encouraging and our Canada business remains robust and profitable, including in Ontario. Africa continues to perform very well. The African markets are a great example of where we quickly realized marketing spend efficiencies led by our worldwide global brand awareness for Betway complemented by targeted localized marketing. This has resulted in multiple new records in customer numbers in both sports betting and casino, and record net revenue and EBITDA despite negative currency fluctuations. Africa’s strong performance highlights that our business continues to evolve and diversify. Together with growth in Europe, this has given us an improved global geographic balance. Overall, I’m very happy with the competitive progress globally, and I am proud of the record results achieved in March, all of which I’m pleased to say were exceeded in the month of April, even with one day less in the month. I’ll now turn the call over to Richard to discuss our progress in the U.S.

Thank you, Neal. Good day, everyone. The acquisition of DGC closed at the beginning of quarter one and we are very excited about the opportunity that the U.S. presents. To recap, the Betway Brand is currently operating in eight states, with market access to a further six. The size of the U.S. market, with a total addressable market of $54 billion, is, of course, very attractive and one that is far too big to be ignored. With DGC still in its early stages, the next three to five years are going to require significant investments, including an estimated €70 million for this year and around €80 million for next year. Some of you will look at this investment and ask if we have ever spent that much in a single market, but we don’t look at it that way. For us, each state is a separate market, and in that context, this is quite normal and exciting for us. Why? Because this investment is very manageable for us and easily funded by our existing cash flow. The source of expansion on a market-by-market, state-by-state basis is how we’ve grown this business for more than 20 years, and we see it as a great opportunity for upside on top of our highly profitable existing global business. We will only enter states where we see a realistic path to growth and profitability. States that offer both online sports betting and gaming are more attractive to us, and we continue to bias towards those. Same as we do everywhere else around the world, we will continuously evaluate our returns and will not be afraid to exit markets where this part is less clear. Around the globe, casino is a key focus for us. It makes up over 60% of our revenues and we will maintain this focus in the U.S., implementing the same dual offering strategy wherever we can. We have therefore secured second iGaming schemes in both New Jersey and Pennsylvania, where we aim to launch our leading Spin brand, Jack White’s petite, later this year. For now, within DGC, the focus is very much internal and on our existing states with a key priority being the migration onto the Betway Global Technology platform. During this time, we expect to keep localized marketing relatively small and ensure that the per-state unit economics stack up. On a state-by-state basis, from the date when we roll out our Betway Global Tech and begin significant investment into marketing, we expect that we will need about 18 months to fully assess viability for that state. After which, we aim to reach breakeven within another 18 months. Overall, as of now, we expect our first EBITDA positive quarter for the U.S. to be in 2026, and we expect 2027 to be our first EBITDA positive year. Of course, should the footprint of live or accessible states expand, then these numbers will change accordingly. And that takes me to our investment thesis. In our view, the best way to see DGC is essentially as a call option in the U.S. Our global business will continue to run as before. We expect it to continue to grow and generate cash, and the DGC acquisition is an opportunity for upside on top of that. We’ve shown all over the world that we do not require significant market share to achieve profitability, and the U.S. is no different. We look forward to updating you through our journey. I will now turn the call over to Alinda, who will discuss our financial results in more detail.

Thank you, Richard. I will now take you through our financial results for the quarter, where we have seen continued momentum from quarter four last year. I will start by discussing our global financial results separate from our investment in the U.S. Excluding U.S. results, total revenue for the quarter was €332 million. Net revenue, which does not include brand license fees, grew to €321 million, a 2% increase from last year. As Neal mentioned, the current quarter is not directly comparable to the first quarter of 2022 due to currency fluctuations and the change in our brand fee. Sportsbook revenue increased by €9 million in the first quarter, growing by 8%. In casino, net revenue decreased by €3 million or 1%. The key drivers behind the overall increase in net revenue include a stronghold boosted by a record month in March following the worst hold during February, strong customer acquisition and retention in Africa, and continued positive growth in most European markets, including the U.K., which was positively impacted by the addition of Jumpman Gaming. This growth was partially offset by lower revenues from Canada due to the Canadian dollar weakening against the euro, as well as Ontario’s ongoing transition to a regulated market. The impact of the euro strengthening against other local currencies that we trade in and lower revenue from the APAC region. Customer numbers for the sportsbook increased by 33% compared to Q1 of 2022. We are pleased to see this continued momentum of strong customer numbers from the first quarter of 2022, with month-on-month growth during the first quarter of this year. This was largely due to effective marketing strategies, strong buyback results and good retention initiatives. Even though we saw a slight decline in the casino revenue numbers, our customer growth remains impressive, up 45% in the first quarter compared to last year. The increase in customer numbers was due to the strong acquisition of new customers, which grew by 29% year-on-year, helped by solid returns in marketing and a good uplift in Canada, including Ontario. Looking at the bottom line, we achieved operational EBITDA for the ex-U.S. business of €51 million for the first quarter of 2023. Compared to the first quarter last year, operational EBITDA was impacted by lower brand license fees, higher cost of revenue, which includes regulatory fees and taxes, as well as agency costs in Ontario, and an increase in general administrative costs, which was mainly due to inflationary increases and higher infrastructure expenses. This was offset by lower and more effective levels of investment in marketing. Our marketing spend sits at 27% of net revenue, which is a result of a conscious decision that we have made to invest in the long-term growth of the business. While we could reduce this marketing expense by 5% to 7% of net revenue, which would result in our EBITDA increasing substantially in the short term and align us more closely with what our competitors are spending, we don’t believe that this is in the best interest of our business in the long term. To contextualize this, if we would reduce our marketing in quarter one by an amount equivalent to 5% of net revenue, then an additional €16 million would have adopted the bottom line. EBITDA margin was over 15% for the quarter. We remain focused on bulk growth and cost saving strategies to drive margins back to higher levels in 2023 and beyond. Our EBITDA margin has already improved sequentially from 13% in the fourth quarter of last year, despite some customer-friendly sports results and early days in the delivery of our expected cost efficiencies. In March, we comfortably proved how operating leverage works in our business, reaching a level of scale that resulted in an EBITDA margin of greater than 20% for the month. Turning now to our U.S. business. Our net investment for the quarter was €17 million. Funding our U.S. expansion from internal reserves remains very manageable for us and we ended the quarter with an unrestricted cash balance of €246 million. Our balance sheet continues to remain strong following the acquisition of DGC. The acquisition resulted in DGC stake of $129 million coming onto the Super Group’s consolidated balance sheet, which is directly offset with a restricted cash balance of the same value and has been accounted for separately since we announced the DGC acquisition. We are in the process of setting the date with the restricted cash, and the balance sheet will therefore remain debt-free. To conclude, here’s how I think about it. Our record-breaking numbers of customers are one of our key engines for revenue. We continue to invest for growth in the business around the world, and driving cost efficiencies throughout the business remains a key focus. We are, therefore, confident in our outlook for the year and we are reaffirming our guidance for both the U.S. and non-U.S. business for 2023. I will now turn the call back to Neal. Thank you.

Thanks, Alinda. Super Group has delivered another solid quarter and remains profitable and financially strong. We have many avenues of future growth across the globe to be excited about. To wrap up, let me summarize where we are. March was a record month and April was even better. Key global markets such as Canada, Africa and Europe are growing well in their local currencies, some of them quite strongly. Our U.S. business is developing according to plan. It’s a marathon, not a sprint, and we’ve got the legs for it. We have a firm hand on our cost synergy and operating leverage benefits are coming through strongly, as we saw in March and again in April. We will continue to optimize our debt, which will add to our upside in the long run as we take better control of products and costs. Overall, we have done well in this quarter and I’m optimistic for the future. First, I’m a glass-half-empty kind of CEO. I don’t waste any time looking back at what we achieved. I’m far more interested in all the work that we still have to do and the great opportunities that lie ahead of us. I’ll now turn the call over to the Operator to open the call up for questions.

The first question comes from Jed Kelly with Oppenheimer. Please go ahead.

Hey. Great. Thanks for taking my question. Just first one on the outlook and the guidance. So you said you’re reaffirming your guidance. If I understand you correctly, April was a record month. Can you kind of tell us how May is trending, and I mean, do you expect to see sequential growth in Q2? And then on the U.S., just we are seeing sort of market access, the cost for market access go down, we are seeing some consolidation. Just when you think about the U.S., I guess, the one thing to highlight as well, there are 50 different regulations with all the states, how do you think about competing against the players that can actually leverage advertising and amortize that spend across 50 states as you think about it? Thank you.

Thanks, Jed. I’ll start off and then I’ll hand over to Richard for the U.S. question. Yes. So, April looks really good and promising as a good start for Q2. May is not looking bad either. But regarding our guidance, we feel comfortable that, obviously, these targets that we set for ourselves are going to be reached. But it’s really only four months into the year, so it’s very early to make a projection about Q3 or still results and then beyond, but it’s looking promising.

Thanks, Alinda. Hi, Jed. So coming on to the U.S., the way we look at it is applying the same toolkit that we have applied to other markets across the world. In terms of our branding, we have, as you know, the single global online sports betting brand Betway, where we have the ability to spend for global eyeballs and then actually amortize that spend across the world. So not just in the U.S., and then, of course, into other markets complementing that global spend with very localized marketing.

Got it. As a follow-up regarding the regulatory situation, I understand there were some challenges last year in Germany and the Netherlands. Looking ahead to this year and considering the regulatory landscape, particularly with the situation in the U.K., will the regulatory environment be easier or more challenging this year? Thanks.

Okay. Well, firstly, Germany obviously has been dealt with, and there still are licenses, which you can now plan for. Netherlands, we are still waiting for our license there. But compared to the other markets in the U.K., the situation is no different than how it’s been before. I think actually this year has a brighter outlook. So the U.K. white paper and the other markets are expected to show improvement as we await the final legislation to come back, and we’re in a very good position.

The next question comes from Bernie McTernan with Needham & Company. Please go ahead.

Great. Thank you for taking the questions. Maybe just to start following up on Jed’s last question, the really strong results in March and into April. Anything to peel back the onion in terms of what from either a geographic standpoint or a product standpoint in terms of what’s driving the strong results?

Well, as Alinda mentioned, it’s good customer numbers. It’s obviously a good sports hold and our continued focus on casino. And what happens in these businesses, when all of these things come together, your revenue obviously increases and then you get this huge operating leverage. And that is key to what we saw in March and I think in April. And for us, it’s about every country making up our global portfolio, quarter one global revenue, and it’s about each country now being operationally profitable per region. This means every extra bit of revenue we get is at very high margins, and this is true for each of our countries.

Understood. Following up on the comments regarding medium-term operational EBITDA reaching 20% or higher, how much of this is attributed to a decrease in sales and marketing, revenue growth, and the reduction in U.S. investment? I'm considering the significant factors that contribute to achieving this goal, particularly with March exceeding 20%.

Yeah. Thanks, Bernie. That is why I tried to put in an illustrative scenario to say, if we cut potentially 5%, that will go straight to the bottom line. That’s not how we run our business and that’s what we are trying to illustrate. We didn’t want to cut marketing for short-term gain. We want to really make sure that we hone this marketing spend and reinvest, like Neal just said, in countries where we can see the returns reinvest in those countries for the long-term gain.

Understood. And then just last one for me. The comments of getting to first quarter profitability in the U.S. in 2026 on a full year basis in 2027, what does that contemplate from a regulatory standpoint or market access in terms of new states coming online?

Hi, Bernie. So those timelines are based on our current geographic footprint plus an additional state to be launched in the next three months. As we said, as additional markets come online, we will reassess that again very much on a state-by-state basis, finding the path to profitability in each of those states.

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

Hey. Thanks. Just on the customer growth, it was really strong growth, sort of unseasonably, I guess. And so, I know you mentioned that you had some more efficient marketing, but can you just maybe go a level deeper there, were the geographies where you saw good customer growth and what did you unlock on the marketing front, and did the customers come sort of in a linear fashion during the quarter, or how should we think about what you were able to accomplish there?

Hi, Michael. Alinda here. We have shared the overall geographic growth on our website, which you can review. Our marketing strategy is proving effective, reflected in the increase of newly acquired customers, particularly a 29% growth in our casino segment. This growth is occurring in markets where there are higher volume customers but with lower value investments. We have noted this trend particularly in Europe and Africa, including the U.K., largely due to responsible gaming initiatives. Additionally, we have partnered with Jumpman, which serves a different business model focusing on recreational customers with lower value. It's important to remember that in the first quarter of 2022, we had Ontario as a non-regulated part of our business, which has since transitioned and affected our numbers. However, we anticipate continued growth in our customer base.

Yeah. This is Neal here. So, again, the optimization of our customer experience, we’re still making good money in Ontario. We are very happy with how we transitioned there. It’s been since August and September last year that talks occurred six months to eight months, nine months, 10 months. So, it’s making good progress, and we understand the markets, we understand regulation, we understand what the product has to do in the regulated market, and we compete with everyone across the globe. So Ontario is no different for us.

This concludes our question-and-answer session and the Super Group results for the first quarter of 2023. Thank you for attending today’s presentation. You may now disconnect.