Earnings Call Transcript - SGHC Q4 2023

Operator, Operator

Good morning, everyone, and thank you for joining us today to discuss Super Group’s Results for the Fourth Quarter and Full Year 2023. During this call, Super Group may make comments of a forward-looking nature that are subject to risks, uncertainties and other factors discussed further in its SEC filings that could cause its actual results to differ materially from historical results or from the company’s forecast. Super Group assumes no responsibility to update forward-looking statements other than as required by law. On today’s call, Super Group 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. Super Group has 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, Super Group will speak to its financial results and metrics in two parts; highlighting Super Group’s profitable and cash-generative global business separately from its investment into the US. This aligns with the annual guidance that Super Group has provided for both 2023 and 2024, and is consistent with both how Super Group views its business internally and how Super Group will report going forward. Super Group recommends that investors refer to its supplementary presentation posted to the website. On this call, I am joined by Neal Menashe, Chief Executive Officer and Alinda Van Wyk, Chief Financial Officer. During the Q&A session, we will also be joined by Richard Hasson, President and Chief Operating Officer. 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. And now, I would like to turn the call over to Neal.

Neal Menashe, CEO

Thank you. Good morning, everyone, and welcome to Super Group's fourth-quarter and year-end 2023 earnings call. We have made tremendous strides in 2023. We are cementing our position as a profitable and geographically diverse online sports betting and gaming operator. We have a clear and sustainable path to future long-term growth. I'm very proud of what we've achieved in the past year, and I am genuinely excited about the outlook for 2024. We feel like we are just getting started as we head into our third year as a New York-listed business. We are determined to deliver meaningful long-term shareholder returns. Let's take a quick look at our 2023 numbers, excluding the US. For the full year, we set a new annual record for total revenue of €1.406 billion. And for operational EBITDA, we achieved a total of €255 million, meaning that we easily surpassed guidance on both fronts. Moving on to Q4. Total revenue came in at €352 million with operational EBITDA of €54 million. The fourth quarter had its challenges with October's unprecedented low sports margin driven by soccer results and the close of the Indian market. However, we made a strong recovery and set some new records. Total revenue was the highest ever for our fourth quarter, and December was our best-ever EBITDA month. The ability to navigate these bumps in the road is a testament to our diverse and loyal customer base. Our customers are active across both sports betting and casino. Over 85% of our net revenue in the fourth quarter came from casino, proving that even when the sports margins go against us, we can still deliver record-breaking results. In the US, our net EBITDA loss for the quarter was €18 million, taking a full-year investment to €57 million. Worldwide, our customer growth is impressive. Even without India, our customer numbers grew to an average of 4.7 million unique active monthly customers. That is 1.2 million more customers than we had at the same point last year and 700,000 more customers than last quarter. Our customer retention remains strong, and this, along with new customer acquisitions, drove us to new highs for daily customers and daily deposits. Each quarter this year, we set records on each of those fronts and consistently surpassed them. We are a technology-driven business with customers at the center of our universe. And it's gratifying to see continuous engagement from both new and existing customers, some of whom have been playing with us for over 20 years. These strong metrics make us confident that we will achieve the double-digit top-line growth that we are projecting for 2024. Now to provide an update on some of our key jurisdictions. Starting with Africa. We had another quarter of strong revenue growth. We accomplished this even though the African market was a key driver behind the negative sports margins for the business in October. Moving forward, we continue to explore the introduction of new products and brands into both new and existing markets. Just last month, we successfully launched our Jackpot City brand in our first African market, and we are super excited about the prospects that this brand presents for us across the continent. In Europe, we expect to see growth in markets that we would typically define as more mature and established, particularly Italy and Spain, which will stand out as outperformers. Both regions boosted the Casino segment significantly year-on-year by offering new localized gaming content. In the UK, Betway delivered strong growth. Jumpman delivered its most profitable quarter ever. Similar to Africa, we rolled out the Jackpot City brand. We are well positioned to handle the UK Gambling Commission’s plan to introduce a gambling custom for online slot games later this year. We expect this to have a limited impact on revenue due to the nature of our UK business and the composition of the customer base. In Canada, casinos grew well, and overall, this remains a strong market for us. In Ontario, industry regulation prompted an initial dip, but our customer retention now exceeds what it was before the new rules took effect. Customer values are as high as they have ever been, and revenues, which initially stabilized, are now growing. In the US, while we continue with our previously communicated technology migration and marketing plan, we are not pleased with the status quo. Given the size of the investment required, the competitive landscape, and the relatively small number of states that are currently regulated for iGaming, we are actively evaluating our US strategy on a state-by-state basis and will make changes as required. We announced in February that we completed the sale of DGC's B2B assets to Games Global. The B2B division of DGC is in great hands, and we wish all the parties the best of luck moving forward. The completion of the transaction aligns with our goals, which is the growth of our worldwide B2C business. Finally, I am pleased to let you know that we are very close to finalizing commercial terms and agreements with Apricot to achieve full control of our Betway global sportsbook technology. This includes a favorable risk-sharing deal structure, which comprises an upfront consideration and an earnout. Once completed, this will be a monumental milestone for our business and will allow the global rollout of the software to new and existing markets, whether organically or through M&A. We look forward to getting this wrapped up and will provide an update before the end of the month. I will now hand the call over to Alinda to discuss the financials in greater detail.

Alinda Van Wyk, CFO

Thank you, Neal. Reflecting on 2023, I'm pleased with how the teams have navigated various challenges to deliver strong growth across both the top and bottom lines. Our business model remains adaptable, resilient, and primed for future growth. Let's get straight into the numbers. For 2023, we set a new record for SGH's total revenue, which came in at €1.406 billion, up 8% year-on-year and 19% in constant currency, comfortably beating our total revenue guidance of €1.35 billion. We also delivered the highest-ever Total Revenue for the fourth quarter of €352 million, up 7% year-on-year and 15% in constant currency. As we touched on in the last earnings call, sports betting revenue was impacted in the fourth quarter due to October customer-friendly results in soccer. We rebounded in November and even performed better in December. Our sports betting revenue still declined for the quarter to €53 million, a decrease of 39% year-on-year and 54% in constant currency. This decline was further impacted by the closure of the Indian market, which, of course, is not included in the comparative quarter. Moving on to the casino, net revenues came in at €289 million, an increase of 22% year-on-year or 52% in constant currency. This growth was driven by strong performance in Africa, Canada, and some of our European markets. Despite the strong performance in the segment, growth was offset by the closure of India. I am very pleased with the progress we have made in optimizing costs in the right areas. We are not about cutting costs for the sake of improved margins. Instead, we continuously analyze our costs and understand the areas where we can operate more efficiently. We are investing in technology, AI, and enhanced processes to drive long-term efficiencies and innovation. All of this allowed us to reduce our headcount over the year by more than 11%. This focus has led to our total operating costs as a percentage of net revenue in the fourth quarter falling to 19% compared to 22% in the same quarter of last year. This is a significant saving of 3% of net revenue. Another area where we will continue to invest is marketing. We spent 29% of net revenue on marketing during the fourth quarter. We scrutinized the return on investment by market and channel to ensure optimal delivery of our revenue targets and to deliver top-line growth. We never want to sacrifice long-term growth for the sake of short-term margin improvement. Operational EBITDA ex-U.S. for the full year came in at €255 million, representing 22% year-on-year growth, comfortably beating our 2023 guidance of at least €240 million. Our EBITDA margin for the year was 18%, an improvement of 200 basis points compared to 2022. This is a positive step in the direction of our long-term target of maintaining EBITDA margins above 20%. For the quarter, operational EBITDA grew 29% year-on-year to €54 million, resulting in a margin of 15%. The margin for the quarter was impacted by the sports results, which resulted in negative EBITDA for the month. However, in December and November, we achieved EBITDA margins of around 24% and 22%, respectively, demonstrating a strong end to the year and our operating leverage kicking in. The U.S. EBITDA loss for the year was €18 million, resulting in an operational EBITDA loss for 2023 of €57 million, which was slightly less than our forecasted spend of €60 million to €65 million. Moving to 2024 ex-U.S. guidance, we estimate that our top line will continue to grow strongly with year-on-year growth of just over 10% to €1.55 billion. Going forward, to align with best practices, we will now report on adjusted EBITDA instead of operational EBITDA. The difference in 2023 between these two metrics was immaterial. Our 2024 guidance for ex-U.S. adjusted EBITDA is a minimum of €280 million. In the U.S., we have started the year spending at a similar rate to last year. As expected, we are constantly evaluating the spend and the returns being generated. While we are still in the process of assessing these options for the U.S. market, I do not believe that it is likely our 2024 adjusted EBITDA loss will exceed what we spent last year. Lastly, we ended the year with a strong balance sheet, which includes unrestricted cash of €242 million and no debt. I will now turn the call back to Neal. Thank you.

Neal Menashe, CEO

Thanks, Alinda. Despite customer-friendly results in October, we recovered extremely well to set the highest ever total revenue for the fourth quarter and for a full year. I thank our entire Super Group team for their dedication and commitment this past year. Our business model places us in a good position to overcome adversity. When sports betting results go against us, we can rely on our casino segment. The casino proves to be a great anchor. Over 78% of our net revenue came from casino in 2023, with the ratio in the fourth quarter growing to 85%. We are confident that this era of our business will continue to trend upward. 2023 was a fantastic year for Super Group. We are a customer-centric business, and our customer base continues to break records. This is very encouraging for future growth. We have a clear, very clear game plan for 2024. We are focused on several areas, including the continued optimization of our global footprint, including the U.S., ongoing investment into marketing channels that yield the highest return on investment, fine-tuning our products and technology, realizing further cost efficiencies in the right areas, and rolling out our Jackpot City Casino brand across new and existing markets. The delivery of these objectives will help us achieve our projections of double-digit growth on the top line, continued increase in our EBITDA, and meaningful free cash flow, with high expectations for 2024. I look forward to continued success. I'll now turn the call over to the operator to open the call up for questions.

Operator, Operator

We will now begin the question-and-answer session. The first question comes from Michael Graham with Canaccord. Please go ahead.

Michael Graham, Analyst

Hey, thanks very much. Thanks for all the detail. I just wanted to ask for a little more depth on your plans for the U.S. business in 2024. You mentioned assessing a range of options on a state-by-state basis. Could you just maybe comment on, I guess, number one, are there any states you're sort of happy with your competitive position? And number two, just what can you say about the range of options in each state? What can you say about the timing of some of these decisions?

Richard Hasson, President and COO

Hey, Michael, Richard here. So as Neal pointed out, we are looking at a number of options and obviously going through them all in extensive detail. At this point, we are assessing them all, and they range from relooking at our current geographic footprint to potentially focusing just on casino states. And of course, alongside that, also any possibility of M&A. But this is very much front of mind and receiving a lot of focus. Of course, we'll update you with more details as soon as we can.

Michael Graham, Analyst

Okay. Thank you. And then maybe just a quick one on Brazil. Just wondering how you're thinking about your strategy in Brazil? And any updates you can give us on your thinking there?

Neal Menashe, CEO

Yes. Hi. This is Neal here. Brazil, like all other countries, we operate there currently. So we are waiting for the regulated regime with what it means for our products, for the taxes, etc. So, of course, it's an important market, and we are waiting for the final rates to come out.

Operator, Operator

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

Jed Kelly, Analyst

Hey, great. Thanks for taking my question. Just given your outlook, can you talk about what regions you're banking on, probably maybe the most upside from? And then just can you talk about how your tech migration is coming? And what percentage of your technology is vertically integrated Q1? Thanks.

Alinda Van Wyk, CFO

Jed, regarding tech migration, I believe Richard mentioned it. You are talking about the tech migration in the USA. We will provide an update on the acquisition of Apricot Software. Could you please repeat your question?

Jed Kelly, Analyst

Just on your outlook, like can you tell us what regions you're seeing the best growth?

Alinda Van Wyk, CFO

Jed, as we called out, we also went into quite a few details on our countries that really stood out. But Africa is always at the top of the list, is really doing well, and we have a couple of African countries and also some of the Central European markets, like Spain and Italy, doing very well. And then in Canada, we have also really lifted our performance as well.

Richard Hasson, President and COO

Hi, Jed. Touching on the U.S., on the technology migration, 7 of the 9 states that we’ve launched have currently migrated with the two large states expected within the next month or so. But of course, that migration is being considered as part of our wider assessment of the various options that we're currently looking at.

Jed Kelly, Analyst

Thank you.

Operator, Operator

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

Bernie McTernan, Analyst

Thank you. To begin with the U.S., you mentioned mergers and acquisitions. What types of assets are you considering for acquisition? Additionally, has your outlook on iGaming legislation changed at all, or has progress just been slower than anticipated? You brought it up on a state-by-state basis, which seems related to iGaming legislation, so I would be interested in your thoughts on that.

Richard Hasson, President and COO

All right. So yes, on the iGaming point, as Neal mentioned, there's a relatively small number of states that are currently regulated. And I think the pace of the rollout of this regulation has been slower than the industry has expected. Within our global business, of course, a large amount of our revenue comes from gaming, so that's obviously important for us. In terms of M&A, we're looking at a range of options. And again, it's one of the numerous options as we assess the overall strategy for the U.S. Any M&A we look at has to be done at the right price for both parties and make sure that it makes sense for our shareholders.

Bernie McTernan, Analyst

Got it. Makes sense. And then if I just look at slide 16 and the constant currency growth, and I appreciate that you guys are providing it, but just the difference in performance between sports betting that happened in 2023 versus online casino. Should we expect them to kind of meet in the middle in 2024 to get to about the 10% revenue growth? Or how should we be thinking about each product? Thank you.

Neal Menashe, CEO

I mean, it's Neal here. From my side, I want to point out that sports betting has margin fluctuations and can be a bit volatile, as we saw in October. However, November and December were great. So, based on that, I would estimate it's still around 75% to 80% casino, which is likely my target.

Operator, Operator

And we have a question from Mike Hickey from the Benchmark Company. Please go ahead.

Mike Hickey, Analyst

Hey, Neal, Richard. Good morning, guys. Thanks for taking our questions. Sorry I've been on the call late, guys, but just curious, Latin America obviously looks like it's getting some heat here. Just curious the opportunity you see there in terms of your longer-term growth. And then just on the US, obviously you put a lot of energy and capital into the market, and maybe the share hasn't spread as we thought it would. But just curious, I know it's a challenging environment, but your motivation here, to try to drive a business because it seems like you put the right pieces of the puzzle together. The optionality in the US market alone seems to be of value, but maybe that's not the case anymore. But thanks, guys, for any color there.

Neal Menashe, CEO

Okay. Hello, Mike, Neal here. Let's talk about LATAM. Listen, we see LATAM starting to regulate, so from our point of view, we see it very similar to the African continent. We've been there a long time. We are waiting to see what the regulations mean in each of the countries, Chile, Brazil, Peru, etc. So for us, it's, of course, an important market, and the software we use is very similar to Africa. So it all looks promising for that and we've just got to see how the regulations pan out, and that's part of our journey and Richard will address your US question.

Richard Hasson, President and COO

Hey, Mike. Yeah, so as you pointed out and as it's becoming clear, the US is proving tough. While we have spent time and put investment to work in the market similar to all of the other markets around the world, it's important to us that we are constantly evaluating and reevaluating what we've invested in the market and ultimately how we can achieve a profitable, sustainable business. That is what we're currently doing in the US. It's receiving a lot of attention internally. We're very much on top of it and assessing these options in detail. That's what we're going through now very actively, and we will update as soon as we have a response to that.

Neal Menashe, CEO

I just wanted to update. One of the questions was asked on our tech, on our new tech stack. So this is obviously with Apricot almost done. It means the sportsbook is simplified. We've got our one sportsbook that we can use across the globe, including Africa. Jumpman has proprietary technology for Betway Global and Africa. We'll then own it from beginning to end. This means we can then deliver all our products and all our prices, etc., across the globe. We are super excited about this; it has taken a long time, but we are almost there now.

Mike Hickey, Analyst

Yes, one quick follow-up, gentlemen. When you look at the US market, does it make sense to narrow your approach in terms of focus? I think some of the smaller operators that have also suffered near term from the share have focused more on states that offer both iGaming and sports betting. I think they found that to be a profitable business. And so obviously, you guys are respected operators. You have the brand, the tech, I mean how far off the mark do you feel you are at this point? Does it have to be something transformative in your mind to sort of get the business? We obviously saw Pen do their deal with ESPN, TBD, but needless to say, does it have to be something transformative, Neal or Richard? Or is it something you can kind of just narrow your focus on states that matter in terms of the combined LTV and then just sort of innovate and build from there?

Neal Menashe, CEO

All right. So it's very much a work in progress and the type of options you're speaking to there, those are exactly the type of options that we're assessing across a broad spectrum. One of those is looking at the geographic footprint, let’s say inclusive of sports betting and gaming. Another one of those potentially just looking at the iGaming states. As I said earlier, there is also always the possibility of M&A. So we really are going through the full range of options and determining what is best for the business and for the shareholders.

Operator, Operator

This concludes our question-and-answer session and Super Group's results for the fourth quarter and full year 2023 Conference Call. Thank you for attending today's presentation. You may now disconnect.