Sportradar Group AG Q1 FY2022 Earnings Call

Good morning and thank you for standing by. Welcome to the Sportradar’s First Quarter Earnings Conference Call. All participants are in a listen-only mode. After the speakers presentation there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today Rima Hyder, Senior Vice President of Investor Relations. Please go ahead.

Thank you, Catherine. Good morning and good afternoon, everyone, and thank you for joining us today for Sportradar’s first quarter 2022 earnings call. Before we begin, I would like to point out that the slides we will reference during this presentation can be accessed via the webcast, or on our website at investors.sportradar.com. A replay of today’s call will be available via phone and on our website. After our prepared remarks, we will open the call to questions from investors. To be fair to everyone, please limit yourself to one question, plus one follow-up. Please note that some of the information you will hear during our discussion today will consist of forward-looking statements, including without limitation those regarding revenue and future business outlook. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in our annual report on Form 20-F and the Form 6-K furnished with the SEC today along with the associated earnings release. We assume no obligation to update any forward-looking statements or information, which speak as of their respective dates. Also during today’s call, we will present both IFRS and non-IFRS financial measures. Additional disclosures regarding these non-IFRS measures, including the reconciliation of IFRS to non-IFRS measures, are included in the earnings release, supplemental slides, and our filings with the SEC, each of which is posted to our investor relations website. Joining me today are Carsten Koerl, Chief Executive Officer; and Alex Gersh, Chief Financial Officer. I’d like to turn the discussion over to Carsten Koerl.

Thank you, Rima, and thank you all for joining today. I'm pleased to share that our fiscal 2022 is off to a very strong start. Our revenue in the first quarter in 2022 increased 31% compared with the first quarter of 2021, driven by the US and our growth in core betting products across all businesses. Our strong customer retention continued at 121%. And we have achieved many other successes such as multiple partnerships for our Integrity business, completion of a new acquisition, as well as increasing our licenses in the North American region. Our US business delivered a revenue increase of 124% as we continued to increase revenues with our key betting customers as well as media companies. We also saw growth in the US ads business at almost three times higher than our Rest of the world's ads business. Globally our ad revenues have grown over 70% year-over-year in the first quarter of 2022. In the Rest of the World, we once again saw an increase in sales from our higher value products such as MTS or the Live Data and Odds services. Our MBS revenue, which is a combination of the MTS and MPS products increased 51% year-over-year. Our Live Odds and Live Data services increased 16% as a result of selling more content to our existing clients. Now, turning to our strategic priorities for 2022. I want to stress that our overarching priorities continue to be accelerating our technology leadership and powerful data-driven networks with AI to process and analyze this data. For the first time in human history, we are living in a Big Data world. Every interaction any company, government, charity, or academic institution has with an individual or entity generates many recorded data points. At Sportradar, we have an especially deep understanding of this new data opportunity. We are the source code of sport with the experience and expertise in transforming 790,000 sporting events every year into granular numerical data that serves our B2B client base with deeper insights than anyone can see. Today, accelerating change, more than ever, is artificial intelligence. It is the mega-trend of our times. It's crystal clear that whoever has the most data delivered by powerful networks in sports, media, and betting has the greatest potential to generate alpha. Everything we are doing at Sportradar is aimed at maximizing this AI opportunity, ensuring that our clients can generate maximum alpha with our products. We have systems in place to analyze all the data in sport events all over the world, which we acquire across our verticals to expand our product offerings. For Sportradar, this adaptive approach has led us to develop commercially reliable synthetic data to serve our simulated reality programs, proprietary computer visualization technology for our sports tracking, and audiovisual product processes, and data-driven deep knowledge analytics of consumer behavior for targeted marketing purposes. In a nutshell, continuing and accelerating our technology leadership, harnessing data, and maximizing insights is the objective that extends across all our priorities, which I group in four categories. First is to grow core betting products. Our high-value add offering products such as MBS and Live Data and Odds are driving significant growth. MBS provides existing bookmakers and operators wishing to start a sportsbook with highly sophisticated and effective services for trading or full turnkey solutions. I will discuss our Managed Trading Services in more detail in a few minutes. Our Live Odds service is one of the most popular in-play trading services in the world. We anticipate continuing growth for this service, especially in markets like the US, where in-play betting still accounts for a minority of the betting compared to other parts of the world where sports betting is more mature. Our second objective is to grow our US business with targeted products and move up the value chain. I'll use our ad:s product as an example. With ad:s, Sportradar has built an omnichannel, digital marketing agency, focused on sports fan engagement and helping sportsbooks as well as leagues and teams to be more efficient and precise in their marketing spend and deliver ROI. Our Integrity offering is deep and broad with more than 150 leagues, anti-doping, and law enforcement organizations, including stakeholders in the college landscape and our customers. Based on our years of experience, we want to ensure that our sports betting partners’ athletes are educated about the issues surrounding match fixing and have information on healthy sports wagering behaviors. Now, turning to our third priority, which is the complete integration of the sport solution vertical ensuring that the technology broadens the products we can offer to our betting, media, and league partners. This is the business we formed through the acquisition of Synergy Sports and InteractSport, giving us incredible penetration in Division One and Two college basketball and baseball, as well as cricket, one of the most popular sports worldwide. Computer vision and camera technologies are at the core of the technology that sport solutions use to provide performance analytics, such as helping a player or team seeking a competitive advantage. It goes without saying that the more information we have on teams and players generates deep insights for our betting and media and league partners. The last, but certainly not least, fourth priority is to invest in our people, values, and technology. As we scale rapidly, we are hiring in key areas of content and technology, and investing in our current talent, prioritizing our people, and giving them the tools they need to compete will always be one of our strategic priorities. We've also begun identifying environmental, social, and governance topics that significantly impact our business. Our approach is underpinned by our conviction that ethics and good governance matter to our future success. This is not a new approach; it's intrinsic to how Sportradar operates our business and as a central player in the sports ecosystem. Through our Integrity business, we monitor over 800,000 matches across more than 70 sports annually. Since 2008, our Universal Fraud Detection System has been instrumental in reporting over 7,000 matches as suspicious and in helping authorities secure 514 sports sanctions and 50 criminal convictions. We believe strongly in sport, and we want to win in whatever we do, but we know that for good competition, it must be fair competition on a level playing field. Our commitment to integrity and supporting sustainability in sport around the globe is something we will never change. Moving to the next section, I want to spend some time doing a deep dive into an area of our business that is a key growth driver for us. Today, I want to talk about MTS, the Managed Trading Service product, which is sold as part of our Managed Betting Services. MTS is a sophisticated turnkey trading risk odds and liability management solution. Our rich set of tools allows our customers to manage betting activity, risk liability, and trading margin performance across sports and markets. This is all executed in real-time according to rules and thresholds that we create in collaboration with our customers, underpinned by our machine learning technology. It's no surprise to us that over 200 organizations globally use MTS. As of the first quarter of 2022, we have processed close to €4 billion in turnover, which is a year-over-year growth rate of 55%. At this current run rate, we expect MTS turnover to be in the range of €17 billion to €20 billion in 2022, making us larger than any betting operator in the United States and placing us among the top five largest global bookmakers based on handle. The MTS service is highly modular, enabling operators to access a range of specialized trading services to suit their business needs. For example, they can ask us to trade all sports on their behalf, or they can choose to trade certain sports themselves while we manage the remainder. Or they can trade everything themselves but access our AI-driven customer managed services to enhance their understanding and insights into consumer betting activities. For us, this modularity is critical in order to cater to all betting operators as they continue on their respective journeys to modernize their operations by integrating MTS's superior trading capabilities and services, ensuring we can support them every step of the way. MTS partners also have the option to access the entire Sportradar product portfolio, which includes products such as engagement tools, AV, and the turnkey sportsbook services. In addition to recruitment and retention marketing services through our ad:s product, our AI-driven behavior and marketing services can enhance data analytics and player personalization in our Sportradar sportsbook platform. Commercially, our overall service provision is underpinned by a revenue-share model, which is based upon the share of the Gross Gaming Revenue generated through the MTS service, typically with a monthly minimum fee. Our current take rate on MTS is between 5% to 7%, compared to the 2% take rate for pure data products, making MTS a highly valuable product for us and one that is fueling our growth. MTS can be deployed quickly, allowing new market entrants to increase their speed to market and drive turnover. We reduce operational risk for customers by leveraging our scalability, expertise, and trading liquidity, and financial risk by generating superior trading margins or even offering a margin guarantee. Perhaps most importantly, our content and technology help operators engage end-users and sports fans. Next, I'd like to discuss capital allocation and our priorities. Last month, Sportradar acquired Vaix, a pioneer in developing solutions for the iGaming industry. Vaix's innovative AI engine allows us to understand the likely profitability of players, past conversion inferred through their behavior over the last three days versus traditional business intelligence, which might give us the same data over two to three weeks. This helps us optimize acquisition strategies using our ad:s advertising platform and measure the efficiency of campaigns more quickly and accurately. The key with Vaix's personalization service is that fans receive a more targeted player-friendly experience, which in turn provides us the foundation data to build a personalized offer and front-end for our future products. The Vaix acquisition shows the type of acquisition we might consider in the future to accelerate our technology transformation. For the past two years, Sportradar has incorporated Vaix's technology into its Managed Trading Services offering, enhancing the data analytics and player personalization prospects of our Sportradar sportsbook platform. I want to remind everyone that Sportradar is well positioned to continue its proven record of consistent long-term growth, strong cash generation, as well as very strong customer retention. We have the experience and the insight and the technology leadership in the sports betting and entertainment industry, and we are investing in our business with an eye toward technology transformation and continued growth. The strong first quarter sets us well for our fiscal year 2022. I'd like to end by reiterating our guidance that we gave in our fourth quarter call for both revenue growth of 18% to 25% and adjusted EBITDA growth of 21% to 30%. With that, I'll turn it over to Alex to discuss our numbers in more depth.

Thanks, Carsten. Hi, everybody. I'm going to repeat a few things that Carsten just told you, but I strongly believe that great news deserves to be repeated. As Carsten already stated, we had a very strong first quarter with growth across all segments of our business. Revenue in the first quarter of 2022 increased 31% to €168 million versus the first quarter of 2021. This was driven by strong growth across all of our segments, with once again the highest growth coming from the US, where we grew 124%. We reported adjusted EBITDA of €27 million for the first quarter. While it's down 5% year-over-year, it is in line with our expectations. This decrease was primarily due to higher costs associated with being a public company which were approximately €3 million for the quarter and one-time temporary savings in Q1 of 2021 related to the COVID pandemic. As a reminder, we are still forecasting adjusted EBITDA growth for the full year in a range of 20% to 30%. Importantly, our liquidity remained strong with cash and cash equivalents of €716 million at the end of the first quarter. Let me give you some details on our Q1 performance. Our Rest of the World betting revenue is our largest segment, representing 52% of our total revenue. The segment grew 25% in the quarter to €87 million, driven primarily by an uptick in our higher value-added offerings, including Managed Betting Services; specifically, our Managed Trading Services and our Managed Platform Services and Live Data and Live Odds services. More specifically, Managed Betting Services revenue grew 51% year-over-year to €26 million due to increased turnover while Live Data and Odds grew 16% to €47 million due to higher sales to our existing clients. In addition, we have successfully begun cross-selling newly acquired Synergy content to our customers. The Rest of the World betting adjusted EBITDA increased 13% to €45 million, while the associated adjusted EBITDA margin declined to 51% from 57%, again exactly as we expected. In the first quarter of 2022, the sporting calendar has normalized. The Rest of the World Audiovisual segment grew 17% year-over-year to €46 million. This growth was primarily due to increased content from Tennis Australia and the National Hockey League as well as upselling content from our Synergy acquisition. This segment was impacted by a loss of revenue associated with the war in Ukraine, which was offset by higher sales to customers in other countries. The Rest of the World Audiovisual adjusted EBITDA was essentially flat at €9 million and its adjusted EBITDA margin declined to 19% from 23%, primarily due to higher sports cost as the sports schedule will return to normal levels with the COVID pandemic easing. Turning to the United States, our highest growth segment, revenue grew 124% year-over-year to €26 million. This growth was primarily driven by three factors: First, increased sales of betting services as more states legalized betting; second, increased sales to media clients; and third, a positive impact from Synergy. We increased revenue with all our major customers in the US and continue to see strong growth in our ads and audiovisual products, which grew over 300% and over 100% respectively. First quarter US adjusted EBITDA was a negative €6 million, a larger loss compared to the prior quarter due to our continued investment in the segment to drive growth. In line with past trends, however, we did see continued improvement in the adjusted EBITDA margin as a result of increased operating leverage. A few things on cost: Personnel costs for the quarter increased by €14 million to €52 million. New employees were added both organically and through our acquisitions primarily in technology and product areas. Other expenses were €20 million, an increase of €5 million over the prior year, mainly driven by higher costs associated with being a public company, as well as one-time COVID-related savings in the prior year. Total sports rights costs increased €13 million to €54 million in the first quarter of 2022. Growth was driven by new 2022 rights for ICC, UEFA, and ATP, and a return to normalized schedules for the NBA, NHL, and MLB. It's important to note that 11 major sports rights comprise approximately 70% of our sports rights expense. While we expect sports rights costs to continue increasing over the next few years, we are very confident in Sportradar's ability to achieve growth in EBITDA and cash flow conversion over that same period. Our liquidity remained strong at the end of the first quarter, with cash and cash equivalents plus our undrawn credit facility totaling €826 million, a decrease from the December 31, 2021 balance of €853 million. This decrease in our cash balance was due to non-recurring payments of €35 million related to the purchase of a non-controlling interest in the Sportradar U.S. LLC subsidiary as well as the final earn-out payment for an acquisition made in fiscal 2019. Compared to the prior quarter, adjusted free cash flow approximately doubled to €13 million. Our cash flow conversion increased to 48% from 23% last year. We believe that our free cash flow conversion will continue to improve. Over the next few years, we expect our unlevered free cash flow conversion to be in the range of 55% to 60%. A key change in our cash conversion is a move from a subscription model to a revenue-share model. The fastest-growing areas for Sportradar, namely Managed Betting Services and a significant portion of our US business, are based on the revenue-share model. While this offers us fantastic opportunities for growth, it also has a timing effect on our working capital and cash collection. Returning to our annual guidance, we are maintaining our previously issued guidance for fiscal 2022, expecting revenue to be in the range of €665 million to €700 million, reflecting annual growth of between 18% to 25%. For adjusted EBITDA, we expect to be in the range of €123 million to €133 million, representing a year-on-year increase between 21% and 30%. We believe our revenue guidance range can withstand the impact from potential revenue losses as a result of the Russia-Ukraine conflict, as we do not rely on any one region for our growth. We also told you that we were not expecting a meaningful adverse impact on our business for the first quarter of 2022. This is certainly the case this quarter. However, in Q2, we are seeing increased impacts from this crisis. We continue to monitor these developments very closely. With that, we are happy to open the call to questions. Operator, would you please open up the line for questions?

Thank you. Our first question comes from Bernie McTernan with Needham & Company. Your line is open.

Great. Thank you for taking the question. And Carsten, thank you for all the detail and going in deep on MTS. Follow-up question though. I'm assuming there are large operators who outsource a low percentage of their MTS services, while smaller operators outsource a much larger percentage. Is that the right way to think about it? And if so, which one is contributing more to revenue now and which one is the larger opportunity to contribute to revenue growth over the next 12 months to 24 months?

Hi, Bernie. Thanks for the question. At the moment, it's very clear Tier 3 operators are powering the growth of the MTS service, while Tier 1 operators contribute to a smaller degree because this is relatively small sports from a liquidity perspective, which they trade with us, like table tennis or cricket. We are actively developing our liquidity trading. We see three different categories in the future, and we are working on innovations for Tier 1 operators involving high liquidity trading with ultra-low margins. Tier 2 and Tier 3 trading systems are also areas where we can excel. For Tier 3, we can trade smaller sports with larger bookmakers very effectively, while trading the full liquidity of a big bookmaker needs improvement in the liquidity trading algorithms. This area of high-speed trading is fascinating. Controlling latency while aggregating high liquidity will lead to trading alpha, which is the future for large liquidity trading.

Understood. And then I was hoping if you could just talk about the Vaix acquisition a little bit. How differentiated that technology is and what the cross-sell opportunities are with your sportsbook customers. And if there is a, if this is kind of like the first step in a larger iGaming opportunity.

Yes, it's a step into it. Look, a traditional BI system helps you probably understand the impact of a marketing campaign in two to three weeks, depending on the scale of the data and the campaign. The AI from Vaix can do this within two to three days. Shortening that by more than two weeks has a massive impact, allowing you to optimize your costs significantly. That's one direct impact we see. Regarding sportsbooks, understanding player performance and what campaigns he responds to is key. Vaix has all the necessary products, and cross-selling them into the gaming space is very natural for us. For instance, if there is no live betting activity, we can quickly find ways to shift engagement into gaming using Vaix's toolset and knowledge.

Great. Thank you for taking the questions.

Thank you. Our next question comes from Michael Graham with Canaccord Genuity. Your line is open.

This is Jason, on for Mike. On the Rest of World Betting segment, you talked about higher turnover and upselling driving the really strong growth there. I'm just wondering, are there any specific regions of the world or countries or operators that are notably strong and driving that performance? Anything to call out there?

The strong growth comes mainly from the Managed Betting Services, particularly the MTS services. The regions primarily contributing to this growth are in EMEA, but it's a broad area. We see stronger growth in certain European countries, as well as Africa and Latin America. For the odds and data services, which grew by 16%, that growth is widespread and comes from serving some new clients in those markets.

Great. That's helpful. And then just you mentioned the impact from Ukraine on Q2 being a little more notable. Can you just drill down on that a bit and share a little more detail?

Yes. Previously, we shared a worst-case scenario of €110 million EBITDA. Looking back now, that number is shrinking. We are distancing ourselves from that worst-case. However, we do see that several bookmakers have stopped ordering some of the services or experiencing payment problems. That's why, Alex hinted that we will see some impact in quarter two. We are working actively on mitigation and see good opportunities emerging in Asia. We are actively managing this as best we can.

Great. Thanks a lot.

Thank you. Our next question comes from David Karnovsky with JPMorgan. Your line is open.

Hi. Thank you. Carsten, you noted the percentage of live betting in the US is still much lower than Rest of World. Do you see anything structural related to the way people consume the four major US sports relative to soccer, which drives a lot more betting internationally? And what underlines your confidence that the US market will continue to shift towards live wagering? Where do you think that push needs to come from in terms of the leagues or the media companies you partner with?

As you know, I've been in this industry for some years and observed many markets shift from pre-match to live betting. The United States has been a pre-match betting market, largely influenced by Vegas and Atlantic City. However, with the younger population and more digital channels, we expect that betting during matches is a natural progression. We are currently observing a shift from nearly zero live betting to a range of over 20% to 30%. Analysts predict that live betting will become dominant. The question is timing, and we can help accelerate this through our audiovisual offerings to enhance the appeal of live betting. The more penetration we can achieve with AV products, the better our live betting results will be. Additionally, expanding audiovisual live streaming content in the US market is essential for this growth. Soccer, being a fast-moving sport, also presents significant opportunities for live betting growth in the US.

Okay. And then maybe related, I know, there's some negotiation regarding the data that you could source from wearables. Assuming you're able to get buy-in from the player associations, what are the key commercial applications? What data can you share with the teams versus the betting operators and media?

From our perspective, we are a technology company aggregating whatever data points we can get, which include computer vision and low-latency video streams from arenas or RF chips. For chip data, buy-in is necessary from the players and unions, and agreements must be established between the league and the unions regarding its usage. Teams need to determine what kind of data they want public versus what is used for betting. This remains a topic for ongoing discussion. We will inevitably see RF sensory chip data entering the betting market, albeit in a non-intrusive manner for players. There are some leagues making progress in this area, with one commissioner noting they always share data with the unions.

Okay.

Thank you. Our next question comes from Robin Farley with UBS. Your line is open.

Great. Thanks. I just wanted to get clarification on the adjusted EBITDA range of €123 million to €133 million. A quarter ago, you mentioned a potential €13 million impact in the worst-case scenario, but that wasn't mentioned in the slides released today. Should we understand from that, that the downside case is now back to being the €123 million of that range? Is that sort of revision to the worst-case scenario?

Hi, Robin. We expected this question from you. It’s indeed like I said before. The worst-case scenario of €110 million is becoming smaller as we distance ourselves from that number. The guidance remains at €123 million to €133 million, and we are experiencing some impact in quarter two. We're actively working on mitigation strategies for this, especially considering the ongoing war situation, which could persist.

And Robin, just a quick note. We will continue to evaluate this and provide updates in future discussions if there’s anything new to share.

Okay. I thought since it wasn't mentioned in the release that it was kind of off the table. It sounds like that the odds are getting lower, but maybe still potentially the situation. Great. And as a follow-up, I’m curious if some of the sportsbooks in the US have overspent in Q1 for customer acquisition and cut back on promotional activity. Have you seen changes in your ad:s business in Q2, and any shifts in spending in the ad:s business given the broader elevation in customer acquisition costs overall?

We can see a significantly higher spend for customer acquisition in the United States compared to our other markets. The industry is well aware that this is not sustainable and we will see some spending reductions. The bonuses and TV campaigns are likely to decrease, which will lead to better penetration and acceptance of programmatic advertising. We have seen significant growth in our ad:s business, growing by 300%, a clear indication that these channels will be utilized for customer acquisition in a more cost-effective way.

So you're actually seeing, so far in Q2, an increase in programmatic, benefiting from that shift?

Yes. You’re welcome.

Thanks.

Thank you. Our next question comes from Ryan Sigdahl with Craig-Hallum Capital. Your line is open.

Thanks for taking our question. I just want to turn Robin's statement into a question. Given Ukraine and Russia, is it now safe to say the odds are lower given guidance reaffirmation and the Q1 you just reported, but the magnitude is potentially bigger? Do you agree with that, yes or no?

Alex, that is a typical question for the CFO, and I will hand that over to you.

Okay. To put it simply, no. The magnitude of the impact on us is now smaller. We don’t believe we will see a €110 million scenario; we intend to outperform that. Our guidance reflects that we plan to mitigate challenges in Q3 and Q4 as quickly as possible. However, I want to underscore that Q2 will be impacted, but we are working on mitigation strategies.

Got it, helpful. One more for me. Just with the big four US sports leagues and the two largest soccer leagues locked up in multiyear exclusive contracts, you have four of those. How much opportunity do you see in the pipeline for new sports rights business going forward versus optimizing the existing portfolio?

Our business growth does not rely solely on sports rights deals. The shift from pre-match betting to live presents substantial opportunities. As I highlighted, we can boost order take rates from an average of 2% to between 5% to 7% if we use the MPS product. The existing rights provide significant growth potential, especially as more states open up to legality in betting. The college landscape offers unique opportunities for partnerships, emphasizing integrity and providing tools for players and coaches. We're well-positioned to take advantage of this growth but will proceed with only those deals that align with our strategy of being a high-growth, profitable, and cash-generating company.

Thanks, guys. Good luck.

Thank you.

Thank you. And this concludes our Q&A session. This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.