Sportradar Group AG Q1 FY2023 Earnings Call

Good day and thank you for standing by. And welcome to the Sportradar First Quarter 2023 Earnings Conference Call. At this time, 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 for Investor Relations. Please go ahead.

Thank you, LeRay. Good morning, everyone, and thank you for joining us for Sportradar's earnings call for the first quarter of 2023. Please note that the slides we will reference during this presentation can be accessed via the webcast on our website at investors.sportradar.com and will be posted on our website at the conclusion of this call. A replay of today's call will also be available on our website. After our prepared remarks, we will open the call to questions from investors. In the interest of time, 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 filed with the SEC in March 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 a 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 on our Investor Relations website. Joining me today are Carsten Koerl, our Chief Executive Officer, and Uli Harmuth, our Chief Strategy Officer. Now, let me turn the discussion over to Carsten.

Thank you, Rima. And good morning to everyone. We are pleased with the strong start in 2023. And once again, we produced solid results with great execution across all our businesses. We had wins across the globe, including the US, Asia Pacific and Latin America. We also strengthened our organization with a new CEO, Gerard Griffin, new CTO, Aleksandr Sokolovskii, and as mentioned last quarter, a new CHRO, Severine Riviere-Gerstner. We delivered first quarter 2023 revenue growth of 24% and adjusted EBITDA growth of 37% versus the prior year. As in the previous quarter, our core betting product in the rest of the world and US segments led the way for this growth and strengthened our profitability compared to last year. Once again, we have demonstrated that we have the best-in-class products that are mission-critical to our clients, whether they are operators, media, or sports teams. In our rest of the world business, our value-added product, managed betting service and live odds service grew 40% and 29% year-over-year, respectively, as a result of our strategy to move customers up the value chain, as well as a positive impact from our recent acquisitions. In the US, we saw very strong growth across betting, media and apps, with apps containing betting products growing over 80% year-over-year and once again surpassing sales to our media clients, which had been the larger client in the US until now. The higher sales resulted from more states legalizing betting, an increase in in-play betting, and an increase in sales for our ads product as operators looked for targeted solutions to engage more fans. The first quarter is a significant sports period for US fans, and our US business supports many facets of this busy period – Super Bowl, March Madness, and now we are running into the playoffs for NHL and NBA, as well as the opening day for MLB – and this all creates deeper engagement with broadcasters, especially with their OTT platforms. This activity also increases betting volumes and more investments in digital advertising by operators in 38 regulated states. Our revenue share model in the US enables us to capture a robust share of the GGR generated by all these sports. Additionally, we believe that through our partnerships with leagues, we have the ability to capture deeper data, especially player data, and continue to leverage that data into proprietary products and solutions that serve our customers. This is how we move up the value chain, offering operators a higher margin product. In the US, we also have doubled down on our efforts to expand into college sports. We recently announced the renewal of our partnership with Big Ten Network to power their OTT B1G+ platform through the 2024 to 2025 college athletic season. Additionally, with the massive growth we have seen in our ads platform, we're now integrating this ads technology into Snapchat, creating a new channel for betting operators to engage and acquire customers using our paid social media advertising service. While we execute on our growth, we also remain focused on our costs and on how we invest. We are the leaders in sports technology measured by revenue, but we must continue to invest to maintain our leadership position, meet our clients' needs, and advance in the industry. We believe that our ability to build products based on technologies that handle big data and sports content, as well as fan and user preferences, embedding liquidity, will increasingly become valuable for our customers and partners. Therefore, we continue to invest into our tech capabilities to automate data capturing in real time with computer vision and enhance athletics and deep data in sports as well as the pairing of liquidity data in real time based on artificial intelligence. Our investments include, first, upgrading our tech stack for betting and gaming and engineering, which will enable us to drive higher revenue per engineering cost. We recently hired our new CTO, Aleksandr Sokolovskii, who will oversee this upgrade and our overall technology transformation. Investments into computer vision technology to automate deep data capture in real-time will be the basis of advanced products. We have developed the first fully automated product for table tennis and will roll out this technology into other sports. We have already seen an increase in more data capturing and more matches in soccer, tennis, and basketball. This automation will allow us to scale our scout network over time, as we believe this investment creates more betting opportunities for sporting events and leads to greater revenue per match over the cost base. Third, we are improving the trading algorithms for our fastest-growing product, MTS, using AI to improve liquidity trading in real-time analyzers of deep sports data. The resulting margin improvement we can realize over time here is a benefit for us and for our clients. Then, before continuing our investment in the US, we aim to maintain our hyper growth in this key market. The US business is already showing results of our investment in both top-line growth and operating leverage, as demonstrated by our third straight quarter of positive adjusted EBITDA and improved margins. While it is great to see this improvement, our goal is to continuously improve the US segment margin, leading to margin expansion for the entire company. It is evident to us that this investment today will yield positive results tomorrow for both top-line growth and margin expansion. It will keep betting operators smarter, connected with data and analytics to manage their sportsbook, give media companies the tools to engage more with fans, provide teams, leagues and federations with the data they need to improve their performance and expand their reach, and finally, keep the industry clean by detecting and preventing fraud, doping, and match-fixing. In summary, I am very pleased with how we have started this year. We are reaffirming our guidance for 2023 that we gave last quarter. Before I turn the call over to Uli, I want to thank him for stepping in to lead our finance team since last December as interim CFO. As you may have seen, we announced a new CFO a few weeks back. I'm excited to welcome Gerard Griffin to Sportradar. Gerard and Uli will work on a smooth transition over the next few months. I know Gerard is looking forward to speaking with all our investors. I will now turn the call over to Uli to discuss the financial results.

Thank you, Carsten. And good morning, everyone. As Carsten already stated, we had a strong start into our fiscal 2023, demonstrating our strategy for growth and our prudent investments in key markets and products. Let me take you through our quarterly results in detail. Revenue in the first quarter 2023 increased 24% to €208 million versus the first quarter of 2022. This was driven by strong growth across all our segments, with the highest growth coming from the US. Our adjusted EBITDA grew 37% over the last year, primarily as a result of higher revenues and operating leverage as we remain disciplined with our costs. Our adjusted EBITDA margin was 18%, an increase of almost 200 basis points over the same quarter in 2022. We also had a customer net retention rate of 120%, driven by our ability to upsell and cross-sell to our existing customer base. Now looking at the segment revenue in detail, our rest of the world betting revenue, our largest and highest margin segment, grew 25% in the quarter to €108 million. This growth was primarily driven by an uptick in our higher value-added offerings, including managed betting services, or MBS, which grew 40% year-over-year. Within MBS, our MTS product, the Managed Trading Services product, saw annualized turnover growth of 52%. This was solid growth despite having a shorter trading month in February and sports results adversely affecting hold rates from our betting operator partners. Rest of world betting adjusted EBITDA grew 6% to €47 million. The adjusted EBITDA margin was 44% compared to 51% in the prior year, primarily as a result of our investments in technology and products. We expect the margin to improve for the full year 2023 compared to the first quarter, as some of the investments translate into higher revenue and operational leverage. Rest of the world AV segment decreased 3% to €45 million year-over-year. Although the company saw growth from both new and existing customers, revenue was impacted by the expected completion of the Tennis Australia contract with its impact starting this quarter. Rest of world AV adjusted EBITDA increased 27% to €11 million, and the adjusted EBITDA margin improved to 25% from 19% in the comparable quarter last year. The improvement was mainly due to the savings from the completion of the aforementioned Tennis Australia contracts. We remain prudent in our contract negotiations and prioritize long-term profitability for our sports rights. Turning to the United States, our highest growth segment. Revenue grew 55% in the quarter to €40 million. We saw more than 80% growth in our betting and gaming revenues, surpassing our media business in the US. This is the second quarter in a row that we've seen our betting and gaming business outpace the media business, which indicates the growth opportunity we have in the US with our higher value products. Our advertising business also experienced growth of 87% in the quarter. This market remains strong as online betting expands to more states and betting operators increase fan engagement in more mature states through same-day parlays and more targeted advertising. The US adjusted EBITDA was €7 million. This represents the third consecutive quarter of positive adjusted EBITDA for the US market. The adjusted EBITDA margin was positive 17% versus a negative margin of 25% in the prior year as a result of the growing scale of the business despite continuous investments. Turning to our costs. Personnel costs for the quarter increased by €25 million to €77 million compared with the same quarter last year; however, it was down almost €4 million compared to Q4 in 2022. The annual increase was driven by increased headcount associated with our investments into artificial intelligence and computer vision technologies, higher share-based compensation, and inflationary adjustments for labor costs. As we have outlined before, these are investments to support the future growth of core betting products and obtain operational leverage in the medium to long term. At the same time, we have the ability to curb costs if needed to maintain growth and continue to deliver margin. Other operating expenses were €21 million, an increase of €2 million or 9% over the prior year. The increase was the result of higher software licenses as we hire more employees, marketing and travel expenses paid to certain major events like the ice exhibition, and higher costs for auditing and implementation of a new financial management system. Total sports rights costs decreased by almost €3 million to €51 million in the first quarter of 2023. The decrease was primarily the result of the completion of the Tennis Australia contract and our efforts to optimize our sports rights mix. For the quarter, our sports rights were 25% of revenue, in line with our guidance. Our liquidity remained strong at the end of March with cash and cash equivalents plus our undrawn credit facilities resulting in €460 million liquidity. We generated over €12 million in adjusted free cash flow for the quarter even with our 2022 bonus payout and some adverse effects. The cash conversion was 34% in the quarter compared to 48% in the prior year and a significant improvement over the negative cash conversion last quarter. We continue to focus on improving our cash conversion cycle. As a reminder, our more mature products, such as live data, live odds, and audiovisual services are based on a subscription model, whereas our faster-growing segments like our Managed Trading Services and our US betting products are based on a revenue share model. Revenue share has an inherent delay in receipt of payment as you can invoice customers only after the service periods while subscription services are invoiced at the beginning of the service period. Our first quarter working capital result is an early indication of the effectiveness of several initiatives we are undertaking to improve our cash flow conversion. We are reaffirming our annual guidance for 2023, with revenue to be in the range of €902 million to €920 million, reflecting annual growth of between 24% and 26%. For adjusted EBITDA, we are guiding to a range of €157 million to €167 million, representing a year-on-year increase of between 25% and 33%. Lastly, it has been a pleasure to serve as the interim CFO at Sportradar. I am excited to begin the transition to Gerard and introduce him to all of you. As Carsten stated, we are off to a strong start in 2023. We remain focused and executing on our growth strategy, maintaining financial discipline, and returning value to our shareholders. With that, we are now happy to open the call for questions. Operator, can you please open up the line for questions?

Your first question comes from the line of Bernie McTernan of Needham & Company.

The US has been just EBITDA positive for three consecutive quarters now. How should we expect the margins to trend for the rest of the year and into 2024 with the new NBA contract and potentially a tennis contract as well? And specifically on the NBA, just any additional color you can provide for how revenue and costs will be recognized.

Uli, I think that's a question for you.

We expect that the overall US segment will continue to show profitability as we see revenues grow over the fixed cost base. As we've communicated on previous calls and as we also stated in the fourth quarter, the new NBA contracts will kick in. It's more of an accounting issue that will be reflected in the fourth quarter since we have to amortize bigger rights deals over the entire rights period. We have to capitalize bigger rights deals at the beginning of the rights period and then have to amortize it over the useful life in a straight-line method. Therefore, we will see that in the beginning of the rights period, we will have higher amortizations compared to the cash payments that we have to make to the leagues because we basically have to amortize already the average of the eight years rights period. Therefore, we expect that the profitability in the fourth quarter in the US segment will go down, potentially slightly negative. Overall, in the year, we expect that the US will remain positive.

You guys called out AI investments and Computer Vision impacting the quarter. I would just love to get your thoughts in terms of maybe how long those are going to be a net drag on the P&L, how you expect that to drive revenue growth and over what timeframe?

The industry is in a transformation process. We are replacing human beings collecting sports information with digital systems. This is a continuous process and will be rolled out across most sports. What it provides is much deeper insights into the sport, which allows us to create new value-creating products for our clients. So the answer here is it's a continuous investment and you're going to need to do it to stay on top of the technology and to serve the clients with products that create value for them. You will see this – we have demonstrated this in table tennis, we are rolling it out in tennis, and we are working hard with our partners, NHL and the National Basketball Association, on using that deep data to create insights. It's about probability creation that we can do with this massive new data. Of course, we can drive new innovative products. To summarize, this is an industry transformation and the market is very hungry for data and for the products based on this.

Your next question comes from the line of Ryan Sigdahl of Craig-Hallum Capital Group.

So, it seems that the Tennis Australia contract wasn't profitable based on the financial movements observed. Is that correct? Additionally, are there any further opportunities to optimize contract rates for any low or no margin business that you have?

Well, I think we are demonstrating pretty well how good we are managing these costs. We are flat. If we look now from proportion on revenues to the spend, what we are doing with the sports rights, I think we demonstrated that we can manage this very well with this quarter's results. Looking now specifically into Tennis Australia, whenever we are closing sports rights deals, we want to have a return for our investors and we want to reach our goal margin. That was not possible in this case, which is reflected in our results. We increased the margin by more than 7% comparing this quarter to last year, so that shows it was the right decision to be made.

For my second question, the integration within ads into Snapchat, how's that gone thus far? Secondly, is there an opportunity to expand that into other social networks, thinking TikTok, Instagram, Facebook, etc.?

Yeah, exactly. We are thinking in this direction. There are a lot of talks here. It’s an exciting area for us. Snap is from a technology perspective very quick in adopting and integrating. So that was a very good partnership for us. But the paid social is, besides the programmatic advertising, a very interesting segment for us, and you will see more rollouts here.

And your next question comes from the line of Michael Graham of Canaccord.

There have been a lot of allegations around gambling in college athletics. And I just wonder if you could refresh us on your integrity services and how important that is in your product portfolio. I also wanted to ask a broader question: The US economy seems like it's going to go into recession, it's widely expected. Can you comment on how your business is expected to perform in pockets of soft economic activity, either in the US or around the world? What do you typically see from your customers and how does the business tend to perform in those periods?

Let's split it into two pieces. I will take over the first and then let's go to Uli for the recession piece. You might refer to the Alabama case, where we had a coach in college who used knowledge for placing his bets. That is not something unusual. It happens rarely, but it happens. I think it's a masterpiece to show how important regulation is. We could detect this because there is a regulatory framework. People are not wagering abroad in some anonymized way with some doubtful operators. The US has a very strong regulation, which allows us to identify these issues. Integrity is everything in sports betting and in sports. We all love sports; we want to see fair competition; we must ensure that this is the case. That unites sports and the sports betting industry as well as operators like us. Integrity is key for this reason. We have invested for over 15 years continually and we pride ourselves on having the most robust and universal integrity system in the world with numerous partnerships with sports leagues and federations. We also extend this with standards in responsible gaming and gambling standards for monitoring where bets arise. We are in that process in the US and I see positive signs here, with the industry fully aligned on this. I must reiterate that regulation is vitally important. The Alabama case shows this can be detected to help keep our sport clean and act responsibly in sports betting. Now I hand over to you, Uli, for the answer on the recession.

We actually looked at the impact on recessions more from a global perspective, not US specific, because there's simply more data available. The global betting market is expected to grow 11% annually through 2027. When we look at the historical growth rates, we have seen that the global betting market, like our underlying market, has grown through all crises, with the only exception being in 2020 when a large number of sports competitions did not take place. When we look at our company's performance, we have consistently managed to grow almost three times faster than the underlying markets due to our ability to upsell and cross-sell to our customers and move them higher up the value chain. Based on these growing revenues, we expand our margin due to the operational leverage that we have in our model, and that has led to profitability. The resilience of the underlying markets, particularly of our business model, has led to consistent growth of Sportradar since its inception, despite all of the crises we have experienced. A good example is even in the year 2022 when the global betting markets were contracting by 11%, Sportradar still managed to grow by 6%. Therefore, we are confident about how our underlying market will perform in a crisis and how our company will perform in a recession.

Your next question comes from the line of David Katz of Jefferies.

You've covered a lot already. Quite frankly, the question on my mind is the one you just answered. But I'd like to go a step further. If you could just talk about the puts and takes and/or the pivotal factors that may lead you to upside to your guidance this year versus downside. Which are the issues that are maybe hanging in the balance that may or may not be within your control?

David, we are a sports company. Let me answer with something which I hear from a lot of coaches in sport: You should never judge the final match outcome based on the result in the first quarter. It's an indication. We confirmed our guidance, and taking into consideration that sport perspective, I think it's too early to change anything on this. We confirm our guidance. Based on the data, we are exactly on track. That's the reason why we do what we do. We have a new CFO coming in with Gerard Griffin, and the new CFO will review critical numbers. We did this in the onboarding process already. I expect no changes here, but anything can happen. However, there is no expectation of a change. Confirming the guidance is a strong signal of our confidence in our plan and the business we have developed, shown in quarter one.

And presenters, there are no further questions. I would now like to turn the conference back to Carsten for closing remarks.

Thank you for joining us today. Our first quarter results reflect the solid execution we expect to see also for the rest of the year. We continue to invest in our long-term growth opportunities and are confident that our business will deliver long-term growth with recurring revenues, high client retention, strong cash flow generation, and higher value for our shareholders. Thanks for joining this call.

Thank you, ladies and gentlemen, for joining us today. This concludes today's conference call. You may now disconnect. Have a great day.