Jul 27, 2022
Mia Nordlander
Good morning everyone and welcome to Kambi's Q2 2022 Report Presentation. My name is Mia Nordlander, I am Senior Vice President, Investor Relations and today I have our CEO, Kristian Nylen; and CFO, David Kenyon with me.
They will present the quarter for you and thereafter, we will have time for questions. [Operator Instructions] So, over to you Kristian.
Please present the quarter for us.
Kristian Nylen
Thank you, Mia and good morning. So, today I'm planning to go through the highlights first and then hand over to David to run through all the numbers and then I come back and talk more about the Q2 in detail.
So, the highlights I would say we had a very robust financial performance against the very demanding 2021 comparatives. A tough comps I think first of all last year, it was a European Championship.
And normally we would have expected a World Cup, this year but that is moved to December. So, the sporting calendar is quite slow this summer.
We also don't have the same kind of revenues from Netherlands since our operators pre-regulation, nearly reregulation in Netherlands is still not operating. Of course we have as I will talk about later Kindred coming back into a market early in Q3.
And the largest factor of course is that all numbers were still including DraftKings last year. So, our operator turnover this year is up 16% if we exclude the DraftKings number.
During the quarter, we also achieved a key milestone study. We were first phase completed of separating our pricing from a core platform in what we call the trading gateway which I will talk more about later.
We strengthened our partner network by extending our relationship with betPARX we even longer contract. We also signed Mohegan Gaming in Ontario.
And finally, we expanded in America, our Americas Reach with day one launches in Canada or Ontario with four partners and then one more later on. We also have done quite a few launches in our countries mainly in US and Mexico.
With that, over to you David.
David Kenyon
Thanks Kristian. Good morning everyone.
So, overall this quarter, we saw a very strong financial performance. We continue to be profitable.
We see underlying operator turnover growth and we have a powerful balance sheet. As Kristian mentioned, we saw 16% growth in that operator turnover that excluding DraftKings and that's despite the impact of the Netherlands regulation and the Euro Soccer Tournament last Q2.
So, very strong numbers there. And that strong turnover allied with it a margin of 8.6% lead to revenue of €34.7 million.
Costs pre-FX of €32 million were in the forecast range and they were offset to the tune of just over €2 million on foreign exchange gains relating to the revaluation of our US dollar assets. This gave an operating profit of €4.9 million at a margin of 14.1%.
And our net cash position of €74.2 million gives us firepower to continue using our balance sheet to drive our strategic growth. The next slide here is the Kambi turnover index.
It's an aggregation of the entire Kambi networks results quarter-by-quarter. The blue columns are an aggregation of the operator turnover, index set -- originally set to 100 when we spun off the business and the orange line is an aggregation of the operator trading margin every quarter.
This quarter the margin was 8.6% and when we looked at the comparatives that was pretty high last -- this time last year at 9.3%. The operator turnover on the index is 656.
As Kristian mentioned, it's a very quiet Q2 -- its typically quiet from sports calendar perspective for many of our key sports. But of course this year there will be a World Cup taking place in Q4 and a condensed football calendar before and after that World Cup.
So, some strong months ahead. In more detail than on the operator turnover versus last year.
So the turnover went from 911 on that index to 656. Firstly, there were some big headwinds we should talk about.
Firstly, and by far the biggest in terms of financial impact was the DraftKings migration, which we saw after Q2 last year. That DraftKings accounted for 20% to 30% of our revenue Q2 last year.
In the Netherlands, of course, there was no activity with Kindred here in Q2 this year, but we are delighted to see them obtain a license and launch in early July. And year 2020 was delayed to 2021 and the majority of the matches took place in Q2 last year.
And again, we are very much looking forward to the World Cup taking place in Q4 this year. Those headwinds have been offset though there have been some growth factors here.
We have new operators since this time last year, they include BetCity, JVH and [indiscernible]. We've moved into new markets including Arizona Connecticut Louisiana and most recently Ontario.
And we've seen growth from some of our existing operators, both in their organic growth and but also in their geographical expansion into new markets. This then feeds into the waterfall of the Kambi revenue conversion, which sets out how operator turnover movement resulted in our revenue movement versus last year.
So constant exchange rates, operator turnover was down 32% on Q2 2021. For the reasons I've outlined.
Due to the dollar being stronger than last year versus the year, this decrease was reduced to 28%. The operator trading margin of 8.6% compared to the very high 9.3% last year.
And there in the other column, you see a big kind of positive impact on our revenues. There's quite a few drivers behind this one.
Firstly, most importantly, our customer contracts often include tears, which charge significantly less on the upper bands of activity. So the lack of DraftKings and other factors impacting the NGR results in a relatively higher effective revenue share across the network overall.
Secondly, we have more live events income this quarter and other fixed revenues, which are not driven by the levels of operator turnover. We also have revenues from settlements with Mohegan Sun, which has a fixed revenue each quarter.
And we have revenues from the Abios business which were acquired at the end of last year. The net effect of all these factors is a 19% decrease in our revenue in total to €34.7 million.
Last, I'm going to talk about the cash flow. There's a few particular points to note this quarter.
Firstly, the CapEx is slightly higher than we usually see we've had some fitout costs in a couple of our offices. The tax impact you see on the right hand side there is higher than normal.
So we're do a tax refund as part of our yearend tax position. And that's expected to be received in Q3.
But that magnifies the effect of the tax outflows here in Q2. And in terms of inflows, we receive €2.6 million in relation to the option price on share options settled earlier in the year.
The net effect of all these various cash flows is an increase in our cash position to €81.6 million. With that, I hand you back to Kristian.
Kristian Nylen
Thank you, David. Okay.
So as I mentioned earlier, we have of course kept on working on our strategic work with modernization. And we have done one key milestone that was achieved during the quarter and that is the trading gateway interface where we have completed the first phase.
So for first time, we have some standalone pricing for low league soccer, so that are not done through the normal way that we have done for many years, where pricing and trading and technology was heavily intertwined and it has served us well for many years, but we have a new set up. It will give us a lot of new benefits and also our customers that I will talk a little bit more about.
So we have a creation of this standalone pricing functionality. We now have a set up where we can much faster develop new algorithms for different sports and tweak them and change them a much, much quicker.
So we will have much faster pace on our internal development. It also gives us the opportunity to package and sell products outside of the normal fully managed service.
So, that's a very positive modernization effect. Also, it gives us another crucial element and that is about our existing partners or future partners, can now in the future be able to trade some of this themselves, if they would like to.
And we can also give opportunity to our third parties, but we ourselves or our partners want to add to the pricing. So, very crucial step for us and we're very pleased to see that it worked very, very well and it's still a lot more work to do on this gateway, but a very crucial and important first step.
Another thing that we have managed during the year and during this quarter is a new betting market. Where we can bet on if a serve in tennis is making an ace, within a game.
This is unique for our network we believe. So it gives our operators a great differentiation from the rest of the market in a very popular sport in tennis.
And this feature, we update orders off to every single point, up until of course if an ace is being served within the game. And with that, we would like to show you a promo of this.
[Video Presentation] Thank you, so yeah. I hope you enjoyed that little promo.
So now, I would like to talk a little bit about some commercial updates. During the quarter, we strengthened our presence more in Ontario with signing in agreement with Mohegan and it's a Fallview Casino.
The Fallview Casino is the largest gaming resort in Canada. We would very nice ramped.
So I think and hope that will strengthen our presence with a great local partner in Ontario. During the court, we have also extended the Greenwood Gaming and Entertainment agreement and its betPARX brand that currently operating in three states, and we hope are quite positive about us being able to support them in very expansion into new additional markets.
Thus every quarter, we have been very active. We have a lot of new launches I think give a total number this quarter was 18 in new launches.
And the major ones here, we went live in Ontario on day one with four our partners, and after that we have added a fifth during the quarter. On the final day of the quarter, we re-launched in Mexico with Rush Street entering the market.
Rush Street has built a very prominent position in the Colombian market, and we hope we will be able to do the same in Mexico. Online launches in the US, we have done with Rush Street in West Virginia, and we've sold an Eagle in Michigan.
And on the US retail site, we have done two several launches. I think three in total.
We've Kindred in Arizona and also we've Churchill Downs in Louisiana. So yet another busy quarter and we hope there is plenty more to come.
At the moment we are preparing for Kansas for the start of a new football season in September and we hope Ohio is next in turn. We are still hopeful for sports betting regulation to get green light in Brazil very soon.
So that would be absolute major market for us, of course, and a lot of attention for us will be on California, November when to sports betting bills will go to the web ballot. In June it was great to see us winning another three awards at EGR awards.
We won with sportsbook platform a year for the third consecutive year. So I think, we just cementing our position as the premium supplier of sports betting in the industry.
We also, especially, proud of a winning the sports betting Software Innovation of the Year with our BetBuilder product. We have been spoken a lot about our BetBuilder product in the last quarterly report and about the possibility to combine across games and sports with this -- which is fairly unique with Kambi.
So it's very pleasing to see recognition it deserves from our peers and also recognition for all our people internally who is continuously improving the product. After Q2 or in July I would say Kindred has reentered Netherlands with Unibet brand.
So yes, we hope that that will be very positive for us going forward in Q3 and Q4. And with that we think strengthened our position significantly in Netherlands where we already have BetCity and JVH active since market reopened -- reregulated.
And we also expect additional partners that formerly was in Netherlands will reenter the market in the coming quarters. So to summarize the Q2 as I started with it was a quieter than normal quarter from a sporting calendar perspective.
I think we've made some great progress on our strategic plans. We have achieved a key milestone.
We were successful complete the completion of phase one or trading gateway. When it's all finalized, it will deliver multiple benefits for Kambi and for our partners.
We have during the quarter expanded to support more partner launches in several different markets. And looking ahead, we expect things to happen in Ohio and Brazil.
And as I mentioned we're really looking ahead for November and web ballots in California. These three markets would definitely increase our term.
We are a very profitable business with strong financial performance. And we have a very strong balance sheet.
So I believe we are very well-positioned for the future. With that, I think it's time for question.
Thank you very much.
Mia Nordlander
Yes, thank you Kristian and David. We will start with the questions on the telephone.
So over to you operator.
Operator
Thank you. We will now begin the question-and-answer session.
[Operator Instructions] The first question comes from Oscar Ronnkvist with ABG. Please, go ahead.
Oscar Ronnkvist
Thanks. Good morning, all and thanks for taking my questions.
I have four, if that’s okay? So starting on the recruitment pace, I noticed you only hired 10 people in the quarter, had quite a steep decrease comparing to the six previous quarter.
So I was just wondering, if you had any comments on the recruitment pace and what we can expect going forward?
Kristian Nylen
Yes, sure. I think, we are recruiting quite well.
I think, us, as many other companies, after COVID has had a much higher staff turnover than we are used to see. So net, it's looking a little bit tougher at the moment.
Having said all of that, I think, we also see what varies quite a few of the larger competitors when it comes to tech people here in Stockholm, who are decreasing their staff. So I think it looks very positive going forward.
Oscar Ronnkvist
All right. So can I interpret that that pace should increase a bit in Q3, Q4?
Kristian Nylen
Yes. I definitely hope so.
Oscar Ronnkvist
Okay. Thanks.
I had a question next one on your OpEx and OpEx guidance, but first David, could you explain you had a positive FX impact on the OpEx? Is that correct?
David Kenyon
Correct.
Kristian Nylen
Yes, as you can imagine, with the majority of our business now coming from the US, we do have a lot of cash inflows in US dollars and the dollar has strengthened significantly, both versus Q1 but -- and equally against Q2 last year. So, yes, that's a kind of a one off unrealized revaluation on those in the books on those US dollar accounts.
Oscar Ronnkvist
All right. But on your OpEx and OpEx guidance, they have seen, both Q1 and Q2 coming in well below your guided midpoints, yet your new OpEx guidance midpoint is raised slightly.
So just looking at the midpoint of your Q3 guidance and the implied Q4 OpEx then, that would be a Q-o-Q increase of 12% and 14% respectively. So can you just share your explanation of what is driving the slow costs in H1 and why H2 increases massively?
Kristian Nylen
Yes. I think, a lot of this has actually FX related, that's your first question.
So actually when you add back the FX -- the real underlying OpEx this time was actually towards the top end of the range of probably €32 million pre-FX. And when we've set the set the full year guidance, we've tried to strip out all FX, because we don’t want to kind of speculate what's going to happen there.
So, actually, we've probably done -- adding back that FX, €62 million in first half of the year and then the midpoints of the guidance is probably €68 million for the second half. So it's -- yes, it's probably lower percent of growth quarter on quarter than it looks.
Oscar Ronnkvist
Okay. Yes.
That makes sense. So next one, on your net cash position, it remains quite large.
So can you say anything about your M&A pipeline, like, is that the main explanation behind keeping €80 million in cash?
Kristian Nylen
We are definitely looking at M&A, as we always are, currently of course, comment if we are close with anything, but we are definitely open to do M&A. And if we can't do that at some point, I think, we will look at other ways of distributing the cash.
Oscar Ronnkvist
Okay, understood. Kristian, just a final one.
The last sentence in your CEO word explains your excitement for H2, for instance, mentioning partner signings. So just, given your previous communication of a strong pipeline, if it has, like, how has that changed over the last few months and should we expect the signings to be Tier 1 operators solely?
Kristian Nylen
I don't want to comment about the signings before they happen, but I am still very excited about the pipeline and I definitely hope we will see some signings happening. As I've said many times before, signings are often very tied to new regulations.
So it's hard to know when timings will be, but I feel very good about our opportunities going forward.
Oscar Ronnkvist
Okay. And just a follow up.
Can you share if it's more in the Europe or more in rest of world or in the US, that you see the strong pipeline?
Kristian Nylen
I think in Europe, I mean it's so many fewer opportunities out there, because the market is much more settled. So the opportunity is definitely more of them in US, and in our portrait world.
But yes, we have some opportunities in Europe as well.
Oscar Ronnkvist
Okay. Got it.
That’s all for me. Thank you very much
Kristian Nylen
Thank you.
Operator
The next question comes from Viktor Hogberg with Danske Bank. Please go ahead.
Viktor Hogberg
Yes. Good morning.
Just a minute – a question on the opening status, if you will put it this way, the underlying opening status is same for the top band. It's 133 now versus 135 before, the difference between the positive 2 million FX in Q2.
Is that how we should read this?
David Kenyon
No, not read. I think we've narrowed the range.
So we've taken it down to a €5 million range. Obviously, we're getting closer towards that full year position.
Yes that guidance again is completely excluding FX. So we've had €2.7 million in the first half of the year.
So you know that's -- the guidance is excluding that so you know that €2.7 million in our world is, we will reduce that number. But again we're trying to guide without FX.
We've narrowed the range down into the middle.
Viktor Hogberg
Without the FX we have seen in H1 already. Is that how we should read it?
As well or is it the only or -- that you won't speculate the FX movements in the second half?
David Kenyon
No without the FX, we've seen in H1? So yes, one through H1 2023 be completely out excluding that €2.7 million that we've seen in the first half.
So that would actually reduce that one through H1 2023 on the books.
Viktor Hogberg
Okay. Understood, we get it.
If you were to come in at €133 million then reported, what would that mean if FX were -- you wouldn't see any FX movements in the second half just the ones we've seen in the first half, if we would see a reported FX number of €133 million for the full year, what does that mean?
David Kenyon
Then you would see €133 million less €2.7 million in the books, so €130.3 million in that case. If there's no other FX movement in the year.
Viktor Hogberg
Okay. Thank you.
And on the customer signings on the previous question, this is for Kristian maybe. On the CMD, last year you talked a bit about the potential to sign a midsized or deemphasized European operator that might have come to when it comes to the technical development today, might be looking at outsourcing and talk a bit about that.
We haven't seen it. Is that opportunity still there?
Have that potential signing decided to do something else, or is that opportunity still there?
Kristian Nylen
It's still multiple. It's not only one, but there is the same ones, I was talking about then is still there.
Viktor Hogberg
And have you -- would you say that the potential or the prospect to sign them is better or worse or the same as last year?
Kristian Nylen
I will not comment on that.
Viktor Hogberg
Okay. Did you say -- and maybe for David, did you say anything about ABS?
How much that contributed in revenues in Q2?
David Kenyon
I didn't. But yes, they contributed around €0.5 million this quarter.
The small net profit for them. But I think they're looking forward into H2, when they launched the odd product, which could be hopefully in Q4 now, that's probably when that profitability is forecast to increase for them.
Viktor Hogberg
Okay. But Q3 maybe your revenues at the same level?
David Kenyon
Yes, you can expect that I mean it shouldn't be lower at least.
Viktor Hogberg
Okay. And on the modernization strategy, we previously said that it's reasonable to expect the first potential signing on this one in the first half or early parts of 2023.
Is that still the same time line you would say, or any revisions to that potential time line for adding customers on this one?
David Kenyon
I mean as usual it's hard to know when we do signings, but we still believe that there is an opportunity for us to be able to market and sell it in Q1 next year.
Viktor Hogberg
Okay. Speaking of sports schedule, it was really slow now in latter parts and the second quarter still slow now during the summer, but it's going to ramp up and then we have Kindred live in as well.
What do you expect in terms of sequential movement in revenues potential to see revenues having troughed now in Q2?
David Kenyon
I think, we can't give -- and we won't give a sales forecast. But I mean, you can say that the proper season is starting a little bit earlier than normal.
So -- and with Kindred as well as you mentioned in Netherlands at Q3, yes, we're looking forward to a busy sporting schedule and then hopefully that comes through into the revenues in Q3. But yes, I can't give you a number.
Viktor Hogberg
Okay. And last question for me.
On the regulatory movement side, would you say on a net basis that it has improved for -- is it at the same level as when you did the call?
David Kenyon
I'm -- I don't think it has become long-term better or worse, but I am a little bit disappointed about, especially the pace in Brazil, which I definitely thought would happen during the year when we talked last time and I'm starting to doubt that it will happen in 2022 now.
Viktor Hogberg
Okay. Thank you very much.
David Kenyon
Thank you.
Operator
[Operator Instructions] As there are no further audio questions, I would like to turn the conference back over to the speakers for any written questions.
Mia Nordlander
Thank you very much. I think we start with one for you Kristian.
We said -- we've seen competitors seeing major growth in Latin America. What can be position in LatAm?
And are we seeing any possibilities in the region?
Kristian Nylen
Absolutely. I mean that is a region we look at it very positively.
I mean, we have a very, very strong position in Colombia. We have partners in Peru and in Argentina already and we keep on, yes, looking at more and more partners in Latin America.
But I think the big thing that is a big focus for us now is to find the suitable partners for the opening of Brazil.
Mia Nordlander
Thank you. One for you David.
Are we considering buybacks, or what will we do with the big cash position and low valuation of the stock? Is one question?
David Kenyon
Yes it's a good question. I mean, in the last 12 months, you've seen that we've done both M&A and share buybacks, so they're absolutely on the radar in the agenda.
In terms of M&A, there's some key areas we've talked about before we think which could really strategically drive the business. So I think M&A is absolutely on the agenda, but also buybacks.
We've done it recently and it could well be that we do it again.
Mia Nordlander
Thank you. One question for you Kristian.
With our new modernization strategy, we're saying that offering operators greater control over pricing will drive broader operator appeal particularly among those that wish to trade on a more sports in-house. Have you had any specific interest from operators regarding this?
Kristian Nylen
We have. And I think that has been something we have had interest for many, many years, but we have not felt that that has been something we have been able to prioritize until now.
So there are definitely a few opportunities out there already now, but yes, it will certainly increase our addressable market going forward.
Mia Nordlander
Okay. I think that was the last question from the web as well.
Thank you very much Kristian and David and thank you everyone for listening in to us. We will be back with our Q3 report, 26th of October.
So I look forward to see you then again. And if you have any questions always feel free to reach out to the IR department.
Thank you very much and have a good day.
Kristian Nylen
Thank you.