Super Group Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 24, 2023

There are 8 speakers on the call.

Operator

Good day, and welcome to the Super Group Results for the Q1 of 2023. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Lisa Kemp, Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Good morning, everyone, and thank you for joining our call today to discuss Supergroup's results for the Q1 of 2023. During this call, we may make comments of a forward looking nature that are subject to risks, uncertainties and other factors discussed further in our SEC filings that could cause our actual results to differ materially from our historical results or from our forecast. We assume no responsibility to update forward looking statements other than as required by law. Additionally, on today's call, we may refer to certain non GAAP financial measures. These non GAAP financial measures are in addition to and not a substitute for measures of financial performance prepared in accordance with GAAP.

Speaker 1

We have 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 Supergroup's website. In addition, we will speak to our financial results and metrics for The Q1 of 2023 in 2 parts, highlighting our profitable and cash generative global business separately from our investment in the U.

Speaker 2

S. This aligns with

Speaker 1

the annual guidance that we have provided for 2023 and is consistent with both how we view our business internally and how we will Going forward, we recommend that investors refer to our supplementary presentation posted to our website. On this call, I am joined by Neil Manasseh, Chief Executive Officer Richard Hessens, President and COO and Alinda Von Weich, Chief Financial Officer. And now, I would like to turn the call over to you all.

Speaker 3

Thank you, Lisa. Good morning, everyone, and thank you for joining us. Earlier today, we reported strong Q1 financial results With net revenue excluding the U. S. Of €332,000,000 and operational EBITDA of €51,000,000 Separately for the U.

Speaker 3

S, our net investment for the quarter was €17,000,000 Year over year comparisons For our non U. S. Business, our typical this quarter for 3 reasons. Firstly, our business in Canada in quarter 1, 2022 was Still benefiting from COVID lockdown. Secondly, in 2023, many of the local currencies in which we Trade, including the Canadian dollar, depreciated meaningfully against the euro, our reporting currency.

Speaker 3

And thirdly, our brand B has materially reduced. So it's helpful to look at our results sequentially to appreciate the progress we have made. Net revenue for the Q4 of 2022 was boosted by the FIFA and Cricket World Cup. So it's an achievement that quarter 1 of 2023 Managed to have additional net revenue growth on top of that. Even more impressive, our operational EBITDA increased significantly, up 21% from the Q4 of 2022.

Speaker 3

And Linda will go through our financial results for the Q1 in greater detail And Richard has held us today to provide you with an update on the U. S. Our efforts to strengthen the company continue as evidenced by ongoing discussions with our software pass the April cost towards bringing even more of our tech back in house and our continuous evaluation of growth opportunities in current and new markets around the world. Operationally, we remain focused on achieving economies of scale in a targeted manner towards our goal of a medium term operational EBITDA margin in excess of 20%. Our largest expense line item is marketing.

Speaker 3

Currently, we are spending 27% of net revenue to support the long term growth of the business. This It's a conscious decision to spend more than the sector average, and I'm watching it very carefully to ensure we are seeing returns. On economies of scale, I want to point out that this is a market by market objective. Key costs such as regulatory staffing and technology do not Generally, right, directly in line with revenue. Therefore, as revenue grows, disciplined spending ensures that operating leverage kicks in.

Speaker 3

This is key to our business model. Once our fixed costs are covered, then incremental revenue is far more profitable and significantly improves our EBITDA margin. I'm very pleased to say this was well illustrated in the month of March where record numbers for customers, Hold and net revenue resulted in operational EBITDA margin of over 20% for the month. So far this year, we have set multiple records, one after the other for daily asset customers with March comfortably breaking the monthly record when it ceded 3,800,000 for the month. For the quarter, average excess customers significantly increased to 3,500,000 per month from 2,600,000 in the prior quarter, a 74% increase.

Speaker 3

Financially, we remain strong and flexible. There is €246,000,000 of unrestricted cash on our balance sheet, which we are using to support the expansion of our U. S. Footprint and other markets as well as for gaining further control of our tech stack in support of the continued growth of our business. In addition to this, our consistent profitability and cash Generation also allows us to explore potential M and A opportunities as well as flexibility in returning capital to shareholders.

Speaker 3

Now turning over to some of our key markets. Firstly, after much anticipation, the U. K. Proposed gaming reforms were released at the end of April. So expect that some pros before we will have minimal impact on our U.

Speaker 3

K. Business. Overall for Supergroup, European markets are looking up. The U. K.

Speaker 3

In particular has seen strong growth in Betway's Williston, which has benefited from the inclusion of Jumpman Gaming. In Canada, revenue has reduced year on year due to unfavorable currency fluctuations and the short term impact of Ontario's regulatory transition. Trends in Ontario are encouraging and our Canada business remains robust and profitable, including in Ontario. Africa continues to perform very well. The African markets are great examples of where we quickly realize marketing efficiency led by our worldwide global brand awareness for Betway complemented by targeted localized marketing.

Speaker 3

This has resulted in multiple new records in customer numbers in both sports betting and casino and record net revenue and EBITDA despite negative currency fluctuation. Africa's strong performance highlights how business continues to evolve and diversify. Together with growth in Europe, this has given us an improved global geographic balance. Overall, I'm very happy with the competitive progress globally And I'm proud of the record results they've achieved in March, all of which, I'm pleased to say, were exceeded in the month of April, even with one day less in a month. I'll now turn the call over to Richard to discuss

Speaker 4

our progress in the U. S. Thank you, Neil. Good day, everyone. The acquisition of BGC closed at the beginning of quarter 1, and we're very excited about the opportunity that the U.

Speaker 4

S. Presents. To recap, the Betway brand is currently operating in 8 states with market access included up to

Speaker 3

a further 5. The size

Speaker 4

of the U. S. Market, a TAM of $54,000,000,000 is of course very attractive and one that is way too big to be ignored. With DGC still in its early stages, the next 3 to 5 years are going to require significant investment, including an estimated €70,000,000 for this year at around €80,000,000 for next year. Some of you will look at this investment and ask if we have ever spent that much in a single market, but we don't look at it that way.

Speaker 4

For us, each state is a market and in that context, this is quite normal and exciting for us. Why? Because this investment is very manageable for us and easily funded by our existing cash flow. This also expansion on a market by market, State by state basis is how we've grown this business for more than 20 years and we see it as a great opportunity for upside on top of our highly profitable existing global business. We will only enter states where we see a realistic path to growth and profitability.

Speaker 4

States that offer both online sports betting and gaming are more attractive to us and we continue to buy towards those. Same as we do everywhere else around the world, we will continuously evaluate our returns and will not be afraid to put out of markets where this path is not clear. Around the globe, Kistino is a key focus for us. It makes up over 60% of our revenues and we will maintain this focus in the U. S, implementing the same dual offering strategy wherever we can.

Speaker 4

We have therefore secured 2nd iGaming skins in both New Jersey and Pennsylvania, where we aim to launch our leading spin brand, Jackpot City, later this year. For now, within DTC, the focus is very much internal and on our existing sites with a key The migration onto the Betway Global Technology Platform. During this time, we expect to keep localized marketing relatively small and ensure that the per state unit economics stack up. On a state by state basis, from the date when we rollout our Betway Global Tech and begin significant investment into marketing, we expect that we will need about 18 months in order to fully assess viability for that state, after which we aim to reach breakeven within another 18 months. Overall, as of now, we expect our first EBITDA positive quarter for the U.

Speaker 4

S. To be in 2026, and we expect 2027 to be our 1st EBITDA positive year. Of course, Should the footprint of life or accessible states expand, then these numbers will change accordingly. And that takes me to our investment thesis. In our view, the best way to see DGC is essentially as a call option on the U.

Speaker 4

S. Our global business will continue to run as before. We expect it

Speaker 5

to continue to grow and to generate cash and the DGC acquisition is an opportunity for upside on top

Speaker 4

of that. We've shown all over the world

Speaker 5

that we do not require significant market share to achieve profitability and the U. S. Is no different.

Speaker 4

We look forward to updating you through our journey. I will now turn the call over to Linda, who will discuss our financial results in more detail.

Speaker 2

Thank you, Richard. I will now take you through our financial results for the quarter, where we have seen continued momentum from quarter 4 last year. I will start by discussing our global financial results separate from our investments into the U. S. Excluding U.

Speaker 2

S. Results, Total revenue for the quarter was €332,000,000 Net revenue, which does not include brand license fees, Grew to a €321,000,000 a 2% increase from last year. As Niall mentioned, The current offer is not directly comparable to the Q1 of 2022 due to COVID, currency fluctuations and the change in our brand fee. Sports book revenue increased by €9,000,000 in the Q1, growing 8%. In Casino, Net revenue decreased by €3,000,000 or 1%.

Speaker 2

The key drivers behind the overall increase in net revenue includes A Stronghold boosted by a record month in March, following the worst 4th hold during February, strong customer acquisition and retention in This growth was partially offset by lower revenues from Canada due to the Canadian dollar weakening against the euro as well as Ontario's Ongoing transition to a regulated market. The impact of the euro strengthening against other local currencies that we trade in and lower revenue from the APAC region. Customer numbers for Sportsbook increased 53% compared to Q1 of 2022. We are pleased to see the continued momentum of Strong customer numbers from the Q1 of 2022 with month on month growth during the Q1 of this year. This was largely due to effective marketing strategies, strong payback results and good retention initiatives.

Speaker 2

Even though we saw a slight decline in the casino revenue numbers, our customer growth remains impressive, up 45% in the Q1 compared to last year. The increase in customer numbers was due to strong acquisition of new customers, which grew 29% year on year, helped by Operational EBITDA for ex U. S. Business of €51,000,000 for the Q1 of 2023. Compared to the Q1 last year, operational EBITDA was impacted by lower brand license fees, high cost of revenue, which includes Regulatory fees and taxes as well as agency fees in Ontario and an increase in general and administrative costs, which is mainly due to inflationary increases and higher infrastructure expenses.

Speaker 2

This was offset by lower and more levels of investment in marketing. Our marketing spend sits at 27% of net revenue, which is a result of conscious decision that we have made to invest in the long term growth of the business. While we could reduce this marketing by 5 to 7% of net revenue, which would result in our EBITDA increasing substantially in the short term And align us much more closely with what our competitors are spending, we don't believe that this is in the best interest of our business in the long term. To contextualize this, if we would reduce our marketing in quarter 1 by an amount equivalent to 5% of net revenue, Then an additional €16,000,000 would have dropped to the bottom line. EBITDA margin was over 15% for the quarter.

Speaker 2

We remain focused on both growth and cost saving strategies to drive margins back to higher levels in 2023 and beyond. Our EBITDA margin has already improved sequentially from 13% in the Q4 of last year, despite some customer friendly post results and early days in the delivery of our expected cost efficiencies. In March, we comfortably proved how operating leverage work in our business, reaching the level of scale that resulted in an EBITDA margin of greater than 20% for the month. Turning now to our U. S.

Speaker 2

Business. Our net investment for the quarter was €17,000,000 Funding our U. S. Expansion from internal reserves remained very manageable for us, And we ended the quarter with an unrestricted cash balance of EUR 246,000,000 Our balance sheet continues to remain strong following the acquisition of DGC. The acquisition resulted in DGC's debt of $129,000,000 coming on to the Supergroup's consolidated balance sheet, which is directly offset with a restricted cash balance of the is one of our key engines for revenue.

Speaker 2

We continue to invest for growth in the business around the world and driving cost efficiencies Through our new business remains a key focus. We are therefore confident in our outlook for the year, and we are reaffirming our guidance for both the U. S. And non U. S.

Speaker 2

Business for 2023. I will now turn the call back to Neil. Thank you.

Speaker 3

Thanks, Belinda. Supergroup has delivered another solid quarter and remained profitable and financially strong. We have many avenues of future growth across the globe to be positive about. To wrap up, let me summarize where we are. March was a record month and April was even better.

Speaker 3

Key global markets such as Canada, Africa and Europe are growing well in a local Currency, some of them move really strong. Our U. S. Business is developing according to plan. It's a marathon, not a sprint, and we've got the legs for it.

Speaker 3

We have a firm hand on our cost synergy and operating leverage benefits are coming through strongly as we saw in March and again in April. We will continue to optimize our tech, which will add to our upside in the long run as we take better control of products and cost. Overall, we have done well in this quarter, and I'm optimistic for the future. But I'm a glass half empty kind of CEO. I don't waste any time looking back at what we achieved.

Speaker 3

I'm far more interested in all the work that we still have to do and the great opportunities that lie ahead of us.

Operator

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

Speaker 6

Hey, great. Thanks for taking my question. Just first one on the outlook on the guidance. So you're reaffirming your guidance. If I understand you correctly, April was a record month.

Speaker 6

Can you kind of tell us how May is trending? And I mean, do you expect to see sequential growth in 2Q? And then on the U. S, Just we are seeing sort of market access, the cost for market access go down. We are seeing some consolidation.

Speaker 6

Just when you think about the U. S, I guess the one thing to highlight, while there are it's 50 different regulations with all the states. How do you think about competing against the players that can actually leverage brand advertising and amortize that

Speaker 2

Thanks, Jed. I'll start off and then I'll hand over to Richard for your Question. Yes, so April 100% looks really good and promising as a good start for quarter 2. Maia is not looking bad either, but I mean regarding our guidance, we feel comfortable that obviously these targets that we set for ourselves is going to be reached, But it's really only 4 months into the year. So very early to say, to make a projection about the quarter We are still results and then they are beyond, but it's looking promising.

Speaker 4

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

Speaker 4

And then of course similar to other markets complementing that global spend with very localized marketing. Got it. And then

Speaker 6

I had a follow-up. Just on the regulatory front, I know last year there was some regulatory headwinds with Germany and the Netherlands. I mean, as we think about this year in terms of like the comping are the regulatory comps, You have what's going on in the U. K, but will the regulatory comps be easier or tougher this year? Thanks.

Speaker 3

Okay. Well, firstly, Germany, obviously, it's been dealt with and there's still casino Netherlands, we are still waiting for our license there. But compared to the other markets with the UK white Paper and the other markets, it's no different to how it's been before. I think actually this year has got a price to us. So the sooner and the U.

Speaker 3

K, I mentioned earlier,

Speaker 4

it's about we

Speaker 3

just wait for the final legislation to come back and we're in a very good position.

Speaker 4

The

Operator

next question comes from Bernie MacKernan with Needham and Company.

Speaker 5

Great. Thank you for taking the questions. Maybe just to start following up on Jed's last question, the really strong results in March and

Speaker 3

Well, as Linda mentioned, it's good customer numbers. It's obviously good sport And our continued focus on casino. And what happens in these businesses, when all of these things come together, your revenue obviously increases and then you get this huge leverage. And that is key to what we saw in March and I think in April. And for us, it's about every country making up our global portfolio, quarter 1 global revenue.

Speaker 3

And it's about Each country now being operationally most a vast majority of them being operationally Per region, so it means every extra bit of revenue we get is at very high margins and this is And it's connected to each of their countries.

Speaker 5

Understood. And then following up on the comments on the medium term operational EBITDA getting to 20% or above, Is that how much of that is just sales and marketing coming down versus revenue growth versus U. S. Investment coming down? Just trying to think about some of the large moving Of being able to get there, especially in the context of March being above 20%.

Speaker 2

Yes. Thanks, Bernie. That is why I tried to put in an illustrative kind of scenario to say, if we cut potentially 5%, that will straight go Down to the bottom line. That's not how we run our business and that's what we're trying to illustrate. We don't want to cut marketing for short term gain.

Speaker 2

We want to really make sure that we are home this marketing spend and reinvest like Neil just said in countries where we can see the returns, reinvest In those countries for the long term guide.

Speaker 5

Understood. And then just last one for me. The of getting to 1st quarter profitability in the U. S. In 2026 and a full year basis in 2027.

Speaker 5

What does that contemplate from a standpoint or market access, in terms of new states coming online?

Speaker 4

Hey, Barry. So those timelines are based on our current geographic footprint, That's an additional state to be launched in the next 3 months. And then as we said, as additional markets come online, we will reassess that Again, very much on a state by state basis and finding the path to profitability in each of those days.

Speaker 5

Understood. Thank you all.

Operator

The next question comes from Michael Graham with

Speaker 7

Just on the customer growth, it was a Really strong growth sort of unseasonably, I guess. And so, I know you mentioned that you had Some more efficient marketing, but can you just maybe go a level deeper there? Were there geographies where you saw a good customer growth? And What did you unlock on the marketing front? And did the customers come sort of in a linear fashion during the quarter?

Speaker 7

Or just how should Think about what you were able to accomplish there.

Speaker 2

Hi, Michael. It's Lin Maria. Yes, so Priti, we share the high level geography growth on the website, which you can just go and review there as well. But it's predominantly I mean, the marketing strategy is starting to work because I've also mentioned like the newly acquired Also growing, which is a good element for us up to 29% casino. But the growth is in jurisdictions where there is As the market is changing and the world is changing, it's higher volume customers, but with lower value input.

Speaker 2

We've seen it in Europe and Africa predominantly. UK, obviously, as part of Europe, and that's mainly due to the responsible gaming measures. We've also added Jumpman, which has a whole different business module with more recreational lower value kind of customer base. And then just a big comparatives between quarter 1, 2023 to 2023 is remember in quarter 1, we had Ontario As a non regulated part of our business, which is obviously transitioning, had an impact also on the numbers, But the growth is forthcoming in the customer base.

Speaker 7

Okay. Thank you. And actually wanted to ask about Just sort of a year into it, can you comment on like how that's going, in particular, how the competitive landscape is shaping

Speaker 3

So again, it's optimization of our customer experience. We're still making good money in Ontario. We are very happy with how we saw Vision Day. It's Since August September last year, they're still 6 to 8, 9 months, 10 months, so it's making good progress. And we are and for us, it's all about similar to other markets.

Speaker 3

We understand regulation. We understand what the product has to do in these regulated markets, and we compete

Operator

This concludes our question and answer session and the Super Group results

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