Super Group (NYSE:SGHC) Limited Q2 2022 Earnings Conference Call August 11, 2022 8:30 AM ET
Company Representatives
Neal Menashe – Chief Executive Officer
Alinda Van Wyk – Chief Financial Officer
Richard Hasson – President, Chief Operating Officer
Lisa Kampf – Vice President of Investor Relations
Conference Call Participants
Bernie McTernan – Needham & Company
Mike Hickey – The Benchmark Company
Jed Kelly – Oppenheimer
Operator
Good morning and welcome to Super Group’s Second Quarter of 2022 Earnings Conference Call. Following managements prepared remarks; we will open the call for Q&A.
I would now like to turn the conference over to Lisa Kampf, Vice President of Investor Relations Outlook for the Year.
Lisa Kampf
Good morning everyone and thank you for joining our call today to discuss Super Group’s results for the Second Quarter of 2022 and outlook for the year.
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 on a substitute for measures of financial performance prepared in accordance with GAAP. The reconciliation of historical non-GAAP financial measures to the most comparable GAAP figures are included in the press release issued earlier today and available on the Investor Relation page of Super Group’s website.
Also, please note that we have posted a supplemental presentation to the Investor Relations section of our company website, along with the press release, the link to the replay of this webcast and filings with the SEC. The presentation includes the financial information that will be referred to during this call.
Today I’m joined with Neal Menashe, Chief Executive Officer and Alinda Van Wyk, Chief Financial Officer. After our prepared remarks we will open the call up for questions, and we will also be joined by Richard Hasson President and Chief Operating Officer.
And now I would like to turn the call over to Neal.
Neal Menashe
Thank you, Lisa. Good morning everyone and thank you for joining us today. Super Group is and continues to be uniquely positioned to take full advantage of the particular growth in the global online betting and gaming market; a sector expected to exceed $145 billion by 2025.
Our Betway and Spin brands enjoyed worldwide reach and recognition, and we are actively working on a number of geographic opportunities that will allow us to deliver future growth, and most importantly, our business is [inaudible] profitable and highly cash generative. This quarter we gain demonstrated the benefits of our global model and recently formed holding company structure, which was good progress made in a number of areas.
We grew average monthly active customers to $2.7 million, up 3% from the second quarter of 2021. We saw good growth in key markets such as Africa and Asia Pacific. Our sports betting continued to deliver positive growth. We kept a smooth anterior license process, with the transition of Betway into the regulated regime, with Spin to follow next week. And we have progressed the U.S. state-by-state licensing of Super Group that is a prerequisite for the acquisition of Digital Gaming Corporation, DGC.
Our result for this quarter of net gaming revenue of €316 million and adjusted EBITDA of €54 million, and for the half year of net gaming revenue of €631 million and adjusted EBITDA of €117 million remain resilient despite the impact of the normalization of entertainment spending patterns post COVID and the current headwind effects of general economic uncertainty on discretionary spending. We expect that these effects will continue to be felt for the remainder of the year, and have updated our guidance according.
Alinda will discuss both our results and our guidance in more detail shortly, but I want to emphasize two things first. One, I believe that our year-on-year results do not properly reflect our achievement over the last 12 months. Our continued progress across the globe is better reflected by growing global sales and ongoing growth in active customer numbers.
Two, ongoing regulatory change plus post COVID normalization will ultimately benefit Super Group, because we have an efficient cost structure and over 20 years track record of trading profitably through thick and thin.
Importantly our control of the marketing our products and our operating costs give us a number of levers to optimize. Here is what we are doing: First, efficient brand spend to maintain global awareness, where we will continue to optimize our portfolio of over 60 worldwide partnerships by focusing on profit. Second, we will enter new markets and expand in existing markets, particularly regulatory changes provide opportunity. In the absence of the cost’s attractive ROI we will reduce or delay spending.
Third, over the next 18 months as we extract cost efficiencies arising from the formation of the holding company with significant savings to be delivered in 2023.
Turning now to some specific market related updates. In Canada we are pleased to report this new contingent last week of Betway to Ontario’s regulator environment and we expect Spin to migrate next week. Given the regulatory restrictions of public advertising of bonuses in Ontario, we don’t expect to see the same level of unsustainable price competition that happened in the United States.
We remain confident from past experience that regulations won’t be favorable for is in the medium and long run and we hope to see regulation introduced to Canada’s other provinces in due course. In the meantime, we will continue to trade as before, and we expect that Canada will continue to underpin our 20 year track record of consistent profitability and cash generation.
Some of the historically key Western European markets continue to be on hold. We are still awaiting licensing in the Netherlands in anticipation of the launch, and we have not yet concluded the assessment of ongoing viability of casino gaming in Germany’s post the new regulation.
In the United States, our goal of completing the acquisition of DGC remains at the end of this year, which is of course subject to be various regulatory timeline. To recap, DGC is a brand licensee of Betway, currently live in seven states and with secured market access in up to 12. DGC will be a tremendous addition to Super Group and the fastest and most efficient way for us to enter the U.S. We look forward to completing the regular approvals and having DGC become part of Super Group as soon as possible.
Moving on to the balance sheet. Consistent cash generation has built a strong balance sheet that is an asset to Super Group. For cash-on-hand, we are considering various opportunities including investing in brand and other marketing channels to generate profitable long term growth; M&A for expansion to new and existing markets or the acquisition of useful skills of technology. DGC is a good example of this and returning cash to shareholders.
Under returning cash, our first Annual General Meeting in September will ask you for authorization to buy back shares. This is a typical and standard debt mobility company and we want that authorization to be able to act if it’s in the company’s best interest. However, we are paying close attention to the [notes closed] [ph] and any use of this authorization would keep that in mind.
In conclusion, let me sum this up for you. We believe that online gaming businesses are resilient, but they are not immune to macroeconomic pressures. What Super Group has is a global footprint and a competitive cost structure that we intend to keep and improve. We are experiencing these pressures, but our underlining business is healthy and we’ll continue to grow over time. Our balance sheet remains strong, our business fundamentals are sound and we are staying focused on long term opportunities around the world.
Thank you. I’ll now turn the call over to Alinda for a detailed discussion of our financial results. Alinda?
Alinda Van Wyk
Thank you, Neal. As we are well aware, 2022 has been a difficult year for many industries, including the global digital gaming industry. With changes in consumer behavior driven by economic uncertainty, revenue growth has slowed down. In the second quarter Super Group’s net gaming revenue was €316 million down 7% versus the prior year quarter. However, on a consistent basis, excluding European market that will close for us this year due to regulatory changes, net gaming revenue in the second quarter have decreased by 5%. Looking at the first half of this year, Super Group’s net gaming revenue is down by only 1% from 2021 to €631 million.
Back to the focus results, we also experienced a shift in revenue mix. In quarter two 2021, our net gaming revenue was 50/50 between Betway and Spin. This year during the second quarter Betway grew to 55% against Spin’s 45%, as sports betting grew, while casino gaming declined. The shift in revenue mix negatively impacts our EBITDA margin, owing to Betway’s lower operating margin as compared to Spin.
Starting with our sports book revenue. Compared to Q2 last year, sports book revenue increased by $6 million or 6%, mainly due to good growth in key markets in Africa and APAC regions, despite being partially offset by declines in Europe and Canada.
Growth in sports betting, net gaming revenue from Africa and APAC markets represent positive momentum, resulting from continued good growth on the customer base and retention rates. In some of the few markets were it does appear that the COVID lockdowns had relatively limited impact.
The growth in APAC was also due to the full IPL season during 2022 after the cancellation of the IPL season in 2021 due to the COVID. The decline in Europe was mostly due to regulatory changes in Germany and Netherlands and fewer sports offerings in 2022, in particular with limited soccer in June this year.
On that note, the English Premier League and France League One kicked off again last weekend and we are seeing an encouraging increase in activity. We look forward to other major European leagues starting this weekend. In conjunction with our EPL brand partnership, about half of this here in games will feature some of Betway’s branding, including our sponsorships with them. Other upcoming events include the T20 Cricket World Cup in October-November, followed by the FIFA Soccer World Cup in November and December.
Moving over to Casino. Casino net gaming revenue decreased by €29 million or 12% compared with the same quarter in 2021 of which €4 million can be attributed to the closure of Netherland with the remainder primarily due to the declining in I-gaming revenue in Canada. We believe that the decline in Canada’s due to a combination of two things. People are getting back to normal behavior post COVID and inflation is putting pressure on spending. Similar factors can be seen in several of our markets across the globe, but the impact is felt most in Canada as that is our largest market.
Despite all of this, our total average monthly active customers increased over 3% to 2.7 million compared to 2.6 million in the prior year quarter. Super Group is well on its way to achieving a diverse mass market business.
On to EBITDA. We continue to present adjusted EBITDA, which is EBITDA adjusted for fair value adjustments on warrants and earn-out liabilities, associated foreign exchange movements and non-recurring expenses. On that basis adjusted EBITDA for the second quarter was down 36% or €30 million to €54 million compared to €84 million in the prior year period. Looking at the half year, adjusted EBITDA for six month period was €117 million, a decrease of only 21% from 2021.
This quarter the steeper decline in EBITDA compared to the decline in net gaming revenue resulted from several factors. Brand licensing revenue declined by €12 million in the second quarter of 2022.
On the expense side, variable or direct expenses decreased by 2% as compared to prior year quarter. Gaming taxes and products cost fell in line with revenue, but this was offset by an increase in payment processing and related foreign exchange cost due to growth in markets with those costs that are structurally higher. Super Group’s marketing costs went down by €7 million or 8% on net basis; a reduction of our variable marketing plus offset by continued marketing investments in partnership deals for long term brand in revenue growth.
General and administrative costs, which was largely fixed in nature increased by €6 million or 10%. Reason for this increase includes nominal annual salary increases, increased technology and infrastructure costs and the cost of additional corporate governance requirements following our public listing back in January.
Looking at our financial position, our balance sheet remains strong with unrestricted cash and cash equivalents of €220 million at the end of June, with no debt. Our cash flow ratio for the year so far a 74%.
On to our guidance. In addition to revising our guidance to take into account the current conditions, we will be reporting review as opposed to net gaming revenue going forward. This is the because the structure in Ontario, as well as certain other jurisdictions and the company likes Super Group operating as an agent of the authority or the license holder. What that means in simple terms is that our reported revenue will include net gaming revenue in some jurisdictions; agency revenues net of fees in other jurisdictions and other revenues such as brand license income.
Back to the numbers. For the full year we project revenue for 2022 under the new definitions to range between €1.15 billion and €1.28 billion and adjusted EBITDA to range between €200 million and €250 million. For the EBITDA bridge to the original guidance, please refer to the presentation on the website.
I want to emphasize that our new revenue projections does not appear in here, because of the change you just mentioned. However, India still remains at our core. Some of the material assumptions underpinning our revised guidance…
Sorry, I’m just going to back to the numbers. I just want to reiterate the guidance. The definition for guidance that’s changed to revenue as noted. The net gaming revenue – the revenue guidance will be between €1.15 billion and €1.28 billion, and adjusted EBITDA to range between €200 million and €215 million.
Some of the material assumptions underpinning our revised guidance; firstly projected revenue has been reduced from prior guidance after taking into consideration expected ongoing pressures from multiple economic and regulatory headwinds, together with some further degree of post-COVID normalization.
Brand license revenue for the remainder of 2022 is expected to remain lower at approximately €2 million per month. Brand marketing being kept at the levels consistent with our earlier forecast, because our focus on investing remains for the long term; and finally, operating costs as expected to be higher in 2022 due to inflation and additional cost of being a public company.
The net effect is that we expect EBITDA margin to be approximately 17% to 19%. This is not the margin that we consider acceptable in the long term, and we are actively reviewing and carefully optimizing all of our costs, while working to extract the benefit of the holding company structure that we implemented in connection with becoming a public company just over six months ago. We expect some of the benefits from this to accrue this year, but meaningful impacts will be noticing 2023 when we expect to realize €20 million to €25 million, decrease in annual overhead costs due to efficiencies.
I also want to briefly touch on our projections. We received some entirely justified critical feedback following our withdrawal of estimates coupled with a lack of specific details in this time of our call last quarter. We run our global business with a long term mindset, making and then possibly adjusting projections in the short term. It’s sometimes – something that is new to us and we have taken steps to improve our ability and comfort in providing more transparency, while still protecting our company’s interest.
In conclusion, results for the second quarter of 2022 are evidence of the difficulties of dealing with the regulatory changes, post COVID normalization and economic uncertainties. We are focused on implementing a leaner cost structure, carefully balanced against future growth prospects in order to preserve our financial strength as we seek to continue to expand our global footprint and drive new and existing revenues wherever possible regardless of our challenging.
I will now turn the call back Neal for his final remarks.
Neal Menashe
Thank you, Alinda. In summary, we generated a healthy level of revenue and EBITDA for the quarter and we remain uniquely positioned in the global online gaming universe. We are digital only. We have a diverse global footprint across sports betting and I-Gaming. We are in control of tech stack, our data and our algorithms.
We are profitable, debt free and highly cash generative, and we have a team that’s been weathering these types of challenges for over two decades. Some of the challenges may be around for a few quarters, but Super Group is a strong company with a healthy balance sheet and we will continue to go off the profitable growth.
Thank you. I will now turn the call over to the operator to open the call up for questions.
Question-and-Answer Session
Thank you. [Operator Instructions]. Also joining the management team today for question-and-answer is Richard Hasson, President and Chief Operating Officer of Super. [Operator Instructions] Our first question comes from the line of Jason Durken [ph] with Canaccord Genuity. Please go ahead.
Q – Unidentified Analyst
Yeah, good morning, thanks for taking the questions. I just wanted to focus on Canada a bit. You mentioned both inflationary pressures and sort of normalizing behavior compared to the COVID impact from last year for the declines there. I’m just wondering if the read through there is that competition from sort of more operators in the market, but not a factor there or just less of a factor.
Then maybe you can just as a follow-up also touch on the delay in the licensing for Spin and whether last quarter you talked about you’re still able to operate as you were previously with regulator knowledge. I’m wondering if that took place throughout the entire period from last quarter through now or if there is any change to that. Thanks a lot.
Neal Menashe
Okay, so I’ll take that. So yes, with Canada and with all other markets we operate in, there is competition, competition in all our markets. So for us its – Canada is – we’re the same company as we were a year ago. Canada is all about obviously going now regulated in Ontario with Betway went last week and Spins going next week. So up to now they’ve been operating on the old software and that’s now moved over. And Betway in the last seven to eight days is in line with our expectations, so Spins going next week. So we’ve learned a lot from Betway and then we can implement that into Spin.
Operator
Thank you. Our next question comes from the line of Bernie McTernan with Needham & Company. Please go ahead.
Bernie McTernan
Great! Thank you for taking the questions. Maybe to start, we talk about the $20 million to $25 million of cost reductions. Just to be clear on the timing, are those all happening in ‘22 so you’ll receive the full benefit in ’23, and then given the cost reductions is 25% EBITDA margin, something that’s achievable in ‘23.
Alinda Van Wyk
Thanks Bernie, Alinda here. We started the process and we – this was a continuous process anyway since our listing to look at our cost base. In my presentation I make reference to 2022 is where you know we really started to focus. We will see it in the last quarter coming to fruition, but the impact of the $20 million to $25 million is in 2023 and that will obviously be visible on the margin.
And to your question regarding the 25% margin, I mean obviously like I say, the 17% to 19% margin is not where we would like to be. We are aiming for 20% in continues growth in that margin by getting all our ratios back intact with a focus on our top line growth.
Bernie McTernan
Understood. And then would just love some commentary in terms of what you’re seeing from the customer LTVs and because of the macro and in the COVID comparisons, whether it’s players turning off altogether, whether people are playing less and engaging less. If it’s smaller bet size, less handle, we just like to see what’s actually happening you know underneath the hood.
A – Neal Menashe
First of all listen, it’s across the globe. Because we are global, it’s not just one country, it’s across the globe. So you see different specs in different markets. But definitely from our point of view it’s just that the discretionary spend of our customer has come down, but in other markets you know there we’ve got more customers, so maybe their spend is slightly down, but then we are – they are spending more of the time you know with us, because we got more customers.
So it’s definite a macroeconomic headwind, but you know that’s as I said, it’s – as this levels out and post COVID we are – they even got that and we still got 2.7 million users using our software and that’s going up.
Bernie McTernan
Thank you.
Operator
Thank you. Our next question comes from the line off Mike Hickey with The Benchmark Company. Please go ahead.
Mike Hickey
Hey Neal, Richard, Alinda! Thanks guys. Good morning or afternoon, wherever you guys are, thanks for taking the questions.
I guess just to double click on the macro again, it seemed like the online casino player was historically been fairly resilient in times of sort of economic distress, and while we have inflation, we also have strong employment and of course your global and I’m looking from a U.S. lens. So I guess if we could again, I guess sort of understand why it’s different this time, and I think you mentioned that perhaps your sports betting client is doing better than your gaming, I think I heard that. I’m just curious if that’s true and why that is?
Neal Menashe
So first of all you know, gaming’s not immune, right. It’s resilient, but again we’ve never seen inflation like this in 40 to 50 years. In the last 20 years we haven’t seen a hit. We’ve seen downturns in 2008 with financial crisis, but not something that’s affected our customers discretionary spend, so – but because we’re global, in different market and including sports, have different customer values, etc. But from our point of view, again, it’s about what’s happening in each of these countries, each of these markets and how the customers are engaging on our platform.
Mike Hickey
Fair enough. Inflation is brutal, I agree with you. I guess so when your players are strained, I mean how do you adjust your playbook or your app to sort of account for that weakness. I mean, how does that sort of change your whole target? How does that change your promotional activity? What adjustments have you made or do you plan to make for a player that is dealing with macro issues that could extend for you know another six to 18 months.
Neal Menashe
Listen, I guess that becomes to your customer account again and you know it’s having more customers spending slightly less, but in different markets you know there are different players baskets etc. for that.
So from our point of view, remember this business is a mass market business. This is not a business of high value customers. This is a business across the spectrum, so it’s about the numbers of customers and your software being able to be superior in those markets and giving them the customer entertainment experience that they want and offering them the right casino games that they like it, but it’s lower bet sized games, and remember, algorithms and everything that we do is based on the – is individualized to the customers.
And the same with sports betting. Its offerings them all the different sports events that they would like to bet on and that’s why we’re saying, when you’ve got lots of these competitions, for example last years this – in June last year we had the Europe and now we didn’t have the World Cup this year, but the World Cup’s coming in November and December. So when you compare this June to last June it isn’t a fair comparison. So all of this helps with bringing the customers into the software and to know what they did last.
Mike Hickey
Okay, fair enough. The last question from me is on the U.S. market. I’m sorry if I missed this. Are you – just sort of the timeline I guess on DGC. It seems like it’s been hanging out there for a while. Just curious – sorry again Neal if you mentioned this, but just where you are in closing that transaction and then maybe just re-examine – given everything that’s changed so fast in terms of the macro conditions, how are you thinking about in hearing the U.S. market today you know versus six months or a year ago and how you think about the impact to your ‘23 numbers?
I think Alinda originally, you know you were saying it was sort of a – these are my numbers, maybe it was $8 million to $13 million in annual negative adjusted EBITDA impact. Just curious if that’s still the same range your thinking and if you’re intent or your playbook or design of going to the U.S. market is the same given our volatility. Thanks guys.
Richard Hasson
Hi there! Richard here. So the closing of the DGC acquisition is still on track for our target goal of having that done by the end of the year. As we mentioned before, a number of licenses at Super Group needs to be granted before that time. So we are obviously working to the timelines of the regulators in those various states, so that remains our goal.
In terms of the U.S., our plan remains very much the same. In terms of the 2023 targets – in terms of the 2023 numbers, we expect the range of impact to EBITDA assuming that DGC was in the Super Group for the whole year to be between €50 million and €70 million, with our target breakeven for the end of 2024 beginning of 2025.
Mike Hickey
Thank you guys.
Operator
Thank you. Our next question comes from the line of Jed Kelly with Oppenheimer. Please go ahead.
Jed Kelly
Hey! Great! Thanks for talking my question. Just two if I may. Circling back to the macro, can you talk about what regions your sort of seeing an impact and is that due to the higher dollar. Because just trying to reconcile with what you are seeing and I know you are global, versus what we heard last week from some of the North American operators, where they are not seeing an impact and we also heard that in travel as well. Particularly Europe and traveling Europe is strong. So are you seeing more of an impact in APAC and Africa.
And then just on the change in the revenue, can you talk about like, is that a benefit or can you talk about how that impacts the financials and the growth rates. Thank you.
Neal Menashe
Okay, so I’ll just add. Because we – you know we are the same company as we always have been. So because we’re in the global marketplace across the world, of course we had currency fluctuation that’s coming out of Africa, APAC, etc., right. So those currencies are always swinging again for dollars or for euros right, so that we’ve had anyway and we continued to grow the revenues in those markets, despite even if its offset slightly by some currency losses in those markets, but that’s the global nature of Super Group from that point of view.
So for us, yes, we can’t comment on how competitive, but remember, we are not in the U.S., we are across the world. So we have global factors across the world in the market that we operate.
Alinda Van Wyk
Yes, and then just on your question regarding the guidance or revenue. The guidance is high quality revenue. I’m being very precise in the repo costs, because to make sure that it’s a strong achievable target for all our businesses and to make sure that it’s the high quality revenue that comes through, and that our teams are very focused on now achieving for the remainder of the year.
Jed Kelly
And then it seems as your going – you are getting live in Ontario this week. Is there a margin drag or anything we should be thinking about from paying like a higher tax rate or anything, now that you’re going to be I guess on the legalized, not legalized, but regulated – you’ll be a regulated operator in Ontario. How should think about that in the back half of the margins?
Alinda Van Wyk
Yeah, so I mean like previously stated as well, the initial introduction into the regulatory environment is always a bit of an impact on the margin. But we’ve got all sorts in place to make sure that margin has recovered towards the end of the year, with the most important impact is that even though you’ve got, I refer to it as agency fee, which is the tax that your implying about.
The most important thing is that we – that the cost associated has theoretically come down as well, like better processing capabilities. So your variable cost is in line then. It will be reduced, but also our cost base is intact for that Ontario transfer and to make sure that our margins for Ontario is as per expectation of our guidance.
Jed Kelly
Got it! And then just one more from me. Just as we look out to next year, sort of the countries, the Netherlands, Germany where you’re having the regulatory headwinds, I mean do you expect to be operating in those countries next year and can that actually become a tailwind. How should we think about that? Thank you.
Neal Menashe
No. Well Germany, we are still operating in Germany, so it’s just there is no casino in Germany. But Netherlands, we are still working with the regular, but it’s not in any of our guidance for 2022.
Jed Kelly
What about ’23? Would you be expected to be operating there?
Neal Menashe
Yeah, yeah for Germany, yes. And then Netherlands we have said it all depends on the regulator in that market.
Jed Kelly
Okay, so that would be an additional market you are live into next year.
Neal Menashe
Yeah, yes, yes. Germany we are currency live with now. We just don’t have a high casino. So it depends on the high casino and the text is that they want in Germany, well it depends if it’s feasible for us to do a high casino gaming in Germany.
Jed Kelly
Thank you.
Operator
Thank you. Ladies and gentlemen, this concludes our question-and-answer session and thus concludes our call today. We thank you for your interest and participation. You may now disconnect your lines.
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