Gambling.com Group Limited (NASDAQ:GAMB) Q3 2023 Earnings Call Transcript

Gambling.com Group Limited (NASDAQ:GAMB) Q3 2023 Earnings Call Transcript November 15, 2023

Gambling.com Group Limited beats earnings expectations. Reported EPS is $0.13, expectations were $0.11.

Operator: Greetings, welcome to Gambling.com Group’s Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to Peter McGough. You may begin.

Peter McGough: Hello, everyone, and welcome to Gambling.com Group’s third quarter 2023 earnings results call. I am Peter McGough, Vice President of Investor Relations. I am joined by Charles Gillespie, Chief Executive Officer and Co-Founder; and Elias Mark, Chief Financial Officer. This call is being webcast live through the Investor Relations section of our website at gambling.com/corporate/investors, and a downloadable version of the presentation is available there as well. A webcast replay will be available on the website after the conclusion of this call. You may also contact Investor Relations support by emailing investors@gdcgroup.com. I would like to remind you that the information contained in this conference call, including any financial and related guidance to be provided, consists of forward-looking statements as defined by securities laws.

These statements are based on information currently available to us and involve risks and uncertainties that could cause actual future results, performance, and business prospects and opportunities to differ materially from those expressed in or implied by these statements. Some important factors that could cause such differences are discussed in the risk factors section of the Gambling.com Group’s filings with the Securities and Exchange Commission. Forward-looking statements speak only as of the date the statements are made and the company assumes no obligation to update forward-looking statements to reflect actual results, changes in assumptions, or changes in other factors affecting forward-looking information except to the extent required by securities laws.

Please also, see our references to forward-looking statements related to presentation and press release. During the call, there will also be a discussion of non-IFRS financial measures. A description of these non-IFRS financial measures is included in the press release issued earlier this morning, and reconciliations of these non-IFRS financial measures to their most directly comparable IFRS measures are included in the appendix to the presentation and the press release, both of which are available in the Investors tab of our website. I’ll now turn the call over to Charles.

Charles Gillespie: Thank you, Peter, and welcome, everyone. This afternoon we reported solid third quarter results driven by another quarter of strong organic growth in North America. Even with Q3 being a seasonally slow quarter, new depositing customers increased 26% year-over-year to more than 86,000, which contributed to 19% growth in revenue to $23.5 million, a third quarter record. Revenue growth was driven by North America and came despite only having three days of revenue from Kentucky’s launch of sports betting compared to a full month of revenue from Kansas sports betting debut in 2022. Third quarter adjusted EBITDA was $6.1 million and free cash flow was $1.6 million. September was the coming out party for our strategic media partnerships.

Both Gannett and McClatchy performed ahead of our already high expectations. We have purposely focused on fewer, bigger partners that can give us access at scale to each market’s premium digital media properties. This relatively new, high-performance model will help drive continued market share gains that will enhance top line and overall cashflow growth. The third quarter’s performance demonstrates our ability to drive growth in existing regulated markets without the significant benefit of a new market launch. While we did have a tremendously strong start in Kentucky, it is a small state and as just mentioned only three days of activity fell in the third quarter given the late September launch. Turning to our near-term growth opportunities.

The trends from our great launch in Kentucky on September 28 has continued into the fourth quarter. We still expect North Carolina to launch in the first half of 2024, and we will include the state in our guidance only when there is firm visibility on a launch date, so likely when we report our fourth quarter results in March. As our Q3 results indicate, we continue to achieve strong organic growth in North America. Our performance reflects strength in both sports betting and iCasino, although iCasino remains a much smaller percentage of our North American business compared to our business outside of North America. Our new category defining brand casinos.com was launched during the quarter. While it is still early in its evolution, our vision for casinos.com as a premier brand for everything casino related is taking hold and we continue to expect a meaningful ramp in contributions from casinos.com beginning late next year.

In our view, we have developed the best technology platform to monetize online gambling traffic. Every day we are making improvements to further optimize our search performance while leveraging data, science, and AI to perfect our algorithms used to monetize the high-intent traffic we capture. Our ongoing return-focused investments in our technology and our capabilities continue to help expand our competitive advantage and ensure we continue to deliver industry-leading organic growth. We’re confident in our ability to continue to gain share in our existing regulated markets, and our organic growth will be evident again in the fourth quarter as we remain on track to deliver on our full year expectations. It is important to note that we are still very much in the early stages of what is a long term growth trajectory for the industry and for Gambling.com Group.

So even as we deliver consistent, impressive, near-term, year-over-year growth against more challenging comps for our existing markets, we are confident that we have the right strategies and operating model in place to extend our revenue growth, strong margins, and free cash flow conversion for many years, which will help continue to drive great returns for our shareholders. With that, I will hand the call over to our CFO, Elias Mark for a more detailed review of the third quarter results and our guidance.

Elias Mark: Thank you, Charles, and welcome, everyone. As Charles mentioned, we generated another quarter of strong financial results. Revenue increased 19% to $23.5 million compared to the prior year ahead of expectations. In constant currency, revenue grew 11%. North American revenue rose 42% to $12.9 million reflecting growth from our owned websites and a terrific contribution from our U.S. media partnerships as they scale. After seven quarters of growth of an average of 28% in the UK and Ireland, we entered a period of more challenging year-over-year compares and revenue from the UK and Ireland of $6.9 million was similar to the year ago period. Revenue from other Europe declined by $465,000 or 17% because of compliance driven product changes implemented for the German market.

Elsewhere in Europe and in the rest of the world, we continue to see strong growth. New depositing customers grew 26% year-over-year to more than 86,000. As a result of the strength in our media partnership business, cost of sales during the third quarter amounted to $2.1 million compared to $600,000 last year. Total operating expenses in the third quarter grew 9% or 2% in constant currency to $16.6 million, excluding the fair value adjustment from the third quarter of 2022. There was no fair value adjustment operating expenses in Q3 2023, due to the early termination of the earn out related to the BonusFinder acquisition. While we substantially moderated the pace of hiring, the operating expense increase was primarily driven by higher headcounts.

Amortization expense decreased from $1.7 million to $432,000 as short-lived assets from the RotoWire and BonusFinder acquisitions are now fully amortized. For the full year, we expect to incur amortization expense of approximately $1.8 million. Net income totaled $5 million or $0.13 per diluted share. Adjusted for the unwinding of the third consideration, adjusted net income in the quarter was $5.4 million and adjusted earnings per share was $0.14 per diluted share. Adjusted EBITDA was $6.1 million in line with expectations. This includes the impact of $612,000 in allowance for bad debt as compared to an average of $241,000 over the previous four quarters. Adjusted EBITDA margin was 26% in the third quarter, reflecting the higher revenue contribution from our media partnerships, which grow higher cost of sales as compared to our own size.

Our media partnership revenues continue to scale in the fourth quarter of the state. Exclusive of $2.9 million related to deferred payments for the acquisition of BonusFinder cash generated from operations in Q3 2023 was $2.2 million. Cash receipts from the three weakest revenue months of the year, June, July and August, fall into the third quarter resulting in seasonally weaker operating cash flow. We expect strong cash flow from operations in the fourth quarter. Free cash flow was $1.6 million. We remain able to entirely fund our organic growth initiatives from operating cash flow while continuing to generate positive free cash flow. Our cash balances as of September 30, 2023 was $26.9 million, a $4.1 million quarterly sequential decline, primarily reflecting the $5.4 million total payments for the acquisition of BonusFinder.

Our very strong balance sheet with significant cash balances and no interest bearing debt continues to provide us with the financial flexibility to pursue value enhancing transactions. Turning to our outlook. We expect to see typical positive seasonality in the fourth quarter as activity kicks up during the autumn sports season on both sides of the Atlantic. Our third quarter results reinforce the fact that demand for performance marketing services for the online gambling industry remains very strong and our unique offerings will become more valuable operators as they reach profitability. We continue to monitor consumer behavior closely and as of now consumers appear to be pursuing entertainment from online gambling [indiscernible]. As we enter the fourth quarter, we were monetizing NDCs in the U.S. with revenue share arrangements more frequently than before, meaning that revenue from these indices will be recognized over a longer period of time.

As a reminder, we remain agnostic on the inherent attractiveness of the revenue share commercial model versus the CPA model. We rely on our internal data science to identify the monetization options which maximize revenues in each circumstance. Our 2023 guidance continues to assume no benefit from additional market launches or acquisitions over the balance of the year and now assumes the Euro to USD exchange rate of 1.07 for the fourth quarter. Given these factors and our Q3 performance, we are reiterating our 2023 full year revenue guidance of $100 million to $104 million even as we now expect a higher proportion of our MDCs to be monetized on revenue share than was forecasted when we raised our guidance in August. Likewise, we’re also reiterating our 2023 full year adjusted EBITDA guidance of $36 million to $40 million, even though the strength in our media partnership business drives higher costs for sales.

With that, I’ll turn the call back to Charles.

Charles Gillespie: Thank you Elias. Before opening up the call for your questions, I’d like to quickly review several of our other growth drivers. While North America is already our largest market, 43 states have yet to legislate iCasino and 20 states have yet to approve online sports betting, which implies a long runway of growth for Gambling.com Group just in the U.S. Our home state of North Carolina is expected to launch online sports betting in the first half of 2024, and the 2024 legislative season will kick-off in January. We are expecting to see a push for sports betting in Minnesota, Mississippi, and Missouri, and for iGaming in New York, Illinois, Indiana and we expect a ballot initiative in Maryland in 2024. As we’ve highlighted today, our third quarter results provide confirmation of the benefits of our media partnership strategy.

We believe our focus on securing fewer agreements with the most prominent news media players, such as Gannett, McClatchy, and the UK’s Independent, and then forging deeper relationships with them will optimize the benefits to our business and our partners’ businesses and ensure the sustainability of these lucrative partnerships. While we are always busy evaluating M&A opportunities, the quality of the companies in our pipeline is better and the tone from sellers is more positive than at any time since we closed the acquisitions of RotoWire and BonusFinder in Q1 of 2022. Our balance sheet remains very strong, providing the flexibility and liquidity to pursue acquisitions of various sizes. As we have proven with RotoWire and BonusFinder acquisitions, we have the discipline to act on transactions that are accretive to our results and we maintain this same discipline as we evaluate potential additional acquisitions.

Given our strong balance sheet and the cash flow we generate, we are confident that if we were to pursue a larger transaction, that we would have access to capital at an attractive cost. We are still in the early stages of executing our near and long-term growth opportunities to generate consistent top line, adjusted EBITDA and free cashflow growth. Thanks again to our brilliant team for their exemplary efforts in executing and delivering on a solid third quarter and for their efforts to position Gambling.com Group as the leading performance marketing company for the online gambling industry. With that, we’d be happy to open up the line for questions. Operator?

See also 13 Best Performing S&P 500 Stocks in the Last 5 Years and 20 Countries With The Largest Natural Gas Reserves in 2023.

Q&A Session

Operator: Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] And our first question comes from the line of Barry Jonas with Truist Securities. Please proceed with your question.

Barry Jonas: Hey, guys. Maybe you could start by giving a little bit more color on the Kentucky launch and how trends are looking into Q4. It sounds like Kentucky was really helped by your media partnerships and I guess I’m wondering to what extent that playbook is scalable into other new launches starting with North Carolina? Thanks.

Charles Gillespie: Hey Barry. So Kentucky was very strong. Our playbook for these new state launches has been really refined and we seem to be winning these new state launches with some real consistency now. It’s hard to say, what the exact market share was, but what I can say is that several of our partners told us we were their largest affiliate in Kentucky by some measure. We’ve got all of our owned assets, so Gambling.com, Bookies.com, BetKentucky.com, RotoWire.com, those all did well, but with the media partnerships, we also had Kentucky.com, which is an asset from McClatchy, and then usatoday.com, so we really had all angles covered in Kentucky and the media partnerships contributed and they will also contribute in North Carolina. With McClatchy, we’ve got the Charlotte Observer and we’ve got the News and Observer. So we’ve got the two main newspapers in North Carolina as well covered with that media partnership.

Barry Jonas: That’s really great. And then just as a follow-up, I wanted to maybe ask for a little more color on the comments about higher mix of rev share that you guys cited in the opening remarks, really curious what’s driving that, the operators we cover seems to be more focused on profitability. So I’m curious if you’re seeing pressure there for either lower CPAs or else that shift to rev share?

Charles Gillespie: As ever, it’s on a case-for-case basis. Even with one client, we’ll have a variety of different deals for different types of traffic. There isn’t some sort of wholesale shift towards revenue share. What we’re trying to communicate here is that it’s incrementally more than it was previously and that has a small effect on the overall business, but there certainly isn’t any major change in the way that we’re invoicing our clients in the U.S.

Barry Jonas: Great. All right. Thanks so much.

Operator: Our next question comes from the line of David Katz with Jefferies. Please proceed with your question.

David Katz: Hi. Good afternoon, everyone. Thanks for taking my question. What I would love, and just a little kind of longer term, maybe qualitative perspective, not guidance necessarily, on how EBITDA margins evolve, let’s say one, two, three years out. Given that you’re obviously adding new resources and deploying new resources and margins tend to move around, but is there some notional range we can keep our eye on the horizon for or something like that?

Charles Gillespie: Yeah. I think we’ve said that in the short and mid-term we intend to operate this business within the 35% to 40% range and while we come in, in any quarter within, or in any year within that range, depends on the proportion of our revenue that comes through the media partnership channel. That proportion has increased as expected in the second half of the year, but the strength in our media partnership business has exceeded our expectations, which means that revenue is a little bit higher than previously expected but margin is a little bit lower. So in the next quarter and for the full year of ‘24 we now expect the margin number to be closer to the 35% than to the 40%. Further, rather than that, it will depend a little bit on how much our revenue comes from media partnerships, whether we extend the media partnership business beyond the U.S. and UK. But that 35% to 40% is the mark we’re working towards.

David Katz: Understood. I appreciate it. Charles, as my follow-up, I know you touched on potentially new states, et cetera. But can we maybe step up to 30,000 feet and sort of look at the U.S. TAM, and it’s obviously prevalent, given one of the operators talked about some updated views this week to that end. Do you just concur that the TAM continues to grow in the United States? What are your thoughts or perspective about where it goes or are we just talking about a penetration approach now?

Charles Gillespie: I mean, we think, this is the point we try to make on all these calls is that we’re still super early in all of this. If you look at New Jersey which has had iGaming for 10 years, it’s still growing. It’s growing meaningfully. If you just look at the whole U.S. market year-on-year, it’s grown, I think the GDR (ph) number for the first nine months is 70%-odd. ESPN bet launched yesterday, I mean, this idea that this is somehow peaked or all the players have been acquired is just categorically untrue. We’ve been to the future. We’ve hopped into DeLorean (ph) and we know what the future of online gambling in America looks like. It looks like the UK and that’s the market we have the longest operating history in and we very much still expect the U.S. to go in that direction.

There’s a couple of differences for the U.S. There’s not as many licenses. It’s a bigger national market. It’s state by state. Yes, it’s not exactly the same, but the fundamental drivers of this industry are not any different. And we remain maximally bullish about the future of online gambling in the United States.

David Katz: I’ll take that. Thank you.

Operator: Our next question comes from the line of Jeff Stantial with Stifel. Please proceed with your question.