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Gambling.com Group Limited (NASDAQ:GAMB)
Q3 2021 Earnings Call
Nov 18, 2021, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Greetings. Welcome to the Gambling.com Group third quarter financial results call. [Operator instructions] The 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 your host Ryan Coleman, with investor relations. Thank you. You may begin.

Ryan Coleman -- Investor Relations

Hello, everyone, and welcome to Gambling.com Group's third quarter 2021 earnings results call. I'm joined by Charles Gillespie, chief executive officer and co-founder; as well as Elias Mark, chief financial officer. This call is being webcast live within 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 also be available on the website after the conclusion of this call and you may contact investor relations support by emailing investors@gdcgroup.com.

I'd 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 law. 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 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 future results, changes in assumptions, or changes and other factors affecting forward-looking information except to the extent required by applicable securities laws.

During the call, there will also be a discussion of non-IFRS financial measures. A description of the non-IFRS financial measures is included in the press release issued this morning. And reconciliations of these non-IFRS financial measures to the most directly comparable IFRS measure are included in the appendix of the presentation and press release. Both of which are available in the investor's tab of our website.

I'll now turn the call over to Charles.

Charles Gillespie -- Co-Founder and Chief Executive Officer

Thank you, Ryan, and welcome everyone. This morning we reported our third quarter financial results, which continued to demonstrate the unique strengths of the affiliate model within the broader online gambling industry. With those following with slides, I'm now on Slide 4. Our third quarter revenue grew by 37% compared to the prior year and despite the third quarter being the seasonally slowest quarter of the year, we delivered adjusted EBITDA of $3.5 million and an adjusted EBITDA margin of 34%.

Identical to last quarter, all of our growth was organic and we remain well-positioned to increase growth further through acquisitions. Net income totaled $4.7 million or $0.13 per diluted share, compared to $2.3 million or $0.8 per diluted share in the prior year. We generated a free cash flow of $0.8 million, compared to $3.9 million in the prior year. The decline is mainly due to non-recurring payments associated with the IPO.

Our successful IPO on the Nasdaq gold market in July was indeed the highlight of the third quarter. We also took important steps in Q3 to solidify our foundation for a strong future of organic growth in the United States. We launched BetArizona.com in time for the NFL season to provide sports betting fans in Arizona with comprehensive state-specific betting information. We also launched MarylandBets.com and two new websites for the Netherlands to establish our positions in these new markets and provide local bettors with trusted and up-to-date daily information to help them place safe and secure legal wagers.

And importantly after the seasonally quiet months of July and August, we delivered the strongest revenue month in the company's history. In September, we saw a significant uplift in our US revenue in September and our US performance exceeded our internal expectations. We have been encouraged to see that strength carry over into the start of this seasonally stronger fourth quarter. Now on Slide 5, our main markets today are the UK, Ireland, the US, and Canada.

And we also serve several other European markets globally and in particular within North America, we continue to see strong momentum from legislators to further legalize the increasingly normalized activity of online gambling. Our top priority is to continue to grow our market share in the US where we will see -- where we still see the nascent US market becoming the world's largest online gambling market in the coming years. During and after the quarter, we have continued to add additional domains to our portfolio to prepare for the launch of online gambling in additional US states. Connecticut's online casino and sports betting is now live as of October 12th.

Louisiana is now issuing licenses and grants and waivers for affiliates to do business. We expect Louisiana to launch in early 2022. New York regulators have now also approved nine sportsbooks to launch online in time for the Super Bowl 56. We believe we are well-positioned to service the New York market with multiple media assets.

Florida went live on November 2nd with a single operator while the Florida market structure is not ideal for consumers. We still expect to generate affiliate revenue in Florida in the future. In Canada, Ontario was previously expected to launch regulated online gambling during Q4, but that is now expected to take place in early 2022. In the Netherlands regulated online casino and sports betting is now live to have recently soft-launched in October.

However, many of the most important international online gambling operators have yet to receive licenses in the Netherlands and therefore we expect to see a positive financial impact in 2022 as more operators go live and the market gains momentum. The German interstate treaty went live at the beginning of Q3 on July 1st. We believe the German market remains viable but we have seen revenue volatility and lower NDC values as a result of the legal uncertainty and regulatory restriction. We possess widely recognized brands including Bookies.com and the iconic gambling.com and the technology platform that allowed us to go to market quickly and efficiently when new markets go live.

Helping us to build upon our established leading positions across the markets where we currently operate. I am on to Slide 6, now our capital allocation framework is outlined on this slide. Our investment plans center around our organic investment initiatives, but also involve M&A. Organic investment, we invest in our existing consumer-facing website and our technology platform to continue to drive organic growth.

Both in our existing markets where we expect to take market share and by ensuring newly regulated markets. Organic growth is the foundation of our business strategy. Our organic growth in Q3 was again the highest among our publicly traded peers, which have reported and thus far. Asset acquisitions as part of the ordinary course of business, we evaluate and acquire useful assets which in the hands of our team can drive additional organic growth.

Examples include domain names and small independent websites, which our team can take over. These are typically small deals of approximately 1 million or less and are not included in our M&A guidance. M&A, we are well-positioned to make attractive approaches to the midsized targets to drive inorganic growth by integrating their complete businesses and teams into our group. We evaluate a broad range of targets on an ongoing basis and seek to execute an average of one to two deals a year and an approximate range of 20 to 50 million each.

Since the IPO we have been very busy evaluating and advancing discussions on multiple opportunities. Despite continuing to invest heavily for organic growth, we remain highly profitable and are not reliant on external financing to fund our organic growth. This gives us a distinct advantage in the online gambling industry and also allows our free cash flow to fund our inorganic growth strategies. With that, I'd like to turn the call over to our CFO, Mr.

Elias Mark to discuss our third quarter financial performance in greater detail.

Elias Mark -- Chief Financial Officer

Thank you, Charles, and welcome, everyone. I'll start with a review of our third quarter and year-to-date financial performance before going into our outlook. Total revenue of $10.1 million grew 37% or 30% on a constant currency basis compared to $7.4 million in the same period of the prior year. The increase was driven by improved monetization of [Inaudible] and we attribute that to a combination of technology improvement and changes in the product and market.

Total operating expenses grew by $3.8 million or $3.5 million on a constant currency basis to $7.7 million, compared to $3.9 million in the prior year. This increase was driven primarily by expanding headcount across the entire organization as being that in the company's organic growth initiatives as well as increased administrative expenses associated with operating as a public company. Sales and marketing expenses totaled $3.6 million, compared to $1.8 million in the prior year. Technology expenses totaled $1.1 million compared to $0.6 million in the prior year.

General and administrative expenses totaled $3 million compared to $1.4 million in the prior year. Operating profit in the third quarter decreased 31% to $2.4 million, compared to $3.5 million prior year. This decrease was driven primarily by higher operating expenses including increased share-based payments expenses and was partially offset by the higher revenue. Net income in the third quarter totaled $4.7 million or 13% per diluted share, compared to net income of $2.3 million or $0.8 per diluted share in the prior year.

This increase was primarily driven by the recognition of deferred tax assets in the quarter. Adjusted EBITDA decreased by 14% to $3.5 million, compared to $4 million in the prior year and thus represents an adjusted EBITDA margin of 34%. The decrease was driven primarily by the increased operating expenses which again was partially offset by increased revenue. Total cash generated from operations at $1.4 million decreased by 65%, compared to the $4 million in the prior year.

This decrease was driven primarily by and by the lower EBITDA and non-recurring payments related to the IPO as well as income [Inaudible]. Our free cash flow totaled $0.8 million compared to $3.9 million in the prior year. This decline was the result of decreased cash-generating operations and such as just above as well as increased capital expenditures consisting primarily of acquisition of the main and capitalized development costs. Our new depositing customers in the third quarter decreased 4% to approximately 27,000 compared to the roughly 28,000 in the prior year.

Cash balances as of September totaled $53.2 million. This is an increase of $45 million, compared to the $8.2 million at the end of December. This increase was driven by the IPO proceeds which totaled $42 million before associated expenses, as well as the net income generated by the company approved. Our borrowings including accrued interest totaled $5.9 million compared to $6 million at the end of December.

On to Slide 8, through the first nine months of the year, revenue grew 81% to $32 million compared to $17.7 million in the prior year. Our total operating expenses grew 95% to $21.3 million, compared to $10.9 million in the prior year. This increase was driven by increased headcount across the board as well as costs coming from both the IPO and the expenses associated with operating as a public company. The operating profit of $10.8 million increased 59% compared to $6.8 million in the prior year.

Net income of $11.6 million or $0.35 per diluted share was significantly higher than the $6.6 million or $0.22 cents per diluted share in the prior year. Our year-to-date adjusted EBITDA totaled $16.1 million an 89% increase compared to the prior year. The adjusted EBITDA margin was 50% compared to 48% in the prior year. Cash from operations grew 74% to $12.9 million compared to $6.7 million in the prior year.

And our free cash flow totaled $10.3 increased 41% compared to $7.3 million in the prior year. Lastly, our new depositing customers increased 29% from approximately 69,000 to roughly 89,000. On to Slide 9, for the years 2021 to 2023, we are targeting our average annual revenue growth to exceed 40%. In our European business, we target growth faster than the European governing market over the business cycle.

In the United States, we expect to take market share and be a significant factor in the market over the longer term. At the same time, we are targeting an average annualized adjusted EBITDA margin of no less than 40%. It is important to note that our adjusted EBITDA margin may deviate from that target from quarter to quarter due to seasonality and due to investments to support organic growth primarily focused on the US market. Lastly, we target the net debt EBITDA leverage ratio of under two point five times.

At the moment, we have negative net debt and very significant cash balances. This longer-term target includes potential consolidated results from future M&A. On to Slide 10, for the full year 2021, we're on track to exceed our 40%% revenue growth target and we expect to achieve our 40% adjusted EBITDA margin target. The outlook is based on information currently available to us and does not factor in potential acquisitions nor is factoring incurring additional borrowing.

It is also important to keep in mind that the first and fourth quarters seem to be our strongest quarters based on the weather in the northern hemisphere and the calendar of the international sporting event. We remain focused on executing our growth strategy, which includes establishing the group as a leading player in the US market as a top priority. It also continues to grow our markets are now more mature European markets and to enter new markets including new regulated USA, Canadian provinces, and international markets such an event and when they open. With that, we will be happy to take your questions.

Questions & Answers:


Operator

At this time, we will be conducting a question-and-answer session. [Operator instructions] Our first question is from Barry Jonas of Truist Securities. Please proceed with your question.

Unknown speaker

Hey, guys. Good morning. Patrick here for Barry Jonas. You talked a bit about M&A earlier but just wanted to follow up there.

Are you thinking about M&A in terms of expanding the current scope of your business at all or more so just bolstering what you already offer? Thanks.

Charles Gillespie -- Co-Founder and Chief Executive Officer

The current M&A strategy is basically focused on acquiring under monetize or under-optimized media assets, which is where we can run our existing business model, which we know and love so much. So that would include affiliates other companies that do exactly what we do and also digital media properties online that are kind of tangential to the affiliate space basically web properties that essentially would be in a reasonably good position to look at it monetizing and then running the same business model that we did. But we're not looking at anything else at the moment.

Unknown speaker

OK. That's great. And if I could sneak a follow-up in just any thoughts on the New York market launching and how you think the high tax rates will affect affiliates if at all. Thanks.

Charles Gillespie -- Co-Founder and Chief Executive Officer

I think it's an open question for the whole industry what those high tax rates will really mean in practice. We are very thankful that there are going to be nine different operators in New York to create the necessary competitive dynamic. We at the end of the day we offer a comparison shop and products and more operators. It's a good thing.

So, I think people won't be too focused on the tax rate at the start as they aim for market share and a successful launch and that will really see the effects of that tax rate at the end of 2022 and beyond.

Unknown speaker

OK. That's great, appreciate the color, guys. Thanks so much.

Charles Gillespie -- Co-Founder and Chief Executive Officer

No problem.

Operator

Our next question is from David Katz of Jefferies. Please proceed with your question.

David Katz -- Jefferies -- Analyst

Hi, gentlemen, good morning. Thanks for taking my questions. I wanted to go back to the M&A discussion, if I may? And to the degree that we could sort of feel likelihood that says within a quarter or two, we'll see more than one deal. And I was hoping maybe we could discuss just the $20 million to $50 million size range and talk about the landscape of opportunities out there, why is that kind of the target size? Are there bigger ones? That would be out there and why are they not the targets, etc?

Charles Gillespie -- Co-Founder and Chief Executive Officer

Good morning, David. I'm happy to comment on that. So in terms of frequency or really timing, we don't want to put any firm stakes in the ground because we think that somewhat undermines our ability to negotiate these deals so all I'll say on that is that we are extremely busy and we look forward to updating everyone when we can. On size, well, the thinking internally is in many respects a bigger deal a $50 or $50 million-plus deal is the same amount of work the $5 million or $10 million deal.

And in a certain respect and actually less worry because probably getting a bigger team which is which has more experience. So it's as if it's the same amount of work to do a bigger deal than a smaller deal, all things equal we prefer to do bigger deals. And that's why we've kind of come out with this guidance of $25 million to $50 million. But we would certainly consider things under $25 if they were very strategic or relevant something we wanted to achieve and we would certainly consider things over $50 million.

And again if it kind of takes all the right boxes. And then the idea of one to two is just kind of to say that we're not going to factor in too many. If you look at our peers they've done 30, 40 plus acquisitions. That is not our objective.

We're not trying to go up to that quantum of acquisitions in neither the short nor really the long term.

David Katz -- Jefferies -- Analyst

Thank you. And if I can follow up in another direction, please. Which is just understanding the landscape for operators I think you're in a unique position to understand what their hunger is for incremental market share. Given that you help them capture that.

What have you seen over the past quarter or so? We on the street are increasingly focused on share and operators' ability to capture it and what it costs them to do so? What are you seeing over the past couple of quarters from your operators and hearing from them that might be helpful for us in that regard?

Elias Mark -- Chief Financial Officer

I think that's largely unchanged. We haven't been any big changes in behavior in the established markets and particularly in this quarter. What we have seen is in the market launch a bit of it already. Now people are extremely hungry to take share some on the new markets open and that equates variety to business for us and it's, but there is in any of us there is ample demand for our position but that does nothing.

It has continued income on the previous quarter including performance.

David Katz -- Jefferies -- Analyst

OK. Thank you.

Operator

Our next question is from Jeff Stantial of Stifel. Please proceed with your question.

Jeff Stantial -- Stifel Financial Corp. -- Analyst

Great. Thanks. Good morning, Charles. Always thanks for taking our questions and congrats on another nice set of results here.

I wanted to start on the promotional environment in the space right now. A couple of your peers did call out low sports hold in July and August. And anecdotally in October that largely factoring in the degree of promotional spend dragging down net gaming revenue. Was this a headwind that you've been experiencing as well? And if so, do you have a sense of how much that's impacted results during the quarter?

Charles Gillespie -- Co-Founder and Chief Executive Officer

That's a great question and we saw those comments as well. I think the key thing to keep in mind with us is that sports are a relatively small part of our business and where we are increasing the sports market share in the US and the US is really driven by CPA deals. So our gaming outcome group specifically its exposure to sports betting and red share is, it's not very high. So there are low sports betting margins that are absolutely a thing that's a valid comment from our peers.

We see that between the operators, and the software, and the sports with software suppliers, and the affiliates. So it's I think those are valid comments but it's not one that really affects us.

Jeff Stantial -- Stifel Financial Corp. -- Analyst

OK. Great. That's helpful. And then for my follow-up.

I want to drill into the other European geography a bit more. Revenues more than doubled year on year once again. You just talked about which markets are driving this string? And then an update on how the results are faring in Germany. In a post converting to a white market would be helpful as well.

Thanks.

Elias Mark -- Chief Financial Officer

Yeah. If we look at year-on-year, we have our significant growth in Europe and that's largely driven by Germany and Scandinavia, we have to bear in mind that the comparative period in the previous year where we didn't have substantial government revenue, which we saw pretty steep growth in our German business from Q3 '20 until Q2 '21. I think if you look sequentially that segment was roughly flat. And that's indicative both of values and is the bad news and volatility in the German market staying up.

Jeff Stantial -- Stifel Financial Corp. -- Analyst

OK. Perfect. I might just squeeze in one more. If that's all right.

I do think talking about Scandinavia some of the temporary rules on deposit limits and in Sweden, I want to say rolled off recently. If I'm correct here the expect this to prove impactful to your results on a sequential basis?

Elias Mark -- Chief Financial Officer

Yeah. I think it was Monday, November 14 when that temporary restriction was lifted in the Swedish market. We see that as a net positive. We think that that's going to have a positive effect on our Scandinavian or particular Swedish revenue.

All things are being equal. It is not going to have a massive impact but it's definitely a positive.

Jeff Stantial -- Stifel Financial Corp. -- Analyst

OK. Great. Appreciate all colors. Thank you both.

Elias Mark -- Chief Financial Officer

Thank you.

Operator

We have reached the end of the question-and-answer session and we'll now turn the call back over to Charles Gillespie for closing remarks.

Charles Gillespie -- Co-Founder and Chief Executive Officer

Thank you, everyone, for joining us today. It's a pleasure to present our business and our results of Q3 with everyone here on the call today. And we look forward to updating everyone on the next quarter. Have a fantastic day.

Bye-bye.

Operator

[Operator signoff]

Duration: 34 minutes

Call participants:

Ryan Coleman -- Investor Relations

Charles Gillespie -- Co-Founder and Chief Executive Officer

Elias Mark -- Chief Financial Officer

Unknown speaker

David Katz -- Jefferies -- Analyst

Jeff Stantial -- Stifel Financial Corp. -- Analyst

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