Gambling.com Group Limited (GAMB) Q1 2022 Earnings Call Transcript

Gambling.com Group Limited (GAMB -0.45%)
Q1 2022 Earnings Call
May 31, 2022, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Gambling.com Group first quarter 2022 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Josh Carroll, investor relations for Gambling.com Group. Thank you. You may begin.

Josh Carroll -- Investor Relations

Hello everyone, and welcome to Gambling.com Group's first quarter 2022 earnings results call. I'm joined by Charles Gillespie, chief executive officer, and co-founder; Elias Mark, chief financial officer. This call is being webcast live within the Investor Relations section of our website, gambling.com/corporate/investors. In a downloadable version of this presentation is available there as well.

The webcast replay will be available on the website, the conclusion of this call. You may also contact investor relations support by emailing [email protected]. I'd like to remind you that the information contained in this conference call, including any financial related guidance we provided consists of forward-looking statements defined by securities laws. These statements are based on information currently available to us, involve risks and uncertainties that could cause actual future results, performance, and business prospects, and opportunities to differ materially from those expressed or implied by these statements.

Some important factors that could cause such differences discussed in the Risk Factors section. Again, [inaudible] filings with the Securities and Exchange Commission. Forward-looking statements speak only as of the date of 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 applicable securities laws. During the call, there will also be a discussion of non-IFRS financial measures.

Description of these non-IFRS financial measures included in the press release issued earlier this morning. Reconciliations of these non-IFRS financial measures to their most directly comparable IFRS measures are included in the appendix to the presentation and press release, both of which are available in Investors tab of our website. With that, I'll now turn the call over to Charles.

Charles Gillespie -- Co-Founder and Chief Executive Officer

Thank you, Josh, and welcome, everyone. This morning we reported our first quarter results that showed the best single quarter financial performance in the group's 15-year history. If you're following along with the slide deck, now I'm on slide four. Our core business performed brilliantly all quarter.

Continued strong organic growth, combined with the performance of our recent acquisitions, helped drive 70% revenue growth against Q1 2021, which was our previous best quarter. We delivered adjusted EBITDA consistent with the prior year as substantially higher revenue offset by increased investments in the organization we are making to support our organic growth initiatives. Our adjusted EBITDA margin in the quarter was 37%, and we delivered positive free cash flow despite continued investments in our domain portfolio. We delivered a record 67 thousand new depositing customers, an increase of 91% against Q1 2021.

This increase was driven by the expansion of our portfolio domain names, websites, and partner sites. The investments we are making in technology and data science continue to benefit us organizationwide. Now I'm on slide five. We continue to deliver on our strategic objective to grow our North American presence, with North American revenues growing over 500% to $10.6 million, representing for the first time a majority of group revenue.

Online sports betting in New York launched in January, well ahead of the anticipated launch date, and we delivered a masterclass performance in the Empire State. According to our clients, we have been among the market leaders in terms of the number of new deposits and customers delivered to them. In anticipation of the launch, we developed two New York specific websites where sports bettors can find trusted, comprehensive, and up-to-date information on sports betting in the state. These states, newyorkbets.com and empirespace.com, complement our flagship US sports betting website, bookies.com, and gambling.com.

Shortly after the launch in New York, we successfully entered the Louisiana market, which was followed by the launch of Ontario shortly after quarter-end. We believe additional new market launches will continue to be a key driver of revenue growth over the coming years. Trading outside of North America was also solid and comfortably ahead of levels seen in Q4 2021. The UK saw strong trading, especially when you consider that during the comparable period last year, we saw temporary demand increases during restrictive COVID measures.

Our media partnership with McClatchy announced in January, got off to a strong start in the quarter and delivered meaningful revenue and new depositing customers. Likewise, our recent acquisition of BonusFinder.com is already proving to be a great acquisition, delivering strong new depositing customer numbers in Q1, and providing a great platform to expand in the Canadian market and beyond. Work on applying our performance marketing platform to RotoWire.com acquired at the beginning of the quarter, is also progressing nicely in preparation for the seasonally stronger fall sports season in the US, where RotoWire is well-positioned to drive incremental revenue. Now, on slide 6.

Our first quarter has served as a strong validation of the investments we are making to drive organic growth in North America. Our portfolio of premier domain names for the US market has already demonstrated its value, and we possess many more domain names and assets on standby awaiting legalization of online sports betting and iGaming in additional space. New sites on these premium domains are being built in-house on our technology platform, which will maximize the line for these capital investments over time. Now, on slide seven.

Over the past few months, we have seen new state launching in the US greatly expand the total addressable market. New York's launch was followed by Louisiana's launch of online sports betting on January 28, in time for the Super Bowl. In Arkansas, the launch of online sports betting on March 4th in time for March Madness. Shortly after the end of Q1, Ontario officially launched its newly regulated online casino, and sports betting market on April 4th.

The highly successful New York launch happened earlier than previously anticipated in the quarter and exceeded our expectations. Likewise, the group had a successful market launch, and yet the market in Arkansas has been slow to develop with only one mobile operator line at time of launch. In Ontario, we are well-positioned, but given that online gambling has been readily available in Canada for years, we did not see the same spike in demand around the launch date, typically seen in well-managed US state launches. Initial conversion rates for their partners in Ontario have been below expectations, as our operators work out the kinks in their new customer acquisition pipelines.

With the acquisition of BonusFinder.com, we are well-positioned across Canada and expect the market to thrive at scale. For the rest of 2022, all of the focus is on Ohio and Maryland, which have already legislated sports betting but have not yet launched their regulated markets. We now do not expect that either state will launch in time for the NFL season in September, as we had previously anticipated at the start of the year. We see these states launching at late Q4 or even in Q1 2023.

Likewise, the launch date of online sports betting in Kansas, which recently legislated is not yet clear. I would like to turn the call over to our CFO, Elias Mark, to discuss our first quarter financial performance in greater detail.

Elias Mark -- Chief Financial Officer

Thank you, Charles, and welcome, everyone. As Charles mentioned, we saw our investments in the business during the second quarter 2021 really start to pay off, and we deliver the best quarterly performance in the group's history. First quarter revenue of $19.6 million increased 70% compared to the prior year, or 84% on a constant currency basis ahead of market consensus. The growth was primarily organic, complemented by growth from our recent acquisition.

The increase in revenue was driven by growth in new depositing customers, primarily within North American sports. We began recognizing cost of sales in January, as a result of our unique partnership [inaudible] and the subscription business of the recently acquired RotoWire.com In the first quarter [inaudible $1.2 million. Total operating expenses increased $7.1 million to $13.3 million. On a constant currency basis, operating expenses increased $7.5 million.

This increase was driven primarily by additional headcount across marketing, product, and sales functions, as well as increased amortization related to the recent acquisition. During 2022, we expect to incur additional amortization of approximately $4.5 million related to the acquisition. We have also increased administrative expenses associated with operating as a public company. We continue to invest into our business to see a clear path is a substantial return on that investment over the coming years, as existing stakes grow a new space launch.

We are able to do so while retaining high margins and generating positive free cash flow. Like the rest of the world, we are experiencing some inflationary pressures, and we seek to mitigate those pressures by increasing the proportion of our operating expenses for more cost efficient jurisdiction as we expand. We generated adjusted EBITDA of $7.2 million compared with $7.1 million in the prior year. This represents an objective EBITDA margin of 37% of their investment in scaling the organization offset by higher revenue.

Net income totaled $4.5 million or $0.12 per diluted share, compared to net income of $4.5 million or $0.14 per diluted share in the prior year. Looking forward, we expect net income per diluted share to be significantly impacted by a fair value movement as a result of revaluing our contingent consideration related to the acquisition. That [inaudible] comparability, we will present net income, and net income per diluted share adjusted for par value movements beginning in the second quarter and continuing until the end of the [inaudible] at the end of 2023. Total cash generated from operations of $3.6 million [inaudible] compared to $6.7 million in Q1 21.

This was because of working capital expansion, primarily driven by geographic revenue growth, as well as the increased proportion of North American revenue with slightly longer average credit growth. We expect cash conversion to gradually improve over the coming months. We generated free cash flow of $1.4 million despite working capital expansion and our continued investments in our [inaudible] portfolio. It remains able to entirely fund the organic growth initiatives from operating cash flows that still remain free cash flow positive.

New depositing customers and corporate were 91% to 67 thousand compared to 35 thousand in the prior year. This was driven by North American sports as well as a solid performance in the UK and other. It retained cash balances as of March 31, 2022, totaling $33 million. The decrease compared to the $51 million at the end of last year, which result to cash considerations paid for the recent acquisitions of RotoWire.com and BonusFindings.com as well as the main acquisition, and this was partly offset by our operating system.

We are very pleased by the strong start to the year, and we continue to expect another year of record financial performance for equity, as both our core business and our acquisitions are performing well. As we look to the balance of 2022, given our growing exposure to North American sports calendar, we are subject to deeper natural seasonality patterns than we have experienced historically. The second quarter at the seasonally weakest, with negatives for seasonality continuing into the first two months of the third quarter. This is followed by a seasonally stronger period, starting with the launch of the NFL season, and continuing to April with September and March being the strongest month.

Our growth expectations are also affected by the timing and quality of new market launches. A very successful market launched earlier than initially expected, forcing some pull forward over initially expected in April into the first quarter. Looking toward the second half of the year. The expected market launches in Ohio, and in Maryland are now looking more likely to occur toward the end of Q4 or in Q1 2023 rather than September.

This pushes some expected revenue from Q3 and Q4 into 2022. On to slide nine. We reiterate our guidance for 2022. So we expect revenue here in the range of $71 to $76 million, representing growth of 68% to 88%.

We also expect adjusted EBITDA with $22 million and $27 million representing of 20% to 47%. With that, I would like to call on back to Charles.

Charles Gillespie -- Co-Founder and Chief Executive Officer

Thank you, Elias. We are now at the end of the slide deck, and I will leave you with a bit of additional perspective on where we see the market today and it developing in the medium term. A slightly longer time horizon, we see exciting developments in California, with a November ballot initiative to legalize online sports betting. We are also hopeful that Texas will seriously consider sports betting in 2023 when the state legislature reconvenes.

As the most populous state in the US with some of the largest market professional sports teams in the world, the expansion of our TAM to include either California or Texas would be very significant indeed. We have already launched the websites betcalifornia.com and bettexas.com in anticipation of the potential regulation of these states, and we believe that we would be in a very strong position to capitalize on these opportunities. We are also watching developments closely across the Carolinas, where we are positioned with betcarolina.com. But I also like to reiterate how we believe we offer a clear path to profitability to B2C operators in the US with our [inaudible] pay for performance model.

As a reminder, when we deliver traffic to our B2C online gambling operator clients, every customer interaction can be tracked, leading to perfect clarity on where customers really come from, and what they are actually worth. With this attribution, operators know their [inaudible] and can therefore have confidence to invest heavily in the affiliate channel. Going forward, we expect affiliate marketing spend from US B2C operators to remain robust, even where overall marketing spend is reduced. We saw similar trends among European operators in years past.

We are confident that has US operators grow increasingly conscious of the efficiency of their marketing spend, they will increasingly choose to bet on a sure thing with their affiliate marketing partners. Finally, I'd like to thank our absolutely fantastic team for delivering another record performance during what was surely our busiest quarter ever. With that, we'd be happy to open up the line for questions.

Questions & Answers:

Operator

Thank you. [Operator instruction] Our first question comes from the line of Barry Jonas with Truist Securities. Please proceed with your question.

Barry Jonas -- Truist Securities -- Analyst

Great. Hey, guys. Can you maybe talk about the level of EBITDA contribution you saw from recent M&A, and maybe just how same store trends were in the quarter?

Elias Mark -- Chief Financial Officer

Yeah, I think it came in as expected. And as we have previously talked about the road we acquired roads of business had lower contribution margins in their subscription business, and our plan is to gradually improve that contribution margin through the flying performance marketing. And if we look at our other acquisition, though, this one is up on that contribution margin. Inline with our more mature organically develops affiliate marketing efforts.

Barry Jonas -- Truist Securities -- Analyst

Got it. And then in terms of the guidance, can just clarify the difference between the high end and the low end. Is that largely timing of new jurisdictions, or there anything else you could comment, which drive the difference?

Charles Gillespie -- Co-Founder and Chief Executive Officer

It really is very all eyes are on Ohio and Maryland. And based on when those markets really go live, that's going to be the biggest determinant of where we land in the range.

Barry Jonas -- Truist Securities -- Analyst

OK. Great. And if I could just sneak in one more. Could you maybe talk about the mix of CPA versus rev share versus hybrid in the quarter?

Elias Mark -- Chief Financial Officer

Yeah. We had an increasing proportion of CPA on the back of a higher proportion of US revenue, which is largely driven by CPA.

Barry Jonas -- Truist Securities -- Analyst

OK. And presumably, we should expect that trend to continue.

Elias Mark -- Chief Financial Officer

Yes, when we look at the US, it's almost exclusively CPA that market dynamics could well change over the next coming years. But that's where the market movements in Europe, we have more [inaudible]

Charles Gillespie -- Co-Founder and Chief Executive Officer

And I'll add that the quarters which are more seasonally heavy for US sports, will thus by definition be more CPA heavy. So Q2 and parts of Q3 with less sports happening it would be less of major.

Barry Jonas -- Truist Securities -- Analyst

Got it. Thanks so much, guys.

Operator

Thank you. Our next question comes from the line of Jeff Stantiel with Stifel. Please proceed with your question.

Jeff Stantiel -- Stifel Financial Corp. -- Analyst

Hey, good morning, guys. Thanks for taking the questions, and congrats on a nice quarter here. I wanted to drill into the decision to reiterate guidance a bit more specifically on the margin front. You came in around 37% in the quarter.

Intuitively, I would think that stays fairly stable if not accelerating in the coming quarters as you roll out performance marketing into the acquired RotoWire assets. With that in mind, just curious on the decision to leave guidance intact, which implies, I think a 31% to 36% margin, is this just conservatism, or are there seasonality headwinds on the cost front that should we should be considering? Thanks.

Elias Mark -- Chief Financial Officer

Yeah. With regards to the margin improvements on the road to our business, we said that we would plan to really roll this out in time for the NFL season. So that's really an H2 effect, and it will be a gradual, we might not be quite up to the same country contribution margin that we are for our other business verticals. But toward the end of the year, we should definitely be a lot closer.

We have been scaling [inaudible] already if you compare Q1 22 to Q1 21, we were at a significantly higher run rate. We continue to hire and invest selectively, but you should not expect to see the same growth rates in outlook throughout 2022 in 2021. We are flagging, if you look into the next couple of quarters, we're flagging that they're going to be subject to natural [inaudible] which would imply that we're ready, and where the likely fixed cost base that would imply in the market.

Jeff Stantiel -- Stifel Financial Corp. -- Analyst

OK. I got it. Understood.

Elias Mark -- Chief Financial Officer

That's not really [inaudible] to market expectations, understood. 

Jeff Stantiel -- Stifel Financial Corp. -- Analyst

Understood. Thank you. That's helpful. And then maybe just take it a step back in a more thematic one.

There's a prevailing view in the broader digital advertising space that performance marketing should take market share in a recessionary environment, just given you see more tangible rely on that marketing spend. Just curious your thoughts on that argument, and if you think you're seeing any evidence of that behavior thus far across your client base, kind of reacting to some of the panic we're seeing in the equity markets.

Charles Gillespie -- Co-Founder and Chief Executive Officer

I think that makes perfect sense, Jeff, and is exactly what we would expect to see in practice day to day with the clients. A lot of our virtually all of our kind of main clients are already doing everything they can to maximize their affiliate relationships. They can only prioritize it so much. But you know when it turns into a bidding war, and they're being outbid by other operators.

Then you really see the model thrive and those prices come up. I think it's just such an easy choice for these marketing departments to prioritize affiliate marketing. And clearly, the market in the US right now is really investors seem to really care about a path to profitability and performance marketing tied together.

Jeff Stantiel -- Stifel Financial Corp. -- Analyst

Great. That's helpful. Thanks, Charles. So then if I could squeeze in one more, I'd just be curious to get your latest thoughts on the pending UK regulatory review.

It sounds like the lawmakers there are taking a pretty rational approach to potential changes, such as any color on what's the latest you're hearing would be helpful.

Charles Gillespie -- Co-Founder and Chief Executive Officer

The latest chatter I have seen is that it's being watered down, but we weren't particularly concerned about it to begin with. So, it's kind of like the never ending story. This hopefully they'll just finally release something and everyone should stop asking the questions about when it's going. But we are quite relaxed about it, and recent headlines suggest that we can be even more relaxed about it.

Jeff Stantiel -- Stifel Financial Corp. -- Analyst

Great. Helpful and encouraging. Thank you both, I'll pass it on.

Operator

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

David Katz -- Jefferies -- Analyst

Hi. Morning, everyone. Thanks for taking my questions. I wanted to just delve a little deeper into other Europe.

We seem to remember at one point Netherlands was going to be somewhat of a tailwind for other Europe, and to the what is embedded in the guidance with respect to the UK. And if you could just help us unpack that non-US portion, that'd be helpful.

Elias Mark -- Chief Financial Officer

Yeah. I think if we look at our performance in Q1, we had a very solid performance in the UK and Ireland, where our revenues were flat compared to an exceptionally strong Q1 in 21. Our UK business is doing very well. Other Europe was down and that's on the back of the regulatory changes in Germany that were implemented in July, we see that kind of continuing.

The other components within other Europe, particularly Sweden, was strong and we have not really seen an uptick in trading in the Netherlands. There are still a lot of the big expected market leaders in the Netherlands still don't have the licenses. It remains unclear when they're going to get this. I've seen in some of the operator guidance that they expected in Q3 orQ4, it remains to be seen. The Netherlands, it's a very small part of our business at this stage, they have some potential in the future.

David Katz -- Jefferies -- Analyst

So if I can just follow that up at the discussion point about the Netherlands. That is effectively conservatively baked into your guidance, and if it does accelerate, right? And come to pass that, I think what you're suggesting is that that would be potential upside if it were to occur.

Elias Mark -- Chief Financial Officer

Yeah. We have not [inaudible] in any significant business from [inaudible] guidance.

David Katz -- Jefferies -- Analyst

OK. Perfect. And I wanted to go back to Ontario, if I may. Which is, frankly, it's an unusual market, right? It doesn't seem to be comparable to what we're seeing in the US.

And I think you may have said, Charles, that it has underperformed your expectations a little bit. Just help us understand, like what the expectations really are for Ontario for you.

Charles Gillespie -- Co-Founder and Chief Executive Officer

That the conversion rates that we have seen with our operator partners have underperformed expectations. Basically because as you say, it's kind of a new and unique market, and it's the first regulated Canadian market. There's been some just teething pains and just kinks that the operators have had to work out. And frankly, we saw this in the US when the first states were launching in the US.

So all those issues are minor and get fixed and things improve. Conversion rates go up and then everybody makes more money. So we're pretty, we're very positive and confident about the future of Ontario and Canada. But it wasn't a blowout like in New York, but it's the numbers are very healthy.

And our expectations for the future are equally healthy.

David Katz -- Jefferies -- Analyst

Understood. One last one, if I may. Can you just give us a bit more window into whether there could or would or wouldn't be any more M&A next 12 months?

Charles Gillespie -- Co-Founder and Chief Executive Officer

We're not providing any specific guidance on M&A at this point. I will say that we were very focused on M&A last year, and we were very happy to do the two deals we've done, and I think those are fantastic deals. So at this point, we don't  feel any specific pressure to do another deal. And we're going to be very opportunistic and picky about the next one we do.

We're plus, we've got our hands full just integrating the two businesses we thought recently. So the focus is really on making those deals as successful as they can possibly be before we race after the next one.

David Katz -- Jefferies -- Analyst

Understood.

Elias Mark -- Chief Financial Officer

That could be opportunities that open up in this market environment and we continue to be very carefully monitor the industry. But I wouldn't expect anything to close in the next couple of quarters.

David Katz -- Jefferies -- Analyst

OK. Thank you.

Operator

Thank you. Ladies, and gentlemen, that concludes our question-and answer session. I'll turn the floor back to Mr. Gillespie for any final comments.

Charles Gillespie -- Co-Founder and Chief Executive Officer

Thanks again to everyone for joining us today. We appreciate your support and interest in Gambling.com Group. We've had an absolutely fantastic start to the year record quarter, and we're extremely excited about our prospects for the rest of the year, both in the US and outside the US. We look forward to updating everybody again in the report Q2 in August.

Thank you very much.

Operator

[Operator signoff]

Duration: 33 minutes

Call participants:

Josh Carroll -- Investor Relations

Charles Gillespie -- Co-Founder and Chief Executive Officer

Elias Mark -- Chief Financial Officer

Barry Jonas -- Truist Securities -- Analyst

Jeff Stantiel -- Stifel Financial Corp. -- Analyst

David Katz -- Jefferies -- Analyst

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