Q1 2022 Codere Online US Corp Earnings Call
Speaker 1: And CFO oscaric lyes. Before turning the call over to oscari'd like to remind everyone that during this call we will be referring to our presentation we uploaded to our website earlier today. We encourage everyone to read the disclaimer section, particularly the points around forward looking statements, non if RS, financial measures and preliminary information.
Speaker 1: During today's call, we will be referring to non-GAAP financial metrics such as net gaming revenue or adjusted a bitdafor, which you can find by conciliations in the appendix section of the presentation.
Speaker 1: Finally Please note that a replay and transcript of this call will be available later today on our website at goar online com, and that, if you haven't done so already, we encourage you to sign up to our Investor email: alerics.
Speaker 1: Oscar over to youthanks Mo, and good afternoon to everyone joining the call.
Speaker 2: This is our first full quarter of operating results as a publicly traded company and we look forward to giving you an update on business trends to add to the information that we have provided in our first annual report, which was filed on Form twenty-f on April twenty-ninth and which is available on our website.
Speaker 2: Before moving into details regarding the quarter, I just wanted to remind you that CLO downline is luxembourg-based and, as a European company, our accounting information is prepared under IFRS accounting standards and our functional currency is the euro. As such, throughout this presentation, all monetary figures will be in euro, unless expressed otherwise.
Speaker 2: Also based on the feedback that we have received from a number of you following our fourth quarter earnings call. In today's presentation, we are providing both consolidated income statements and country level net gaming revenue and adjusted EBITDA on a quarterly basis throughout two point zero two two million and 21, in addition to, of course, first quarter 2022 figures.
Speaker 2: We hope that this will be helpful to those of you that have either built or are considering building a financial model, but also as further context for everyone that is tracking the performance of our business.
Speaker 2: Going forward, we will be moving this information to the annex and focusing more on current quarter and year-to-date results in each case versus applicable prior year periods.
Speaker 2: With that, I will go ahead and pass the call on to motion.
Speaker 3: monshaur, you may be on you.
Speaker 4: Hello.
Speaker 2: Ye we hear you know, thanks.
Speaker 5: Sorry thanks sir, and thanks everyone for joining the call and sorry for the delay. For those of you who are new to the company, I would like to provide a quick overview of their online. I joined the company in late two thousand and eighteen and.
Speaker 5: When it was a onlylly own subsidiary of kaderi group, which is a mjrid based gamming operator with over 30 years of freated gamming operating experience in Spain, Italy and Latin America. This, past, November thirtyeth, we completed a merger with a nasaut listed spec, which resulted, if not only could ER online being a? U's listed business, but also in our raising over one million Doll.
Speaker 5: To finance the substantial opportunity we have ahead to grow the business, in particular, throughout Latin America. Moving to the highlights of our first quarter 2022, we delivered strong operating results in the period, with net gaming revenue up twotwenty-four percent from nearly 26 million years and 15% versus Q4%. Thousand and twenty-one.
Speaker 5: This world was driven by a significant increase in active customer and in Mexico, with a monthly spent proactive at above hundred euro.
Speaker 5: In terms of customer acquisitions, we continue to see strong volume.
Speaker 5: Our first time deposit increased almost in 50% to 78 thousand at an average cost of around €200.
Speaker 5: Considering that this is the first full quarter where we have had the benefits of a higher level of investment, we are pleased with the performance and confident that we are on track to meet our full year guidance as a net gaming revenue growth Accel rates.
Speaker 5: Over the next few quarters. This is year we also have a Ward cup, which should provide an additional rapply for fourth quarter results. We are quite encouraged by the long term growth prospect of our markets, not only based on what we see on the ground, but also based on other industry sources that we have received upwards the growth focast for a certain market, for example in Mexico and Argentina. We are now expecting the total addressable market size of twentthousand per to 25% higher than our per projections, and we believe that we are well positioned to capture our share of that growth.
Speaker 5: Finally we have put in place a long-term incentic plan for key members of the team, which was approved by the shareholders on March. Third, this is a five -year years plan that include restrictedure stock option and deferred payment rights.
Speaker 5: We will not only further align senor management and Directors interest for those because there online in its shareholders, but also strengthen the retention and motivation of seum management and Directors in the long term.
Speaker 5: With that, I will turn it back back to austm oscom.
Speaker 2: Thanks marchet. Turning to the financial results for the full year, we see that the 24% growth in consolidated net gaming revenue was driven primarily by an impressive 56% growth in Mexico, and that Spain has recovered to levels we had in first quarter of 2021, prior to the regulatory restrictions that came into effect in May of last year.
Speaker 2: As you know, these restrictions impose significant limitations on advertising, sponsorships and promotional activities, So these operating results are not only very encouraging, but the start, we believe, is a positive trend for our Spanish business.
Speaker 2: Colombia also performed well in the quarter, with an 80% increase in net gaming revenues, and our remaining markets also contributed to the positive results in the quarter.
Speaker 2: In regards to EBITDA performance by country and as discussed in our prior earnings call, we had a significant uptick in negative EBITDA in the quarter, primarily due to higher levels of marketing investment in furtherance of our accelerated growth throughout this business.
Speaker 2: The exception was, as has been the case for some time Spain, which generated two and a half million euros of EBITDA on the period, a level has sustained for the last few quarters, despite the regulatory hurdles which prevented us from deploying our promotional tools in this market.
Speaker 2: We believe there may be a readit across here for our Latin American operations, where we would be seeking to replicate this path to profitability, whereby promotional activity can eventually be curtailed once we have achieved meaningful scale and our otherwise positioned as one of the leading brands and operators in the markets in which we compete. The Spain example also highlights the import of our omniichchannel approach, as having a retail presence allows you to reach the customers in a way pure online players cannot, especially when marketing and promotional activity is restricted.
Speaker 2: Adjusted EBITDA, the first quarter decreased to negative 13 million, in line with our expectations, primarily due to this increased level of marketing investment and, to a lesser extent, higher platform content, technology and personnel expenses incurred in the period. But we believe that these higher levels of marketing and operational investment are laying the foundation for the significant growth we are targeting over the coming years.
Speaker 2: We understand that the recent sell-off in certain technology and other high-growth stocks is partially driven by concerns about the path to profitability and cash burn.
Speaker 2: But please remember that a significant portion of our overall marketing spend is discretional or otherwise uncommitted. As such, we can increase, decrease or, if needed, discontinue marketing spend at at any point in time, based on what we are seeing across our markets.
Speaker 2: Also the upfront investment we make to acquire customers in a given period, but we typically referred to as a cohort, is generally recovered and generates to return over the lifetime of those customers.
Speaker 2: Internally we define lifetime is five years following acquisition and would be seeking a relationship between lifetime value through acquisition cost of about three to five x depending, of course, where we are in the growth trajectory in any given market and the applicical unit economics within that market.
Speaker 2: Turning to the Spanish operating and financial metrics, we see the recovery net gaming revenue in the first quarter of 2022 to about the same level we had in the prior year quarter, despite the lower level of active customers as a result of the promotional restrictions in place.
Speaker 2: On an LTM basis, we are flat in revenue levels, but with 6% more average monthly actives in the period.
Speaker 2: Due to the impact of COVID-19 on sports activity in the prior LTM period.
Speaker 2: In Mexico. Meanwhile, net gaming revenues reached €1 million in the quarter, an increase of 56% year-on-year and 27% sequentially.
Speaker 2: This strong performance is supported by our omnichannel approach, given the large retail presence go that a group has in the country, with nearly 90 gaming halls, and also by the fact that, in Mexico, 100% of the retail activity is tracked as required by regulation, allowing for more effective promotions and overall customer management across channels.
Speaker 2: In Colombia. Meanwhile, we have had strong growth in the quarter in terms of both net gaming revenue and actives. But while this continues to be a relatively small business, we are making a number of adjustments that we believe will allow us to continue growing the business and improving our return on marketing investment.
Speaker 3: Turning to the balance sheet of as of March 30, first we had over $1 million available for for deployment as the negative 13 million and EBITDA adjusted EBITDA, the period was more than offset by a 12 million decrease in networking capital. That is a positive cash impact of 12 million and a positive one point four million foreign exchange impact on the proceeds from the business combination which we hold dollars as a result of the strengthening of the dollar throughout the quarter.
Speaker 2: Overall the net working capital position of the business decreased to negative 28 million by quarter's end, primarily as a result of a one million increase in accounts payable.
Speaker 2: Which was due to both a delay in the invoicing from certain of our Mexican media partners, but also delay in payment of certain services provided by commomic group.
Speaker 2: We expect to get caught up in these payments, which amount to out nine million, throughout the second quarter, and that the net working capital position of the company will be back to a more normalized position by quarter end.
Speaker 2: Pro forma for the payment of these nine million. Our cash position, as of Mark City first, would have been around nine million expressed in dollar. U's dollar terms.
Speaker 2: On Page 16 you have further details regarding the cash flow statement and the variation net working capital in the quarter, both of which we were providing for the for the first time this quarter.
Speaker 2: That's all from myend. For those of you who might be interested, will be attending stevel's Investor conference in Boston. Will be there on June eighth and will also be available for meetings in New York the following day, at June ninth. So feel free to reach out if you'd like to meet in person.
Speaker 3: And will now hand it back over to machine for closing remarks. Thanks o adjustment to highlight that the first quarter results who are in line with our expectations, our trend that continue throughout the man of April , and we believe that we are on track to meet our commitment to the Investor for the year. We continue to believe that the opportunity we have in the front of us is amazing and we are more focused than ever on executing our plan. We look forward to speak with you again in later August when we will publish our second quarter results, and we'would like to wish everyone a safe, healthy and happy summerwith that said, I will return back to the operator to open up the call for qathank. You, everybody.
Speaker 6: At this time. I would like to remind everyone: in order to ask a question, press star, then the number one on your telephone keypad. Your first question comes from the line of Jeff stanthel from steel. Your line is open.
Speaker 7: Hi good morning you ask thanks for taking the questions you know for first off I wanted to drill into the returns on your ongoing marketing plan. It looks like CPAs were up about 30% quarter on quarter now trending about 200 per customer. You know. It's this kind of the right level in the near term. Should we expectit to keep climbing at bit. You know if you as you had Q on your marketing plan and then what are you seeing with respect to the LTV. On this CAC I think you know when you first one public. You talk to a four times. Target is that'sconsistent with what you're seeing Thank.
Speaker 8: Hd also I will take it. So you right, I mean we see increase in the CPA, but that was expected. I mean, as you increase the marketing spend and you acquire more customer, the blended- the blended costs of the customer cost per customer- is increased. But at the same time we are modifying and we optimizing our CRM activity. So I think that overall what we are doing, we are stabilizing the formula between the amount of customer that we need to acquire in order to accommodate the growth, the same time to optimize the bonuses, the AP level, So we will receive the same return that we expected in the business plan. So, all in all, we think that we want write So see that the value growth at the C growth and if we see that there's some decrease in the lifetime value, we will adjusted on the CPA level as well.
Speaker 5: So we finding on the fly? That's what we would thinkok helpful, Thank you know. And then honest no, I think in the decky reited your goal to be evenbit itive by 2024. just curious, how should we think about the timing for peak EBITDA lossesis? You know, given your plan with to me, sometime in 2022, but that's kind of what quarter orper PS? Should we think about the CAD? ence therethinkum? Yeah, it's, It'sa good. It's a good question, Jeff. I think that that this is a steady Bo. I think the the peak EBITDA loss will be will be something you see in the current year period, So in and thousand and 22, and then the business will start tracking as we start having a cumulative effect of that marketing investment from all the incremental cohorts that are coming in the mix here. You'll start seeing that now moving in the direction of that more and 24, both both EBITDA positive, in cash flow positive. So 2022 would be, from a from a full year standpoint, the trough here in terms of the low point, I mean bitd.
Speaker 7: undsaid that o care and then just in Spain it looks like you're adapting really well to the regulatory restrictions that were. But in place can you just talk about some of the things in more detail that you're doing to navigate. These head with I you take market. shareyou know it sounds like you're leaning even further into the omni channel know advantage or just anything else that you're got to you know executing just to to adapt to some of these changes around marketing yeah. Just so guy. I will take it. It's it's challenging. I mean markets like Spain and de when the facing like a full ban of advertising obviously our ability to our ability to acquire plists quite limited in terms of the advertising spend. But having say that it's it's a matter of brand and couldera is a very well. Positions is a brand in Spain. Both because the reion presence we have hundreds of shop which out of them are.
Speaker 5: I think and also can correct me- around six more our branded coulderors on Sha. So that is an omniichchannel strategy is a very strong position. At the same time we see reduction on marketing spend from our competitors. So just by that we are gaining some market share and at the same time as any other markets we invest quite heavily on the product side to add more content, to add more sports event to offiz, the finunnel of the player experience, and that by sales it increase the player value as well. So I think that if you combineed everything together, by having a strong branding position on the back of the realment sponsorship that we have for years, the retail omnichchannel strategy, the product, the CR? M and the long term engagement with the playors, I think that we will see increased and anyhow the expectation or targets.
Speaker 5: In spay and needs to agree on the TH that it you by years. So I think that we align with that, with that front, Jeff. I would also add that, just on the real maddriid front, that that the sponsorship is is still in effect, that even even though we CAn't utilize it, the same where we could pre free marketing and and emotional restrictions, that that we broken leverage that, that sponsorship for hospitality and other things that are useful to us in furtherance into our business, especially with some our higher end customers. So that that's another point that's a little bit differential, I think.
Speaker 7: Okay interesting, that's helpful, Thank you. And then you know, just on Brazil, we have heard some news flow since the last time we spoke at Q4 earnings. Can you just talk about what you're hearing here? You know in terms of timing and you know any details on structure? And then, just how should we handy at the odds that you know you think this, this could get ped.
Speaker 2: You you want me to start him. You jump in terms of assessing, kind of Ok. So, as everyone knows that there's been some recent legislative development on specifically on the sports betting front in Brazil, we had understood that this legislation was was going to be taken to the President of Brazil for a signature on may tenth, but but are not a way that this is actually taken place. We understand that this contemplates no no, an unlimited number of licenses, but it would be a single license for sports betting in both the retail and online channels: five year term. The upfront to license acquisition cost of a little- in euro terms it's €4 million that think it's like 22 million azilian the eyes. The gaming tax rate it seemingly will be based on, similar to most most other.
Speaker 3: Regulated markets based on on when and not as initially contemplated amounts wager, which is, which is good news, and also they're contemplating a a window for existing on unregulated operators to begin complying within the new new regulatory framework. There's also some other things here about a possible I think some people have referred to as a sandbox or a pilot program where, where they may be selecting certain operators to to get started with, to start establishing, and what I imagine is that the detailed regulatory framework that that will apply going forward to all license holders in terms of what we're doing, where we're obviously evaluating options, including you know what one or more local partnerships or obviously, if go that a group are are controlling and majority owned shareholder moves forward with retail sports betting, obviously we would be interested in a coordinated omniichchannel approach.
Speaker 3: Go one strategy. I think we have to give a hard thinkink on that. It's not not something. That's what the table really more shaking Chi with, with his view and his expectations of the marketyes, So obviously brazil- it's. It's one of the biggest market in regula, ted- will become one of the biggest regulated market in the world and the third in Latin America may be the biggest on Lin America. So we will need to be there in a certain point. I mean as being like Latin America operators and our aim to become the biggest one of all the continent. The way to do it is it's very careful. I we have to do very carely because the size of the market and the fact that it's a different language that the Spanish that we're using in any other jurdiction to be well modified, both in terms of the product but both in terms of the approach to the market.
Speaker 5: I would say that it's most likely that during 2022, we will not start any actual operational activity in Brazil. We are more ableimling to 2023. We will start obviously, by preparing the operational, operational activity and the product itself and then, as also mentioned, our preferable route is to go through a partnership, local partnership, the several options that we are checking right now, which I think that it's too too early to unders said that was izing techholdlogers. Are that?
Speaker 7: Sorry broke up a lot of that. It be very meyes plan, sorry So. So I think that at the beginning of next year we'll start with a slow marketing with a slow marketing spend. It's as I said, it's a big market, expensive market. We'll do it very carefully and we are very committed to our shareholder and to our business plan to stick to the six core market that we're operating now. So we are focusing on that, will look on asside what's happening in Brazil. For my experience, the same we've seen in other big market like North America, and in the past though, rush to the market and start spending millions of marketing didn't have a lot of chance to succeed. So we'll start very carefully, preferable to a local partner with a good product, with a good operational team on ground, and then we'll take it from thereperfect. that's's's super helpful: one housekeeping, one for me really.
Speaker 9: But let us let us give a think if in some quarters that that you know we want to incorporate and potentially included our in our Q who call right. Now. We're not giving any any quarterly guidance in terms of in terms of ebitd cash yeah. It just kind of goes to the question about the cadence of the the capterburn and you coming quarters. I appreciate that and then the otherthe question is can you talk a little bit about the competition for customer acquisition. At least you know here in the states there the companies are obviously spending significantly. You mentioned this. He about you know how the spend has been and at least in the states there's been a shake out among some of the players that have exited online sports betting or at least significantly cut back on marketing spend because as you mentioned the know capital markets have kind of closed for some of the smaller. Players can you talk about the trend line in terms of costs of acquisition and your thoughts about the jectory of those cost of the increase to a point in some cases where.
Speaker 5: To the market in Mexico and Colombia's a bit different. And then I will touch abit about anamine Argentina, that the market that we are operating in Mexico it's it's we adjusted as you saw in presentation. We are just at the timem for Mexico and now understand that the the market based on the publicication, competitors and mainly playated and better with 6: five But the market is bigger than then we envision and so we see that and we feel quite comfortable with our expectation, with our plan. There is a lot, a lot room to grow. Although there are some small and mid size competitors entering to market, we Don foreseeseening any competition. For us it's a very complicated the market. It's both on the terms of the regulatory, both in terms of the processing, the payments cashing, cash out for the playareers and L K we C. So we feel quite comfortable that us it local operators with a very strong onlyomthe channel.
Speaker 5: Of a fraudulent account activity that there, the market that we know that everybody is suffering from and we see that our voice of share in Colombia is getting a bit higher because we give the same amount of activity while the competitors we growing from the market. So we expect, think that that will be the currenme continunity in Colombia because is the first, I would say the second AC second year after the copy that there is a lot of, a lot of competitors that trying to to go for this market, including the rush back, the motor operator, the tender to the market and everybody now is trying to see how to build the playar valuein the city of bonocyirus, when we just started. We believe that again, based on our local onlyn channel and the retail experience that will not suffer from any competition in the city of monocyus.
Speaker 5: Or the competition that we havewith that obtain the license will not will not disturb our growth as plan, and the same is in pana. So just to summary it up: in Mexico feel very comfortable about our ability to grow without any disturbance from any competition and if there is any, there is competition and new com to the market. We don't see that that will anyhow can can prevent fronance from growing in the way that we want to. Colombia is challenging and we're doing some reevaluation to the market. In argenteen, nine pana, MA feel quite comfortable, standard more if I could just that. In Spain specifically, we have based on the latest regulatory data that we have, which is from Q4. We are there, is there is signs that we're taicking up meaningful share, particularly on the sports spending side, but also on CAS, CAS o of the business. We're waiting to see. The first quarter data is to form.
Speaker 3: That was a trend that that that could consolidate here in in the first and then hopefully into the second quarter. But but we are are starting to see some of that, some of that improvement and the benefits from the strategy that we have in Spain, which obviously is, are our homemarket, in the, in the market where we've we've been been operating for quite some time. So there there are some positive things happening there. We want to see how that the Q Q1 numbers come out from, from the regulator, to see if that's solidifies but a positive trend hold in Spain.
Speaker 7: Great thanks for all the color that let others ask question. Thank you, great thanks mickke, and there are no further questions at this time. Mr gilermo lunche, I turn the call back over to you for some final comments.
Speaker 10: Okay before before. We do have some questions coming in from the webcast So I will just them on. On Mo stock answer first: one is around the long term incentive plan that we just passed and we are being asked we can briefly describe the triggers or the L? tipso, I don't know, or more Sha we want to do each. one yeah your yeah the, the. As we mention earlier in the present the, the program is a five year program and has really three basket, three types of awards, the first being restricted stock units. These are up front grants that best pretty much linearly over the over the course of the five year period, about 20%, 20% per yearthose are fairly straight for. The next basket is stock options. I think the key there is that they're struck at $10 per per stock options, obviously the $10 being the price of the Char.
Speaker 3: The private investors invested in our transaction, in our business combination through the pipe last November . thirtieth and the last piece is the deferred payment rightiting. This is effectively a deferred cash payment at the end of the five year plan. It's based on value creation, is the only component of the plan that's not not linked directly to the evolution of the share price and it's based on as as similar as similar to the variable compensation bonus is that we have on an annual basis is based on the, the year five performance and the value creation, the equity value creation of the business versus versus the baseline as established in the business combination itself. I think the the target to achieve 100% payment payment under the deferred payment rights is three million of of equity value creation, effectively a doubling of the equity value of the business. So I think that's kind of a high level from in terms of just just investors having a view of how Directors and managers will be aligned with shareholders.
Speaker 11: And again. If you would like to ask a question over the phone, please press star one on your telephone key. padok, we have another question on the webcast.
Speaker 10: The target market. Target addressable market increase in Mexico, argentinadoes this refer to H two GC estimates or also to cotheirairline in-house estimates for these markets.
Speaker 12: Yeah sorryi go have here morei was I was going to addressed to you, ussare.ye, AH. I think Mexico is our TAM. We have A. it's a combination. It's the, the updated- I believe these are less than a month old- H T G C, forecast through 2026, and then we take an estimate. We try to anchor around 2027 as as the tar year from from a TAM standpoint, but largely the evolution in the upward revision is H T G C. in the case of Argentina, it's a number of different sources But I think generically would be more accurate to say that it's A. it's an internal estimate that we formulate as it relates to expectations and obviously that's going to be evolving over time as we and other operators in the city, in the province and elsewhere start learning a little bit more about the the, the Argentine customer and the potential for growth in the market.
Speaker 13: Okay So we don't have any more questions on the webcast. I don't know operatory. We have anyone else through thethrough the linethere are no further questions on the phone line. The Flor yours, MR launchecha.
Speaker 10: Okay So So if there are no further questions we will leave it here for now thanks again everyone for connecting and of course feel free to reach out to myself or our scar. We have any we have a last minute ions that just GI it through the webs. So.
Speaker 1: Let's do it. While you obviously need to preserve most of your cash for growth, even a small stock repurchases at current prices will be very accretive over the long term. Any thoughts?
Speaker 14: Yeah can, I can take this one and we- I mean, we had this question at the on our, on our prior nings call and I think it's it's very, it's a very bad question and something that we always, you know, we'll have to have on our minds, especially where, given current levels, where this LCK is trating. But it's not something that what today we have contemplated the business is performing, it's a is performing in in line with our expectations. I think our expectations, as as you've seen with our- you know, three year guidance in terms of revenue growth is- is ambitious. Little focus continues to be on those core markets. The focus continues to be preserving that cash to invest in the business. So long as those dynamics, So long as the UN economics continue to hold as, So long as the opportunity continues to be there, I don't think there's any change in terms of what we would be recommending for a managina standpoint or what, what our- you know the, you know our majority shareholder may be thinking as a release utilization: that cash.
Speaker 13: Ok thanks, ourcar. So yeah, no more questions on the webcast either. So thanks again everyone, for connecting today and feel free to reach out to to myself, for Oscar, if you'd like to discuss any anything further. Otherwise, we will speak again at the end of August , or I you to 2022 results. Thanks everyone, and and hope you have a nice summer. Thank you. This this concludes today's conference call. Thank you for your participation. Everyone may now disconnect.