LeoVegas AB: Third quarter: 1 July–30 September 2018

”A challenging quarter for our two largest markets, with greater focus on compliance and sustainability. It is satisfying to note that LeoVegas is the most well-known online casino brand in Sweden – our position ahead of regulation is very strong!” - Gustraf Hagman, CEO and co-founder

Third quarter: 1 July–30 September 2018[1]

• Revenue increased by 41% to EUR 78.6 m (55.6).
• Organic growth in local currencies excluding markets closed in 2017 was 14%.
• EBITDA was EUR 9.0 m (7.6), corresponding to an EBITDA margin of 11.4% (13.7%).
• Net Gaming Revenue (NGR) from regulated markets was 35.5% (25.3%) of total NGR.
• The number of depositing customers was 318,189 (202,980), an increase of 57%.
• Earnings per share before and after dilution were EUR 0.13 (0.06).

Events during the quarter

•  Sports betting brand BetUK launched in the UK market.
•  Log-in and registration via BankID e-identification and immediate payouts. 
•  LeoVentures acquired 51% of esports betting operator pixel.bet.
•  The subsidiary Authentic Gaming signed agreement with the UK’s largest land-based casino and was granted a B2B licence for the UK market. 

Events after the end of the quarter

• LeoVegas is Sweden’s most well-known and most appreciated brand in online casino according to several brand surveys conducted by Mantab Global.
• Launch of the legs11.co.uk brand, with focus on bingo, in the UK market.
• Net Gaming Revenue (NGR) in October amounted to EUR 26.6 m (20.6), corresponding to growth of 29%.

Comment from Gustaf Hagman - Group CEO and co-founder

The third quarter was a quarter of transition for LeoVegas as a Group, during which we have focused on compliance measures, completion of platform development projects and other long-term investments to enable the next major steps in the Company’s development. The work on meeting compliance requirements in the best way possible has been necessary and will give us a major competitive advantage. We are now at the forefront in this area, ensuring long-term sustainable and profitable growth for the Group.  

Despite the important improvement efforts, we are not satisfied with our growth or profitability during the third quarter. Our work with compliance has mainly affected our near-term growth in our two largest markets, the UK and Sweden. As a consequence of this shift we saw a drop in the average player value, which we have not been able to mitigate in the short term by a new record number of depositing customers during the quarter. The second factor that has made a significant impact is the large projects we began during the second quarter. We will see the effects of these first in the longer term, while they have also locked up resources that we have not been able to use for other growth initiatives. In parallel with the progress of certain long-term technical projects that are still ongoing, the organisation has now been able to return to more growth-focused projects. We have also launched a number of new initiatives during the autumn focusing on products and the customer experience which are expected to gradually generate positive effects. The results of this work have been confirmed by positive customer KPIs during the start of the fourth quarter. This, in turn, bodes well for a return to higher growth figures going forward.

At the forefront in sustainability and compliance
As we communicated in our report on the second quarter, we have seen a rise in external requirements on operators for responsible gaming and compliance. We believe that we as a Group have made great progress in this area. We have introduced controls and processes that we believe go far beyond the average for the industry, especially in the Swedish market. For example, we have carried out proactive measures in responsible gaming and anti-money laundering and have implemented extended SOI (source of income) routines, which entail a more in-depth review of a customer’s financial situation. We have gradually implemented these measures over a longer period. We began to see the effects of our proactive measures during the second quarter, and they have now borne full effect during the third quarter. On the whole, a picture has emerged in which our work in this area has had an adverse effect on growth during the third quarter, but at the same time entails that we are even better positioned for long-term growth. With these newly implemented routines we will have the best opportunity to work effectively and sustainably in a regulated environment – something that will only be possible for operators that have invested in the routines and processes required. We see this as a major competitive advantage. 

We have high aspirations in all markets, but all markets must also be addressed according to their unique features. In certain markets we believe that our work with compliance has had a negative impact on the customer experience, such as with respect to information routines and internal processes. This is a very difficult balance to maintain, and we are now fine-tuning our operations in an effort to comply with the various regulations through a high level of gaming responsibility while at the same time offering an attractive and smooth customer experience.

Development during the quarter
Revenue totalled EUR 78.6 m (55.6) during the third quarter, an increase of 41%. Organic growth in local currency was 7.5%. Organic growth excluding markets that were closed in 2017 was 14%. EBITDA totalled EUR 9.0 m (7.6), corresponding to an EBITDA margin of 11.4% (13.7%).

The main explanation for the slower growth is the weak performance we had in the UK during the period. Organic growth for LeoVegas.com in the UK was negative, by 32%. Royal Panda and the Rocket X brands also noted lower revenue from the UK.

For LeoVegas, EBITDA has fluctuated from quarter to quarter. However, on a yearly basis we have a steady trend with respect to our margin. The lower EBITDA margin for the third quarter compared with the second quarter is explained by two main factors. The first is that we have grown our workforce in relation to revenue at a faster pace than previously. Most of our new employees are on the responsible gaming and compliance team, which has doubled in size since the start of the year, and in technology development. The second, major factor is the investments being made for the Rocket X brands, which is several major marketing initiatives, including the launch of the BetUK brand. These investments are weighing down earnings in the near term but are expected to lead to higher growth in coming quarters.

Focus on casino and the customer experience
LeoVegas has since start focusing being “No 1 in mobile” and have a unique strength as a casino brand. Sports betting, which we added in 2016, is important for LeoVegas’ total customer offering and growth. We have invested in the product and have now succeeded in building up an established sports betting brand. We intend to continue with the strategy we adopted after the FIFA World Cup, namely, to channel our focus back to the casino vertical.

Technology
During the second quarter we launched our new front-end platform, which was necessary to support our continued rapid growth and uphold our market leadership in products. One of many advantages is the improvements in search engine optimisation (SEO). The value of improved SEO is that customers find their way directly to Leovegas.com via search engines instead of going via external affiliates. During the third quarter we already saw an increase and improvement in organic traffic to LeoVegas.com. For example, the number of new customers via organic traffic has grown by 50% since the new platform was implemented. It is very gratifying to see a positive effect in such a short time. Over time this will make us less dependent on external market channels, which in turn will lead to growth with higher profitability.

Regulated markets
NGR from locally regulated markets accounted for 35.3% of total during the third quarter. Starting in Q1 next year, when the Swedish market will be regulated, we expect that about 60% of our revenue will be derived from regulated markets. This is in line with our expansion strategy to grow in locally regulated markets and markets that are expected to become regulated.

Sweden - very strong position ahead of regulation
Sweden is one of our core markets, and we are approaching the 1st of January, at which time the market will become regulated after many years of anticipation. We look forward to a fruitful cooperation with the Swedish Gambling Authority, with which we filed our licence application in August. We are highly confident that Sweden’s new regulation structure, under which all active operators will work according to the same rules, will lead to a sound gaming market with a high level of channelisation in which the focus is on the customer experience and responsible gaming.

In Sweden we have had a need in recent quarters to update our product to meet the ever-fierce competition. During the third quarter we launched a log-in and registration process via BankID e-identification and immediate payouts. This was implemented though direct integration with BankID and not via a third-party solution. This reduces the number of clicks and improves the customer experience. With these improvements we believe that we continue to offer Sweden’s best customer experience in mobile casino along with the broadest offering.

Naturally, our absolute ambition is to uphold our position as the most well-known and most highly appreciated casino brand in the Swedish market following regulation of the market. Moreover, we have many exciting campaigns left to carry out before year-end. One such initiative highlights our new ambassador, Hollywood star Dolph Lundgren, who we will be seeing a lot of in the media. This, along with LeoVegas being the most well-known and appreciated online casino brand gives us a very strong position ahead of regulation!

UK – a new level to grow from
The UK market is presently challenging, but as the fourth quarter gets under way, we have begun to see a return to positive trends for the group and have thus found a new level to grow from. This is a result of the enormous work we have done in compliance.

Having an open dialogue with a cooperative regulator is important for creating a good business climate with the shared goal to create a sound and sustainable gaming market. In this work the UK Gambling Commission (UKGC) has led as a good example, and our cooperation and understanding are very positive.

The adjustments we have made to how we conduct business have been necessary in order for us to deliver sustainable and strong growth over the long term. The operators that maintain high standards of compliance with the customer in focus will have a very strong position going forward in the UK, but in other jurisdictions as well, since more and more countries are regulating their markets, and knowledge is thereby being built up about compliance in regulated markets. The work on automating and streamlining these processes has already begun.

As a result of the transition that is taking place in the UK, the general player value has dropped to a lower level, but the customer acquisition cost offered by certain marketing partners has not yet decreased to a corresponding degree. Historically, however, customer acquisition costs have always become aligned with the new conditions created by market changes.

“Scale-up markets” - continued strong growth
In addition to Sweden and the UK, which today are our largest markets, we have what we call our “scale-up markets”. These include Canada, Denmark, Germany and Italy, among others. We are investing heavily in these markets and see that our KPIs are pointing in the right direction. Germany, in particular, delivered a strong third quarter with growth well above 100%, but markets like Denmark and Canada are also growing fast and increasing in importance for the Group’s total growth.

Our brands
Rocket X
LeoVegas Gamings brands in the UK, under the collective name Rocket X, had a challenging quarter. These brands are active only in the UK market, and player value has therefore been hit extra hard in the short term by the increased compliance requirements. However, we now see a very positive development of the customer base for these brands, which we expect will contribute to renewed growth from the current revenue level. There are many growth-driving initiatives for the UK market. Among others, we launched the BetUK brand with sports betting as the main focus, with very good initial results. In addition, after the end of the quarter, the bingo brand legs11.co.uk was launched.

Royal Panda
Royal Panda derives nearly half of its revenue from the UK and has also been affected by the increased regulatory requirements. In other markets we see a considerably stronger growth trend. The earn-out period for Royal Panda ends on 1 December, and integration of Royal Panda has entered a more intensive phase. The earn-out payment is now expected to be lower than we had previously anticipated, which is coupled to the weaker performance in the UK during the earn-out measurement period. Our revised assessment is that it will end up at around EUR 30 m, which will be paid out early next year.

LeoVentures – eventful quarter
The third quarter was yet another eventful period for LeoVentures. During the quarter our subsidiary Authentic Gaming signed an agreement with Aspers, the UK’s largest land-based casino, to provide its roulette games via live streaming from Aspers’ prestigious casino in London. Authentic Gaming was also granted a B2B licence for the UK market. During the quarter LeoVentures also invested in the esports betting operator pixel.bet. The ambition over time is to position itself as the leading brand in esports community. Important within esports are Twitch streaming and streamers as influencers, which closely ties to LeoVentures investment in the CasinoGrounds streaming community, which is developing very well.

Financial targets 2020
Even though one of our core markets is currently undergoing a change that is weighing down growth in the near term, I want to reiterate our financial targets for 2020 of at least EUR 600 m in revenue and EBITDA of at least EUR 100 m. These targets are obviously more challenging today than when we communicated them this past spring, but we see good opportunities to reach them. Among other things, we still have a very strong position in the UK, with several compelling brands, and we have good opportunities to begin growing again sequentially following the recent quarters’ focus on compliance. We expect to be able to grow our market share in Sweden following the market’s regulation, as the overall customer experience and responsible gaming aspect will grow in significance. At the same time we have a number of markets in which we are now gaining a bigger presence and growing strongly in – all with potential over time to be LeoVegas’ largest market.

Our expansion plan remains ambitious, and we are looking at a number of new markets in which to expend in the coming years. We are not ruling out new acquisitions as long as they fit with the Group’s strategic agenda. At LeoVegas we are working hard to ensure our long-term sustainable growth and continue building the leading Gametech company.

Comments on the fourth quarter
October started out with Net Gaming Revenue (NGR) of EUR 26.6 m (20.6), representing growth of 29%.

The UK has had a significant impact on our figures for the third quarter as well as for the month of October while most of our other core markets continue to show solid growth. In regards to Sweden, the combination of increased marketing and an upgraded product has had a good initial effect, with 25% higher revenue in October over September and with good profitability.

Historically, performance during the fourth quarter has been stronger toward the end of the period, as December is typically the month with the highest level of customer activity.

I am convinced that the growth initiatives we have begun, and our renewed casino focus will take us back to the strong growth we have historically had. They give us good opportunities to create long-term sustainable value for our shareholders. 

Presentation of the report - today at 09:00 CET
To participate in the conference call, and thereby be able to ask questions, please call one of the following numbers: SE: SE: +46 (0) 8 5664 2753, UK: +44 (0) 330 336 9127, US: +1 646 828 8144, Confirmation code: 90 66 139 or join at the web https://edge.media-server.com/m6/p/h3fot9hw

This information is information that LeoVegas AB (publ) is obliged to make public pursuant to the EU Market Abuse Regulation 596/2014. The information was submitted for publication, through the agency of the contact person set out below, at 08:00 CET on 7th of November 2018.

For further information, please contact:
Gustaf Hagman, Group CEO: +46 (0) 8 410 367 66, gustaf.hagman@leovegas.com
Stefan Nelson, CFO, +46 (0) 70 958 78 55, stefan.nelson@leovegas.com
Philip Doftvik, Director of Investor Relations and Corporate Finance: +46 73 512 07 20, philip.doftvik@leovegas.com

About the LeoVegas mobile gaming group
LeoVegas’ passion is “Leading the way into the mobile future”. LeoVegas is Sweden’s premier GameTech company and is at the forefront of using state-of-the-art technology for mobile gaming. A large part of this success can be credited to an extreme product and technology focus coupled with effective and data-driven marketing. Technology development is conducted in Sweden, while operations are based in Malta. LeoVegas offers casino, live casino and sports betting, and operates two global and scalable brands – LeoVegas and Royal Panda – as well as multiple, local brands in the UK. The company’s shares are listed on Nasdaq Stockholm. For more about LeoVegas, visit www.leovegasgroup.com.

[1] Throughout this report, figures in parentheses pertain to the same period a year earlier.

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