888 Holding's (EIHDF) CEO Itai Freiberger on Q4 2015 Results - Earnings Call Transcript

| About: 888 Holdings (EIHDF)

888 Holdings PLC (OTCPK:EIHDF) Q4 2015 Earnings Conference Call March 22, 2016 6:30 PM ET

Executives

Brian Mattingley - Chairman of the Board

Itai Freiberger - CEO

Aviad Kobrine - CFO

Analysts

Brian Mattingley

Good morning, ladies and gentlemen. Thank you very much indeed for coming along to the 888's full year presentation 2015. I would ask, this is sort of a fairly informal format, but I would ask that that you allow us to run through the full presentation and there will be a section at the end for questions-and-answers.

You should also be aware that this whole event is being recorded. So, again please be aware of that. I'm here today purely and simply to welcome Itai, our new CEO and to pass the meeting over to him and allow him to drive the presentation and also to give him best wishes to drive the Company forward in its next chapter.

So, on that matter, I'll pass on over to Itai.

Itai Freiberger

Thank you Brian.

Brian Mattingley

I also want to take this opportunity and thank you for your contribution to 888 over the past five years and look forward to working with you constantly as a Chief Director and as a Non-Executive Chairman. For me this is an exciting days, I think of the journey I started from 13 years ago. I was fortunate enough to work with great people and teams throughout the years and especially doing my 10 years as COO and which we elevated 888 into a new height. It’s even more gratifying to assume the position of CEO after another record year in which the 888 team has yet again demonstrated what can be achieved when state of the art technology meets online professionalism. We will continue to push and grow the business in regulated market and I personally look forward to our next challenge which I will share with you today.

2015 was an exciting year, we’re planning to prepare for the perfect storm. Some items were expected like VAT and POC and some were unexpected like ForEx and the M&A attention we gave over the year. We're still able to push the business and preserve momentum, in my view our business is resilient as the challenges we put in front of it, and I think that's the result of what happened with our mitigation and point of consumption actually made us the better company and I think the results speak for themselves. It's the testimony of our organization knowhow and our proprietary technology, it allows us to meet market challenges, adapt and reacts with subtle changes and also opportunities.

Despite these adverse conditions, we were able to deliver another record year, we were able to mitigate a good portion of what could have been over $45 million potential EBITDA decline, we’ve done that through capital planning and malicious execution using our proprietary technology and innovation. Strong current trading as I see the business is firing on all cylinders.

2015 was a strong year. Our revenue increased 12% on a like for like basis with record Q4 revenue up 20% above previous year. EBITDA reached $81 million despite new gaming duties of $32 million and EU VAT of $10 million. As a result of the strong results the board recommended a final dividend of $0.04 plus a one-off dividend of $0.08 which brings the total year to $0.155.

Now I'll move over to Mr. Kobrine.

Aviad Kobrine

The first slide, I want to cover is our P&L and there are quite a few new moving parts on our P&L this year. We really attempted to decomposed the various moving parts and generate like for like composition, so that you can get an understanding of the strong performance of the underlying business and the revenue line -- very top revenue line was $472 million, which is an increase of 4% over previous year, from that we deducted $10 million of VAT, this is a newly introduced VAT for 2015 which is applicable to very few European member states, but it is here to stay unfortunately.

So after that deduction, we end up with $462 million of revenue which is a 2% on a reported basis, compared to last year, as I mentioned, it represents 12% on a like for like and I'd decomposed like for like.

Operating expenses, went down by $3 million to $127 million, the next big line on the P&L is a gaming duties, these increased by $36 million compared to last year, $32 million of these are all new for '15 but there was clearly increase in gaming duties due to our existing regulated markets. R&D expenses went down by $4 million to $36.8 million. Selling and marketing increased by $5 million but I will cover selling and marketing in the different Slide. Administrative expenses went down by $5 million to $28.4 million and the adjusted EBITDA is $80.6 million.

Going down the P&L you can see we had acquisition cost and retroactive gaming duties of $23 million, this has broken down and close to $15 million net transaction cost relating to aborted acquisition of bwin and the other write is one-off retroactive gaming duties which we do not expect to recover. The taxation went down considerably this year, predominantly because we just made less statutory profit in Gibraltar.

On the next Slide, you can see our group revenue, as I mentioned, we increased revenue on a like for like by 12% to $508 million, but I would like to show you that it represents CAGR of 19.6% on a like for like basis. If you look on the most right hand bar which represents 2015 like for like, you can see the decomposition of the impact of $35 million as a combined in FX impact on the Group plus the 10 million VAT which gets you from the 462 to 508, like for like.

On the next slide you can see our quarterly revenue, a few texts from this number of one quarterly revenue on a like for like basis for each quarter, quarter 1, quarter 2, 3, and 4 is higher when they corresponding quarter a year before. What you can also on the bottom right hand side that is in Q4 quarterly revenue increased 20% over the previous year to a very pleasant results.

On the next slide, the geographical segmentation a few things moving here, number one which I want you take home is that proportion of revenue from regulated market has increased, and is increasing overtime from 47% in 2011 and it is now 59% in 2015 and giving that our regulated markets is the fastest growing segments of the business we definitely expect this increase going in 2016. The UK now represents 46% of our business from 44% last year and the continental Europe business 39% up from 37% last year.

On the B2C side, revenue increased actually 14% on the like for like basis which represents 14.9% CAGR again you see on the right hand side the dominantly the FX impacted our B2C business to the tune of $32 million and almost all of the VAT is actually attributed to the B2C business of $10 million. The strong performance continued, it is led by casino and sport and as you've read the current trading our Q1 so far continues to be very strong, continuous to be led by casino and sport and regulated market which is Italy, Spain and Denmark.

In the next slide, you can see our revenue B2C built on a quarterly basis on a half yearly basis, on a reported basis H2 last year was 6.5% compare to the previous year and the last quarter was up 13% on a reported basis and you can see the same on Slide 14 the numbers represents 16% half yearly increase in a like for like and 23% quarterly growth on a like for like basis. On the next slide you can see the revenue by product, let's not forget all our products were adversely impacted by FX movement. On a like for like basis revenue increased on all products with the exception of poker, casino up 18% on a like for like basis. Bingo up 2.1% and the Emerging Offering in close of 51% over last year driven by our sport business.

If you look at the casino business, the casino business increased as I mentioned 18% and you can see the FX impact on the casino revenue and VAT of $23 million of FX negative impact and $8 million of VAT. This is driven by the successful launch of 777 which Itai will elaborate a bit later and slot machines in Spain.

On the poker side, the poker declined by close to 4% on a like for like basis, but I want to just explain that the way we adjust for the like for like basis on the poker is very-very conservative basically customers purchased chips which are denominated in dollars, therefore in their local currency given the lower purchasing power clearly they have purchased all their propensity to spend decline, but given that it's not an observable statics that we cannot actually calculate, we just did not take any risk and we have not adjusted for that element.

Unlike some of our competitors which have been more liberal with the way they adjust for the poker. So what I am saying is, that actually the underlying poker was definitely stronger than what you see here, but we just have not qualified it. Importantly we’ve certainly outperformed industry standard on the poker and Itai will show you couple of slides about that.

In Slide 18 you can see our performance on the emerging offering as we mentioned it's a 51% increase on a like for like basis. This is predominately a sport business with smaller other businesses in that segment, but sport is the clear driver and again it was impacted by FX to $204 million.

On the Bingo, on the Bingo if you take a look into consideration the decline pound versus our reported currency dollar Bingo went up 2%, we definitely see improvement in KPI but the market remains very competitive indeed. The next slide we wanted to brag a bit about cash, we are generating a large amount of cash. We are paid during 2015, $53 million of cash interim and the final for the last year. Customer deposits increased to $82 million, which is an increase of 22%. We see this is an exceptionally important leading indicator for the business. People deposit and then these deposits translate into revenue later on. Our corporate net cash increased generated $96 million net of customer deposits. And we remain highly cash conversion net cash generated from operating activities to EBITDA represents 105%.

I mentioned marketing, our marketing spend in absolute terms actually increased by $5 million. However, if you look at the marketing ratio, if you divide the marketing spend by the revenue before the VAT deduction, you actually get to the exact same ratio as last year, 29.4%. We have increased the new customers recruited by 28%, which means by definition the CPA, or the cost by acquisition, went down, which is another example of how our marketing analytics works phenomenally well.

On the next slide on the cost structure, I'm not going to bore you too much with this. But I will just mention that OpEx as a percentage of revenue went down. Our admin expenses percentage of revenue went down, the same for R&D marketing ratio remained the same and the only big change is external, the percentage of gaming duty that we incurred during the year when considerably up and represent now 10.6% of revenue.

The next slide, which is even more interesting, it’s here only to show you one thing. As the businesses moves into regulated market, as the volume increases in regulated markets, the processing fees and the charge-backs, which are these acronyms, PSP and CB, go down and I expect this to continue the same trend.

Now come to the slide, which in my view, it’s my favorite of this presentation, is where we try to show you what really happens on the macro level. On the left hand side, you can see the EBITDA which we reported in 2014, 100.7 million and on the right hand side, the reported EBITDA this year. What happen to us this year? We generated through organic growth of $22.4 million, which brings us to a number above last year of $123 million.

However, from that number the authorities took $10.2 million in VAT, an additional $32.2 million of newly introduce gaming duties, which did not exist the year before and we ended up reporting $80.6 million. Importantly, we have not adjusted these numbers for FX, with FX these numbers, or the reported EBITDA, would have been higher by several millions.

The next slide will show you just a historical representation of our EBITDA from 2010, from the lows of $29 million to the implied $123 million of last year. This is why we think 2015 was a phenomenally strong year for us. Almost last but not least, during this period, we have increased our dividend, as Itai mentioned. Given the strong momentum of the business, the strong cash generation, the Board decided on a $0.04 final dividend and additional one of $0.08 per share of special dividend which brings total entire year to $0.0155. And you can see that represents 72% increase over a period of three years only, so this is a very strong increase.

The last two slides the first is the balance sheet. You can see we’re still unlevered, we have learned from our acquisition that the debt markets are most definitely open for us for the correct acquisition. We can do a lot more with this balance sheet and with this test generation. And I will finish with the cash flow statement where you can see that net cash generated from operating activity of $85 million, this is up to paying the acquisition costs, et cetera. And I’m going to hand over to Itai to give you some more detail.

Itai Freiberger

Hi. Let’s talk about the achievement of 2015 and our plans for this year. 2015 was a very busy year, we’ve delivered over 270 project, we’ve launched three new regulations in Romania, Denmark and Ireland. We extending or expanding into existing regulated market like slots and sports in Spain and sport in Italy. We’ve launch new products like Casinoflex additional content to our offering which are our key success factor to our business. We’ve launch brands like 777.com [technical difficulty] and all of that enables further growth to the business and we are very encouraged by the results of new product in markets.

This slide -- I’ll show you we coexist in a different way, it shows how strong the year was. I think when you measure an online business, you should measure it by a matrix of activity and acquisition. And that graph shows the positive trend in major KPI and you can have to look and see how we’ve done.

Deposits, we traditionally use this slide to show the strength of the business, we're able to generate growth in all of our core markets across recent key parameters, you can see dark blue at the end represented some of the headwind and we discussed before. Deposits are the fuel for the business, when we see deposits in the business right now, this is future NGR [ph] gaming revenue and I will discuss this a little bit later but if you want, quite a crystal ball with the state of the business.

I'd like to take this opportunity and also highlight one of the key enables for the consistency positive deposit trend, we usually don't show these type of development but this is a single one out of the 270 that was delivered last year. During last year, we rolled out New Cashier, we call it C2, it's a more dynamic adaptive mobile oriented piece of software, it is a proprietary software, a critical e-commerce component, in any e-commerce site. It allows us to innovate and optimized the way we interact with our customers, after expensive testing and analysis, we see significant improvement during that critical phase of the customer journey. This actually allows us to do certain things and change certain things in day to day basis to optimize the way, we operated the business.

In Poker, we continue to outperformed the industry, today 888 is a major player in the global market that gives us an advantage from the marketing perspective, there is no marketer out there in the market or poker affiliated Web site, that's can ignore 888 and that ensures that we get positive and consistent flow of new customers through the entire industry, has a very strong number to and as you can see the trends of liquidity is very positive from our perspective. It's an important and profitable vertical for 888 which we also use to cross-sale which allows us to leverage our technology, our core platform, our back-office is very good at crossing between the different verticals and when we acquire customers into poker which is a high volume type of vertical, we can then cross them into the rest of the business which remain that we can make it even more profitable for us. There are lots of innovations coming up in this product and I'm sure that we'll be able to discuss it next time we meet.

Here's numeric example of the growth beyond the positional KPI, we demonstrated depth and breadth of the business and the talent we have around the world, which is also related to the number of release by the UKGC, and how big is the market and the opportunities we have to grow in the market, specifically around sport. I will touch on that later. Another interesting item here to look is jackpot awarded that gives you some color to the growth we have in our casino vertical. And often asked about how we meet our goals and achieve our growth, I'd like to take this opportunity and shed some light on some of the success factor behind these achievements.

Acquisition, as I said in the past, acquisition is the life blood of the business, we see growth across all verticals in market, growth remain blue ocean, we have set aggressive goals and we've met them. Sport is now the fastest growing acquisition channel in the business, as you’ve just seen in the ads presentation, we're able to keep our marketing ratio stable despite significant marketing effort. In particular our casino which is our co-product enjoyed very strong FTD trend, this will drive future growth into the casino vertical. We believe, we're now the largest few online casinos.

On the active side for an online business to be successful, deposit should eventually turn into activities, our proprietary scrap-loan has proven to be very effective in turning deposits into active, into net gaming revenues, which then drives additional marketing, which then drives more deposits, this is where we benefit from our platform capabilities and marketing knowhow. This effective sales factor is feeding itself, which is a massive advantage that we hold in the business.

In Sport, as mentioned we continue to focus on this vertical, I'm very happy with the result, which exceeded our expectation. And operate outside with our capabilities to leverage so much more than what we have such as analytics, technology, marketing dollar, brand knowhow people CRN payments and many more to become a significant operator in this vertical. We’ll set a goal to take sport to the next level and we're investing resources and marketing dollars into it. As you can see the results are very positive.

Beyond the impressive trend in bets and deposits, we have grown 888 Sport into much richer appealing destination, a wide event verity including a growing in-play offering, complemented our product and marketing efforts throughout the year. We continue to enhance the event of position across all the market, aiming to offering even more appealing in localized sport betting experience. The same agenda that lead us through our other verticals applies here, we're marketing through a positive return.

Regulated market both existing and new has been a critical growth factor in the business. This is one of many campaigns we've run, specific one in Denmark, which is showing very encouraging trend following in its recent launch, regulated market across the board has become a significant growth engine and we're able to generate market share in each one of the market we decided to operate. We see a market -- regulated market as the future of the industry as it's moving towards regulated market.

In Spain, which is also becoming a very significant market, with the introduction of Sport and Slots, we now have a full suite of product, we now have a competitive comprehensive offering and the 888 is forced to recognized in that market, EURO16 is around the quarter and this will give us an opportunity to instruct [ph] a fully force for the first time in this market. Spain is now our second largest market in the business.

In Italy, we're able to maintain casino market share in the highly fragmented and competitive market, it is very hard to achieve market share or growth with the single product especially when comes to casino that carry the highest CPA from the entire business. In order to mitigate that strategic disadvantage we decided to launch the sport, sport gives us access to a wider and growing market, we can now utilize our technological edge and start crossing CRN between the two verticals we have in Italy and within them.

Casinoflex, this one an interesting view on how a new product is born, it's a B2B mobile oriented soft casino proposition. We see organic and nonorganic growth, a healthy mixture of existing and new partners. We identify soft casino as a growing vertical and decided to invest into that sector. Casinoflex is a product and technology innovation sandbox. We're testing so many different ideas in that products some of them will probably stay some of them will have to go away. It's very similar to a way car manufacture is representing or promoting a car -- concept car in a car show sometime you never see the car, but you see parts and elements of that car available in the car that you're actually buying the next year. So this is where we allow ourselves to go crazy if you want and do certain things which I'll be happy to show little bit later. We're very encouraged by the result of Casinoflex and enthusiastic about future prospects.

So what's next, new market and regulations, we continue to aggressively push our sport proposition. We keep our eyes open for opportunities in the market that will create significant value to the business and shareholders. Our business performance allows us to make such decisions from a position of strength. Our disposition in the market comes from leading technology, passion and dedication.

We put 2015 behind us, we're firmly set on the challenges and opportunities that lay ahead. 888 is will equipped and positioned to monitor such opportunities and I am bullish and excited about 2015 and beyond. Thank you very much.

Question-and-Answer Session

Q -

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