Q3 interim report analysis – Evolution, Kindred, Betsson & Kambi

Co-founder and managing director of iGaming NEXT, Pierre Lindh, sat down today with CEO and co-founder of HappyHour.io, Robin Eirik Reed, to discuss the flurry of interim reports released this week.

With Evolution, Kindred, Betsson and Kambi all announcing their Q3 results this week, the pair got together to analyse the results and dive deep into where the reports suggest the businesses are heading.

Reed said this quarter is very special in many ways – in that it is “perhaps the first pre-pandemic quarter”, and that looking at global data, iGaming in general had been beginning to stagnate slightly prior to the pandemic.

But with online gaming now expected to make up 30% of the global gaming industry within a few years, Reed said there had been a tailwind in growth since the second half of 2020 and throughout the beginning of this year.

Given the impact of the pandemic, the key question is how much of the growth we have seen is sustainable, Reed said, and how this will affect businesses in the long term.

Is Evolution evolving in the right direction?

To start with, Evolution, which published its report showing revenues and profits had almost doubled year-on-year in Q3, saw an adverse reaction from investors, as its share price fell around 8% on the day of the interim report’s publication.

Uncertainty around how this growth can be maintained could be a reason for the investor caution around such companies, Reed said. While on the face of it the report is extremely positive, some of the reported growth is a result of acquisitions and the underlying organic growth was not necessarily very strong.

Evolution has been one of the few companies to properly innovate in iGaming, he argued, and has provided a lot of value to the industry.

The question is how the business plans to continue this growth – can it take its EBITDA from around the €200m mark to €400m and then €600m?

This, he argued, is what will need to happen if the share price is to continue growing with the same momentum as it has seen previously.

Evolution’s geographical mix

One of the most interesting elements of the report was the geographical breakdown of its results, Reed said. Nordic markets have seen a big jump between Q2 and Q3, while the UK and rest of Europe have declined slightly.

So, there hasn’t been much growth in Evolution’s historically strongest markets – meaning Evolution’s next growth markets are Asia, North America and the rest of the world.

Reed argued that the question here is whether Evolution can continue to take market share in Asia, and how quickly it can grow there.

For North America – the question is how fast these markets can grow – as states continue to regulate iGaming one-by-one, Evolution’s growth will be at the mercy of the speed of regulators across North America.

Slow growth for RNG products

Growth in Evolution’s recently acquired RNG businesses has also been disappointing, the two argued, with growth from NetEnt and Red Tiger branded products coming in at just 3%. Big Time Gaming, however, has accounted for much of the growth in the RNG product vertical.

Commenting on the slow growth seen in these products for Q3, Reed said Evolution knew what it was doing when it acquired those brands – and the problem was that NetEnt had an enormous legacy issue in its technology.

Evolution’s commitment to rebuilding the business’ technology platform, and the introduction of a single integration point for Evolution products, is one reason for the slow growth, Reed said, but he is cautiously optimistic about the company’s future.

He believes the work being done will “greatly fuel an enormously strong brand.”

With regards to market confidence around US regulation, Reed said that there is a difference between what companies are saying publicly and the confidence in the arrival of new iGaming regulations across different states.

It won’t happen as quickly as people believe, he argued, and will take a few years for all states to open up.

The key question for Evolution’s expansion in the US, then, is how fast the market will open.

More acquisitions down the line?

Another way of growing the business, Lindh suggested, is to essentially “buy revenue” through acquisitions of other businesses. The BTG acquisition was an obvious choice, he argued, given that it was a low-cost and high revenue generating business.

Lindh said it was unlikely Evolution would attempt to enter a new vertical such as sports betting, given its low margins and the fact the business is not proven in that space, while Reed argued it was also unlikely it would look to expand further into the RNG space.

Evolution prefer to demonstrate its ability to innovate the online casino space, he said. Even if they did acquire a further RNG provider, it wouldn’t be transformative to the business which already has casino in its DNA.

One thing is for certain, Reed said: that further acquisitions will not be able to improve Evolution’s margin – as there is no business out there that currently has a higher margin than the supplier.

The speakers agreed that the disciplined route for Evolution would be to focus on its organic growth – and Reed argued that the business’ core strength is that it has a strong competitive position in terms of its strategic positioning.

It is the only casino provider which operators around the world cannot do without, he said. While you could take away one of the top four or five players in the slot space without having a huge impact on the industry, you could not take Evolution out of live casino and expect the vertical to continue in its current form.

A closer look at Kindred’s results

Kindred’s share price also fell on the stock exchange this week, mainly as a result of the warning it gave around its expected reduction in growth in Q4, Lindh said.

Reed contended that Kindred is not traditionally known as a casino company. Originally Unibet, it had always been known as a sportsbook brand but is now a business which generates 60% of its revenue from casino products.

Kindred’s uphill climb in Europe

Further, the whole Western European segment is “very much up in the air” for Kindred – with its withdrawal from the Netherlands market, difficulties in the UK and France and stiff competition in Belgium, Kindred will require a very strong execution if it is to continue to grow in these markets, Reed argued.

Looking to the Nordics, the industry has seen huge challenges around payments in Norway, and the future of the market holds two options for operators: either it will become tougher for offshore operators, or it will regulate. Either way, Kindred will lose, Reed argued.

Finland, where the business also has a lot of traction, finds itself in a similar position to Norway, he said, where banking challenges are expected in the next year and either the market will become tougher for offshore operators or will regulate – again, either way, Reed expects Kindred to lose out as a result.

In the US, Kindred is currently active in 6 states, but is currently spending more on marketing than it is generating in revenue, and despite this, revenues are also declining.

Can Kindred push through?

Reed was still cautiously optimistic with his outlook though, given Kindred’s reputation within the industry. It is a very strong, experienced, and professional business, he said, and if there’s any company which can overcome these difficulties – it’s Kindred.

While their execution, product and marketing are all strong, the key question is where the business is heading strategically, Reed said.

Perhaps Kindred’s acquisition of Relax Gaming and entry into the US shows hope for the future, and the business may be positioning itself as a strong contender in several states with a view to consolidating with some of the larger businesses.

The Dutch dilemma

An important thing to remember regarding the Netherlands market is that Kindred and other such businesses who were recently forced to withdraw, when they are licensed and able to return to the market, will not be able to use the customer databases they have built during their experience in the jurisdiction for any marketing activities, according to the regulator.

This, combined with the fact that the first round of licensees announced in September will have a significant head-start, makes the market an increasingly uncertain one for many operators.

For Kindred, having announced that around one third of its EBITDA previously came from the Dutch market, it will take a great deal of investment to be able to turn back to profitability in the market.

Reed said, however, that we must remember Kindred is highly experienced in the Dutch market and has built positive relationships with many customers there. Re-entry into the market will certainly prove to be costly, but cannot be compared with a new entry into an unfamiliar market.

Looking for a buyer?

Lindh said the business appears to be ripe for acquisition at this point – and that for businesses such as media companies in the US looking to enter the gaming market, Kindred could be an excellent acquisition and is likely to be available “at a discount”.

Should you bet on Betsson?

Following the reversal of the decision for chief executive Pontus Lindwall to resign from his post earlier this week, Betsson released its Q3 report, which also highlighted the impact of its sudden withdrawal from the Dutch market.

Reed said when he arrived in Malta in 2010, Betsson was “the company to work for”. This reputation then came into question, for several reasons, he said, and the business found itself losing employees, leaving other companies to rise in the wake of its “downfall”.

Now, he said, the situation has been turned around. Betsson has returned to being a highly respected company, with very strong management in place.

In addition to becoming an increasingly attractive business to work for, Reed said Betsson has also managed to address a key question for the company, which is its sportsbook offering.

Having operated as a casino business for many years, he said, the company has been working to build and maintain a sportsbook – an extremely difficult task compared to building a casino – but that Betsson has managed it over the last few years.

Looking at the last report, Reed pointed to Betsson’s 24% increase in sportsbook revenue, and strategically, compared with Kindred for example, it’s important to remember Betsson is present in markets such as Italy, Central Europe, Asia and LatAm, where the operator is growing at a good pace.

This shows the business has a management team which dares to take risks, he said, having also acquired some smaller companies and managed to grow them.

The brand will therefore be well positioned in many markets as they regulate in the coming years, Reed argued.

A slow start in Africa

However Pontus Lindwall, in conversation with Lindh earlier this week, claimed that African markets were not mentioned in the business’ quarterly report as the revenues generated there were still much smaller than originally anticipated.

Reed agreed it is still very early to expect African markets to start generating significant revenues for gaming businesses, but that they will definitely grow stronger in the future.

It is therefore a wise move for Betsson to have started building its identity in markets such as Kenya.

More difficulties in Europe

With regards to its key markets in Europe and the Nordics, Reed said Betsson faces the same challenges as other operators, for example in Norway, where payment issues will make further growth in the market very difficult.

However, if the business can continue to see some growth in its European markets, and added growth across the rest of the world, then there is a strong investment case for the business, which will be well positioned for the future.

Reed said the key questions to consider as the market moves out of Q3, which is traditionally the worst quarter of the year, into Q4, which is usually the best, is to what extent and for how long the Covid-19 pandemic has changed user habits, and how this will impact the iGaming sector at large.

Kambi can be on top – but will it be?

Lindh said Kambi has faced significant headwinds this year, not least from the potential loss of its US deal with Penn Interactive.

DraftKings is also preparing to leave the supplier, meaning the loss of one of Kambi’s largest clients, and Lindh suggested that investors are now seeing that the sportsbook supplier’s business model is somewhat fragile due to its reliance on a few key clients.

In spite of this, Reed said, the business has had a very strong quarter, demonstrating 48% growth year-on-year.

The biggest question is what the strategic position of the company will be for the future, as well as changes in industry-wide dynamics: will the strongest sportsbooks be delivered by B2B or B2C companies moving forward?

At the moment, he said, the industry is moving towards those being controlled by B2C companies, which leaves Kambi in a difficult position.

The dangers of vertical integration for Kambi

If bigger tier-one operators see vertical integration as a way of mitigating regulatory risk, and increasing their margins to gain an operational advantage, then where does that leave Kambi, Reed asked.

They will have to pick up tier-two and tier-three operators, and if those operators are getting squashed in the marketplace then it makes growth even more difficult for Kambi. This is the main thing people fear with regards to the business, he said.

This is particularly true in the US, where if plans such as Penn Interactive’s hope of building a proprietary sportsbook via theScore come to fruition, the market may end up being dominated by one, two or three major companies with in-house sportsbooks, leaving Kambi without the needed opportunities for growth.

However, the company has shown some encouraging developments with regards to its product, which has gone from something relatively simple to something much more sophisticated in recent years – with partners being offered the opportunity to decide more flexibly which elements of the Kambi proposition they buy.

Reed said an increasing wave of vertical integration is something he has been predicting for several years. He argued that the model has proven itself, when looking at the largest gaming business in the world, Entain, which is vertically integrated.

Changes to dynamics in the industry-at-large

Looking at the shift in dynamics across the whole of the industry, Reed argued that the principal driver of change is regulation, bringing with it higher taxes and greater limitations on players, and that companies are combatting this using economies of scale.

This is what leads to consolidation, he argued, which means that one of the strongest capabilities that large operators have besides regulatory compliance is the ability to consolidate companies. To do that, Reed said, a business needs to operate on its own proprietary tech stack.

Now, he said, these businesses are looking for technology and brands, and trying to absorb costs either by increasing the margin on the technology by owning it and improving its efficiency, or by buying brands with higher levels of awareness, to improve their marketing efficiency.

What they’re not prioritising is content, and content providers have not been hit as hard as operators with regards to regulation, and are therefore currently living their heydays.

This is now changing in the US, Reed said, and businesses are beginning to emphasise the number of exclusive games they can offer to partners.

Therefore, the pressure is now beginning to increase on suppliers, and some of them may soon be rendered sub-suppliers to the larger operators who will ultimately consolidate and control the market.

To wrap up…

Overall, Reed predicted an increasing trend of vertical integration across the industry, as well as further consolidation and increasing pressure on suppliers. Only the businesses with the best brands, technology and innovations will be positioned to be acquired, he said.

As a final word to investors, Reed said it’s too early to see how things will develop into Q4, but that there will be some very strong opportunities in the market ahead of the next quarter’s results season.