Shares in Evolution have risen more than 6% after the supplier reported 36% annual revenue growth to €1.46bn for 2022.

Topline numbers

Revenue in Q4 2022 reached €407.5m, an increase of 35.7% year-on-year.

EBITDA amounted to €279.5m, corresponding to a margin of 68.6%.

Evolution’s share of revenue from regulated markets stood at 40% in Q4 2022.

In full-year 2022, operating revenue increased by 36% to €1.46bn compared to 2021, while EBITDA rose by 37% to around €1bn, corresponding to a margin of 69.2%.

The firm’s full-year EBITDA margin was 69.2% and thus at the lower end of Evolution’s guidance of 69-71%, but the company viewed it as a strong performance given the challenging market conditions throughout 2022.

News nugget

In Q4 of 2022, Evolution’s top-line growth was driven by strong demand for its core live casino product, which saw a 41.1% year-on-year increase in revenue.

Meanwhile, RNG revenue increased by 5.1% compared to last year’s pro-forma figures, but was still below expectations.

Carlesund acknowledged the need for improvement in terms of efficiency and quality in game production for slots and RNG.

He emphasised that the path to double-digit growth would not be linear, but expressed excitement for 2023, with new products set to be unveiled at ICE London next week.

Carlesund flagged the war in Ukraine, increasing inflation, lower consumer confidence and remaining pandemic effects on supply chains as core challenges over the past 12 months, with all of these factors impacting the recovery of the world economy post-Covid.

However, he added that Evolution was able to overcome these challenges to post an increase across all key financials, with further growth forecast for the year ahead.

Evolution designated 2022 as the year of the product and released a total of 88 new games, with plans to release over 100 new games in 2023.

All regions reported year-on-year growth, and Evolution continued its global expansion with investments in studio expansion.

The company launched its second New Jersey live casino studio and increased the number of live tables by over 300, totalling over 1,300 live tables at the end of the year.

Carlesund said Evolution would continue to invest in studio expansion, both in existing and potential new locations.

Meanwhile, Paul Leyland of Regulus Partners noted that Evolution’s top customer grew its revenue contribution by 69% to over €200m of Evolution’s B2B revenue.

He speculates that this customer is 1xBet, which would make it the largest online gaming business globally, generating an estimated €1.3bn in B2C revenue from Evolution products alone.

Best quote

CFO Jacob Kaplan spoke about the new minimum tax rate, which the EU agreed to adopt, and which caused Evolution’s stock price to drop in December.

Under the agreement, companies with annual revenue of €750m or more will be taxed at a minimum rate of 15%.

In 2022, Evolution paid an effective tax rate of 7%, which is almost 1% higher than in 2021.

Evolution CFO Jacob Kaplan: “A lot of works still remains, and we will probably know more as the year progresses, but expect higher tax levels from 2024 onwards.”

Kaplan commented: “Our tax rates will continue to gradually increase in 2023 as we increase our global footprint.

“According to the current timetable, the global minimum tax rate it will come into effect in 2024. A lot of works still remains, and we will probably know more as the year progresses but expect higher tax levels from 2024 onwards,” he added.

Best question

Carlesund, when asked by Martin Arnell of DNB about growth drivers, shared his excitement for upcoming game releases.

However, the also pointed to growth potential in both Latam and Asia.

“However, we are also seeing Europe picking up and there are a number of countries in Africa that are really interesting as well,” Carlesund said.

In 2022, Evolution’s European business grew 15%, the UK 4% and the Nordics 8%.

Evolution’s Asia business saw a 47% growth, while North America grew 45%, and Other markets, which likely includes South Africa, grew by 57%.

This proves that “secular growth is now being found in many obscure markets rather than a few visible ones,” according to Leyland.

He added that this comes with both commercial and regulatory risks as well as the obvious rewards.

Current trading and outlook

Carlesund said cost efficiency will remain important in 2023 as the uncertain macro environment continues.

In response to wider economic uncertainty, Evolution has increased its 2023 EBITDA margin by 1% and predicts an EBITDA margin of between 68% and 71%.

At the time of writing, shares in Evolution were trading more than 6% higher.

Evolution generated €378.5m in operating revenue during Q3 2022, an increase of 37.1% over the prior-year period.

This brought the firm’s total revenue for the first three quarters of 2022 to €1.05bn, up 36.5% year-on-year. That puts revenue for the first nine months of 2022 only marginally behind the €1.07bn generated by Evolution during the full 12 months of 2021.

The live casino segment generated the vast majority of quarterly revenue at €310.4m, or 82% of total. That gave live casino a growth rate of 44.7% year-on-year.

The remaining €68.1m, or 18% of group revenue, came from Evolution’s RNG segment, consisting of acquired businesses including NetEnt, Red Tiger, Big Time Gaming and the recently acquired Nolimit City. 

Q3 was the first reporting period following the acquisition of Nolimit City. Including revenue from the newly acquired business, year-on-year growth in the RNG business was around 10.7%.

The growth rate pro-forma, however, where Nolimit City revenue is retrospectively included in Q3 2021 figures, came in at just 1.9%. Evolution CEO Martin Carlesund commented that growth in the RNG segment is “not yet satisfactory”, as the business continues to fall short of its double-digit organic growth rate target.

By region, Asia was Evolution’s largest market in Q3 by revenue, generating €127.8m and showing impressive quarter-on-quarter growth of 15.2%, as well as year-on-year growth of 66.6%.

For comparison, Evolution’s second largest region, the Rest of Europe (excluding the Nordics and UK), brought in €115.3m in Q3, giving a quarter-over-quarter growth rate of 4.8% and year-on-year growth of 11.7%.

North American and Other markets also saw impressive climbs year-on-year, with North America bringing in €50.1m in Q3, up 57.1%, and Other markets generating €41.5m, up 62.1%.

In the mature UK and Nordics markets, meanwhile, revenue growth was slower, with the Nordics bringing in €23.2m amid a rise of 19%, and the UK generating €20.7m, representing a climb of 8.4%. 

At 41%, the supplier’s share of revenue from regulated markets was ahead of Q3 2021 (38%), but this represented a sequential decrease from 43% in Q2 2022. In real money terms, the €156.4m in revenue from regulated markets represented a year-on-year increase of 50.7% and quarterly growth of 5.7%.

During Q3, Evolution’s EBITDA margin slipped slightly, but remained very high by industry standards at 69%, down marginally from 69.9% in Q3 2021.

That left the business with EBITDA of €261m, an increase of 35.3% from €192.9m in Q3 2021.

Overall profit for the period totalled €221.3m at a margin of 58.5%. That represented growth of 40.6% over the prior-year period and an increase of 1.5 percentage points in the profit margin.

After accounting for €32.8m in costs relating to exchange differences arising from the translation of foreign operations, total comprehensive income for the period was €188.5m, up 11.2% year-on-year.

As of the end of the period, Evolution held cash and cash equivalents of €319.7m, with total current assets of €886.1m and total assets of €4.20bn.

Financial analyst Paul Leyland of Regulus Partners said in a note to investors that the business is yet to demonstrate that it can add growth to the RNG segment.

While the supplier’s live casino expertise allows it to benefit from the high barriers to entry and considerable infrastructure economies of scale in that segment, the development of RNG games across the industry benefits from agile localisation and requires a very different management style to find success, Leyland said.

“In our view: ‘we need to produce more slots’ is only half true – a critical mass of them also need to be good in an environment where customer choice is growing as quickly as customer discernment,” he commented.

With Evolution’s growth driven in large part by live casino in unregulated Asian markets, balancing that growth with the risk of regulatory crackdowns is likely to continue to dominate the outlook for the business, Leyland concluded.

Regulus Partners analyst Paul Leyland: “In our view: ‘we need to produce more slots’ is only half true – a critical mass of them also need to be good in an environment where customer choice is growing as quickly as customer discernment.”

Looking to the year ahead, Carlesund told analysts on the supplier’s Q3 earnings call that it was on target to reach its goal of launching 88 new games in 2022, having already launched more than 60 since the start of the year.

Asked whether the upcoming FIFA World Cup would have a positive or negative impact on the business, Carlesund said: “In general major sports events are always a positive. It creates new players, activity and marketing, and so it’s a positive for us, clearly so.”

Given the macroeconomic climate and rising inflation, however, costs are likely to continue to increase, with operating expenses growing 36.5% year-on-year to €142.1m in Q3.

Those costs were principally driven by higher costs for personnel, connected to the launch of new tables in Evolution studios and the expansion in general of the business compared to the same period of last year.

CFO Jacob Kaplan said that while costs are expected to continue to rise into 2023, and the business must prepare for a tougher situation than the past few years, the increase in costs is not expected to be dramatic.

One of the fastest increasing expenses this year has been energy costs, which has taken a toll on firms across the sector. 

While Kaplan recognised this would increase costs for Evolution, which relies on using large amounts of electricity to power its live dealer studios, the cost makes up only a small portion of the firm’s overall expenses. The increases, therefore, are not expected to have a significant impact on the business.

Evolution’s share price fell by around 1% in the wake of the report’s release, to around SEK1,020.

Still, this represents an increase of some 9% over the past five days and around 13% over the past month.