Sportradar Group AG (NASDAQ:SRAD) Q3 2023 Earnings Call Transcript

Sportradar Group AG (NASDAQ:SRAD) Q3 2023 Earnings Call Transcript November 1, 2023

Sportradar Group AG beats earnings expectations. Reported EPS is $0.05, expectations were $0.04.

Operator: Good day, and thank you for standing by. Welcome to Sportradar’s Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Christin Armacost, Manager of Investor Relations. Please go ahead.

Christin Armacost: Thank you, operator. Hello everyone, and thank you for joining us for Sportradar’s earnings call for the third quarter of 2023. Please note that the slides we will reference during this presentation can be accessed via the webcast on our website at investors.sportradar.com and will be posted on our website at the conclusion of this call. A replay of today’s call will be available on our website. After our prepared remarks, we will open the call to questions from investors. In the interest of time, please limit yourself to one question, plus one follow-up. Please note that some of the information you will hear during this discussion today will consist of forward-looking statements, including without limitation, those regarding revenue and future business outlook.

These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the Risk Factors discussed on our Annual Report on Form 20-F, filed with the SEC in March, and Form 6-K, furnished with the SEC today, along with the associated earnings release. We assume no obligation to update any forward-looking statements, or information, which speak as of their respective dates. Also, during today’s call, we will present both IFRS and non-IFRS financial measures. Additional disclosures regarding these non-IFRS measures, including a reconciliation of IFRS to non-IFRS measures, are included in the earnings release, supplemental slides, and our filings with the SEC, each of which is posted to our Investor Relations website.

Joining me for today’s call are Carsten Koerl, our Chief Executive Officer, and Gerard Griffin, Chief Financial Officer. And now, let me turn the discussion over to Carsten.

Carsten Koerl: Thank you, Christin, and good morning and good afternoon to everyone. We have a lot to share with you today on our performance for 2023, strategic actions we are taking to improve profitability, as well as our growth expectations for 2024 and beyond. In a dynamic time of our organization, I am impressed by the focus and execution exhibited across our teams. In particular, our ability to unlock greater profitability from our growing revenue base. This collective effort is laying a durable foundation for our continued growth and success in 2024 and beyond. While we remain on track to deliver strong year-over-year growth in 2023, we are updating our outlook to reflect the financial performance to-date and address some recent market headwinds.

While we expect to deliver adjusted EBITDA at high end of our previous guidance and stronger adjusted EBITDA margin, we’re reducing our revenue outlook to reflect some of these short-term challenges. Now, we expect to deliver revenue in the range of €870 million to €880 million, representing year-over-year growth between 19% and 21%; adjusted EBITDA in the range of €162 million to €167 million, representing year-over-year growth between 29% and 33%, and improved EBITDA margin in the range of 18.4% and 19.2%. We have lowered our full year’s revenue outlook, mainly to reflect two factors. First, the euro has further strengthened creating pressure on our U.S.-dollar-denominated revenue, relative to our initial expectations. Second and, more recently, in Q3, betting operators, especially those outside of the U.S. have experienced margin pressure, primarily to live betting and soccer due to winning streak of bettors, with more favorites winning and Goldrich games during the start of the European Football season.

This contributed to softness in our Q3 MTS results and our outlook for the rest of the year, very participate in our sports betting clients’ revenues. Our strong outlook for adjusted EBITDA and adjusted EBITDA margin reflects improving operating leverage through both cost management and ongoing strategic initiatives to streamline our business operations, which we will walk you through shortly. Turning to the third quarter. We delivered revenues of €201 million, up 12% year-over-year. This was lower than our expectations, primarily due to the noted softness in MTS revenues. Outside of this, our portfolio results were broadly in line with our expectations. We delivered record quarter profitability with adjusted EBITDA of €50 million, up 38% year-over-year, and adjusted EBITDA margin of 25%, an improvement of 471 basis points year-over-year.

We also generated net cash from operating activities of €76 million, up 19% year-over-year, and we ended the quarter with €290 million cash and cash equivalents, up €26 million or 10% quarter-on-quarter. As a leader in our industry, we work to ensure that we consistently deliver value to our clients and shareholders. This week, we initiated a reduction in our global workforce. This action is part of a broader set of strategic initiatives to better position the company for growth, which we aim to simplify and streamlining the company’s operating structure, improving product ROI, and portfolio optimization. When completed, this reduction in workforce should result in an approximate 10% reduction of the company’s 2023 labor cost run rate and contributes positively to future operating leverage.

It will also enable us to be more agile, intently focused on our strategic priorities, and to capture the market opportunities ahead of us. Now, I’d like to update you on a few new and expanded deals that will help drive our growth and profitability into 2024. First, our teams are well underway with realizing the value of our strategy partnerships with the NBA, with our latest lifetime revenue and profitability estimates ahead of our original expectations when we announced this deal in 2021. With the knowledge of the current trading and newly closed long-term client agreements, we can confirm that this investment remains on track to be a strong revenue contributor and highly accretive to our EBITDA margin goals over the lifetime of the deal.

To remind you, the NBA deal begins with 2023-2024 season and runs through 2031. With last week’s tip-off of the season, we have now signed up our U.S. client base to the premium content for the next eight years, including DraftKings, BetMGM, Bet365, FanDuels, and Caesars. We are also incredibly pleased with the positive engagement for this premium content offering across our international client base that accounts for approximately 40% of the total NBA deal value. We are just at the beginning of our journey with this great franchise, that will be an important innovation and growth catalyst for the company. I look forward to unlock the additional value, which we will deliver to our clients and our company over the term of the deal. In addition, I am thrilled about the partnership with the Taiwan Sports Lottery we selected as their Official Technology and Service Solution Provider through 2033.

This is our 14th governmental approved lottery. We will be providing the Taiwan Sports Lottery with the platform combining multitude of services like MTS, pre-match, live odds, and the end-to-end sportsbook and player account management solution. This roll-out, which commenced in quarter three, will ultimately extend to over 2600 retail outlets in Taiwan. Last, our value continues to be recognized in the industry, winning several awards, including Sports Betting Provider of the Year, Marketing Services Provider of the Year, and Top leaders in AI 100. Before I turn over to Ger, I would like to reflect a little more on where we are in our journey. I’m excited about the market prospects ahead of us. Driving sustained profitability growth on scale by using the power of a worldwide network, together with the growing data opportunity, is more than ever fascinating and motivating.

We are the industry leader and trusted partner because we have developed enduring and valued relationships with our clients and partners that only deepened with our innovative capabilities. Our best-in-class content portfolio is the fuel, which powers our existing products and robust recurring revenues. It’s also the catalyst for further core revenue growth, product innovation, deeper monetization, and value creation. Our content portfolio today is as a critical – is at a critical mass and stable level to drive our revenue growth and profitability ambitions for the years ahead. Put it in another way, while we can acquire more rights if the ROI makes sense, we do not need more rights to deliver on our growth targets. Last, we are operating at scale with an agile organization to drive strong profitability growth in the years ahead.

We also have the financial capabilities to enhance our position further should the right opportunities arise. To put this into a context, let me walk you through how this translate into revenue growth and higher margin for the company. Using the U.S. as a sample, we offer the broadest sports coverage, delivering official analytics and intelligence to 95% of the core U.S. professional sports or over 5,000 games annually, based on our partnerships with NBA, MLB and NHL. We leverage this foundation of assets across our media, league, and sport partners to move up the value chain with our products and capture a higher share of U.S. gross gaming revenues, or GGR. In-play adaptation is the key driver for that in the U.S.; whereas in more advanced European markets, in-play adaptation accounts for approximately 80% of the betting revenues.

In the U.S., it accounts for approximately 35% of the U.S. GGR. According to our estimates, closing the in-play gap would result in a 25% to 35% increase in our current U.S. revenue base with a strong margin profile. Last is the strength of our product roadmap throughout 2024. Highlighting our partnership with the NBA, we intend to drive deeper value within the live betting markets and to bring live and immersive fan experience, next-generation telecasting, and AI-driven and 3D analytics for coaching solutions. You will see us introducing products like micro betting, virtual stadium, mixed reality, Augmented AV, and real-time stats and insights. In summary, we are well positioned to capture the significant growth opportunities ahead, by expanding monitorization with our existing clients, acquiring new clients, leveraging the power of data and drive insights and innovation, and broadening and deepening our partner ecosystem.

With that, I turn over the call to Gerard to discuss the financial results and outlook in more detail.

Gerard Griffin: Thank you, Carsten. Turning to the third quarter, we delivered revenues of €201 million, up €22 million or 12% year-over-year. While most of our revenue lines were broadly in line with our expectations, we had a lower-than-expected revenue from our MTS platform due to the weaker client revenues in which we participate via revenue share. In Q3, betting operators internationally experienced margin pressures, primarily in their live betting in their soccer segments, due to a winning streak for sports betters with more favorites winning and Goldrich games during the start of the European Football season. This adversely affected our Q3 MTS results. From a portfolio perspective, Rest of World Betting was up €11 million or 11% year-over-year, with solid performances across the main product lines; in particular, Live Odds and Data were up 18% year-over-year; MBS despite the softness in MTS was up 7% year-over-year.

Rest of World AV was up €5 million or 15% year-over-year, supported by the addition of the new CONMEBOL rights and an uplift in services to existing and new clients. The United States segment was up €3 million or 11% year-over-year, as we continue to see growth in this developing market. In U.S. dollars, the U.S. grew 18% in the quarter. All other revenues were up €2 million or 19% year-over-year, primarily driven by growth in our ads business. Net profit for the quarter was €5 million, including €15.5 million in impairment charges resulting from the streamlining of our business operations and product portfolio. This compares to €13 million net profit in the prior year, which benefited from stronger foreign currency gains. Looking at our adjusted EBITDA, we delivered a strong result.

Adjusted EBITDA was €50 million, up €14 million or 38% year-over-year. Adjusted EBITDA margins improved almost 471 basis points to 25.1%. This improvement was driven by a more profitable revenue mix and operating leverage across all major expense lines; in particular, personnel expenses driven by lower run rates as we actively manage our expense base. Personnel expenses were €75 million, up €7 million or 10% year-over-year. Personnel expenses, excluding stock-based compensation, were €64 million, up €3 million or 5% year-over-year. Sports rights were €36 million, up €1 million or 3% year-over-year. Turning to liquidity, we ended the quarter with liquidity of €510 million. This was comprised of €290 million in cash and cash equivalents, up €29 million or 10% quarter-on-quarter, and a €220 million revolving credit facility with no amounts outstanding.

Given our solid liquidity position and our focus on delivering long-term value to our shareholders, we are reviewing several options to enhance our capital allocation. Before I turn to our revised 2023 outlook and initial views for growth in 2024, I would like to take a moment to expand on Carsten’s remarks related to the actions we are taking to better position the company for top line growth and operating leverage in the future. As we’ve noted in the past, we are continuously challenging all aspects of our business to ensure we are focusing our talents and resources on the most profitable growth opportunities. Due to this focus, this week, we initiated a reduction in our global workforce. This action is part of a broader set of strategic initiatives to better position the company for growth, which are aimed at simplifying and streamlining the company’s operating structure, improving product ROI, and portfolio optimization.

When completed, this action should result in an approximate 10% reduction in the company’s 2023 labor cost run rates and contribute positively to future operating leverage. We expect this action to be materially complete by the first quarter of fiscal 2024. In 2024, we expect the operating leverage our strategic initiatives will unlock in personnel, cost of sales, and other operating costs will be offset by the pressure in operating leverage, resulting from the one-time step up in our Sports Rights costs expected from the first full year of our NBA and ATP partnership deals. As we look beyond 2024, there is the potential for all major expense line items to contribute to improved operating leverage as we continue to actively manage our operating costs run rates and a more stable Sports Rights portfolio cost base.

Turning to our revised 2023 outlook. While we remain on track to deliver strong year-over-year growth in 2023, we are updating our outlook to reflect our financial performance to-date and address some market headwinds. Our updated outlook for fiscal ’23 is as follows. Revenue in the range of €870 million to €880 million, representing year-over-year growth between 19% and 21%. Adjusted EBITDA in the range of €162 million to €167 million, representing year-over-year growth between 29% and 33%. Adjusted EBITDA margins in the range of 18.4% to 19.2%. Our revised full-year revenue outlook primarily reflects greater FX pressure on our U.S. revenues than previously indicated, given the strength of the euro versus the U.S. dollar, lower MTS revenues for the year given the softness experienced in Q3 and a more cautious estimate for Q4.

Our stronger adjusted EBITDA outlook primarily reflects improving operating leverage through the continued active cost management and initial benefits from the ongoing strategic actions to streamline our business operations and product portfolio. Turning to 2024. As we look forward into 2024, we expect to deliver at least 20% revenue growth from our enhanced content portfolio, which will include the NBA and ATP rights, and improved monetization across the product portfolio. We also expect to deliver at least 20% adjusted EBITDA growth with the improvement in operating leverage in personnel, cost of sales, and other operating costs offsetting the one-time impact from the step up in Sports Rights costs for the new NBA and ATP partnerships. In summary, we remain on track to deliver robust growth in 2023 and are well positioned for continued profitable growth in 2024 and beyond.

With that, we’d like to open up the call for your questions. Operator, will you open up the line for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] One moment for first question please. Our first question comes from the line of Ryan Sigdahl with Craig-Hallum Capital Group. Your line is now open.

Ryan Sigdahl: Good day, Carsten and Gerard. Thanks for taking my questions.

Gerard Griffin: Good day, Ryan.

Ryan Sigdahl: Curious on the U.S. So, deceleration in growth, I know a little bit of an FX headwind. But even considering constant currency deceleration in growth there and even relative to the rest of the business, I guess you commented 19% growth in betting and AV – implies there was, you know, weaker somewhere else to offset that to get to 11% overall. So, what specifically isn’t going as well there?

Carsten Koerl: Gerard, do you want to take this question as the CFO?

Gerard Griffin: Yes. No – in terms of the U.S., we actually – if you take off the FX impact we feel, we actually had a strong growth in the quarter. I would remind you it’s – this is our quietest quarter when you look at, in terms of the fiscal year. Outside of our explanation, there was nothing else material to call out in terms of the AV side of the business.

Ryan Sigdahl: Then, just on guidance for the year lowering in part – smaller part – due to the euro strengthening. As I look at the euro trading at the lowest USD conversion this year, I mean, it’s actually depreciated versus U.S. dollar since you last gave guidance. So, am I missing something there?

Gerard Griffin: No, most of the impact was what we flagged back in the last quarter, where you saw that – we flagged that versus our original guidance. We felt there was pressure of around €10 million. All we’re saying is that that pressure, which is now reflected in this revised guidance range, did increase the actual blended rate in Q3, did contribute to more pressure. I think as you look into Q4, it shouldn’t be an impact.

Operator: Thank you. One moment for our next question, please. Our next question comes from the line of Robin Farley with UBS. Your line is now open.

Robin Farley: Great, thanks. Two questions, and I apologize if you covered this, we have had some trouble getting on to this call. But – on the AV business for Rest of World, I don’t know if you addressed the margin being down a couple hundred basis points there even with the 15% revenue increase. So, I don’t know if there’s any color to add on the Rest of World AV. I know you just mentioned something about the U.S. business, but on the Rest of World AV. And then, the another question is – on the NBA deal, can you give us a sense of kind of the profitability between your arrangements with them on the sports data side versus tracking technology. It seems like there are lot of companies that have some piece of a deal with the NBA in different tracking. And so, I wonder if you could just help us understand the profitability of the different pieces of your arrangement with the NBA – if there is – you know, in general terms. Thanks.

Carsten Koerl: Hi, Robin, this is Carsten. So, looking to the AV revenue, that’s a seasonal effect. So, it’s – the quarter three is not a high traffic order from AV perspective. You know that we have a portfolio which we bring to the market, so they are always premium rights. And behind this, we line up a couple of cheaper rights, for example, Table Tennis. And that is the effect, which you see here – the growth comes like – through the stated CONMEBOL and MLB there. So, nothing special to state. You will see a readjustment in quarter four here, which goes from a profitability – most likely bit in the other direction. But that is seasonal effects and very small. Looking to the NBA deal, and I’m glad that you asked, I’d like to remind everybody that those deals are accounted from an accounting perspective, treated in a way that was the lump sum.

And in this case, it’s splitted in equal proportions over eight years. We all – I think can follow that during the term of the deal, it gets more profitable for us as the distributor, because we can line up more products and more clients behind it. So, this deal gets only more margin accretive for us during the term. The second half of such deals are significantly more profitable. Combining this with our strong outlook which we gave for 2024 shows you how good we leverage our business and how good we leverage our worldwide operation and the client base. Looking specifically to the data piece in the United States, which we mentioned, accounts for 60%. It’s on the data – it’s not AV. Worldwide, there is an AV component in there and there was a blended that mix between the data and the AV deal on a worldwide basis.

Worldwide, we are very satisfied with how we are tracking. From the U.S., we signed every operator for the next eight years on the extended deal, which includes deep data and innovative solutions, where we have highlighted a few of them. There are no tool tracking providers for the NBA. There is one tracking provider – one official tracking provider – nothing else. There is a small size deal in place with some teams, which we fear to get also solution from another tracking provider that’s on discretion of the NBA teams. It doesn’t extend to the Women NBA, and that is a team by team based deal. We have a deal with the – with the NBA on this, and we are providing those solutions which we highlighted. I hope that answers the question, Robin.

Robin Farley: Yes. Great, thank you very much. Thanks.

Operator: Thank you. One moment for our next question, please. Our next question comes from the line of David Karnovsky with JPMorgan. Your line is now open.

David Karnovsky: Thank you, Gerard. Maybe just following up on the 2024, the 20% revenue growth, and I think you had set EBITDA as well. Just while we have you on the call, I want to see if you could break that down a bit in terms of where you think that growth will come from by segment? And then, Carsten, you noted importance of in-play betting for future growth. Just curious with the start of the year, NFL, NBA, and NHL seasons, how the uptake looks there relative to early last year?

Gerard Griffin: Carsten, do you want me to start?

Carsten Koerl: Yes, please. Start, Gerard.

Gerard Griffin: So, David, in terms of the actual growth next year, you know, we believe that the growth is going to be broad based. In the sense that – we obviously will see the contributions from, you know, our enhanced content portfolio. So both, directly and indirectly through, obviously, cross selling and packaging. That’s going to obviously help our U.S. growth. But as you saw in our notes, you know, 40% of the NBA business is outside of the United States. So, we expect it to be a major contributor internationally, similarly with the ATP. Beyond that, you know, we’ve been investing, as you know, in enhancing, you know, the overall potential of our portfolio. So, we do believe that there’s opportunities to introduce new products next year but also enhance our existing portfolio to enable us to upsell and continue to drive on – what is already a very strong and recurring revenue base.

So, broadly speaking, it’s going to come across the board in terms of the existing portfolio. But, obviously, the addition of new products and new content is going to help amplify our growth in 2024.

Carsten Koerl: And, for the second part, with the in-play, we see a pickup – 10%, sometimes 15% on the operator base, a shift into live betting, from 30% and average to a 35% or a little bit more. These are numbers which we get from the operators. I think more important is that we are supporting this trend with our products. The AV products are stimulating. We have that for baseball, and for NHL now. And what is also stimulating is, all the visualizations based on deep data, which you saw in the slides, which we do and where we launched a couple of new products for the NBA. What we want to do here is we want to create that experience for the betters to follow the match in running and, of course, stimulate them for placing some bets.

A testament that we are right on track is the interview, which Amy and Jason from FanDuel and DraftKings as the CEOs, did on G2E and stated there – and we moderated that panel – that live betting is high on their agenda and the products around this are our products which they are looking into. So, I think all this together shows you we are all working very solidly that we move into the live betting. And the last piece maybe is the leagues. They are supporting this a lot. They see the opportunities with that live experience. So, we think the trend will continue. We have nothing to think against it. If it reaches the 80% which we see in Europe, that’s prob – that’s still open, but we see a solid trend from pre-match into live betting.