Evolution Gaming Q4 21 Earnings Call
Summary of Evolution Gaming's Q4 Earnings Call
Evolution Gaming is a company that I have a small position in due to its large market opportunity, high margins, and wide moat.
I would like to make it a much larger position if the valuation is right.
Possible volatility, most recently resulting from geopolitics related to Russia and Ukraine, may give me an opportunity to do that this week, so I am doing a lot of homework on the company.
I am looking to add to my position at levels below $100 per share, but that could change to a price that is a little above $100 per share.
The market cap at $100 per share would be around $22 billion.
TTM revenue is $1.2 billion, so the price-to-revenue multiple would be 18 which is a little high, but income and margins (EBITDA, Operating and Net) are high and look sustainable.
Net income for 2021 was $689.1 million, so a $22 billion market cap would be a price-to-earnings ratio of around 32x.
32x is a good multiple to pay for a company with high growth rates, high margins and a large market opportunity that appears to be in the early innings.
Evolution reported 4Q 2021 earnings on February 9, 2022 and published its year-end report.
Here is my summary of the 4Q 2021 earnings call:
Evolution has over 1,000 live tables at the end of the quarter, but won’t disclose the amount of tables in its respective markets (North America, Europe, Asia, etc.).
Live tables increased by around 300 during 2021.
On the 1st day of the quarter, the newly regulated Dutch market opened up and Evolution is already powering the majority of the licensed operators in this market.
The U.S. is a huge opportunity and Evolution will continue to invest there.
Its Connecticut studio is expected to open around the summer of 2022.
In the fourth quarter, revenue increased by 69% to 300 million euros. EBITDA increased by 115% to 207 million euros which is a very high EBITDA margin of 68.9%.
EBTIDA margin for the full year was 68.7% and the CEO says that he expects they can expand this margin to 69-71% in 2022.
Evolution will prioritize growth over margins though.
Live casino delivered growth of 49% in 4Q 2021 compared to 4Q 2020, a very satisfactory growth rate per the CEO.
Before the end of 2022, Evolution expects to launch 88 new games.
North America is growing fast with a 205% year-over-year growth rate.
Evolution is increasing staff for live casino games to keep up with its high growth, this could affect margins.
Acknowledged wage inflation but doesn’t seem to be affected by it at the moment.
Full year revenue for 2021 is 1.068 billion euros.
For the full year of 2021, the tax rate was 6.5% (very low).
Evolution’s main way of shifting capital back to shareholders is a dividend policy of 50% of earnings.
Evolution says they have a small presence in Asia.
Regarding the regulatory allegations, Evolution is talking daily to the NJ Gaming Board and has seen an insignificant effect on revenue. Evolution only sells to licensed operators and is very comfortable with their business model.
I don’t see the regulatory allegations affecting Evolution negatively at the moment.
Here is what Evolution’s CEO, Martin Carlesund, wrote in his annual letter regarding the regulatory allegations:
“Towards the end of the quarter, a dubious, anonymous and falsified report with the clear intention to harm Evolution was published. We have over 15 years’ experience of operations in regulated environments and we are comfortable and confident in our ways of working, our business model as well as in our constant strive to improve in all areas. Evolution is a content provider and we only supply to licensed customers. With the ambition to be even better we will continue to work on all processes in relation to due diligence of our customers and their licensing and regulatory framework. The measure we have taken during the quarter have had insignificant financial effect.”
Evolution has a share repurchase program; the company repurchased 1,158,865 of its shares costing 123.3 million euros.
The Euro:USD exchange rate fluctuated between 1.11 and 1.22 during 2021. Therefore, it looks like the cost per share at which Evolution bough back its own shares at ranges from $118 - $130.