The report is out, in line with preliminary data. Revenue 30.4m (+35% y-y, of which 12% is organic) and EBITDA 14m. Just some random thoughts of my own without much structuring.
The quarter’s revenue was impacted by about 1.5m due to player-favorable match results. Guidance was reiterated, which means over 35m revenue and 35% y-y growth for the final quarter of the year.
The share of rev share dropped slightly in the quarter but should return to over 60% levels in the future. The share of rev share contracts is perhaps the biggest factor explaining the recent performance difference compared to competitors. CEO Warner also mentioned in the webcast that, depending on the contract, G2 gets 40-50% of the lifetime losses in rev share agreements. This is in line with my previous estimate, and one could say it’s not a bad deal. Of course, most new depositors only generate one-time income, and I’ve read estimates that 70% of deposits are front-loaded, but the tails can be long.
Peers $Ctm and $Betco, which issued profit warnings, have been playing a more short-sighted US state regulation-enabled CPA game, which is now backfiring as sports regulation is in a relatively mature stage and casino regulation is completely frozen. Ctm is pivoting to the sweepstakes market, which according to my gut feeling is also a growth prospect for G2 regarding the US. So G2 hasn’t participated in the US hype, but has entered the market more strongly through the KafeRocks acquisition. According to Warner, the market is quite difficult, but they are satisfied with their progress there. America currently accounts for 21% of revenue, so they aren’t too dependent on that market. One of the most interesting opportunities in the industry at the beginning of next year is the Brazilian market becoming regulated, which Warner spoke about as a factor requiring work but also creating business opportunities. Regulation regarding the tax paid by players on winnings over 400 USD will likely drive the highest-value players to Curacao-licensed games. However, there are over a hundred license applications in the market, and competition among operators for customers should bring good business for affiliates.
Even though the US market is difficult, one can expect a decent performance from Gentoo, especially in the context of the industry. Management seems to have a clear view of the next steps on the roadmap and where growth can be captured. Drivers are still growth in the sports vertical, Ag rollout to new local markets, and cost savings from the Titan integration. Diversification across multiple markets and sites combined with rev share makes the business less volatile. Profitability and cash flow will be more straightforward and good now after the split. When asked about next year’s guidance, Warner spoke about the company’s aim to continue growing faster than the market (+10%) and his personal hope for it to be organically closer to 20%.
The share price development has certainly been miserable, and holding these small caps with non-existent liquidity feels painful in this market. However, the fundamentals are roughly as follows: organic growth over 15%, EBITDA margin around 48%, cash flow from EBITDA around 80% (from memory). On the negative side, of course, is the GiG capitalization that came with the split, and there is now 90m of debt on the balance sheet. This is now trading at about 5.5x this year’s EBITDA. Betco is still trading at 8x the current year’s EBITDA and Gambling.com at roughly the same 8x. In my opinion, G2 should close at least that relative discount because of the higher rev share, better growth, and better margins. Let’s see how it goes.