Gaming Innovation Group (GIG) - Growing iGaming cash flow machine

[Passi]

Gaming Innovation Group (STO: GIGSEK, OSL: GIG) is an iGaming company operating mainly from Malta that has grown at a rate of over 15% over the past few years with improving profitability.

GiG consists of two business units: 1. Media and 2. Platform & Sportsbook. What makes the case particularly interesting is that GiG aims to split the (in my opinion, undervalued) units into separate companies during Q3/2024. From a valuation perspective, it therefore makes sense to treat these two separately.

GiG Media: A serial acquirer churning out 45% EBITDA

Media focuses on the iGaming affiliate business, and it accounts for about 80-90% of GiG’s current value. Since its founding in 2015, Media has acquired affiliate assets, practically iGaming-focused websites, from which visitors are directed to become customers of online casino and betting companies. Media has about 260 employees across Europe.

Media operates a good 100 websites, the most popular of which include wsn.com and askgamblers.com. Media also has a partnership agreement started in 2022 with the UK’s News UK, through which Media manages the betting sections of the popular media outlets The Sun and talkSPORT.

Media also offers services for the execution of marketing campaigns. About 2/3 of Media’s revenue comes from its own publishing operations (Publishing) and 1/3 from services (Paid services).

What makes Media’s unsexy business interesting is GiG’s proven expertise in acquiring affiliate assets and tuning them into prime condition. Simplified, Media buys websites at a favorable valuation and aims to strongly grow the recurring cash flow they generate.

As the most recent example, GiG acquired AskGamblers from Catena in January 2023 at an EBITDA multiple of 4. Under Media, AskGamblers has more than doubled its EBITDA in under a year. In Q4, revenue grew by a further 32% QoQ and 93% YoY, and growth is expected to continue this year as Gamblers transitions to using Media’s technology platform and expands to cover the sports side as well, with the Euro 2024 football tournament and the Paris Olympics approaching.

As the newest acquisition, there is KaFe Rocks from late 2023, the development of which will be interesting to follow in the coming quarters. The company, which focuses on the US market, was acquired for 35 million euros, of which 15 million euros was paid immediately and 20 million euros over the next couple of years depending on financial development. KaFe Rocks is expected to bring in at least 10 million euros in EBITDA in 2024, meaning the acquisition’s EBITDA multiple would be 3.5.

Media’s total revenue grew by 44% in 2023, of which 19% was organic. In Q1 reported this week, the corresponding figures were 52% and 21%. The number of new players (FTD, first time depositors), which acts as a leading indicator, grew by 13%.

63% of Media’s revenue comes from revenue share, 10% on a cost per acquisition basis (i.e., a one-time fee), and 27% from other services. Revenue share is the most valuable of these because it is recurring revenue: whenever a player referred by GiG plays at an operator, a portion of the revenue is paid to GiG Media. GiG aims to further increase the share of revenue share. Operators pay GiG anywhere from 15% to 50% of the lifetime revenue brought in by the player.

Last year, Media’s EBITDA was 45%, and EBITDA minus amortization of acquisitions was 40%. EBITDA converts at a high percentage into free cash flow. When looking at the figures for the entire group, it is also good to note where the cash flow generated by Media goes: towards (successful) acquisitions and the development of the platform side. The media business itself is therefore, at least for now, very profitable, with its cash flow being used for growth investments.

GiG Platform & Sportsbook: A potential SaaS growth company

GiG’s platform side offers a SaaS-based end-to-end platform for iGaming operators. The platform includes a user interface/website, player account management, back office, and related services, and it is available in over 30 regulated markets. GiG strengthened its overall offering by acquiring Sportnco’s sportsbook in 2022 and replacing its own sportsbook technology with Sportnco’s counterpart. There are about 450 employees on the platform side.

P&S is interesting for the same reasons as many B2B SaaS companies: revenue is recurring, switching costs for the customer are high, and the service provider’s margin is (presumably) high at a mature stage.

The platform takes about 2.5%-3% of the operators’ net gaming revenue, and the Sportsbook takes about 8-10%. GiG also offers the platform on a subscription billing model, at a monthly price of a few tens of thousands of euros.

Platform & Sportsbook revenue grew by 34% in 2023, all of it organic. However, the chart below shows how growth has, at least temporarily, stalled. Q1 revenue was a disappointment to the market. Due to customer churn and the discontinuation of sales of the Enterprise product, revenue fell QoQ for the second consecutive quarter. Revenue from customers who stayed on the platform grew by 20% YoY.

It should be noted, however, that the management of the platform side was revamped in late 2023 in preparation for the split, its product portfolio has been expanded, and the sales pipeline has more than doubled from a year ago.

The company has high expectations, especially for the Sportsbook. The Sportsbook product has been adopted by 31% of existing customers, but 70% of customers in the pipeline are about to adopt the Sportsbook. This is significant because, as I mentioned above, every euro played in the Sportsbook brings GiG 3x the revenue compared to a euro played through the platform.Platform’s adj. EBITDA improved throughout 2023 and was 12% in Q4. Q1 took a step back due to growth and product investments. Also, the majority of GIG’s capitalized R&D expenses relate to the Platform & Sportsbook side, and the platform’s free cash flow is still clearly in the red. Therefore, do not swallow pure EBITDA figures raw.

Valuation

I have outlined EV 2024 scenarios on the back of a napkin below, using an EV/EBITDA multiple for Media and an EV/S multiple typical for high-growth SaaS companies for Platform.

GIG’s EV is currently approx. 430 MEUR (share price 32 SEK), which includes both the Media and Platform sides.

Swedish brokerage houses’ mid-point/base case target prices and links to free analyses:

• SEB 51 SEK
• Red Eye 56 SEK
• Carnegie 51 SEK
• ABG - SEK

In the figures of the analyses, it is good to note that Red Eye and SEB forecast figures for both Media and Platform, while SEB and Carnegie forecast only for Media due to the upcoming split. Of the above, only Carnegie and ABG have updated their reports after the recent Q1.

By Alex Feng here, there is also an insightful recent analysis of GIG’s investment case and valuation relative to peers, such as Better Collective, which is also followed on this forum (spoiler: the author sees GIG’s valuation as significantly more attractive than that of its peers). It is also good to note that the market, probably for many reasons, does not award very high multiples to companies like Media. In the scenarios above, I used relatively modest multiples, despite Media’s high growth rate and cash flow.

Owners

The ownership situation is interesting. Mateusz Juroszek’s family has been buying shares aggressively over the past year and now owns about 15% of the company.

Juroszek was the CEO of the sportsbook company STS, which Entain bought last year for 850 million euros. The family now reportedly has a fortune of two billion.

Last month, Juroszek commented to Bloomberg that:

• Plans to increase his ownership to 25-30% in the coming months
• Wants Media to double or triple its revenue over the next 2-3 years and list on Nasdaq
• Expects Media’s US revenue share to grow to 30% from the current 10% following the KaFe Rocks acquisition
• The Juroszek family is ready to continue financing GIG’s future acquisitions

In addition, it is worth noting that the Platform side’s relatively new CEO Richard Carter bought 200k shares in February (530 kEUR), and GIG’s CEO Jonas Warrer bought 270k shares in December (700 kEUR).

Juroszek and another board member also made small additions this week on the earnings dip.

Targets & Forecasts

As the split approaches, GIG has not set long-term targets. However, from the figures mentioned by Juroszek, one can at least draw indicative conclusions about where the company is intended to be taken.

Analyses forecasts from Tikr - more detailed figures in the analysis links above.

To wrap it up, my own retail-investor-flavored estimates of the case’s catalysts and risks:

Catalysts

Short term:

• The split, likely happening in H2, will make the sum-of-the-parts value clearer to investors; Media is attractively valued based on cash flow and peers, P&S on SaaS metrics
• Good start to Q2: Media’s revenue grew by 19% organically in April
• Major sports events boost 2024 betting: Euro 2024, Copa America, Paris Olympics + the sports side is just being added to AskGamblers
• Platform side’s strong sales pipeline and Sportsbook’s cross-selling opportunities
• Media’s Kafe Rocks acquisition, will it reach AskGamblers-like striking distance?

Long term:

• iGaming tailwind: the industry is forecasted to continue growing by over 10% at least through this decade

Risks

Media:

• Changes in Google’s search engine algorithms
• Risks related to acquisitions and financial leverage
• Are the excellent margins at a sustainable level/is competition increasing?

Platform & Sportsbook:

• Cash flow in the red/financing risk
• Fierce competition and operators’ own solutions; cf. Kambi’s challenges in recent years
• Competitiveness of the product portfolio still a question mark, especially in the eyes of larger clients
• Regulatory changes in key markets

If you got interested, the recent Q1/24 webcast nicely summarizes the situation of both Media and the platform side.

And a final disclaimer: I made a small entry into GIG at 27 SEK in spring 2023 and have been adding in the 30-34 SEK range in recent weeks. Currently about a 5% position in the portfolio. So we are still in the dating phase

[Petri_Gostowski]

Thanks @Passi for the interesting and, above all, thorough opening

This isn’t exactly my area of expertise, but I always get interested when I hear the word “media.” Regarding those low prices for affiliate assets, it raises the question: are the low acquisition prices explained by their lifecycle? In other words, does a site like that bring in traffic for a short time, but because they aren’t strong brands etc., the old site needs to be replaced with a new one after a few years? This can be compared to why it makes sense for Alma to invest in Iltalehti while owning Nettiauto, etc. Of course, Iltalehti generates digital ad revenue for them, but its role is also important in drawing consumers to Alma’s services, from where it’s easy to direct them to Nettiauto and other marketplaces and services. This makes Iltalehti a more valuable asset than just the direct advertising revenue it generates.

At the same time, with the media growth and profitability figures you brought up, one could justify higher valuation multiples. But then again, if the lifecycles of the sites are short, a large part of that EBITDA will likely need to be reinvested in new sites in the future. Does this logic make sense?

[Onni_Maiha]

A few questions came to mind. Which betting sites does the company operate? Do they calculate their odds themselves, buy them from somewhere, or copy the odds and odds changes from other companies? What are the company’s competitive advantages compared to hundreds of other operators on the sportsbook side?

[Passi]

@Petri_Gostowski

Those low prices for affiliate assets raise the question: are the low acquisition prices explained by their life cycle? In other words, does such a site bring in traffic in the short term, but because they aren’t strong brands etc., the old site needs to be replaced with a new one after a few years?

An excellent question which I have also pondered myself and which is one of the main reasons why, as someone outside the industry, I haven’t dared to build a larger position in GIG for now. I think the low prices are explained exactly by that.

This can be viewed from a few angles, finding arguments both for and against:

1. Track record of recent acquisitions

Askgamblers:

• AG was founded 18 years ago and has grown gradually. You mentioned the power of the brand; AG’s General Manager’s view in a recent podcast was that AG is now a top 3 brand in the industry and is trusted.
• Catena Media bought Askgamblers in 2016 for 15 million. AG was generating an annualized revenue of over 3 MEUR at the time.
• GIG bought AG from Catena at the end of 2022 for 45 million. AG was generating a revenue of about 17 MEUR.
• Even though revenue and earnings multiplied under Catena’s ownership, according to industry experts and AG’s GM, Catena didn’t get everything out of AG (Catena has a poor reputation in the industry anyway).
• Under GIG, AG’s traffic, revenue, and EBITDA have grown explosively. Website traffic:

(source)

KaFe Rocks:

• The traffic for KaFe Rocks’ main asset time2play.com has also grown significantly under GIG:

(source)

• From these, one could conclude that there are high-quality (and even long-standing) site brands in the industry whose performance GIG can significantly improve. Of course, only time will tell if the current level is sustainable.

2. Organic growth & diversification

• Media’s organic growth has been over 20% for three consecutive years now, so they are doing something right besides just acquisitions.
• GIG has over 150 sites. Diversification of sites, markets, and customers is high on the company’s agenda and is progressing well. In Q1, 66% of revenue came from outside the top 5 sites and with 46% YoY growth (they don’t disclose how much of this is organic):

3. Fading of a star site & changes in Google’s algorithms

• GIG has mentioned Casinotopsonline as its flagship site for years, along with WSN.
• Casinotops’ traffic has collapsed during the early part of the year (image below). Suspected reasons for this include a recent UX redesign of the site (Google rank suffers), and/or Google algorithm changes in February-March.
• The rest of the year will show if the collapse is only temporary - but it’s a good demonstration of how quickly traffic to these sites can change and how dependent affiliate sites are on Google. As recently as 2021, Casinotops’ traffic grew by over +250% YoY.

(source)

4. Revenue share

• Over 60% of Media’s revenue comes from revenue share.
• This protects, at least partially, against site collapses; even if all sites were shut down today, customers who joined through them earlier would still generate revenue for GIG as long as they remain active players at those casinos.

So there are threats, but personally, I’m looking at this through a positive lens right now and see 1) good organic growth, 2) successful acquisitions that are yielding an excellent ROI, 3) improving profitability, and 4) constantly opening new markets.

On the numbers side, it’s certainly important to monitor free cash flow. As you mention, EBITDA growth on paper is no consolation if cash flow is constantly drained by purchasing sites that then fizzle out after a few years.

The highest quality listed benchmarks in the industry are likely Better Collective and Gambling.com, which have also grown strongly through acquisitions. I could summarize information about these here at some point.

[Passi]

@Onni_Maiha

What betting sites does the company operate?

Some of those were mentioned above. The content of the sites can be related to iGaming in various ways. For example, AskGamblers is an online casino review site. They also have a free complaint service through which players have received over 60 million euros in refunds.

What are the company’s competitive advantages compared to hundreds of other operators on the sportsbook side?

I see that the Sportsbook complements GIG’s other platform offerings. This means a casino operator acting as a customer gets everything from a single source. As an outsider to the industry, I cannot assess how the sportsbook compares to its competitors. In its marketing materials, GIG sells this through features such as fast localization, customizable odds, markets and pricing, comprehensive functionality, and suitability for 29 regulated markets. Personally, I will judge the quality of the product based especially on the figures for the next 12 months—i.e., sales, profitability, churn, etc. The GIG investment case itself is based on the Media side, which constitutes the majority of the company’s current value.

[IsoValas]

Thanks @Passi for opening the thread. I’ll offer my own thoughts, as this is currently the largest holding in my portfolio. Let this also serve as a disclaimer regarding my views.

Regarding @Petri_Gostowski’s very good question, I’ll answer from GiG’s perspective. GiG currently has about 160 sites, most of which are smaller local ones and some larger global ones, with AskGamblers being the spearhead. According to rumors, AskGamblers also has an active community and forum where discussions take place regarding operators’ offerings, promotions, reviews, etc. If I recall correctly, there are over half a million registered users. This naturally reduces dependency on search engine results, and on the other hand, a long history likely improves rankings. A broad portfolio, in turn, is beneficial for upselling to operator customers. It is easy to offer campaigns targeting new markets to existing operator customers when your own portfolio supports this. Similarly, larger operators want to work with these bigger affiliate firms when multiple markets can be operated from a single point of contact.

Thinking about Alma and Iltalehti, it also came to mind that larger affiliate firms operate the betting sections of these traditional media outlets, which are popular worldwide. GiG, for example, has a partnership with News Corp UK & Ireland: https://www.news.co.uk/latest-news/gaming-innovation-group-enters-into-partnership-with-news-uk/. I could imagine such cooperation models landing in Finland as well, in the digital newspapers of Alma and Sanoma, if that becomes possible when Finland moves to a new gambling licensing system and marketing is allowed in that regard.

Regarding @Onni_Maiha’s question, GiG no longer runs its own B2C sites; it sold those business operations to Betsson in 2020. Regarding the history, it should be noted that at that point, the group was in financial difficulties and the sale was partly forced to get the balance sheet into better shape and focus the business on the B2B side. In a way, it is a turnaround company, and the history might still weigh on the current valuation. By the way, the sold Guts, Rizk, Kaboo, and Thrills brands still operate on GiG’s platform, and at least Rizk has successfully expanded in the Balkan region, in Croatia and Serbia. Generally, the casino side is more profitable for operators, and I’ve joked with friends that the SB (sportsbook) side serves as a customer acquisition channel for the casino. When evaluating player value for operators, the highest-value customers use both casino and sports.

GiG has historically been a very casino-driven provider, and its own sports product was only integrated into the offering after the Sportnco acquisition: https://www.gig.com/news/gaming-innovation-group-completes-acquisition-of-sportnco/. While the latest acquisitions on the media side look very good at this point, this has not really lived up to expectations yet, at least not so far.

When evaluating the investment case, the good thing is that the valuation is really cheap compared to the track record of recent years, and the P&S (Platform & Sportsbook) business doesn’t need to be valued as anything more than an option.

For me, the media investment case simplified: It is a capital-light business with high gross margins and cash conversion, creating recurring cash flow (rev-share). Organic growth has been around 20% in recent years (and the latest data points continue on the same line). Huge value can be created through opportunistic acquisitions and their development, and the new ownership base (the Poles) wants to continue this line. Furthermore, I think the gambling industry is the most attractive global consumer industry, estimated to grow at over 10% annually until the 2030s, so it is certainly not a dying industry.

When evaluating the industry’s value chain, affiliates are generally considered to be in the weakest position due to being at the mercy of Google, and history certainly shows many sites losing their positions. At this point, however, a diversified portfolio helps manage risks, and clearly, some players get more out of their assets than others. Among game providers, there is fierce competition in RNG games, and in live games, well, the familiar-to-most Evo (Evolution) dominates with its moat. Operators are super-competitive, and everyone basically has the same games and offering. In the words of Betsson’s Pontus [Lindwall], a competitive advantage arises from knowing the preferences of different markets and targeting the right offering to a specific market. The US market is an interesting curiosity, currently almost duopolistic, where FanDuel and DraftKings have dominated with their daily fantasy history and lower customer acquisition costs. As regulation progresses, especially for casinos, I believe the market dynamics will favor even new players gaining market share as the ROI on customer acquisition grows. This then creates business for affiliates too. In general, the biggest risk in the gambling industry is idiotic regulation that drives customers to the black market. The German market serves as a prime example of this. On the affiliate side, many players bet on faster regulation in the US, and in the frenzy of the COVID years, operators overestimated customer lifetime values (LTV) and paid very high CPA fees. This has now changed as a result of markets opening slower than expected and player lifetime values moderating. Consequently, companies like Better Collective (Betco) and the troubled Catena [Media] have moved more toward a rev-share model, and Better Collective reported that this change is affecting performance negatively in the early part of the year.

If we look at the media business based solely on historical figures and forecasts, the valuation multiples should be at a different level. Also, when looking at listed peers and comparing valuation and key metrics like growth, profitability, and the share of rev-share contracts, we see that GiG is trading at a clear discount to Better Collective and Gambling.com, which is not justifiable based on the numbers. At the midpoint of the current year’s revenue guidance of €130m, the company can be expected to make over €60m in EBITDA and €45m in EBIT (operating profit). As a betting man, with the EV currently at about €420m, I’m betting on this.

[IsoValas]

Just as I was about to promote media partnerships, Google went and removed a large portion of these sites from its search results.

There was good information about this in Gambling’s conference call. Gambling also lowered its guidance as a result, but on the other hand, stated that larger sites will benefit from this in the long run, as traffic is redirected to their own higher-margin websites.

In my opinion, the new guidance provided by Betco in connection with the acquisition also includes a downward revision related to this, at least regarding revenue. There are plenty of interesting developments in this industry, one of which is the updated regulation in the Netherlands, which includes a 37.8% tax rate, among other things. https://next.io/news/incoming-netherlands-government-agrees-gaming-tax-hike/

[IsoValas]

GIG: Gaming Innovation Group expands its reach in online gaming with the acquisition of Casinomeister - Inderes GiG is acquiring Casinomeister in a €3m deal. The figures for the acquisition target were not disclosed, but the deal looks exactly like the kind of value creation potential I want to see them pursue. In the press release, management believes they can develop the site under their ownership in the same way as Ask Gamblers.

[Passi]

Several positive news items from GIG over the past week:

They completed a SEK 100m directed share issue. Participants included Platform CEO Carter (SEK 11m), Media CEO Warrer (SEK 0.6m), several funds and, of course, the Juroszek family (SEK 11m). Carter’s investment is particularly pleasing; he nearly tripled his holding.

The reasons for the issue are stated as expanding the shareholder base, management commitment, and Platform’s working capital needs. The main reason is, of course, the latter. As I mentioned in the opening post, Platform is not yet cash flow positive, and after the upcoming split, Media will no longer be funding it.

Price was SEK 31 per share, which is roughly the market price of recent weeks. 2% dilution. In my opinion, this is good news; insiders increased their holdings at market price, and the platform’s short-term financing is now sorted.

Secondly, the Casinomeister acquisition mentioned by @IsoValas. Admittedly, it’s small-scale and the company’s figures weren’t disclosed, but traffic is heading “north-east” (trending upwards), and exactly these kinds of industry-specific sites producing content beneficial to players should benefit from Google’s recent policy change.

(source)

Thirdly, Platform launched the SweepX product in the US utilizing a local partner’s content and player database:
- a revolutionary social sweepstakes casino platform solution for the USA…in partnership with Primero Games LLC, the largest land-based sweepstake operator in the states
- Primero Games specialises in developing innovative casino software and equipment for the gaming industry,with over 50,000 sweepstakes machines across the US…The collaboration will see Primero leverage its extensive player database to quickly expand into the online social sweepstakes casino market.
- It is estimated that the sweeps market generated about $3.1 billion in 2022, and we project that it will continue to grow at a +31% CAGR, reaching $6.9 billion by 2025, as per data shared by E&K.

And finally, a CFO was named for the Platform & Sportsbook division. He spent six years at Kambi, among other roles. I take this as a sign that the split is progressing.

[IsoValas]

GiG is in an interesting situation. The share price has dropped to the 28 SEK level based on various speculations as KafeRocks owners sell on the market. Today, a flagging notification was released regarding SkyCity’s exit, and at the same time, the Polish ownership rose above the 25% level. The transaction price is at the 27 SEK rate. Previously, funds were raised through a share issue where the CEOs of both business units subscribed significantly at the 31 SEK level, with the Juroszeks also supporting. The issue proceeds are mainly allocated to the platform business after the split, as positive cash flow is still awaited.

Following the Google update, there is suspense regarding the Media division and the impact on the figures, especially since competitors have issued profit warnings on the matter. However, the CEO of Media reiterated in a next.io interview that the overall impact on their own sites has been slightly positive. It will be interesting to see the fate of the News Corp/Sun partnership sites and the impact on the numbers. Website traffic for the largest sites is generally developing well. Casinotops still looks dead, though, and Ag traffic dipped momentarily, but now seems to be recovering. According to a KYC firm mentioned in a podcast, the Euros have started well, with a record number of new customers registering during the first games.

In summary, my thoughts on the situation: there is plenty of uncertainty now, but strong insider buying, selling pressure likely coming from individual sellers, website traffic development, and a summer filled with tournaments keep the overall picture positive.

[DayTraderXL]

Mateusz Juroszek has on June 24 purchased 6,069,375 shares in the igaming company Gaming Innovation Group, where he is a board member. The shares were purchased at a price of SEK 27.00 per share. The purchase price amounts to SEK 163,873,125.

This is according to the Swedish Financial Supervisory Authority’s (Finansinspektionen) insider register.

[Passi]

GIG reports Q2/2024 interim report:

• Gentoo Media (formerly GIG Media) met expectations, +39% growth, +18% organic
• Growth driven by AskGamblers and KaFe Rocks, acquired in recent years
• Margins remained strong, and revenue and EBITDA are trending nicely upwards
• Q3 started well, with 37% growth in July (likely about half organic)

• Platform revenue weak -22%, mainly due to the Enterprise Solution already removed from the offering
• The main highlight: +38% growth is predicted for next year with over 20% EBITDA, and 82% of this revenue is already secured by contracts
• Cash flow breakeven guidance Q3/2025

• Split is progressing; Gentoo Media (formerly GIG Media) and Platform & Sportsbook are currently scheduled to start trading separately on Oct 1, 2024

[MKICAP]

The stock conversion event related to the GIG Software spin-off seems to have appeared on Nordnet, and the response deadline is until Oct 7. Do those more informed have any info on whether there is something specific to consider here, or should I just hit approve for the maximum conversion amount?

[IsoValas]

The expected split did indeed take place at the turn of the month. For every GiG share, a depositary receipt for the P&S business was issued, and since the P&S business was listed only in Sweden, the Norwegian depositary receipts must be converted into Swedish ones. This is possible at least on Nordnet through the corporate actions section, and I recommend everyone do it, as there is no information regarding a Norwegian listing. This could have been handled more elegantly, especially since Monday saw significant intraday volatility that couldn’t be capitalized on in this regard. Regardless, this is the situation we are working with.

Someone resourceful could update the thread name to Gentoo Media ($G2m) and, if they wish, open a separate thread for GiG Software ($GIG SDB).

[Jippe]

The recent weakness in the share price seems to be largely unjustified. The caravan moves on and the dogs bark.

Gentoo Media - Trading update for Q3-2024

[IsoValas]

3110784.pdf

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.

[IsoValas]

Gentoo Media - Mandatory notification of trade - Inderes

Sharing this as well: insiders are buying even at premium prices. Hopefully that eager seller has finally finished offloading their shares and we’ll see some positive price development for a change.

[Passi]

To follow up on @IsoValas’s excellent summary, here are a couple more slides from the presentation.

Revenue and EBITDA are ticking steadily upwards, driven by acquisitions. Regarding the Q3 results, it is also worth noting the seasonality: QoQ growth has been practically flat every year. According to the company’s expectations, Q4 is set to be strong again.

Cash flow looks great. The CEO mentioned in the webcast that if they generate 15 MEUR in EBITDA, he expects a cash flow of 10-11 MEUR from that (bond interest expenses already deducted). The company is finally able to use its generated cash flow freely now that there is no software side to finance. According to my back-of-the-envelope calculations, Gentoo’s FCF yield is now around 10%, which is quite reasonable for a company growing organically at a rate of about 15%. (note: the “investing” section in the image includes significant acquisitions)

GIG Software has indeed been split into its own company. There are likely not enough enthusiastic owners here to warrant a separate thread for the software side, so below is a short snapshot of their reported Q3 results. Tldr: the business is progressing as expected, and for next year, revenue is still expected to exceed 44 MEUR with an EBITDA of 10M. 10 MEUR in cash, and cash flow breakeven is expected in Q3/25.

[Passi]

Gentoo’s Q4/24 earnings report yesterday. The train is chugging along:

Good:

• Healthy overall picture: 16th consecutive time revenue is at ATH and 18% organic YoY growth. Full-year organic growth 17%.
• They expect double-digit organic growth this year as well. More detailed guidance will come in the Q1 report.
• No major headwinds from Google updates, nor are problems expected in the near future.
• Overall good performance in 2024 vs. competitors.
• The Chairman of the Board mentioned buybacks as one option for cash flow allocation.

Bad:

• EBITDA dropped to 40% (full year 46%), and consequently, cash flow also suffered; clearly, “extra” marketing was invested at the expense of profitability to reach the lower end of the revenue guidance. According to the CEO, they will stick to the familiar 45-50% EBITDA going forward, which naturally also weakens revenue growth compared to this quarter.
• Rev share (most valuable revenue) accounted for only 51% of revenue, presumably for the same reason as above. According to the CEO, this will also return to the normal level of approx. 60% in the future.
• Top5 websites flat YoY, growth came from smaller sites. Casinotopsonline, in particular, is still having problems. In the report, they tried to spin this as growth coming from a broad front and not being entirely dependent on the largest sites. But this doesn’t inspire confidence, and it’s a bit hard to believe in strong sustainable growth when some of the spearhead products are struggling. On the other hand, there’s hidden upside here if and when they get, for example, casinotops up and running, which seems to be a priority project for the CEO.

Among analysis firms, ABG and Carnegie (edit: now also Redeye) have already published their updated forecasts, with 2025 averages of 14% revenue growth at 45% EBITDA. EV/EBITDA for these is around 5, and if they can convert approximately 2/3 of this into cash flow as per their comments, the FCF yield is clearly double-digit. The market doesn’t really believe in the company’s future, and peers trade at significantly higher multiples:

Major owner Juroszek has plenty of confidence, having bought another 700k shares and now owning over 18% of the company.

[IsoValas]

Gambling.com reported preliminary figures for fiscal year 2024 today Let’s quickly look at them and compare them with g2m, as I believe Gambling.com is perhaps the closest peer, also in terms of size.

1. $Gamb’s revenue was $127.1 million and $g2m’s was €124.6 million.
2. $Gamb’s operating profit (EBITDA) was $48 million and $g2m’s was €55.7 million.
3. Gambling’s revenue guidance midpoint is $172 million and EBITDA is $68 million, of which $14.5 million comes from the acquired Odds Holdings. If we assume Oddsjam’s revenue to be approximately $30 million, organic revenue growth is about 12% and EBITDA growth is roughly at the same level.
4. $g2m guided for double-digit organic growth and assumed stable margins. With 12% growth, revenue would be approximately €140 million and EBITDA approximately €63 million.
5. We can see that organic growth is very similar, and $g2m has better margins. The valuation difference between these peers is interesting. $g2m’s EV is approximately €360 million and $gamb’s is about $630 million (assuming approximately $100 million in debt, which should become clear from tomorrow’s full report).
6. $g2m’s EV/EBITDA is approximately 5.5 and $gamb’s is about 9.2.

As can be seen from the valuation, these growth companies are not receiving undue affection. I haven’t found any fundamental reasons for the valuation difference between the two, so I continue to watch g2m’s sluggishness, hoping the gap will close.