GAMB - Gambling.com Group Exclusive Q&A With CEO On Company And Industry Outlooks

2023-10-13 18:23:33 ET

Summary

• Gambling.com Group Limited expects the U.S. online gambling market to reach around $50 billion by 2027, with significant growth potential beyond that.
• The company believes that competition in the sector will increase, with more operators entering state markets and attracting experienced non-U.S. operators.
• Gambling.com Group's business model focuses on player acquisition and performance-based marketing, which has contributed to significant revenue growth.

Gambling.com Group Limited (GAMB)

Price at writing: $13.59

52- week range: $6.62--$14.83

1- year analyst target: $16.86

Market cap: $509m

Our price target ("PT") outlook calibrated to sector growth ‘23/’24: $19.75.

Premise: Clean balance sheet , entry point seems right with little downside risk and a clear path to steady upside.

The following Q&A with CEO Gillespie was completed 10/11.

Q1: There have been dozens of forward forecasts as to the growth arc of sports gambling revenue in the U.S. They vary dramatically from $15b to as much as $100b by some analysts to 2030. Assuming the sector continues growing via both mature and new states, where do you see projected sector revenue by 2030?

We have a view that the U.S. online gambling market will be +/- $50B dollars by 2027 with slightly more than 50% of it being in iGaming. I think this is a somewhat middle of the road view. Of that, we expect roughly 10% to flow through to performance marketing and thus our immediate TAM of gambling specific performance marketing would be approximately $5B. With a little legislative momentum and a few breakthroughs on iCasino, we could blast past that figure. The key takeaway is that we remain very early in the development of regulated online gambling in the United States and the opportunity for Gambling.com Group is immense.

Q2: Your business appears to benefit from a balkanized sector that has produced a multitude of platforms. Market shares of the two leaders constitute over 70% of total net win now. Clearly there will be consolidation ahead. Assuming we wind up with tops, 6 sites dominating the entire sector downstream, how do you see that prospect impacting growth of Gambling.com Group?

Nothing in my 20 years of online gambling experience would suggest the FanDuel/DraftKings duopoly is sustainable. In a few years, the early leaders in the sector will have a smaller slice of a much larger pie. Online gambling is regulated state-by-state and we expect that over time, state regulators will increase the number of licenses to optimize tax revenues. This will enable more operators to enter state markets and attract experienced operators from around the world that have yet to try their luck in the U.S. experienced non-U.S. operators, like Bet365, have been waiting for some of the frenzy with non-performance marketing to die down before coming in strong in a calculated way … with performance marketing as their foundation.

New Jersey, which legalized online casinos a decade ago is a great example of what’s to come for many states. NJ has a vibrant and competitive market with nearly 30 active online sportsbooks and nearly 20 online casinos. According to analyst reports, on the iGaming side, our friends at FanDuel & Draft Kings together have roughly 42% of GGR in New Jersey.

The longer operating history and competitive marketplace in NJ shows how things will evolve in other states. If you want to know what the future of NJ looks like you have an almost perfect comp in the U.K. which regulated online gambling nearly 20 years ago and is even more competitive and fractured with more operators having less market share.

Q3 Sports betting is a low margin business and will always be one assuming historical hold percentages of sports books over decades validate ~the 7% hold. Major entries are pursuing profitability based on reducing promotional spend dramatically and overall expenses as a road to positive EBITDA over time. Where does that put your own marketing efforts to expand your client base?

There are two fundamental ways to make an online sportsbook business highly successful. You either gain massive scale with only sports betting or you cross sell into online casino with less scale. In either case, player acquisition remains paramount and the fuel in the tank that powers the entire operation. Operators in the U.S. are increasingly focused on acquiring customers profitably and that drives them straight into the arms of companies like ours. We can guarantee the profitability of investing into our traffic since the commercial agreements are entirely performance based. They only owe us money if we send them a player which registers, deposits and plays.

This model works well for the operators and enabled Gambling.com Group to increase revenues more than 80% in 2022. This year, Wall Street consensus estimates point to over 30% revenue growth.

Q4: You appear to reinvest your profits in the business, which is just okay from an ROE basis—yet it seems your growth prospects may be hampered by the aforesaid consolidation. With a shrinking competitive field, does your service to bettors become less attractive with fewer sites? How do you moderate your business model for the years ahead if this happens?

Again, we do not expect less competition we expect more competition among our clients. New entrants will continue to enter the market and they will outnumber the operators which give up or “are consolidated.” Near term both Fanatics and ESPNBet are entering the fray.

It is important to understand that the portion of players that come through the performance marketing channel in the U.S. is still much lower than what we see in more mature markets. We estimate it to be around 10% where it is 30-40% in the U.K. If the U.S. comes up to the same levels of the U.K., we will see our TAM triple or quadruple even if the U.S. market overall didn’t grow.

The company’s ROE was 13.5% for the first six months of this year. In our most recently reported quarter (June), 33% of our revenues converted into free cash flow. Our plan is to continue to reinvest and scale our core business in order to provide superior returns to our investors.

Q5: To what extent is churn a factor in your customer base? Are you heavy with newbies to sports betting in new states vs. visitors who come from existing states?

To clarify, our customers are the online gaming operators. We send them new depositing customers and they pay us on a performance basis. As online betting consumers become more informed and sophisticated as to the offerings of different gaming operators, they tend to become less loyal. The online betting consumer is incentivized to sign up for a new operator to gain access to promotions and bonuses. Bettors use comparative shopping websites like ours to decide where they want to open an account next. To the extent they churn at the operators, it can be positive for us if they are switching from one operator to another. If they churn and never play again well that isn’t a great outcome – but this isn’t typical.

The demand for our services from our online gambling operator clients remains remarkably consistent over time. For them, they understand we control a certain amount of traffic, and that traffic will result in a certain number of new depositing customer accounts with the operators. If they decide they want less of our traffic, for whatever reason, they can be sure that the traffic will go to one of their competitors. This dynamic helps us maintain healthy pressure on pricing.

Q6: Your balance sheet is reasonably clean. Your current ratio at 1.32 is okay. How do you see your financial evolution? You are a relatively young company in a relatively young business. Do you plan any significant borrowings to expand or diversify? Equity offerings?

At present we have ample free cash flow to continue investing in our growing business. We are debt-free and at present have no borrowing needs. If the right M&A opportunity presents itself, we could come back to the market to issue equity or raise debt.

Q7: Who do you see as your closest peer competitors and what do you believe sets your business model apart from them that will produce superior earnings ahead?

Our closest competitors are Better Collective and Catena Media. Both companies are publicly traded on the Nasdaq Stockholm market. What sets Gambling.com Group apart from our competitors is our superior organic growth and our technology-first approach to the business (not to mention our Nasdaq U.S. listing). We run our websites from a central technology stack which optimizes content publication and our ability to monetize thanks to a strong business intelligence platform and clever data science. We have only ever done 6 proper acquisitions and achieved scale through organic growth. Our peers each achieved scale through a large number of acquisitions.

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