Better Collective: Growing recurring revenue
Research Update
2023-03-01
07:29
Redeye updates on Better Collective following its Q4-results which were stronger than expected driven by the US market and a strong performance during the FIFA WC. We were also encouraged to see strong growth of recurring revenue for which the company also introduced a new key metric which includes subscription revenue and CPM in addition to revenue-share income. The company’s updated financial targets for 2023 were largely in line with our expectations, although we slightly trim our EBITDA estimates owing to growth investments in a new markets and an adtech platform. Our valuation range is increased however due to a lowered discount rate following an updated rating and our new base case stands at SEK325 (SEK270).
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Hjalmar Ahlberg
Anton Hoof
Strong Q4-results
Better Collective's Q4-results came in much stronger than expected with stronger growth and profitability than expected. The company reported revenue of EUR86m and EBITDA of EUR35m which was 8-9% above our forecasts, driven by solid growth in the US and the FIFA WC, together with strong profitability in the Paid Media segment.
Growing recurring revenue
Better Collective saw strong growth in its revenue-share based income in Q4 which increased with 81% YoY. The new key metric, recurring revenue (revenue-share, subscription and CPM income), grew even stronger with a 94% increase YoY. With a strong NDC intake in Q4 coupled with the transition towards an increased mix of revenue-share contracts in the US, there is also potential for continued growth of recurring revenue going forward.
Slightly trimmed EBITDA estimates
While Q4 came in stronger than expected, we make limited changes to our forecasts as the financial targets for 2023E were close to our estimates. Still, we trim EBITDA somewhat (5-6% for 2023-24E) owing to the announced growth investments. However, we raise our valuation range due to an updated rating which has resulted in a lower discount rate and our new base case stands at SEK325 (SEK270). The base case implies an EV/EBITDA valuation of 19x 2023E and 16x 2024E while the share has historically traded in a range of 8-20x twelve-month forward EV/EBITDA.
Key financials
| EURm | 2021 | 2022 | 2023e | 2024e | 2025e |
| Revenues | 177.1 | 269.3 | 301.1 | 339.6 | 383.1 |
| Revenue Growth | 94.2% | 52.1% | 11.8% | 12.8% | 12.8% |
| EBITDA | 55.8 | 85.1 | 95.7 | 112.1 | 129.8 |
| EBIT | 45.5 | 70.4 | 78.6 | 93.6 | 109.9 |
| EBIT Margin | 25.7% | 26.2% | 26.1% | 27.6% | 28.7% |
| Net Income | 17.3 | 48.1 | 53.0 | 67.2 | 82.4 |
| EV/EBITDA | 20.5 | 13.4 | 11.3 | 9.0 | 7.1 |
| EV/EBIT | 25.1 | 16.2 | 13.8 | 10.7 | 8.3 |
| P/E | 30.8 | 20.1 | 18.3 | 14.4 | 11.7 |
Q4-results above our expectations
Better Collective reported revenue of EUR86.1 and EBITDA of EUR35.2m for Q4 2022 which was in line with the preliminary results released on February 6. The outcome was stronger than our estimates where we had expected revenue of EUR79.4m and EBITDA of EUR32.6m ahead of the release of the preliminary results. Coming to the performance per region, US was stronger than forecasted despite the ongoing transition towards an increased mix of revenue-share contracts while Europe/RoW was also stronger than our projection driven by the FIFA WC.
Growing recurring revenue
Better Collective saw strong growth in revenue-share based income during the quarter which increased by 81% YoY. The company also saw a strong intake of NDC's in Q4 which increased by 117% YoY totalling 580k of which around 78% were on revenue-share contracts. As such, Better Collective continues to build for growth of revenue-share based income which has been strong in the last few quarters as the sports win margin has normalised following a below-average level during H2 2021 and H1 2022.
The company has also started to report total recurring income (which in addition to revenue-share based income also includes subscription and CPM revenue), and including this, the growth trend for recurring revenue has been even stronger with an increase of 94% in Q4 2022. With the ongoing transition of revenue from US being pushed to revenue-share based contracts instead of CPA, the positive growth trend of recurring revenue is likely to continue going forward.
Strong growth in US and solid profitability in Paid Media
The US continued to be a growth driver for Better Collective during the quarter with a revenue increase of 71% in Q4 2022. This was achieved despite the ongoing transition towards an increased mix of revenue-share based income (in Q4, six sports books where on revenue-share contracts compared to four in Q3 and two in Q2). US continues to be a market with high seasonality largely driven by the NFL league which starts in September and ends with the Superbowl in February. Furthermore, growth is also impacted by states that regulate sports betting, where Maryland launched online sports betting in Q4 2022. While the increased mix of revenue share can lower the fluctuations, the US market will likely remain highly seasonal with the majority of revenue coming in Q4 and Q1.
Better Collective also saw strong growth in Europe/RoW which increased revenue by 59% in Q4 2022 driven by the FIFA WC during which the company saw a total inflow of <300k NDC's. The company's Paid Media business performed very strong during Q4 with revenue growth of 94% where the transition from CPA to revenue-share contracts is now paying of. The segment saw strong profitability with an EBITDA-margin of 23% which was achieved even though a large share of NDC’s were delivered on revenue-share contracts. While profitability in the segment is likely to fluctuate going forward, the strong growth and profitability in the quarter illustrate the potential of the business segment which also can be a strong growth driver for Better Collective when it enters new markets and during sport events.
Positive outlook for 2023
Coming to the outlook for 2023, Better Collective has seen a very strong start of the year with revenue of >EUR37m in January driven by the launch of sports betting in Ohio. For the full year, Better Collective’s target is to achieve revenue of EUR290m-300m and EBITDA of EUR90m-100m. The target includes costs of around EUR10m for investments in an adtech platform and establishment of a stronger presence in LatAm and other emerging markets. The target also considers the short-term negative impact from continued push towards an increased mix of revenue-share based contracts in US.
The new financials targets are largely in line with our forecasts ahead of the Q4-report (we estimated revenue of EUR299m and EBITDA of EUR101m). However, assuming a slightly higher cost base on the back of the growth investments we now expect a stable EBITDA-margin of c32% in 2023E (previous c34%) and a slower margin expansion in 2024-25E with an EBITDA-margin of c33-34% (previous c35%).
Muted M&A potential in private market
Commenting in M&A opportunities, Better Collective says its sees more muted activity as valuations in the private market remain elevated compared to public listed companies. Still, the company's acquisition of 8.5% of capital in Catena Media suggests that Better Collective is still opportunistic and interested in parts or all of Catena Media's assets. Given Catena Media's ongoing strategic review which includes divestments of parts or the whole company, this increases the chance of a potential deal, however, Better Collective has not commented more than that it is satisfied with the position.
Coming to Better Collective's near-term M&A capacity, the company had around EUR76m of available capital in end of 2022 and an additional credit option of EUR72m giving a total capacity of EUR148m with a covenant implying a max net debt to EBITDA of 3.25 (pro-forma EBITDA adjusted for acquisitions). As such, there is still capacity available for M&A-driven growth where the company's historical trend has been to carry through 1-3 acquisitions per year.
Slightly trimmed EBITDA estimates
In summary, we make limited estimate changes, although EBITDA is trimmed with 5-6% for 2023-24E with regards to the investments in a new adtech platform and for the establishment of a stronger presence in LatAm and other emerging markets. The table below summarises financials for 2019-2025E.
DCF-Valuation
While we trim our estimates, we have raised our valuation range on the back of an updated rating which comes partly due to revised answers and partly due to changes in the rating model. Our new rating is 4, 4, 4 for People, Business and Financials, whereas the previous rating was 4, 3, 3. With the new rating, we lower our discount rate to 8.0% (previous 8.5%), and our new base case stands at SEK325 (SEK270) while the new bull cast stands at SEK460 (400) and the bear case at SEK190 (SEK150).
| Bear case SEK190 | Base case SEK325 | Bull case SEK460 |
| Our bear case assumes a higher number of competitors and higher investment needs to maintain and update products that impact profitability negatively. | Our base case scenario assumes solid growth in all markets with a slight margin improvement and a stable competitive landscape. | Our bull case scenario assumes strong growth driven by the US and other new markets and an expanding margin on the back of scalability. |
| Average sales growth of about 8% between 2024-28 with EBITDA-margin of 30%. | Average sales growth of about 12% between 2024-28 with EBITDA-margin expanding to c. 35%. | Average sales growth of about 15% between 2024-28 with EBITDA-margin expanding to c. 38%. |
| Terminal growth of 2% with terminal EBITDA-margin of 25%. | Terminal growth of 2% with terminal EBITDA-margin of 30%. | Terminal growth of 2% with terminal EBITDA-margin of 33%. |
Valuation and estimate trend
While the Better Collective share has been strong in the last months, valuation remains in the lower end of its historical range since 2019. The EPS trend has flattened out somewhat, but with the positive outlook for the coming years we expect EPS to trend upwards which should be supportive for the share price development.
Investment thesis
Case
Profitable growth supported by booming US sports betting market
Evidence
Solid track record by owner operated management team
Challenge
High growth in US will drive increased competition
Valuation
Base case DCF driven by US growth – implies valuation in higher end of historic EV/EBITDA range
Quality Rating
People: 4
We regard management as capable, with notable industry experience. Impressively, Jesper Søgaard and Christian Kirk Rasmussen have taken Better Collective from a single site to the world’s leading sports betting affiliate. However, board members average a relatively short history with the company. The founders, who are also part of top management, hold the majority of the shares. We consider this positive as this creates long-term alignment with shareholders. Chairman of the board Jens Bager holds over 2%, while several other board members and the CFO also have significant shareholdings. This strengthens the ownership structure further. Moreover, Better Collective has several institutional investors among its largest owners, which we view as a further stamp of quality.
Business: 4
The bulk of sales are generated from regulated markets, which mitigates regulatory risk. The US market and several large South American markets offers a large potential for Better Collective, as they are being regulated. The operations are also highly scalable, and the gross margin is above 60%, including Paid Media. Better Collective’s community sites create network effects and barriers against new competitors. Moreover, much of the sites’ traffic is direct, leading to low dependence on Google and expensive paid media compared to peers. On the negative side, Better Collective is still exposed to regulatory risks and potential margin pressure. Furthermore, despite its rapid growth pace Better Collective still has strong EBITDA margin of above 30% with strong cash flow.
Financials: 4
Better Collective is a very active and successful industry consolidator with several acquisitions carried through in the last years. While this can increase leverage in the short term the company’s strong cash generation means this quickly improves and opens for further growth by acquisitions.
Financials
| Income statement | |||||
| EURm | 2021 | 2022 | 2023e | 2024e | 2025e |
| Revenues | 177.1 | 269.3 | 301.1 | 339.6 | 383.1 |
| Cost of Revenue | 64.9 | 92.2 | 97.6 | 110.1 | 124.3 |
| Operating Expenses | 56.4 | 92.0 | 107.8 | 117.3 | 129.1 |
| EBITDA | 55.8 | 85.1 | 95.7 | 112.1 | 129.8 |
| Depreciation | 1.8 | 2.3 | 2.3 | 2.5 | 2.9 |
| Amortizations | 8.5 | 12.3 | 14.8 | 16.0 | 17.0 |
| EBIT | 45.5 | 70.4 | 78.6 | 93.6 | 109.9 |
| Shares in Associates | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Interest Expenses | 5.9 | 9.6 | 8.0 | 4.0 | 0.00 |
| Net Financial Items | -2.5 | -5.4 | -8.0 | -4.0 | 0.00 |
| EBT | 26.2 | 65.0 | 70.6 | 89.6 | 109.9 |
| Income Tax Expenses | 8.9 | 16.9 | 17.7 | 22.4 | 27.5 |
| Net Income | 17.3 | 48.1 | 53.0 | 67.2 | 82.4 |
| Balance sheet | |||||
| Assets | |||||
| Non-current assets | |||||
| EURm | 2021 | 2022 | 2023e | 2024e | 2025e |
| Property, Plant and Equipment (Net) | 1.7 | 8.8 | 8.1 | 7.2 | 6.3 |
| Goodwill | 178.2 | 183.9 | 183.9 | 183.9 | 183.9 |
| Intangible Assets | 341.7 | 487.5 | 478.8 | 469.5 | 460.2 |
| Right-of-Use Assets | 2.7 | 0.00 | 0.00 | 0.00 | 0.00 |
| Other Non-Current Assets | 10.2 | 9.9 | 9.9 | 9.9 | 9.9 |
| Total Non-Current Assets | 534.5 | 690.2 | 680.7 | 670.6 | 660.3 |
| Current assets | |||||
| EURm | 2021 | 2022 | 2023e | 2024e | 2025e |
| Inventories | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Accounts Receivable | 30.1 | 53.2 | 60.2 | 67.9 | 76.6 |
| Other Current Assets | 4.2 | 10.3 | 30.1 | 34.0 | 38.3 |
| Cash Equivalents | 28.6 | 31.5 | 88.1 | 163.4 | 254.0 |
| Total Current Assets | 62.9 | 95.0 | 178.4 | 265.3 | 368.9 |
| Total Assets | 597.4 | 785.2 | 859.1 | 935.9 | 1,029.2 |
| Equity and Liabilities | |||||
| Equity | |||||
| EURm | 2021 | 2022 | 2023e | 2024e | 2025e |
| Non Controlling Interest | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Shareholder's Equity | 344.8 | 412.9 | 465.9 | 533.1 | 615.5 |
| Non-current liabilities | |||||
| EURm | 2021 | 2022 | 2023e | 2024e | 2025e |
| Long Term Debt | 121.1 | 201.7 | 201.7 | 201.7 | 201.7 |
| Long Term Lease Liabilities | 1.5 | 5.0 | 5.0 | 5.0 | 5.0 |
| Other Non-Current Lease Liabilities | 74.5 | 100.6 | 100.6 | 100.6 | 100.6 |
| Total Non-Current Liabilities | 197.1 | 307.2 | 307.2 | 307.2 | 307.2 |
| Current liabilities | |||||
| EURm | 2021 | 2022 | 2023e | 2024e | 2025e |
| Short Term Debt | 0.00 | 1.1 | 1.1 | 1.1 | 1.1 |
| Short Term Lease Liabilities | 1.3 | 1.7 | 1.7 | 1.7 | 1.7 |
| Accounts Payable | 18.4 | 22.3 | 30.1 | 34.0 | 38.3 |
| Other Current Liabilities | 35.7 | 40.1 | 53.2 | 59.0 | 65.5 |
| Total Current Liabilities | 55.5 | 65.1 | 86.0 | 95.6 | 106.5 |
| Total Liabilities and Equity | 597.4 | 785.2 | 859.1 | 935.9 | 1,029.2 |
| Cash flow | |||||
| EURm | 2021 | 2022 | 2023e | 2024e | 2025e |
| Operating Cash Flow | 31.6 | 48.2 | 64.1 | 83.8 | 100.1 |
| Investing Cash Flow | -219.2 | -112.6 | -7.5 | -8.5 | -9.6 |
| Financing Cash Flow | 188.8 | 65.7 | 0.00 | 0.00 | 0.00 |
Rating definitions
The team
Disclosures and disclaimers