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Position: No position, as of 2025-02-20
Summary
As the results in BETCO’s Q4 ’24 report were already known, the most important new information related to the guidance for 2025 and beyond. Overall, management expects a flat development during the year, burdened by the Brazilian market.
We also believe that Media Partnerships are a key driver. Still, management finds that the issue is deliberately omitted from their communications, as there are still active partnerships that are not compliant with Google policy.
On the brighter side, BETCO expects to have excellent cost control, strengthen cash conversion, and focus more on paying down debt than on new M&A.
As stated only six months ago, the guided revenue for 2025 is about 20% below what the company expected to earn in 2024. This shows the inherent issue with a business susceptible to Google updates and new iGaming regulations.
We still see a significant downside risk from today’s share price levels. Given that 2025 is expected to be very rocky for the company, we expect the same for the share price. Therefore, we have adjusted our price target down further.
Q4, still dark clouds
After the markets closed yesterday, Better Collective (BETCO) released its Q4 ’24 report. The quarter's outcome was already known, as the company released a reversed profit warning on February 6th. The report's most interesting and essential details relate to the underlying development and especially guidance for 2025. The share price reacted negatively to the report, initially declining over 10%, but ending up around 4% down.
2025 outlook
The most important information from the report was the 2025 guidance, with great detail on what will affect the results. From the Q4’24 report:
2025 guidance
Better Collective’s guidance for 2025 is as follows:
- Revenue of 320-350 mEUR
- EBITDA before special items of 100-120 mEUR
- Free cash flow of 55-75 mEUR
- Net debt to EBITDA below 3x
2025 guidance implications
Revenue growth will be short-term impacted by the Brazilian market regulation. Given the before-mentioned factors in Brazil including taxation and added costs on net gaming revenue as well as expected customer churn, Better Collective estimates between 50-70% decline in Brazilian revenue share income short term, which impacts EBITDA for 2025 by estimated 35-50 mEUR. H1 2024 further provides a tough comparison with a 20 mEUR EBITDA before special items effect stemming from a higher US marketing activity from partners last year, the state launch in North Carolina as well as the European Championships in Soccer. On the other hand, Better Collective expects absolute growth in its European, Esport, South America ex Brazil and Canadian businesses, as well as US growing from its lower baseline. This is estimated to give an EBITDA before special items growth boost of between 20 to 40 mEUR during 2025. Lastly, the cost efficiency program will have full effect of 50 mEUR for the year. All this combined means EBITDA before special items is guided flat versus last year.
On the revenue
Revenue is expected to come in at €320-350m. Using the mid-level guidance of €335m, down from €371m in 2024.
€52m of the €371m came from M&A addition during 2024. Playmaker and AceOdds will continue to contribute during 2025, but only partially. We believe M&A are expected to add around €15m in revenue, which means that organic revenue is expected to land around €320m. So flat compared to 2024.
We are worried about the extremely rapid decline in expected future revenue, which shows the inherently complex nature of BETCO’s business.
As late as August 2024, the company had the following 2024 guidance (Q2’24 report):
2024
Following the acquisition of AceOdds during Q2, the financial targets for the Better Collective group for the year 2024 were upgraded:
- Revenue of 395-425 mEUR, implying 21-30% growth (previously 390-420 mEUR)
- EBITDA of 130-140 mEUR implying 17-26% growth (previously 125-135 mEUR)
- Net/debt to EBITDA stay below 3x (unchanged)
2023-2027
The long-term 2023-2027 financial targets remain unchanged:
- Revenue CAGR of +20%
- EBITDA margin before special items of 35-40%.
- Net debt to EBITDA before special items of <3.
Therefore, the current revenue expectation for 2025 is around 20% below the 2024 revenue guidance, which was issued only six months ago. If the long-term CAGR of 20% had been applied to the 2024 guidance, then 2025 should have been €489m. Thus, the expected revenue is 30% below the implied prior to earlier guidance. The consensus estimate we have seen amounted to about €370m, so the guidance is below “market expectations”.
On the EBITDA
Using the mid-level guidance values, we find a €20m hole in the math to add to the flat EBITDA guidance. However, the report presentation transcript added that about—€15m was an effect of the 2024 efficiency program. We think this was just an actual change to the Media Partner business, which declined due to the Google updates. Why would an efficiency program otherwise reduce EBITDA?
On the Free Cash Flow
This is the first time BETCO has included free cash flow (FCF) in the guidance; we see no clear explanation as to why. In all reports, BETCO discusses “cash conversion” (dividing cash flow from operations by EBITDA). In Q4 '24, the cash conversion was around 60%, lower than usual. However, this was due to an increase in trade receivables, which are expected to be paid in Q1 ’25. At first glance, the expected free cash flow looked very weak. But from the earnings call transcript, we got the following information:
Analyst, Oscar - So my first one would just to be a little bit clear on the free cash flow guidance that you put out. So trying to get a sense of the cash conversion down from the EBITDA midpoint of around EUR 110 million. So EUR 55 million to EUR 75 million and EUR 65 million as the midpoint. So you obviously have some interest payments and some tax payments on the earnings. But then just some color on sort of working capital movements and also especially looking at the expected CapEx going into 2025. So I appreciate some more color on the expected other investments in intangible assets, if that's possible.
CFO, Flemming - Yes. Thanks, Oscar. Flemming here. Yes, the free cash flow is a new one. And of course, we have previously given cash conversion, which is operational cash flow over EBITDA. But this, as you also allude to, free cash flow also includes payments of interest and also tax as the main component. And then we also have below EBITDA, we have intangible or you can say payments to partnerships. So these 3 components are to be considered. So this is the free operational cash flow.
They are talking about cash flow from operations. In general, we see the FCF guidance as quite strong. It implies a cash conversion of 59%, up from 44€ in 2024.
Period | 2023 | 2024 | 2025G |
|---|---|---|---|
Adj, EBITDA | €111.1m | €113.4m | €110.0m |
Cash flow from operations | €89.0m | €49.5m | €65.0m |
Cash conversion | 80% | 44% | 59% |
Why is the margin not higher if there is no Partner Media revenue?
EBITDA margin was 36% in the publishing business during Q4; we still find it strange that the margin is not higher as the “Partner Media” business absorbed their own operated sites. We still see no other explanation than that significant partner revenue is still present. Either new players are actively being sent, or long-term revenue share deals are “dying” out slowly. Both of those explanations are not great for BETCO.
Period | Q1'21 | Q1’24 | Q2’24 | Q3’24 | Q4'24 |
|---|---|---|---|---|---|
Publishing revenue | 23.9 | 66.3 | 71.2 | 56.4 | 70.9 |
Publishing cost | 11.7 | 43.8 | 51.1 | 40.0 | 45.4 |
% revenue | 49% | 66% | 72% | 71% | 64% |
The main issues we see
What about Partner Media: BETCO's management tries to present a transparent view of 2025; however, we find that the Media Partner issue is deliberately omitted from their communications. Likely, there are still deals in place, and the company does not want unwarranted attention to that.
Reliability of projections: The revenue guidance is about 30% below the implied projections from management presented just six months ago. This shows the inherent issue with a volatile business like BETCO’s.
The true risk: BETCO has often “received” a higher valuation on multiples of earnings than peers, as sports have been viewed as more “safe” than casino affiliates. But we believe the current problems at BETCO show the true risks:
Google can change everything at any time.
Regulations can create significant changes in market dynamics currently seen in Brazil.
Estiamtes and valuation
So, how does this play into estimates and valuation? For now, we assume…
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