Red flags from BETCO's Q1 report

BETCO released its Q1 report last week. We have been following the company closely since our negative case was presented in the previous year, when we thought that Google policy updates would hurt the partner segment, which they evidently have. Brazil, like for all actors in the industry, is the most significant current issue.

Brazil is a big issue

Brazil is a big issue at the moment. At the core it’s due to the structure of no welcome bonuses, which lead to low channelization of the legal market plus low competition for new players. As a general rule and affiliates want high bonus options for operates and many operators that compete for players. Currently, it’s the opposite in Brazil. 

There seems to be debate on this as industry actors are pressing for a legal change, in our experience, this takes years, if ever, for a government to change such a big part of the legal framework.

With consumer protection in mind

The regulatory stance reflects broader concerns about consumer protection and problem gambling prevention. Vitor Hugo do Amaral Ferreira, SENACON’s director and consumer protection advisor for the Ministry of Justice and Public Security, signed the directive reinforcing Brazil’s position on protecting vulnerable populations. The measure specifically targets advertisements and promotions designed to encourage betting, extending beyond simple bonus offers to encompass any form of advance payment or promotional advantage that might incentivize gambling behavior.

There seems to be a loophole in using loyalty programs, but we have limited insight into how that works or holds up against the legislation.

The long-term issue is that it creates a low channelization. The channelization rate, which measures the proportion of domestic consumers gambling within the national licensing system, reveals both progress and persistent challenges in Brazil’s regulated market. Early estimates for January 2025 indicate that Brazil’s betting market generated approximately $154 million in Gaming Revenue, with $101 million (63.89%) coming from Brazil-licensed operators and $53 million (34.17%) from internationally licensed operators. This channelization rate of approximately 64% represents a moderate start for the regulated market but falls short of the optimal rate of above 80% that regulators typically target for effective market control. So the low channelization is actually what creates a potential upside for BETCO, as regulators might loosen up on the welcome bonuses.

Rising DSO - might cause issues in the future

The DSO (Days-Sales-Outstanding) increased during the quarter and came in at 73 days, compared to 51 days during Q1’24. Accounts receivables stood at €69m, and y/y, they increased by 12% while revenue fell 13%. This delta is quite significant and can be a signal of weakening revenue ahead. 

This is a quote from the report: 
"The cash flow is positively affected by delayed payments from 2024 received in Q1 2025. However, it was also negatively impacted by delayed payments of 9 mEUR from customers in Brazil due to the new regulations, including establishing new commercial and administrative frameworks." 

This risk can't be understated and should be explained further by BETCO with a focus on the overall state of the Receivables and credit risks. There might be operators here who will not pay or cannot legally pay (maybe they don't have a license yet). Overall

Rising DSO is usually a bad sign and can signal significant risks ahead.

Cash flow weakening - partly affected by the working capital issue

We are looking at operating cash flow minus CapEx, and it’s getting weaker. The margin stood at only 16% in Q1. This can be compared to 21% in Q1 last year. The combination of the declines in margin, net working capital issue and revenue declines led to a 32% y/y.

M&A “growth” is over, and recurring revenue down

Of the €82.6m in revenue, the M&A addition was €14.8m, so the organic drop amounted to -18%. For Q2, only AceOdds has an M&A addition. When this is

over, the Group revenue will follow organic declines. Q2 will still be rather rough on a comparable basis. Recurring revenue also decreased by -8% y/y but a more alarming 22% on a q/q basis. 

NDC decline is a leading indicator of future issues

NDCs are a leading indicator of future growth. It’s core to continue sending new NDCs to operators. Q1 marks the third quarter with a y/y decline in NDCs; the decrease during Q1 was 30%. On a positive note, the Rev./NDC increased; however, this is only natural as less revenue relates to newly sent NDC and more to older revenue share deals. The trend of NDCs is maybe one of the most alarming issues we currently see, and it indicates that there are a few quarters before we will see a material change in revenue trajectory.

The light at the end of the tunnel - at least there were no changes to 2the 025 guidance

BETCO did restate its guidance for 2025, and given the guidance's reversals over the past quarters, that can be viewed as positive. Management now likely has a better feel for where the whole year will end up. As we are soon in June, the insight into Q2 should already be high. Management discussed in the earnings call about that it’s positive that FIFA 2026 will be partly held in the USA, but that is in over a year.

Uncertainty still not in the stock price

Overall, it’s hard to see what will change the negative sentiment related to BTCO in the near term. A shift in the regulatory framework in Brazil would be a positive catalyst, but we find that highly unlikely to materialize soon.

Based on consensus estimates, BETCO is still trading at around 14x EBIT. The two closest peers, G2M (Gentoo Media) is trading at NTM EV/EBIT of 7.5x, and GAMB (Gambling.com) sits at a NTM EV/EBIT multiple of 10x. Given the significant uncertainties, we do not see why BETCO should trade at a premium.