Net Gaming suffers due to regulation and competition in Q2

16 August 2019

iGaming affiliate business Net Gaming Europe has reported a 24% year-on-year decline in revenue over second quarter of the year, blaming tighter regulations in a number of European markets for its struggles.

Revenue for the three months to 30 June, 2019 fell to €3.5m (£3.2m/$3.9m), with the decline offset in part by the acquisition of the site. Excluding new acquisitions, legacy brands saw revenue decline 27% from the prior year.

Chief executive Marcus Teilman blamed "political regulation effects" in Europe for the decline, having cited the launch of Sweden's igaming market and Italy's gambling advertising ban as key headwinds following the publication of the operator's Q1 results. This contributed to revenue from Europe falling to 69% of the group total, down seven percentage points. Sweden, which accounted for 4% of revenue in Q2 2018, saw its contribution decline to 2% of the group total. 

While North America accounted for 18% of revenue - down from 19% in the prior year - Net Gaming said market openings had led to a significant increase in competition. This resulted in a 32% year-on-year fall in North American revenue. As a result the share from other regions grew to 13%, up from 5% in Q2 2018.

Going forward, Teilmann said, the business would look to increase its geographic reach, partly through acquisitons, and partly through organic growth.

"Continuous minimisation of the company’s risk by spreading political risk over several geographical markets is a strategy we will be pursuing going forward," he said.

To aid these efforts, the business upgraded its proprietary technology platform in Q2, while its CasinoGuide and CasinoSpielen brands were relaunched in the UK, US and Germany.

The business also suffered some short-term pain due to its transition from a cost per acquisition (CPA) to revenue share-focused business. With paid media advertising being phased out, new depositing customer numbers fell 29%, something that Net Gaming said had also been affected by European regulatory changes and increased North American competition.

CPA still accounted for 51% of revenue, compared to 47% from revenue share deals (up 17 percentage points).

Costs for the quarter rose as a result of higher personnel expenses, which increased to €1.0m, after which earnings before, interest, tax, depreciation and amortisation was down 32% at €2.0m. Once financial items and taxes were stripped out, net profit for the quarter was down 41% to €1.2m. 

"I am not satisfied with our performance in Q2, but I am hopeful that that we will show improved EBITDA levels in the future," Teilman noted.

For the six months to 30 June, revenue was down 15% year-on-year at €7.6m. External expenses were cut from €1.6m to €1.3m, but Net Gaming spent more on staffing in the period, with personnel costs rising from €1.6m to €2.0m. Other operating expenses also climbed from €1,000 to €33,000, with EBITDA dropping 22% to €4.6m this year.

Lower revenue and higher costs also pushed operating profit for the first half down from €5.9m to €4.2m, while net profit for the half fell to €3.2m.

Despite a difficult first half, Teilman said remained positive about the future, noting Net Gaming would continue to pursue acquistions. This saw the business acquire the UK-facing after the period end.

"Ahead of us, we see attractive business opportunities in a highly fragmented market to make disciplined and reasonably valued acquisitions that meet our investment criteria," he said. "Our starting point is that the acquisitions will be primarily financed through our relatively large existing cash resources and our strong operating cash flows.

"I am convinced that using existing cash and cash flows in this way creates good value for Net Gaming’s shareholders over time, as our overall financial target is earnings per share growth."