Nordic Leisure

Weak gross margin burdened Nordic Leisure’s Q3 result

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Nordic Leisure (NLAB.ST) reported third quarter revenues of SEK 29.5 million and an EBIT result of SEK -4.7 million. Revenues beat our expectation by 10 percent but the gross margin came in at 54.5 percent, almost 15 percentage points below our expectations and 13 percentage points below the second quarter’s gross margin.

Strong customer intake but weak margins

In Nordic Leisure’s third quarter the company grew its gaming revenues by 80 percent year-on-year and 21 percent sequantially. The gaming revenues reached SEK 27.8 million and 87 percent of them were generared in Latvia and Estonia. Total revenues, including sales of for example food and beverage,  grew by 73 percent year-on-year and reached SEK 29.5 million.

Furthermore, the company increased its investments in product development and in marketing during the quarter. The amount of active online users was 20,266, implying a year-on-year growth of 97 percent. Sequantially Nordic Leisure’s active online users grew by 20 percent. The company spent SEK 6.3 million on marketing in Q3, compared to SEK 5.3 million in Q2. The increase of marketing spending has cleary had an effect on the growth of active online users.

Despite the sequential user growth of 20 percent Nordic Leisure’s ARPU (average revenue per user) remained largely unchanged between the second and the third quarter. In Q3 the ARPU was SEK 1,374 (see the chart below). Alpha Researcher argues that the largely unchanged ARPU indicates that Nordic Leisure is successful with activating new users and also with improving the activity amongst already existing ones.

The increased marketing efforts have however put pressure on the company’s gross margin. The gross margin has declined from 71 percent in Q1 to 55 percent in Q3. Alpha Researcher has not managed to get in touch with the company management about the matter in question, but we believe that the gross margin decline is a result from marketing campaigns with generous “welcome bonuses” et cetera.

Along with a continued high level of employee costs, that were up 50 percent compared to Q1 2015, the EBITDA and EBIT margin was -12.6 and -15.8 percent. Well below our expectations, but mostly dependent upon the comapny’s weak gross margin.

Nordic LeisureAs the left chart below shows Nordic Leisure’s trend of fast growing casino revenues continued during the quarter. Casino games now generate 45 percent of the company’s total gaming revenues. One year ago the casino share was 33 percent. Alpha Researcher expects that Nordic Leisure’s casino revenues will be equal to their odds revenues within two or three quarters.

Nordic LeisureNordic Leisure

The right chart above shows that Nordic Leisure’s marketing spending in relation to their revenues has been around 20 percent during each quarter since Q1 2015. We expect that a level around 20-22 percent of revenues will be kept in the upcoming year. Together with campaigns and bonuses it will most likely continue to put pressure on the company’s gross margin. However, we believe that the company will try to mitigate the negative effect on the gross margin by analyzing how the bonuses are handed out and thus gradually improve the bonus system. Just like large operators such as Betsson has done in recent years.

In Q4 employee costs are expected to decrease to previous levels of around 30 percent of revenues. It is however unclear to us how the employee costs can have surged from SEK 6.5 million in Q1 to SEK 9.9 million in Q3, when the reported average amount of full-time employees during the the same period has declined from 144 to 136.  Alpha Researcher hence wants the company to be clear about this matter and explain it in more detail.

Even though the company currently is involved in an interesting acquisition of Betting Promotion we have taken a more neutral stance to the share due to these circumstances (gross margin and employee costs), that to us are unclear and not fully explained by the company. However, for now the share remains in our portfolio.

On the positive side the company still has a cash position of SEK 42 million. And as previously mentioned it is on its way to acquire Betting Promotion as well. Furthermore it has a strong online market share of more than 70 percent amongst Latvia’s licensed online gambling operators. There are however still many unlicensed operators that the Latvian authorities are fighting. Additional online growth potential in Latvia thus exist, since there still is a considerable “black market” in the country. Latvia’s relatively low online gambling penetration also give rise to future growth potential.

Lastly, Optibet has launched its .com website which has been well accepted by for example the finnish market. The online gambling market in Finland is exposed to competition, but the company believes that there still is room for new operators and hence expect the positive development to continue.

Additional info: Nordic Leisure today announced that Peter Åström, former CEO of Entraction and currently Chairman of the Board in Betting Promotion, takes over as Group CEO. The current CEO continues to work as CEO in Lifland Gaming (Optibet). Alpha Researcher views this as a strategic move since Nordic Leisure will acquire Betting Promotion and thus become more than just a gaming operator. Peter Åström has a good track record and was CEO in Entraction when the company got acquired by IGT in 2011.

Disclosure and disclaimer

Nordic Leisure is a part of Alpha Researcher’s portfolio and is also included as one of our Alpha Picks. The analyst owns shares in the company. Click on the link to read our initation of coverage analysis of the company. Please note that the estimates in the initiation of coverage analysis most likely are outdated.

Alpha Researcher does not take any responsibility for investments made in Nordic Leisure. The analysis or article written above and all the conclusions that are made within it are solely Alpha Researcher’s opinions and expectations. It should absolutely not be seen as any investment advice. We highly encourage investors to make their own analysis and/or contacting investment professionals before buying any shares in Nordic Leisure.

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