Aspire Global
and the iGaming Industry
Part 2
By Manuel Maurício
February 19, 2021
Symbol: ASPIRE.ST
Share Price: SEK 58
Market Cap: SEK 2.711 Million (€268 Million)
Announcement
Before we start, I want to make an announcement. I will be offering one month of access to the All in Stocks subscription to the person who puts me in direct contact with an industry expert; someone from “A Nossa Aposta”, “ESC online”, or any other online betting company, it doesn’t need to be in Portugal. I just need to talk to an industry expert that understands what an operator is looking for when choosing a platform and what’s happening in the industry right now.
*This offer expires on the 28th of February
Business
“We are building something that will be a monster in the gaming industry in 2, 3, 4 years from now” Tsachi Maimon, Aspire Global CEO
One cannot understand Aspire Global without first understanding the industry. Given its infancy, the iGaming industry is characterized by constant change; different companies operating in several different verticals, often competing with their partners, clients, and suppliers; there are constant acquisitions, divestitures, partnerships, and break ups. This makes the analysis all the more complicated (and slow).
To make a long story short, Europe is the most mature market, Latin America is growing, and the USA, where each state is independently passing laws to admit online gambling, is where everyone wants to go. The number of companies in this industry is just astonishing. During this week, there wasn’t a day when I didn’t discover a few new companies. This tells me that this is not an easy industry, and we’ll be seeing many changes in the years to come.
On this write-up I’ll be using a couple of competitors as a means of comparison, but I’ll leave the detailed analysis of the competitive landscape and geographical dynamics for the next week. Given that Aspire has been focused on Europe, today I”ll be looking at the financials and recent history.
Segment contribution to revenue
The company operates under 2 main segments, the Business-to-Business, where it provides the operators (casinos) with the software, the platform, and the Business-to-Consumer, where it operates its own online casino, Karamba.
The big bet is the B2B segment. The Business-to-Consumer serves the purpose of testing stuff and being in the field understanding what the B2B clients are experiencing in the “real world”.
And as we can see, the Business-to-Business segment has been the driver of growth.
As you might remember from my previous write-up, Aspire gets a percentage of all the revenue generated on its platform. As the B2B partners get bigger, they get a larger share of the revenues, counterbalancing the operating leverage and scalability that would be expected from a software business.
This may allow for the bigger clients to stick around instead of building their own platforms, as is current practice.
The B2B business is composed of 3 sub-segments. The Core platform (in dark blue), and the 2 recent acquisitions, Pariplay (in red) and B-to-Bet (in green).
Core Platform
Prior to the pandemic, the revenue coming from the core platform – that still accounts for 53% of the total revenues – was kind of stagnant. The pandemic clearly helped it grow, but what we’ve seeing for the last couple of quarters is some weakness.
But I believe that this will change going forward. As the company acquires more and more verticals, it will be able to cross sell all of its products, and it will also be able to get bigger clients.
Pariplay
Pariplay is Aspire’s gaming segment. It’s 2 businesses in 1. The game developer that builds the games, and the game aggregator that goes out to other game developers, buys their games, and resells them to its clients.
The aggregator business should be a very low margin business. I’ve looked at one competitor (Bragg Gaming) and their aggregation business has paper thin margins.
I was quite surprised when I found out that Pariplay’s margins were in the upper 20’s. I’m not sure if this is related to their proprietary games so I asked the CEO. I’m still waiting for his reply.
What’s important is that the integration has been successful and the revenue and margins are growing. I expect Aspire to be able to cross sell other products to Pariplay’s clients and vice-versa.
HOW ASPIRE BUYS CHEAPER THAN WHAT IT LOOKS LIKE
Aspire bought Pariplay for $13.3 million back in 2019, implying a valuation of 5.4x EV/EBITDA. As we can induce from the chart above, this multiple has rapidly lowered to the current 2.5x. Very cheap.
This is only possible due to the powerful synergies created when Aspire integrates a new vertical in its ecosystem. These synergies are both from a cost cutting perspective as well as from a cross-selling perspective.
B-to-Bet
B-to-Bet is Aspire’s newest segment, the sports betting platform, also called Sportsbook. Until now, B-to-Bet was present mostly in Africa and Colombia, but with the Euro 2021 at the door, I believe that we’ll be seeing it in Europe soon.
It’s still too early to tell, but I believe the same road-map will be used for B-to-Bet. Aspire will cut costs by reducing headcount in the administrative, legal, and financial departments, while cross selling it to its customers.
The difference between B-to-Bet and other Sporstbooks (such as the leader Kambi), is that B-to-Bet can now offer Aspire’s Player Account Manager (PAM). The PAM allows for the client to manage everything, from payments, to marketing, and promotions.
It’s not that the competitors can’t build or buy their own PAM’s, but for the time being, this is a plus for Aspire.
AND AGAIN, THE VALUATION
B-to-Bet was bought in 2020 for $20 million. 2020’s EBITDA was €2.1 Million, so we would be talking about a multiple of 9.4x, making it a more expensive acquisition than Pariplay.
Aspire also agreed to an additional payment in 2 years depending on B-to-Bet’s performance. The valuation will be 7x EBIT minus the $20 Million already paid. Let’s see what this means:
On its latest report, Aspire has “set aside” a contingent consideration of €17 Million to be paid in 2 years from now, just in case B-to-Bet is such a huge success that the 7x EBIT will lead to a higher valuation than the €20M.
Taking this into account, the whole price for B-to-Bet in 2 years could be €37 Million.
Working backwards from these numbers, Aspire’s management team expects that, in 2022, B-to-Bet will be making €25 Million in revenue and €7 Million in EBITDA.
*EBIT = Earnings Before Interest and taxes
*EBITDA = Earnings Before Interest Taxes Depreciation and Amortization
If this doesn’t ring a bell, it means that we could be seeing B-to-Bet triple in size in 2 years (!)
Income Statement
When we look at Aspire’s Income Statemet, we can’t compare it directly to its competitors.
Because Aspire is the one owning the license, it will show a higher revenue than its peers just for the simple fact that Aspire recognizes all of the revenue generated by the online casinos, while the competitors only recognize their share of revenues. This also leads to lower margins in comparison to its competitors.
I’m not going to do a side-by-side comparison of all the metrics, but I’ll compare the revenue to 2 relevant peers, GAN and Bragg.
Both these companies have seen their share price go up several times in the recent months. This is mostly due to the move from smaller exchanges to more visible ones in the US and Canada.
It’s interesting how GAN is worth 3x what Aspire is worth today!
Now, in a business like this one where the platform is already developed, the cost of serving a new client shouldn’t go up proportionally with the revenue.
Think about it. The platform is already built. If the number of players betting on Aspire’s virtual slot machines goes from 10 to 100, that shouldn’t represent a higher cost. Yes, there might be some customer support costs and transaction fees, but those shouldn’t be meaningful.
This means that, as the revenue goes up, the margins should expand. But much to my surprise, Aspire’s margins have been going down over the years.
I had to dig deeper to understand why. I’ve found a few reasons:
First, the shared revenue contracts allow for the operator (Aspire’s partner) to earn a higher share of the revenue as that revenue grows. For Aspire, the opposite is true.
Second, Aspire has been increasing its presence in regulated markets. This means that the tax burden is higher.
Third, Aspire has been “helping” its partners become profitable again by giving them discounts. Now, this is interesting.
As I’ve said before, the B2C business is a dog-eat-dog world. These guys must be constantly spending on marketing to gain market share. And there’s no guarantee that there will be winners in the end. It’s a race to the bottom. So, in order for the operators to keep their doors open, Aspire is helping them.
I’ve asked the CEO (who replied to my first email after 15 minutes) when this would stop, but I haven’t yet received a reply.
In all honesty, the operating margin has been going up since the 4th quarter of 2019, but it hasn’t yet transpired into the annual numbers. I believe will be seeing a higher operating margin going forward.
Now, my old friend Warren Buffett once told me that I should be looking at the profits on a per share basis. The management might be growing the revenue and profits on the back of diluting its shareholders (issuing shares to buy other companies).
If we look at the Operating Profit per share, we see that the revenue growth hasn’t translated into earnings-per-share very well. That’s, in great part, due to the margin decline.
I believe that with the recent acquisitions this will improve, maybe dramatically.
Another good piece of advice that ol’ Warren gave me was to look at the Return-on-Invested-Capital.
And the Return-on-Invested-Capital for Aspire has been astonishing. The fact that it collects cash from its clients immediately, but only pays its creditors much later, makes it so that the there is very little capital invested in the business.
As if this wasn’t enough, as long as the revenue keeps growing, the actual cash generated by the business will be higher than the reported profits.
Now, I don’t want to bore you with every single detail, but what we’re seeing there in 2019 was consequence of a payment of €13.7 Million to the Israeli Tax Authority for some accounting shenanigans relating to the period of 2008-2018.
I conclude 2 things from this: First, the historical profits are overstated, but there’s no way to distribute those €13.7 Million for all those years because the company wasn’t publicly traded.
Second, it’s better to keep an eye on the management team.
Balance Sheet and Corporate Governance
At the end of 2020, the company had $22 Million in available cash, and $28 Million in debt. This debt will mature in April 2021 and the company had been talking about the different alternatives it had. It could pay it down, refinance it, or even increase the debt.
On the latest report the management announced that it will pay down the debt in April, but to do that, it will need to take on a “bridge loan” of $10 Million from its largest shareholders.
As the name implies, a bridge loan is a loan that makes the bridge between two events. In this case, it will help pay down the debt until Aspire receives €14 Million that is owed by its sister company NeoGames (the 2 companies were previously combines).
This is a bit of a yellow flag because the bridge loan will bear an interest rate of 7% in a time when the interest rates are much lower than that, especially for a cash generating public company.
The fact that the lenders are major shareholders of Aspire also makes me itch. You see, the major shareholders of Aspire Global are also the major shareholders of NeoGames. So what they’re doing is to finance Neogames, their other company, with the money coming from Aspire shareholders. Hummm…… I should definitely look into this in detail.
Management and Ownership
Tscahi Maimon is the CEO and owns 1.72% of the shares outstanding whereas the major shareholders are directors of the company. This is usually a good sign as smaller shareholders will want the management and board of directors to have the same interests as them.
On the other hand, it can create a sense of impunity for the largest shareholders which may lead to some doubtful decisions (avoiding taxes and lending money to the company at high interest rates)
Also important to mention the reduced free-float (the shares that are available for retail investors). It’s just 11% of all the shares outstanding. That means that with the current market capitalization of €270 Million, there is only €10 Million that can be bought.
This means that when it gets “discovered” by the american hedge funds with deep pockets, the price may shoot through the roof.
What's will the future look like?
Aspire has been shifting its focus from unregulated markets to regulated markets and it intends to keep doing so in the future. Going forward, the focus won’t be so much on acquisitions, but on volume, on scaling up its current segments. Yes, there will be some minor acquisitions, but they shouldn’t be relevant.
For operators, the future will be terrible. Costs will go up while regulation becomes stricter. I believe that this spells consolidation. The smaller, weaker competitors won’t be able to keep up so they will be bought or go out of business.
Operators, such as Aspire, will also see their margins reduced by regulation and taxes, albeit to a lesser extent. I believe this will also lead to consolidation. The way to gain in the platform business is by gaining scale, offer all the services and verticals, and improve automation. Aspire is doing all of that.
Aspire wants to become a one stop shop for operators, controlling more elements in the value chain. These guys remind me of Keywords Studio, a game developer (not in the gambling industry).
As Aspire grows to integrate more and more verticals, its competitive landscape also changes. 80% of small and medium operators don’t own the gaming platforms they use. These have been Aspire’s clients. But that’s about to change.
20% of the largest operators don’t own their own platforms and prefer to outsource these services. Those are the ones that Aspire is targeting now. And those clients want multi-vertical solutions, hence the recent acquisitions of Pariplay and B-to-Bet. Going forward, Aspire will be going up against big boys such as Playtech and Scientific Games.
One of the arguments Diogo Gonçalves used to convince me to look at Aspire was the fact that the management had always done what they said they would do. Right now, the management has said that the priorities for 2021 are to roll out the sports offering (B-to-Bet) in Europe, Africa, and Latin America, and to certify the sports platform for future US deals.
I’ll be talking about this in the next write-up.
Valuation Ratios
Just so we get a sense of how cheap (or expensive) the company is right now, here’s a comparison with 3 relevant peers. Playtech is the largest one and it also serves physical gaming so I might not be comparing apples to apples here.
It’s just astonishing how GAN can get such lofty valuations. It’s true that it’s growing faster than Aspire, but Aspire has higher revenue, and it’s profitable.
The fact that GAN and Bragg trade in the US/Canada gives them much higher visibility compared to Aspire which trades in Sweden. I expect Aspire to get better visibility as it grows and I would expect it to move to a more “important” exchange soon.
From the numbers above, we can assume that, relative to its peers, Aspire is cheap. Hell, even on a standalone basis, Aspire is cheap. 15x FCF for a company that is growing revenue at 38% isn’t common.
Playtech also seems to be cheap. I’ve got to look at it as well to see what’s happening there.
Conclusion
As you might’ve noticed, I like what I’m seeing, but I’m still not there yet.
There’s so much going on with this industry that one needs to understand the other relevant players to fully understand each company. On the next week I’ll be looking at the expansion opportunities, the competition, risks, and I’ll be modelling the next few years for Aspire and try to come up with a fair estimate of where we could be seeing it in 3 or 4 years from now. In case you’re fed up with Aspire, the next week will be the last one, I hope.
And remember my offer. I will be offering one month worth of the All in Stocks subscription to the person who puts me in direct contact with an industry expert
DISCLAIMER
The material contained on this web-page is intended for informational purposes only and is neither an offer nor a recommendation to buy or sell any security. We disclaim any liability for loss, damage, cost or other expense which you might incur as a result of any information provided on this website. Always consult with a registered investment advisor or licensed stockbroker before investing. Please read All in Stock full Disclaimer.