Telematic Interactive 2023 Q3 review

• Telematic Interactive Bulgaria AD reported 3% revenue growth for Q3 YoY reaching BGN 86.4mln. Casino revenues take the lion’s share of BGN 76.9mln or 89.1% of the total after an impressive 20.9% YoY growth. Sports-betting reached BGN 5.3mln, which marked a decline of 19.3%, but that was due to the migration to a new sports-betting platform in Q2 and Q3. The new platform has better functionalities and is expected to have a positive role in growing this business in the future. Still, this line accounts for 3.5% of the operational revenues.
• The remaining 4.7% is revenues from providing gaming content to B2B customers, which grew at 29%. The significant jump of this business line is explained by its comparatively small size, but the company has strong expectations for its potential. This account also makes the major difference between the individual and consolidated revenues.
• The main reason behind the increasing revenues is the increased monthly average active clients. The new CRM system, as well as staff training towards a more individually targeted approach, has lead to a 22% increase in this metric, to reach a total of 90,109 active clients per month. The conversion rate has stayed at the previously reported levels of 35% and the churn rate still stays at impressive for the industry levels of 4%.
• OPEX increased proportionately a notch more than sales – by 22.4% to BGN 66.6mln. The largest contributor is External services, which increased by 21.8% to BGN 40 mln but represents nearly 60% of OPEX. In that, the 3 largest sub accounts, responsible for nearly 90% of the account value are Marketing, which increased 15.2% to BGN 14 mln (35% of OPEX), Fees for gaming content, which increased over 29% to BGN 13.7 mln (34% of OPEX) and Payments services, which increased 13% to BGN 7.9% (20% of OPEX).
• External services is the account showing the expense made to provide gaming content. The company uses gaming content by external suppliers, where the compensation is based on revenue share. The larger growth of this account (compared to total revenues) is due to the one-off expense in Q3 associated to the migration to the new gaming platform.
• The lesser increase in marketing expense for the 9 months (compared to total revenues) is due to the strong marketing campaign, which was conducted in Q1 and the seasonally slower Q2.
• On the shareholder meeting on 19.12.2023 the decision to distribute a second dividend in 2023 was made – BGN 0.40 per share for a total amount of BGN 5.2 mln.

Commentary:

Currently, the company shows outstanding performance by industry standards, but there are a few warning signs we should be aware of when looking forward.

It is visible that sales growth has decreased its pace and is reaching a plateau – even though total revenues for the 9 months increased by 17.6%, the Q3 2023 on Q3 2022 results for the 3 months show increased just 12.2%. Additionally, the conversion rate dropped from 38% to 35% YoY and the churn rate increased from 2% to 4% YoY (but for the 3 months of Q3 2022 it was 1%, while in 2023 it was 5%). It is clear that Telematic Interactive is getting into a more mature phase of its development and the decisions to implement a more effective CRM system and new gambling games, which limit the loss for the casino, show that. These are tactical decisions as any decision pertaining to efficiency is tactical. Taking those steps is essential to keep their position in the existing market and remain profitable in the longer run – steps that no shareholder would disagree with.

However, the clarity over the strategic steps seems to have diminished. In their case, strategic steps would be getting into new markets or opening new lines of business, each one of which has the potential to be a game changer. Prior to the IPO, the plans were to use the vast market of Ukraine as a second step for their expansion. Because of the war there, that did not materialize and Peru was chosen as their Plan B as the company could expand to a comparable market to Bulgaria (total disposable income in Peru is 1.5-2.3 times that in Bulgaria depending on way of calculation and data sources) and to get access to large portions of Latin America.

Telematic Interactive is very open about their financial results, where they describe every metric very diligently – a feature that is not common in all listed companies in Bulgaria and for that they should be praised. The news for the work with regards to Peru, however, seem to be somewhat limited.

Additionally, the announcement on 14.12.2023 that they had signed a contract with a company in North Macedonia to start operations there seems to show that the focus is going into a less important direction – even if the operations develop perfectly in the next years, due to the 50% ownership and the size of the market, this venture can hardly offer 10% upside to the operations in Bulgaria.

We should not forget, however, that despite everything, Telematic Interactive is a superior investment. The steps towards efficiency have eroded part of the EBITDA and the Net Margin, but still the company remains a cash rich enterprise with very low debt, operating at more than 21% margin – a feat very few businesses can show. Additionally, the dividends they distribute make this one of the best picks when shortlisting secure high-dividend yield stocks. The transparency, as mentioned earlier, is commendable and top notch. In this sense, it would be very positive to see the management focus again on a step that could be a game changer as it has shown that it knows how to do gaming and has attracted decent amount of interest through shareholders, who believe in their ability.

Full report can be accessed here.