Telematic Interactive 2024 Q1 review

• Telematic Interactive Bulgaria AD reported 2% revenue growth for Q1 YoY reaching BGN 30.7mln. Casino revenues take the lion’s share of BGN 27.1mln or 88.4% of the total after a 7.7% YoY growth. Sports-betting reached BGN 2.3mln, which marked an increase of 1.3%. The main contributor to this is the new bonus programs and promotions, which significantly increased the number of new registrations and more than doubled the conversion rate. Still, this line accounts for 7.7% of the operational revenues.
• The remaining 4% is revenues from providing gaming content to B2B customers, which dropped by 11%.
• The main reason behind the increasing revenues is the increased monthly average active clients as well as the average income per client. The new CRM system, as well as staff training towards a more individually targeted approach, has led to a 4.2% increase in active clients, to reach a total of 99,145 per month. The average income per client has gone up by 2.5% The conversion rate has increased to 68% and the churn rate is at 13%, which is an increase from previous periods. The reason for that is that a large portion of the newly attracted clients seem to be less active, which leads to many leaving the platform.
• OPEX increased proportionately a notch more than sales – by 22.4% to BGN 26.3mln. The largest contributor is External services, which increased by 25.2% to BGN 15.9 mln but represents 66.7% of OPEX. In that, the 3 largest sub accounts, responsible for nearly 85% of the account value are Marketing, which increased 27.4% to BGN 5.9 mln (37.6% of OPEX), Fees for gaming content, which increased over 29% to BGN 4.6 mln (34% of OPEX) and Payments services, which increased 18% to BGN 2.9% (18% 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 growth in the account is associated with the one-off expense for the new gaming platform in second half of 2023 and the expenses needed for the expansion in Macedonia and Peru.
• In 2023 the company distributed dividends twice – 11.07.2023 for BGN 1 per share and on 28.12.2023 for BGN 0.40 per share. On 28.12.2023 that represented a total dividend yield of 9.39% and 78.47% dividend payout ratio (2022 earnings). In 2024 the company distributed dividends on 21.03.2023 for BGN 0.39 and on 13.06.2024 for BGN 0.9. On that day, that represented a total dividend yield of 8.16% and 80.1% dividend payout ratio (2023 earnings).

Commentary 

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

Telematic has been a stellar performer regarding profitability since its listing in 2022. The signs of market saturation, however, have been around for around a year and the performance in Q3 2023 showed a noticeable drop in revenue growth when it decreased from its above 22.5% levels to 17.3%. Profitability decline needed another quarter to show on the financials when Operating margin decreased from 24-25% to 22% and Net Margin from 21-23% to 19%. Q1 2024 additionally confirmed and increased the trends when Revenue growth took a severe hit to 6.2% and Operating margin and Net margin dropped to 15% and 13% respectively.

It is understood that revenue growth cannot be increasing indefinitely, and this becomes even more apparent in smaller markets like Bulgaria with population of 6.5 million. Once the growth flattens, the only way for the company to maintain or improve profitability would be to optimize its cost structure. That, however, is limited in nature and hides the risks of adverse events hindering this process. At that point the company becomes essentially fully dependent on outside events, rather than management decisions, dictating the performance of the organization. As such, the company can offer attractive investment opportunity primarily due to its dividend policy rather than the opportunity for capital gain. It is a very tricky situation and while this can be tolerated for some time at large corporations with various lines of business, it can prove very dangerous for businesses with a single line of business on a single geographical market. Telematic Interactive is not there, so we should not be concerned at this point, but the warning signs have started to appear.

Their investments in the CRM system clearly show the need to optimize costs and increase efficiency. Cost optimization, however important, is a tactical move. Telematic needs to make strategic moves and strike with great intent.

New geographical markets

Since the expansion in Ukraine proved impossible due to the conflict, the focus of the investors was on the other location – Peru – as Plan B as the company could expand to a comparable to Bulgaria market (total disposable income in Peru is about 3x that in Bulgaria depending on ways of calculation and data sources). Similarly, total disposable income for Macedonia is about 20% that of Bulgaria. If we consider the 2023 TIB results and make the assumption that Peru and Macedonia can be utilized in the same way, it would mean that total revenue can reach BGN 530mln (from BGN 118mln existing), indicating the opportunity for a 350% growth. Added benefit for Peru is that it can serve as the gateway to other South American countries.

We believe that it would be very interesting for investors to see greater effort specifically in South America.

New business lines

As mentioned earlier, the largest portion of the revenues is from casino games – nearly 90% come from that. The other business line, which they have been trying to develop, is sports betting, which, however amounts to less than 8% of the revenues. Even if both businesses involve bets on unknown future events, they are fundamentally different as organization of the process. Casino games involve more or less predetermined probabilities and even if predictions for the outcomes of a small sample, i.e. single or a few bettors, can involve a large statistical error thus large differences in the expected costs, that is not the case with large samples, i.e. thousands or millions of bets. The total outcomes and profitability can be predicted with acceptable degrees of certainty.

Sports betting involves much greater degree of uncertainty for the casino as the events, based on which bets are made, are highly unpredictable. The first channel to influence income and cost is through establishing the odds. The problem is that those odds cannot be much different than the market as it would create large arbitrage opportunities for players. The other way of control is via a very strict and efficient client program. As usual, beneficial clients should be encouraged. However, the plethora of online betting platforms has created the fraud risk significantly. Because of this, rogue players can create liabilities for the casino very quickly, which is why all the successful sports betting houses have very talented teams, which detect fraudulent deposit, betting and withdrawal patterns and monitor closely client interactions. Additionally, a rogue player can have expectancy about the odds and use the casino for money laundering purposes. As a result, the skillset of employees for casino games vs sports betting is very different and the latter requires greater investment in human capital.

It is likely that this is the reason why Telematic has not invested more in this line of business. Undoubtedly, this is a harder way to do business in the gambling sector, but the rise of many of the sports betting companies around the world has shown that this business can indeed be very profitable and covers a demographic, which is very different than casino games clients, i.e. the chance of cannibalizing of revenues is little.

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. The transparency is commendable and top notch and the dividends they distribute make this one of the best picks when shortlisting secure high-dividend yield stocks.

Full report can be accessed here.