Compliance focus slows LeoVegas growth in third quarter

Compliance focus slows LeoVegas growth in third quarter

Thursday, November 8, 2018 Posted by News Team
CEO Hagman explains compliance and technology development has eaten up resources

LeoVegas chief executive Gustaf Hagman has admitted that he is unsatisfied with the company’s third quarter performance despite the business seeing revenue grow 41% year-on-year during the period. 

Revenue for the three months ended September 30th grew to €78.6m, with €10.8m of the total coming from its Royal Panda subsidiary and a further €9.5m coming from the UK-facing Rocket X business. Organic growth in local currency was 7.5%, though this would have almost doubled to 14% if markets closed in 2017 such as Australia, the Czech Republic and Slovakia were excluded. Customer deposits totalled €253.4m, up 31% year-on-year.

The company described the UK market as “challenging”, with player value falling as a result of player protection controls introduced. 

Currently LeoVegas generates 35.3% of revenue from regulated markets, with this share set to rise to around 60% once Sweden re-regulates its gaming market in January 2019.

Despite this growth Hagman described Q3 2018 as “a quarter of transition” for the business. 

During the period, he said, LeoVegas focused on measures to strengthen its responsible gaming and anti-money laundering processes, including extended source of income routines to review customers’ financial situations.

These compliance measures had slowed the company’s short-term growth in its core UK and Swedish markets, Hagman said. However, he described them as necessary, and that they would give the business a major competitive advantage in the long-term.

The company also invested in its platform during the period, with the launch of a new front-end platform, improving its search engine optimisation, allowing it to connect directly to customers via online searches rather than going through affiliate sites. This had already boosted organic traffic to LeoVegas’ site, allowing the business to be less dependent on third-party marketing partners and ultimately improving profitability.

Cost of sales climbed 42% to €14.7m, with gaming duties up 81% to €7.3m, resulting in a gross profit of €56.4m for the quarter, a 37% increase from Q3 2017. 

LeoVegas also reported growth in personnel costs, which almost doubled to €10.5m, with marketing expenses rising 24% to €28.0m, and other operating expenses up to €10.1m. Earnings before interest, tax, deprecation and amortisation for the period rose to €9.0m. 

However operating profit fell 49% to €3.5m, though financial liability fair value gains of €10.1m helped offset this decline, and the company’s net profit for the period was up 98% at €12.8m. 

“Despite the important improvement efforts, we are not satisfied with our growth or profitability during the third quarter,” Hagman said.

“Our work with compliance has mainly affected our near-term growth in our two largest markets, the UK and Sweden,” he explained. “As a consequence of this shift we saw a drop in the average player value, which we have not been able to mitigate in the short term by a new record number of depositing customers during the quarter. 

“The second factor that has made a significant impact is the large projects we began during the second quarter. We will see the effects of these first in the longer term, while they have also locked up resources that we have not been able to use for other growth initiatives.”

For the first nine months of 2018, revenue was up 63% to €243.3m, with EBITDA for the period up to €33.5m and net profit climbing 27% to €21.1m. 

Despite Hagman’s dissatisfaction with LeoVegas’ Q3 performance, he noted that the company had recently launched a number of initiatives focused on improving product and customer experience, which he said would boost revenue and profit.

“The results of this work have been confirmed by positive customer KPIs during the start of the fourth quarter. This, in turn, bodes well for a return to higher growth figures going forward,” he said. 

For the fourth quarter, net gaming revenue for October amounted to €26.6m, with the company launching the bingo brand in the UK market. Brand surveys conducted by customer research specialist Mantab Global also revealed that LeoVegas was Sweden’s best-known and most appreciated online casino brand, which the operator said bodes well for its future prospects in the country.


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