Business

Originally founded in Denmark, Better Collective is a digital media gaming company, that operates in Europe, North America, and South America. The company has a particular focus on sports media and e-Sports. Better Collective was founded in 2004 by Jesper Søgaard and Christian Kirk Rasmussen, who serve as CEO and COO today. Better Collective completed it’s first acquisition in 2006, when it acquired bettingexpert.com and entered a partnership with Bet365.

From 2011 to 2014, Better Collective entered it’s ‘Market Penetration’ phase and experienced a significant increase in revenue growth, going from a 15% to a 36% revenue CAGR, with this growth being entirely organic in nature.

From 2015 onwards, Better Collective entered it’s ‘Geographic roll-out’ phase. The company shifted focus to expanding to new geographic markets. Better Collective enjoyed a further acceleration in revenue growth, with a revenue CAGR for the period of 57%. Better Collective is still in the process of expanding to new geographic markets, having entered the United States in 2018 with the repeal of the PAPSA Act 1, and South America in 2022.

In 2018, Better Collective conducted an Initial Public offering and listed on the Oslo Børs. In 2019, Better Collective began earning revenue on ‘Paid Media’, a new business line that involves charging operators for preferential placement in their media properties.

The company has two Operating Segments, ‘Publishing Media’ and ‘Paid Media’, and two Geographic Segments, ‘Europe and Rest of World’ and ‘North America’.

Better Collective’s Publishing Media segment connects betting users (customers) with betting operators (e.g., bet365.com, Unibet.com) through digital offerings, such as betting tips or sign up sign up offers. This drives higher quality traffic to betting operators, which in turn, pay a fee to Better Collective.

Better Collectives Paid Media segment earns revenue by offering advantageous positions on their digital media properties, usually betting site aggregators, to betting operators.

The ‘Europe and Rest of World’ geographic segment is comprised of Europe and South America. Better Collective does not have a significant presence in Africa, the Middle East, Asia or Australia. Europe and Rest of World represent a more mature market for Better Collective, with slower growth, higher margins and contributes the majority of Better Collective’s EBITDA.

North America includes Canada and the United States. It is a more nascent market, with higher growth, lower margins, and with a greater proportion of revenue in this area currently being generated on a one-time basis.

Better Collective’s Publishing segment is a high growth, high margin segment. Publishing is poised to continue to grow as well as see meaningful margin improvement over the coming years. Better Collective owns and operates numerous sports media platforms as well as having multiple media partnerships in place. iGaming operators pay to fee to Better Collective when a New Depositing Customer (‘NDC’) is referred to their service through one of Better Collective’s content sites. This revenue may be one-time (‘CPA’, ‘Fixed Fees) or recurring in nature (‘Revenue Share’, ‘Subscription’) Publishing is Better Collective’s largest and most valuable segment, comprising 70% of Better Collective’s revenue and 84% of Better Collective’s Adj. EBITDA for FY2022. Publishing has experienced rapid growth. This is largely due to strong organic growth from their underlying assets, although a robust M&A program has bolstered this already impressive figure. Publishing has grown at a 42.4% CAGR since 2019. Publishing has both high EBITDA margins and high incremental margins. Publishing had 38.3% EBITDA margins in 2022, up from 28.7% in 2021.

Paid Media is a fast-growing segment with high incremental margins. The data collected on Paid Media advertising has applications for Better Collective’s Publishing Media Segment.

Better Collective offers betting operators the ability to pay in exchange for an advantageous position on their media properties, usually betting site aggregators.

Paid Media has grown from €2.69m in revenue in 2019 to €82.24m in revenue for 2022. Paid Media’s most recent quarter recorded 37.1% revenue growth Year-over-Year.

EBITDA margins have been inflecting upwards from 7.9% in 2021 to 16.3% in 2022. In addition, Better Collective’s most recent quarter had an Adj. EBITDA Margin of 31%. I estimate that Paid Media has incremental EBITDA margins in the low/mid 30% range.

The data collected by the Paid Media segment allows Better Collective to optimise advertising spend in other areas, which further drives value for Better Collective’s Publishing Media segment.

Better Collective’s M&A program has been highly accretive for shareholders, allowing the company to enter new markets, monetise previously underutilised channels, and realise synergies from owning media channels. M&A has been an integral part of the Better Collective story, with the company completing 30 acquisitions since its IPO in 2018. Since its inception, Better Collective has acquired local and global media groups, iGaming media groups, and media partnership companies. Going forward, Better Collective expects most of its acquisition activity to focus on Local and Global Sports Media but will continue to buy affiliate companies when available at an attractive price. The iGaming affiliate market is highly fragmented. Better Collective can continue deploying capital at high rates of return for years to come through its M&A program. Better Collective can realise significant synergies from owning and operating media channels in the gaming space, while also monetising a previously underutilised asset. For example, sports media often does not have a betting component, but does drive traffic to other sites which do, which Better Collective can capitalise on. Better Collective has used M&A to roll-up affiliates and sports media, conduct bolt-ons, and as a means of entry to new markets. As an example, it was the acquisition of the Atemi Group that allowed Better Collective to firmly establish itself in its ‘Paid Media’ segment. While M&A has been dilutive to the company, the value of the M&A has more than compensated for this dilution.

Management is aligned with shareholders. The CEO and COO own a meaningful percentage of the company and with other insiders owning a significant percentage of shares. Jesper Søgaard and Christian Kirk Rasmussen own 10,671,179 shares each, or 21,342,358 shares collectively. This corresponds to 38.7% ownership by the CEO and COO.

Other Executive Officers and Directors own 1,824,153 shares, bringing total insider ownership to 42%.

Despite shares more than tripling since Better Collective’s IPO in 2018, there has been only limited insider selling, and insider ownership remains high.

Better Collective has begun shifting to a recurring revenue model. This is a high-margin, fast growing revenue stream and deserves a higher multiple compared to one-time payments. Better Collective has begun shifting from a one-time fee model for referred users to a revenue share model that is recurring in nature. This is often overlooked due to the lagged nature of the revenue earned when a user is acquired under a revenue subscription model. There has been a significant increase in the proportion of new users who are under a revenue share model. In addition, a high proportion of new users in US, its fastest growing and potentially largest market, are under a recurring revenue model.

Industry

The online betting industry has seen high single digit growth in in Europe which is projected to continue for the foreseeable future. 2

In 2018, a decision handed down by the supreme court in in the case of “Murphy v. National Collegiate Athletic Association” lifted the federal ban on sports betting in the United States.

Better Collective has recently begun expansions into South America. It appointed its first South American CEO in Q1 2023 and has specifically cited Brazil as a high potential market for sports betting.

Gaming and online gaming is surprisingly recession resistant. A 2017 study examined the behaviour of gamblers in Iceland between 2007 and 2011. The study found that despite the severe economic downturn experienced in the country, individuals gambling habits remained largely unchanged. The only gaming category the experience a significant decrease in activity was Electronic Gaming Machines, to which Better Collective has no exposure. 3

Better Collective’s organic growth is currently in the high 20%/low 30% range, significantly above the industry average. In addition, management has guided to long term organic growth in the 20% range. I attribute this to Better Collective’s focus on the sports betting segment of the industry over the more commonly pursued Casino segment.

Competitive Advantages

Better Collective benefits from three identifiable competive advantages.

Economies of Scale

Better Collective enjoys economies of scale due to its large fixed cost base, smaller variable costs, and high incremental margins. A new competitor to the space would be at a disadvantage for years compared to Better Collective due to its need to achieve scale before reaching any level of supernormal profitability. Both of Better Collective's operating segments boast either high margins, or high incremental margins, which is evidence of economies of scale being present in the business.

Network Effects

As more users join Better Collective’s network of affiliates, Better Collective can collect better data on the habits of its users, what promotions are effective at targeting customers, and how best to generate traffic to their media properties.

Intangible Assets

Because of Better Collective’s diversified media holdings, they have access to a wide range of proprietary data that pure-play gaming operators or other gaming media companies do not. In addition, a hypothetical new competitor would be partially hamstrung by their lack of access to critical consumer behaviour data, which Better Collective has been accumulating for years.

Valuation

I estimate a 27.55% IRR if shares are purchased at their current price and held for five years using conservative assumptions. These assumptions are expanded upon below.

A link to the DCF and DCF notes in excel form can be found by clicking this link

I assume revenue grows at a CAGR of 26.2% from the end of 2022 to the end of 2028. This is below Better Collective’s historic growth rate, and roughly in line with their recent organic growth. If Better Collective can continue to execute on their M&A program, this may end up being conservative.

I assume EBITDA grows at a CAGR of 29.4% from the end of 2022 to the end of 2028. This is slightly below the lower bound of managements guided earnings of 30%-40% per year over the long term.

I assume operating margins begin inflecting upwards again as Better Collective leverages its scale, Paid Media margins begin to improve, and the costs associated with building out its AdTech platform normalise.

Better Collective has indicated that they believe that margins may begin inflecting upward as management has indicated they expect earnings to grow faster than revenue, which would point to improved margins.

Better Collective is currently trading at an Enterprise Value/EBITDA (TTM) multiple of 14.5x. I believe Better Collective can conservatively trade at an Enterprise Value/EBITDA multiple of 15x. Even underwriting modest multiple expansion, most of the returns generated from holding Better Collective stock comes from earnings growth.

Risks

Adverse regulation environment

Better Collective has benefitted from a recent favourable court rulings relating to the legalization of sports betting in key markets. If these court rulings were to be reversed, it would materially and adversely affect Better Collective’s financial performance.

While the possibility remains that these court decisions could be reversed, I view it as unlikely for two primary reasons

By legalising sports betting, the proverbial genie has been let out of the bottle. Reversing the decision would now involve individuals losing their jobs, and capex spent on gambling infrastructure becoming almost worthless overnight.

State governments that have opted to legalize sports gambling have enjoyed a new stream of tax dollars. I suspect that many local governments would be reluctant to give up this new source of funds.

Seasonality of Sports Gaming

There is a natural seasonality to sports betting due to the irregular nature of sports events. While Better Collective may experience short term volatility in revenue and earnings, over the medium to long term, the volatility should not be as pronounced.

Better Collective is exposed to key customer risk.

A single customer represents a significant portion of Better Collective’s revenue. There are two mitigants to this risk.

Better Collective’s key customer has represented smaller portion of revenue over time as Better Collective continues to experience organic growth and acquire affiliates.

Better Collective has begun shifting from a one-time revenue source (CPA) shift to revenue sharing model. This model is recurring in nature and subject to less volatility than one time revenue.