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Business Owner's Checklist for Evolution AB
Some company metrics to track
It is vital for the owner of any business to track a consistent set of metrics through the years. It is not unusual for any company to be going through a “once in a century” environment at any point in time. What’s more, there always seem to be short-term sacrifices that managers ask the owners to bear for the sake of long-term returns that are surely just behind the horizon. Tracking some key indicators over a long time provides the ultimate litmus test to determine if the shareholders’ sacrifices were truly temporary and the leadership’s promises of returns were actually kept. Which metrics to follow and how much weight to put on them depend on the business in question as well as the investor’s approach and timeline.
While following Evolution AB for the last few years, my interests have led me to a few indicators that I found myself tracking across the quarters and years. My goal with them has been to be able to draw a qualitative story of the business from its financials. This list is not exhaustive and new questions often arise during research. Nevertheless, it is helpful to start with a limited number of essential metrics to keep track of.
Revenue growth (duh!)
Year-on-year and quarter-on-quarter
Sources of growth
Where did the new sales come from? Was it from Live or RNG? From Europe, Asia, North America or Others? Was it regulated or not?
→ Personnel expense as % of revenue
→ Sales vs Salary, per employee
Live Casino is a relatively personnel heavy operation. The resulting operational leverage means that squeezing extra revenue per headcount comes with incredible incremental margins. As an example, by doubling its sales per employee, Evolution raised its profit margin from 34% to a whopping 57% between 2018 and 2021.
→ Operating & profit margins on both quarterly and LTM basis
→ FCF margin on a yearly basis
Evolution has shown incremental earnings growth throughout its public existence despite gaming’s seasonality between winter and summer months. Therefore, I usually take last available quarterly earnings’s run-rate (i.e. 4 x quarterly EPS) as the current annual profitability.
Organic Investment Returns
→ Sales growth vs previous year’s CapEx
Evolution’s Live Casino investments usually have a quick turnaround time. It is not unusual for a studio expansion (and related headcount increase) to start producing sales within a year. Therefore, I like comparing a year’s organic sales growth (in Euros) to a previous year’s CapEx spend. This exercise doesn’t return precisely correct return numbers for a number of reasons, but can give a reasonable impression of the trends over multiple years.
→ Sales growth from acquisitions vs acquisition costs
Evolution has gone through quite an acquisition spree since 2020. Considering the agreed purchase prices never seemed like bargain-basement deep value deals (in fact, could be considered generous at up to 20x EBITDA), I prefer to assume the acquisitions were done at perfect fair values and focus on the growth in sales (and hopefully profits) that come from them in the following years.
Receivable collection time
→ Annual avg. days sales outstanding
This is simply a health check. It takes up to a month for Evolution to invoice its operator customers for the earned commission on player bets. After this revenue is recognized, collection of the receivable takes around 2 months.
→ Numbers & geographies of new hires
→ Game presenters (low pay, profit center) vs engineers (high pay, cost center, ideally a source of moat)
as % of revenue
Evolution has been paying extraordinarily low rates (5-7%) of corporate income taxes thanks to channeling revenues through its Malta subsidiary. New revenue sources in North America as well as the global minimum tax initiatives can be expected to double (or more?) these rates. This will create a pressure on company’s net profits that shareholders need to keep track of.
→ as % of revenue
→ SBC dilution effect %
Management’s “Play Money”
→ Cash + NTM OCF - NTM planned CapEx - Dividend reserve
Buybacks vs share price opportunities
Number of shares outstanding (diluted)
Evolution has kept a very conservative balance sheet and largely doesn’t use debt. Therefore, I don’t have a checklist item for the company’s solvency. Obviously, this absence will be rectified in case of a shift in company’s debt policy.
There are further important qualitative areas that are not directly covered by this checklist (but obviously affected indirectly in time). Having an up-to-date understanding of product innovations, competitive dynamics and the global regulatory environment requires more than just analyzing the company’s financials and is beyond the scope of this checklist.
This is not investment advice. The presented information may be inaccurate.
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