Redeye updates on Better Collective following preliminary Q3-results which were significantly weaker than expected. The company has also updated its financial guidance for 2024 which suggests continued soft performance in Q4, where the main negative impact seems to be driven by the US market. While the company also launches a cost savings program, the near-term growth outlook has weakened, and we lower our 2024-26E EBITDA by 19-20%.

Better Collective's preliminary results for Q3 2024E indicate revenue coming in at EUR81m and EBITDA at EUR22m (EBITDA margin of 27%). This is significantly lower than Redeye’s forecasts, where we expected revenue of EUR103m and EBITDA of EUR32m (EBITDA margin of 31%). The company states that the soft performance is mainly due to lower-than-expected activity from US partners, while it also sees a continued slowdown in Brazil ahead of regulation. While the company sees continued strong long-term growth potential in both markets, the near-term outlook is soft. As such, the company also lowers its 2024E guidance, where it now expects topline of EUR355m-375m (previous EUR395m-425m) and EBITDA of EUR100m-110m (previous EUR130m-140m).

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Better Collective

* Operates in a fragmented market with numerous competitors, potentially limiting market dominance.
* Indirect exposure to regulatory risks through customers in the gambling industry.
* Dependence on key individuals (CEO and COO) for continued success.
* Products do not significantly contribute to the greater good, primarily serving recreational purposes.
* Potential ethical concerns associated with the sports betting industry.

* Strong recurring revenue base (60%) with potential for growth, enhancing business stability and predictability.
* Successful geographic expansion from Nordics to Europe, North America and South America, demonstrating adaptability and growth potential.
* High ROIC and operating leverage, with strong margins and efficient capital allocation.
* Robust competitive advantage through strong assets and scale, likely to improve over time.
* Diversified revenue base and limited correlation with economic cycles, providing operational stability.

* Lack of consistent operating margin growth over three consecutive years, potentially indicating challenges in cost management or operational efficiency.
* Return on Equity (ROE) and Return on Assets (ROA) performance below desired thresholds, but this is partly explained by acquisitions.
* Absence of dividend payments, limiting appeal for income-focused investors. However, given M&A potential, we believe it makes sense to allocate capital to acquisitions rather than dividends.

* Strong profitability with gross profit margin exceeding 40% and operating margin above 20%, indicating pricing power and competitive advantage.
* Consistent revenue growth outperforming industry average over the last five years, signaling market share gains and competitive strength.
* Solid financial health with current assets 1.5 times greater than current liabilities, low debt levels, and strong interest coverage.
* Excellent earnings quality demonstrated by efficient inventory management, effective accounts receivable collection, and high operating and free cash flow conversion rates.

* Lack of dividend payouts, as all profits are reinvested in the business, which may not appeal to income-focused investors.
* Limited board ownership, with only three of eight board members holding sizeable personal stakes, potentially reducing alignment with shareholder interests.
* Limited female representation in leadership, with the company still working towards its target of 35% female employees (currently at 31%).

* Strong founder-led leadership with CEO Jesper Sögard demonstrating visionary thinking, industry expertise, and a commitment to long-term value creation.
* Decentralized organization with a lean structure, promoting accountability and adaptability, supported by consistent delivery on promises and strategic goals.
* Effective capital allocation, including well-timed acquisitions and share issuances, with a focus on generating attractive returns on investments.
* Transparent and timely investor communication, with management being candid about challenges and maintaining consistent long-term objectives.
* Significant insider ownership, with CEO and COO holding approximately 34% of shares, aligning management interests with shareholders.

EURm	2022	2023	2024e	2025e	2026e
Revenues	269.3	326.7	363.2	383.4	438.4
Revenue Growth	52.1%	21.3%	11.2%	5.6%	14.4%
EBITDA	85.1	111.1	104.1	128.4	153.9
EBIT	70.4	82.8	64.5	87.6	112.6
EBIT Margin	26.2%	25.4%	17.8%	22.9%	25.7%
Net Income	48.1	39.8	33.0	59.7	84.5
EV/Sales	3.6	4.9	2.6	2.2	1.7
EV/EBITDA	11.5	14.5	9.1	6.7	4.8
EV/EBIT	13.9	19.5	14.8	9.8	6.6

Key financials

Weak Q3-results and lowered guidance

2024-26E EBITDA estimates down 19-20%