(Members can access a PDF of this post here)
1Q26 Financials.
Evolution reported 1Q26 and the stock was down -2%.
Reported revenues were -1.5% y/y, but grew +6.8% in constant currency.
They noted that Asia grew q/q for the second consecutive quarter as they made progress against Asia’s cybercrime. Asia grew +2.2% q/q, but is still down -2% y/y.
North America grew 10% y/y in Euros, but was adversely impacted by forex. In local currency North America grew 21% y/y.
LatAm was also strong, growing +29% y/y.
Europe was the biggest disappointment, which was down -12% y/y. The cause of this is two-fold. The smaller factor is their ring fencing effort, which increases some friction to play and potentially bounces out some legal players—but also eliminants players who were playing in these jurisdictions illegally.
The bigger cause of Europe’s weakness stems from strict regulations that are pushing players out of the legal market—and with Evolution’s ring-fencing effort, they are effectively ensuring they are no longer invertedly participating in the black market in Europe. Examples of strict regulation include monthly deposit limits, low max bets on slots, and 5-second delays between spins. Furthermore, high taxes have resulted in gaming operators adjusting the RTP (return to player) downward, which means illegal sites have better payouts.
With poor results from Europe, Evolution reported total Live revenue -3% y/y at €435mn, which is the second quarter ever where Live revenues were down sequentially.
RNG had a better quarter, +8% y/y.
Business Commentary.
While the business is growing in mid-single digits even in the face of two massive headwinds, investors are not going to be enthused that the European market is now also a troublesome market with no clear line of sight as to when that could reverse.
The crux of the European market’s issue is that players are being pushed to play illegally because the gaming experience is better—players can bet as much as they want and the odds are better. It would be very challenging if not impossible to make a game so good to win those players back. Thus, the only way this trend really reverses is if Europe either lightens their regulations to bring players back to the legal market, or if they are successful with shutting down illegal operators.
Looking at the Asian market we can see how hard it is to shut down illegal operators—as soon as one is shut down, another pops up. Furthermore, if Europe was successful with clamping down on illegal gaming operators, then we would also expect Asia would be able to do it too (which would of course be bad for Evolution).
The problem with Europe is that outside of the UK, regulators do not seem interested in lightening regulations to draw players back into the legal market. It can take years before they realize that their policies have been a fumble to protect players and give up on trying to squash illegal operators and instead roll back player protections and taxes.
Evolution can (and does) have the best games, but they simply cannot compete against a competitor who doesn’t have to follow all of the various gambling regulations and can offer better odds because they skirt taxes.
There is no timeframe as to when his could reverse—and it looks like it got worse this quarter with Europe losing €11mn q/q, the most this market has been down in a single quarter outside of the first quarter when they initiated the ring-fencing effort.
On a slightly more positive note, Asia is trending in the right direction with revenues increasing for the second consecutive quarter. Management offered cautious commentary around extrapolating out this trend as they are fearful a new technique by the cybercriminals could set back their progress—but so far it looks good.
The North America and LatAm markets are working really well for them and are likely to continue to support the company’s growth for the foreseeable future.
EBIT Margins have been slightly pressured at 57%, down 130bps y/y as they lost some operating leverage from the revenue decrease and had a slight increase in D&A from their recent studio buildouts.
Valuation.
If terms of valuation, their ADR EVVTY is currently trading at $68. This year’s revenue growth could be positive, especially if forex stops working against Evolution, but we will just assume flat revenue growth and earnings from their trailing 12 months.
Looking at just TTM EPS of €5.01, that translates to about a 11.5x earnings multiple at today’s exchange rates. This translates to an 8.6% earnings yield, which they could return almost all of which to investors. For now, though, they have paused dividends and have yet to announce new capital actions (most investors are expecting a large buyback).
Even if Evolution can just consistently grow low single digits, an investor would be able to pencil out a 10%+ return. With a mid to high single digit growth rate, that return could jump to mid to high teens. On the other hand, it is also possible that they continue to bleed market share in Europe for some time as regulators are slow to change their focus. It also isn’t out of the realm of possibility that Asia reverts to a headwind as cybercriminals make new advancements.
*At the time of this writing, one or more contributors to this report has a position in EVO. Furthermore, accounts one or more contributors advise on may also have a position in EVO. This may change without notice.