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3Q25 Update.
Evolution reported 3Q25 and the stock was down -7%.
For the first quarter ever, they reported a contraction in y/y revenue. Total revenues shrunk -2% y/y, driven by weak performance in Asia of -6% y/y and Europe of -7% y/y as their ring-fencing efforts continue in the EU.
The Asia revenue contraction was a surprise as they seemed confident that they were starting to get a grip on the issue last quarter with Asia revenues growing by +4% y/y after essentially being flat q/q for the previous 4 quarters.
As Martin noted last quarter, “when we take measures, we take away a little bit of revenue that is good revenue and a little bit of revenue that is not—that is criminal or stealing”. This quarter Evolutions claims they were too aggressive with their measures which caused the larger than expected contraction.
Martin also noted that the Philippines is volatile as operators and players adapt to the new legal frameworks. He also mentioned India is potentially moving towards regulation, which creates more uncertainty. However, he didn’t try to quantify how much of Asia were these secondary issues versus the cyber-attacks.
Europe was -7% y/y. This wasn’t surprising as their ring-fencing efforts are expected to be a drag for a full year from when they started in 1Q25. They mentioned that one of the largest EU regulators called out Evolution as the best B2B supplier in this regard. In our view, the EU revenue contraction isn’t as worrisome as it is defined when it should end and is more clearly self-inflicted. It also is prudent for a better long-term relationship with EU regulators. The UK probe though hasn’t concluded and while Evolution seems to be very proactive to address their concerns, it isn’t clear if they may fine them or ask for even more restrictions. On a sequential basis the EU did grow slightly at +1% q/q.
North America growth was good at +15% y/y and LatAm growth improved a bit from last quarter to +6% y/y. The opening of the Brazil studio was called a success, and their Ice Fishing game was well received. As it is a faster paced game show, they now believe there is an opportunity in what they are calling the “speed game show arena”.
One piece of good news was that growth returned to RNG with 3Q25 +4% y/y, an improvement from +0% y/y last Q. They created a new RNG studio called Sneaky Slots from scratch. Because of One-Stop Shop, which is their direct integration to aggregators and operators, they can push new game titles to all of their customers without having to separate integrate new brands. This is a key advantage versus other suppliers who do not have the same direct integration and may have to convince individual operators why it is worth the effort of installing a new integration.
EBITDA margins were 66.4%, on the lower end of their 66-68% full year EBITDA margin guidance. However, profits or costs aren’t really the problem, it’s the revenue growth trend. By and large this was a disappointing quarter and management commentary didn’t give investors much confidence there would be a change anytime soon in Asia.
Business Commentary.
In just a couple years Evolution has gone from a strong growth stock to a deep value one where the question has moved from how long they can grow 20%+ to whether single digit growth is achievable. This has been reflected in the stock which is down almost 65% from its April 2021 peak. While many investors may have considered their 2021 valuation of ~60x earnings to be excessive, their current TTM multiple of 11x assumes significant business contractions continue. While we address how much growth is priced in today in our reverse DCF below, we don’t need complex math to see that the market is pessimistic on Evolution.
There is some reason to be so too. Issues with the Asia market have been on-going for nearly two years and there isn’t any line of sight as to when it could end. The improvement last quarter suggested that the worst was behind them, but 3Q was not only a regression, but the worst Asia revenue contraction they ever reported. On the other hand, their explanation—that they got too aggressive with security measures, which resulted in a loss of “good” revenue—is plausible.
However, they frame this as meaning that the revenue contraction was partially self-inflicted, but the other implication is that they cannot eliminate the stolen streams without causing collateral damage. There isn’t any reason to think that this won’t continue to be the case in the future. This balance is similar to a credit card company deciding how aggressive they should be with fraud prevention. If they are too aggressive, they risk losing legitimate transactions. If they aren’t aggressive enough, they risk allowing fraudulent transactions to go through.
They are in a tricky situation because the illegality of gambling in most Asian countries means that there will not be any support from law enforcement. Additionally, as we noted in our last update that included AlphaSense expert call transcripts, it appears that it is their partners that are on occasion ripping them off in order to avoid paying commissions to Evolution. This puts them in a much stickier situation because one source is responsible for their good revenues, as well as stealing from them, making cutting them off completely a tough trade off. It makes sense why they are trying to find a technical solution to stop the stolen streams rather than just cut off bad actors completely.
The opaqueness of the Asian market as always been a risk. Evolution can honestly say that they are following the laws, but it still is true that most markets in Asia are black and any revenues derived from that geography often have some actor (usually the operator or player) breaking or bending the law. While this isn’t what is impacting Evolution directly, it is impacting them indirectly.
This is 1) because operators feel more brazen to steal from Evolution, knowing that law enforcement can’t defend them, and 2) since the operators are already breaking the law, they probably don’t have much to lose. However, despite the poor optics and unsavoriness, this doesn’t necessarily hurt Evolutions business. The operators who do not follow the law and get caught tend to disappear and reappear quickly. Evolution does not work with operators who operate illegally, but they sell games to aggregators who might. It is also possible for an operator to have a legal operation and an illegal operation. (It is common for operators to operate under international licenses and players to VPN in).
In an AlphaSense expert call interview, a Playtech Managing Director in Asia, noted that perhaps 60-70% of all of Asia revenue comes from Korea. While it is unclear how he would know this (especially since a lot of gaming revenue in Asia is unregulated), we have heard from other AlphaSense expert calls that Korea is one of their largest markets next to Japan.
Similar to as we described above, an operator will get the game from a supplier who resells it. In some cases, it sounds like there can be several layers of resellers that each mark the game up. As we mentioned, the customer is also often the one who is ripping off Evolution’s feeds. This makes cutting them off exponentially more complicated as commission-generating revenue is comingled with stolen revenues. In this context it makes sense that they could have been too aggressive cutting off stolen feeds not realizing the impact it would have on “good” revenues from that same customer.
The other aspect of this is the leverage it leaves with the operator since Evolution cannot full cut them off without self-inflicting harm to themselves. Furthermore though, this expert alleged that Pragmatic had aggressively entered the market and offered steep discounts (including no commissions initially) to gain share from Evolution. While operators having a second option other than Evolution does limit Evolution’s leverage in the relationship, it is telling that Pragmatic had to go to literally free to win share.
However, this narrative of the only players being Evolution and Pragmatic doesn’t jive with our prior research. We never previously considered Evolution to be dominant in Asia and considered it a much more competitive market. It is a little odd that this manager is framing competition as a being just between these three in Live Casino providers, similar to how it is in Europe. Also, for what it’s worth, our understanding is that Pragmatic’s product is far better than Playtech’s. Given that this is a Playtech manager and Playtech was just named as being the one behind the Black Cube report that alleged significant illegal activity, everything said should be taken with a degree of skepticism.
Nevertheless, this all does present a new risk for why Asia is struggling. As Asian markets like Korea and Japan clamped down on online gambling activity, they targeted financial institutions since it is easier to go after the financial institutions than the operators. This raised the transaction costs for players to move money in these markets (with cash or crypto according to this expert). Below the expert notes that as transactions costs went up, the operators’ margins got pressured. The operators in turn were more willing to rip off their supplier to make up some of the difference as their business came under pressure.
The reason why this is a new perspective of what is going on in Asia is because it suggests that the structural economics of the operators came under pressure and now it is hard for them to make a decent margin. This is likely a permanent result of the clamp down on gambling activity. The increased cost of transacting made all operators less profitable and thus the commission suppliers like Evolution were charging was too high for them to handle.
Now in Evolution’s other markets, operators complain about their margins too, but in this case the operator can simply decide to cheat Evolution—and many have decided to do that. In order for Evolution to take their full commission, they basically have to get operators to accept that their businesses will forever be a lower margin business—all the while in the operators’ eyes, they are the ones taking all of the risks.
While no doubt this is an unsavory aspect of the business—and many investors understandably don’t want to be involved with this—but at the end of the day, gaming rules vary by jurisdiction and Evolutions operates within the letter of the law… even if they do benefit from the law having gaps globally.
In terms of when the situation can turn around, it isn’t clear. On the other hand, their regulated revenues continue to increase. While we wouldn’t advise this, it is interesting to think what would happen if they stepped out of Asia entirely. Asia is about 37% of revenues, but the vast majority of unregulated revenues and negative optics. Since this is a more competitive market with lower take-rates, it is likely that their margins here are lower. However, even assuming the same margin as the total company and losing all of these earnings, their multiple would only jump from 11x to 18x. How would investors value this business without any of the Asia issues? It wouldn’t be wild to think that the regulated business would get a higher multiple, especially after they lap the EU ring-fencing and return to growth there.
Again, we don’t mean to suggest they should do this but just want to explore one potential worst case downside scenario to help elucidate just how negative the developments have to be to support the current valuation. An investor will ultimately have to decide how comfortable they are holding through their attempts to reinvigorate the Asia business and whether it will be a long-term stain to the company, even if it is a profitable business. On the other hand, the situation could also improve next quarter, and this could prove to be the trough of the Asia business.
Turning to their other markets, there isn’t much new to add. The EU will continue to suffer the ring-fencing headwind for another 2 quarters, and the UK still hasn’t said that Evolution has satisfactorily resolved their complaints (but it seems more likely than not that their actions have addressed their complaints). After the ring-fencing is complete, they should return to growth there.
North America and LatAm continue to be bright spots as more gaming activity is legalized and competitors are at a big disadvantage to Evolution. To better understand what is priced in though, we turn to our reverse DCF.
Valuation.
Below we update our reverse DCF for a lower growth rate and stock price.
We decided to lower the growth rates because it is usually easier to assume a more conservative growth rate and have high confidence in the lower range of the returns than argue about how good it could be. If more conservative growth scenarios are attractive, then higher growth scenarios certainly would be. Of course, it is on each investor to decide what they are comfortable assuming and whether the risk in any assumption is worth the upside.
Below we see the reverse DCF outputs at the current market cap of $15bn. At a 0% growth rate and the middle-margin scenario, Evolution is earning about what the stock market has historically. Said differently, we could say the market is pricing in close to 0% growth. If an investor believes that they could return to high single to low double digit revenue growth then they may find this to be a very attractive risk/ reward. However, there is also the risk that the Asia business continues to contract and it takes a while for regulated revenues to outgrow that headwind.
Call and Press Release Notes
Buybacks
- “In total, we invested EUR 187 million and bought back 2.5 million shares. In total, we have now used EUR 406.5 million of this year’s mandate from the Board of EUR 500 million. And following the release of the Q3 report today, we’ll be back in the market with an aim to use the full mandate before the year ends.”
Cash Flow
- “Our operating cash flow after investments amounted to EUR 342.1 million in the quarter, which corresponds to a cash conversion of 83%. With that, we are back on track after a seasonally and unusually weak second quarter. The change in working capital was positive EUR 35.2 million this quarter, meaning a swing back from the weaker number last quarter,”
Europe
- “Europe is back to growth quarter-on-quarter. In the second quarter, we saw the full effects from our ring-fencing measures which provided a new baseline to grow from. Despite a summer without any major sports events, we saw good momentum even in the more mature regulated markets compared to the first part of the year.”
North America
- “North America continues to deliver two-digit growth year-on-year but a more modest increase quarter-on-quarter. We saw strong investments from our customers in the quarter, with several larger dedicated studio environments going live across both the USA and Canada”
India
- “We are watching it closely right now, and there are volatility in India, as you understand. At the time, if there would be a ring fencing, that will be later down the road.”
Game Releases
- “More than 110 new releases. Within Live, during the third quarter, we launched the highly anticipated Ice Fishing, which is our first-ever speed game show. Reception has been excellent across our markets.”
- On the RNG side, a total of 22 new titles were launched including Gator Hunters, a direct sequel to the massively successful Duck Hunters
- “We are doing better and better, slowly, bit by bit when it comes to our RNG offering.”
Headcount
- “On headcount, we are growing 4.2% on a year-on-year basis, but we have actually decreased 2.7% quarter-on-quarter. The slowdown is, to some extent, reflected in the revenue. We don’t hire unless we grow, but looking at recruitment base within full year, there are sometimes fluctuation based on temporarily slower high pace in recruitment.”
As a reminder, we named our research firm Speedwell after the ship that helped ferry passengers to the Mayflower. The idea is that we want to help you take your journey, but ultimately you are on your own in the decisions you make. An investor must judge for themselves whether they believe these returns are worth the potential risks that could materialize with Evolution.
*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.