Description

The writer of this document, related persons, and / or entities ("Writer") currently holds a long position in this security. The Writer makes no representation that they will continue to hold positions in the securities of the issuer. The Writer is likely to buy or sell securities of this issuer and makes no representation or undertaking that Writer will inform the reader or anyone else prior to or after making such transactions. While the Writer has tried to present facts it believes are accurate, the Writer makes no representation as to the accuracy or completeness of any information contained in this document and disclaims any obligation to update such information. The views expressed in this document are the opinion of the Writer, which may change at any time – This document should not be construed as a recommendation to buy or sell any security. Any person who reads this document (“Reader”) agrees not to invest based on this document and to perform his or her own due diligence and research before taking a position in securities of the issuer. Reader agrees to hold Writer harmless and hereby waives any causes of action against Writer related to this document.

I am long shares of Kambi (“Kambi” or the “Company”) because I believe (i) the Company is worth over 170 – 200 SEK / share today – This represents a 20% - 32% margin of safety to the current share price of ~136 SEK, (ii) if I am wrong about this, I think Kambi is its growing intrinsic value and will still be worth at least 200 SEK / share (likely closer to 250 SEK / share) over the next 2 – 4 years, which would generate a mid-teens IRR or higher from the current share price, and (iii) that several free options / catalysts (some of which I believe are inevitable) are not priced into the stock and could drive returns substantially higher (20%+ IRR). Multiple expansion is also a lever that could drive further returns.

Despite (i) the Company having the #1 market position in the outsourced sportsbook software market, which has high barriers-to-entry and likely ~20 years of secular growth ahead of it and (ii) the Company’s track record of capital efficiency and prudent capital allocation (ROEs of 15% - 40% every year since 2015), Kambi shares trade for less than 4.8x 2024E consensus EBITDA (~8% forward normalized FCFE yield). I think this is simply too cheap for a high quality, rapidly growing business, with good management that has high barriers-to-entry and benefits from secular growth tailwinds. Kambi’s main competitor (Open Bet) was acquired by Endeavor (NYSE: EDR) in 2021 for ~6.8x revenue – Applying this multiple to Kambi would result in ~3.2x (~320%) upside from today’s price (I don’t think Kambi is worth ~6.8x revenue, but if Kambi is worth just half of this multiple, then shares are substantially undervalued today). My write-up focuses on Kambi’s qualitative characteristics because I think that is where my thesis mostly differs from the market’s perception – I think the business quality and the very long runway of highly profitable and capital efficient growth are underappreciated by the market.

I believe this opportunity exists because:

• Kambi’s long growth runway (at high incremental margins) and moat are misunderstood.
  • Market sentiment regarding in-sourcing and vertical integration by gaming operators is overly one-sided and I believe this will change over the next several years.
  • Three large and high profile Kambi’s customers (one being DraftKings) ended their supplier relationship with Kambi over the past three years.
• Kambi is an orphaned, small cap stock that has sparse sell-side coverage.
  • Kambi generates most of its revenue in the United States, reports its financials in Euros, is listed in Sweden, and is headquartered in Malta for legal / regulatory purposes (Sweden is the company’s operational headquarters, where the executive team sits).
  • Kambi’s last earnings call attracted only two sell-side analysts (both Scandinavian banks).
• Kambi’s financial results can be difficult to model for short to medium-term oriented investors.
  • New contract wins can be large relative to the current size of the Company.
  • Revenue is seasonal, based on the sporting calendar (not only what sports are in-season, but also due to major, intermittent sporting events like the Winter / Summer Olympics and World Cup).
  • As mentioned before there have been several large contract losses in the recent past (DraftKings and Kindred each accounted for ~40% of Kambi’s revenue when the end of the partnerships were announced).
• Furthermore, I think Kambi suffers from becoming extraordinarily overvalued during the COVID and modern monetary theory (MMT) experiment that was run from 2020 – 2021 (Kambi was a constituent of the “BETZ” ETF that many meme stock people enjoyed speculating on), when Kambi shares reached a peak of almost 500 SEK / share. Stocks that have experienced extraordinary booms, busts, and bouts of volatility often dissuade future investors from becoming involved. Many marginal buyers / investors that have “been burned” in the past will avoid a company or an entire industry in which they made a poor investment in the past (in my experience, most people learn the wrong lesson from their mistakes).

I think that Kambi is a software investment that even the most hardcore value investor can love. The management team and business characteristics are both underappreciated and run counter to the hype train that seems to drive most software and iGaming stocks:

• Concentrated on profitability and ROIC rather than growth at all costs.
  • Consistently profitable and capital efficient business.
• Not a serial acquirer or leverage junky.
  • Kambi has made only two acquisitions over the past decade.
  • Zero funded debt; net cash position comprises ~15% of market cap (Fort Knox baby!).
• Not a serial share diluter / or abuser of stock-based comp.
  • Weighted average shares outstanding have increased less than 2% over the past 5 years.
• Measured management team that provides more “steak” than “sizzle.”

Business Overview

Anders Ström first founded Kindred (OM: KIND SDB), a B2C / digital gambling operator in 1997. Kambi was co-founded within Kindred by Anders Ström and Kristian Nylen in 2010 and was spun-off to Kindred shareholders in 2014 to free Kambi from the channel conflict that Kindred’s B2C / digital gambling operation posed. Mr. Nylen has remained as Kambi’s CEO from 2010 – present, but is going to retire later this year. Mr. Nylen (owns 2.4% of Kambi shares) has agreed to join Kambi’s board after he steps back from the CEO job and Mr. Ström (owns 19.4% of Kambi shares) is the chairman of the board.  

When asked in May 2023 if he would consider selling his Kambi shares, Mr. Ström “Rejected the proposition, likening it to selling the horse that will win the Elitloppet (a famous Swedish horse race) three weeks before the race. Of significance, He believes Kambi is significantly undervalued and is confident in its future value.” (Source: https://sbcnews.co.uk/technology/2023/05/23/unibet-founder-anders-strom-reveals-c-level-rifts-on-kindreds-direction/). For reference, Kambi shares traded for 200 – 215 SEK / share in May 2023. While Mr. Ström could certainly be talking his book, it is notable that he pushed the Kindred board to sell the company (citing that it needed additional scale), so he is not known to be dogmatic about irrationally holding assets that should be exited or can fetch fair value (or greater) in a sale transaction.

Kambi is the leading outsourced sportsbook and sportsbook technology provider in the world (as of 2021, Kambi had ~50% more revenue than Open Bet, their closest competitor). Playtech’s sportsbook technology has failed to keep up with Kambi and Open Bet and they are no longer considered a serious competitor (although their scale and ability to cross-sell products is generally formidable). The only other real “competitors” are in-house solutions that were created and are operated by tier 1 gaming operators such as Bet365, Flutter, and FanDuel – These solutions of courses do not compete for new customers, but are a barrier-to-adoption (of Kambi’s product) by large tier 1 operators.

Kambi is effectively a market-maker. They make a market on the real outcome of sports events and idiosyncratic events that happen (or not) during sporting events based on raw data they receive from sports leagues and their data vendors (e.g. BetGenius, Sportradar, IMG Arena, etc.) combined with their own data, algorithms, market action / feedback, and experience. These odds are then presented in a real-time, entertaining format (front-end) that is managed by casino operators and presented to the casino’s customers who can bet on various outcomes before games or during sporting events.

Kambi generates revenue through revenue share / royalty arrangements with its customers (e.g. 12% of a customer’s net gaming revenue (NGR)). Kambi’s economic characteristics are very attractive – Kambi benefits from gaming operator partners’ investment in its brand, facilities, and customer acquisition, etc. without contributing capital themselves to these initiatives. Furthermore, Kambi is a first mover in a business where technology, reputation / track record, and scale matter. The Company is a a highly efficient software business that exhibits increasing returns to scale – The Company maintains one software platform with an efficient architecture that allows for the efficient modification and re-selling of its software at high incremental margins.

Kambi’s turnkey system translates real-time actions during sporting events into probabilities / odds and runs 24 / 7 / 365 across 50+ markets without any planned downtime (note – market makers in financial markets are afforded plenty of downtime when markets are closed). Kambi processes more bets per day than orders on Amazon and the system’s architecture is flexible and powerful enough to operate compliantly under more than 50 different jurisdictions’ specific regulations. The system also has powerful omni-channel regulatory / compliance, CRM / bonusing, risk management / trading, order management, customer intelligence (limiting action given to advantage players / “sharps”), payments, and BetBuilder / bet acceptance engines that work harmoniously across different technology standards (retail, web, and mobile). Kambi’s best-in-class BetBuilder product (allows customers to create their own bespoke bets on combined outcomes across multiple prop bets, games, and sports) prices 100bn different potential bet combinations in real-time and Kambi spends 15%+ of its revenue on R&D / software development to maintain and expand its market leading position.

In the process of building their best-in-class system, Kambi incurred ~€145mm in capitalized software costs, ~€53mm in M&A, at least ~€325mm in staff operating costs, and ~€27mm in CapEx over the past 11 years. In total this amounts to ~€550mm (over $600mm) of capital spent and well over 50 customers and hundreds of system launches. I am usually skeptical of the idea that costs directly relate to asset quality, especially for an intangible asset like software (this reasoning is Marxist / focused on inputs in my view, rather than focused on outputs / productivity of the product), however I believe this capital was spent thoughtfully and purposefully based on Kambi’s track record of capital efficiency (average high-teens ROIC over the same period) and founder-led management team.

EGR (eGaming Review) industry awards are the most reputable and recognized in the online gambling industry and Kambi has won EGR’s B2B Award for best Sportsbook Platform Supplier and best Sports Betting Supplier four and three years in a row, respectively (2020 – 2022). 2023 winners haven’t been announced yet. Kambi also won EGR’s B2B Award for best Innovation in Sports Betting Software the last two years (2021 – BetBuilder and 2022 – AI / algorithmic trading capabilities).

Kambi benefits from the secular trend toward new jurisdictions regulating sports betting. Governments have (almost without exception) lived beyond their means for many years and they need more revenue streams to sustain themselves – governments are also recognizing that prohibition hands control of gambling activities to unscrupulous / nefarious actors and doesn’t allow the government to benefit from gaming activities through licensing fees, excise taxes, and income taxes. This trend toward increasing regulation accrues advantages to scaled sportsbooks vendors, because sportsbook / market making is a high fixed cost business and because regulations lower operators structural profitability directly (via gaming / excise taxes, ongoing monitoring  / compliance costs, and higher marketing budgets needed to attract mass market players) and indirectly (by placing more customizations and requirements on operators’ technology resources).

Kambi’s Moat

• Scale
  • From an industrial organization perspective, it is much more efficient for Kambi to set probabilities and odds one-time (and sell these probabilities to many operators), through one set of servers, and in one software platform rather than each operator duplicating the high fixed costs associated with these activities on a standalone basis.
    • Scale is a self-reinforcing competitive advantage because it allows Kambi to spread its relatively large R&D and development costs across a massive customer base (comprised of many casinos’ customer bases), which facilitates continued technology leadership and cost advantages.
  • Just like in the financial markets, a scaled market maker can provide more competitive betting lines (i.e. tighter bid-ask spreads) to customers, while still maintaining high profitability relative to sub-scale competitors.
• Network Effects – Real-time data, across different time zones from 40+ operators in ~50 countries and historical data that grows by 500mm transactions per month provides greater insight and superior risk management and financial results.
• Switching Costs / Long Sales Cycles
  • Sportsbook is by far the most complicated gaming product. It is extraordinarily difficult to create a quality, proven, competitive product that can price and accept risk on 24 / 7 / 365 sporting event probabilities in real-time (including during play) for many sports and across many geographies that is on par with (let alone superior to) Kambi’s offering.
  • For gaming operators, migrating to a new sportsbook technology solution is typically a high-risk, low-upside maneuver that is time consuming (1.5 – 2 years) and a burden on technology resources.
  • Long-term incumbent contracts and long sales cycles also represent a barrier-to-entry.
• Installed Base
  • Kambi’s was able to cross-sell a recently acquired capabilities (Abios) to ~15% of their customer base in less than 1.5 years after the bolt-on acquisition.
  • Kambi’s installed base affords Kambi the luxury of being able to acquire strategically important and / or tangential upstarts at seemingly high prices to preserve the Company’s competitive position, while compounding value.
    • Cartoon Economics – If Kambi does a bolt-on acquisition for a $10mm revenue company that operates at EBITDA breakeven, and then can increase the acquired company revenue by $10mm via cross-selling at 80% incremental margins ($8mm EBITDA), then Kambi could pay 8x revenue on a headline basis ($80mm EV), which would only amount to 10x EBITDA post-revenue synergies.
• Technology – Kambi’s best-in-class software modules such as BetBuilder allow gaming operators to attract more customers and generate higher revenues and margins (bets placed BetBuilder and parlays generate higher margins). It would be extraordinarily costly, time consuming, and risky (from a speed of market entry and product perspective) for an operator to build a sportsbook technology and operation from scratch rather than partnering with Kambi. Given the scale, network effects, switching costs, regulatory and product / technology complexity discussed above, Kambi dominates its market and faces relatively few true competitors from a product quality perspective.

Divergent View

Market View and Customer Losses – I believe the market overly discounts the risk of Kambi’s customers’ in-sourcing their sportsbook technology. It is well known at this point that Kambi has lost its three largest customers over the past few years to insourcing: DraftKings (acquired SBTech’s sportsbook software for $634mm), Penn Entertainment (acquired The Score’s sportsbook software for $2bn), and most recently Kindred (which developed their own sportsbook solution). At the time of announcement, these customers represented roughly ~40%, ~15%, and ~40% of Kambi’s revenue, respectively. Despite this massive headwind, I project that Kambi will have more than doubled its 2020 EBITDA (when DraftKings first announced that it would insource its sportsbook technology) by the end of next year primarily through a combination of (i) organic growth of the existing installed base and (ii) growth from new partners / contracts. Revenue from Penn Entertainment will roll off this year (Kambi will still continue to manage Penn’s retail sportsbook so they actually don’t lose 100% of Penn’s business) and I estimate revenue from Kindred will step down to 15% and 13% of revenue in 2024 and 2025, before Kambi’s partnership with Kindred ends in 2026. Despite these headwinds, I expect Kambi to grow their total revenue by MSD - HSD through 2026 from their existing customer base.

The market has obviously been growing quickly and admittedly, I don’t think Kambi did the best job of providing a truly modular solution (they were only selling their turnkey platform as a product until recently). Kambi’s software has been opened up and turned into its own ecosystem that can connect with third-party customer engagement, loyalty, etc. solutions via Kambi’s APIs. This allows operators to have more control over their sportsbook product and strategy. Furthermore, Kambi’s platform lacked a front-end offering until Kambi acquired Shape Games, a front-end that can power operators’ personalization, social media, and gamification strategies. The Company’s previous philosophy was that casino customers should provide their own front-end (Shape is a module within the Kambi platform that lets Kambi’s customers create their own front-end on Kambi’s platform or allows Kambi to create a custom and differentiated front-end for their customers that integrates with Kambi and other third-party sportsbooks). Kambi’s has historically focused on substance than style and this has generally served the Company and shareholders well, but in this instance it did not. Although the substance and the back-end capabilities of Kambi’s system are likely the most important part of the product, gaming operators are marketing companies at the end of the day and are very concerned about the look, feel, and message of their sportsbook. These two product weaknesses have been addressed and I believe three recent major contract wins validate this view (Bally’s, LiveScore, and Svenska Spel).

My View – Sportsbook is an outstanding candidate for outsourcing for a variety of reasons that are underappreciated by the market. Scale is important because the complexity and costs of building, maintaining, and operating a sportsbook has increased as a consequence of increased sales channel complexity (shift from retail to online / omni-channel sports betting), technology becoming more important (due to the digitization, more complex betting products (parlays, etc.), and the rise of in-play betting versus pre-game betting), and increasing regulation that is heterogenous across U.S. states and different countries. More succinctly, scale is especially difficult for operators to independently achieve because (i) the product and technology is complex and requires organic innovation, (ii) fragmented sales channels, (iii) fragmented products, and (iv) fragmented regulation.

Furthermore, a sportsbook is higher risk and structurally less profitable for casinos than core casino games (slots, table games, etc.). Gamblers in the aggregate cannot mathematically beat the house while playing traditional casino games (e.g. slots) because the odds are fixed and the games are mechanical. Sportsbooks are very different than traditional casino games (which afford the house an edge 100% of the time) because sports betting requires casinos to risk their bankroll on dynamic, real-world events that are outside of their control. As a consequence, sportsbooks require ever modern technology and more expensive human capital to operate than other facets of a gaming operation. Furthermore, sportsbook revenue is more episodic and has lower velocity than traditional casino games – For example, marketing toward mass market NFL bettors must be done leading up to games that are predominantly played once a week (Sunday) during only a three-month period during the year (fall), and the bettors may wager once or just a few times per week. This is very different than casino customers that can play the same slots and table games every day (24 / 7 / 365) at a very high velocity (it doesn’t take long to spin the reels on a digital slot machine 25 times) and generate a consistently high return to the gaming operator.

An operator setting up their own vertically integrated sportsbook requires substantial upfront investment in technology and labor on top of ongoing fixed operating costs. This strategy is fraught with execution risk that ranges from the system migration and launch to the product quality itself. Product quality is not only a risk for the obvious reason (weak revenue), but also because a weak product will lead to weaker margins and customer lifetime value (because the operator will be forced to more liberally utilize bonusing to attract and maintain customers).

Logically, an operator should only accept the costs and execution risk of vertical integration if (i) they have the vast size and scale required for in-housing to make economic sense and (ii) they believe they can deliver a substantially superior product than Kambi. On the other hand, Kambi can provide operators an immediate, proven, highly customizable, scalable, and world-class product (that has been launched hundreds of times) with an aligned partner that earns a share of net gaming revenue (variable cost).

Why Have Operators Insourced? – I highlight operator’s perception and narrative around the insourcing craze that has taken place in recent years below. I contrast my view of the market reality in the sub-bullets.

• “Cost Savings”
  • The supposed cost savings of insourcing does not take into account risk, upfront costs, or ROIC.
    • In-sourcing requires the incurrence of substantial risk, time, upfront costs, and technology resources and is more susceptible to total failure than outsourcing.
    • Outsourcing allows an operator to spend time and scarce technology resources  on more productive initiatives and avoid upfront costs and ongoing fixed costs.
  • Negative Effect of insourcing on revenue and profitability – Product quality and revenue of insourced products are likely to be lower (versus an outsourced solution).
    • Lower product quality will lead to lower revenue, which will necessitate bonusing to attract and maintain players, which in turn will lead to weak (and perhaps negative) profit margins.
    • If revenue is weaker and margins are lower than they would be with an outsourced partner, why not outsource?
    • It is difficult to recreate the technology, know-how, scale, and algorithms of Kambi or Open Bet’s 15+ years of experience that maximizes the value that can be extracted out of sports data. Perhaps it could be done with flawless execution over a decade, but why accept the execution risk, brand degradation, and profitability drag of offering a product that is inferior to competitors for over a decade?
• “Control” – Owning the tech stack undoubtedly provides the operator with greater end-to-end control over product, content, customer experience, etc. but as the old saying goes, be careful what you wish for!
  • Will the operator be able to capitalize on this control?
    • If so, by how much? Is it worth the risk and cost of vertical integration?
    • Control can be illusory. For example, if the operator will not have adequate regulatory and technology resources to modify their software to accommodate regulations in new jurisdictions, then outsourcing will provide more control to the operator (in a practical sense, because the operator will be able to rapidly launch and scale in newly regulated markets).
  • Can the operator attract and retain the right human capital to provide unique technology, betting products / content, customer experience, etc.?
    • This is not the core competency of most gaming operators.

I also think it is dangerous to extrapolate the recent past to the future. In the recent past, the world became accustomed to ZIRP and we lived through tech bubble 2.0, where capital was not respected and narratives around technology (including companies owning their own technology) were more important than economic reality. I believe that economic reality will set in and win the day over the long run, and more specifically, I believe that gaming operators are more likely to make rational capital allocation and opex decisions that more adequately consider risk-reward tradeoffs, ROIC, and cash flow generation, which will benefit Kambi. Furthermore, there are early signs that market participants in the gaming industry have started to accept this economic reality, I will start by providing context on three of Kambi’s large historical customer losses:

1. 888 – This was Kambi’s first major customer loss (early 2021). 888 and Kambi began their partnership in 2013 and increased 888’s sportsbook revenue by 5x through 2017, when a contract extension was struck. 888 ended the partnership in 2021 to pursue insourced technology that they acquired via M&A. This clearly didn’t turn out as smoothly as planned – just 1.5 years later (mid-2022), 888 acquired William Hill’s UK and international assets and a large selling point of the deal was William Hill’s owned, in-house sports betting capabilities. Since then, sports betting has been de-emphasized as a non-core product relative to 888’s core iGaming roots.
   1. 888 Chief Strategy Officer at November 2022 Investor Day – “A few words about our evolved plan for the U.S.A. So it's no surprise that the U.S.A. is one of the most attractive growth opportunities out there, but as everyone knows, is also intensely competitive. So our original plan here was to build a nationwide sports-led operation in 12 to 15 states. It's become clear to us that the intense competition in sports betting and the dominance of the top four brands means that it will be very difficult to deliver positive returns without evolving our plan.”
   2. 888 Chief Strategy Officer on 1H23 Earnings Call – “I'm sure you all know that the iGaming market is huge in the U.S., about USD 6 billion across the 3 main states and growing at 20% or so a year. Our plan is focused on getting low single-digit market share of that iGaming market with sports across a wider range of states but as a complementary product with most of the focus on growth and investment on casino.”
2. Penn Entertainment – Penn has the worst management team I’ve seen in the industry (and one of the worst I’ve seen in general), so I don’t think there is much informational value in their actions (unless you are looking for a case study on how to destroy shareholder value). I am not surprised that an activist investor is now seeking board seats at Penn.
   1. First they acquired Barstool Sports in early 2020 and lost $850mm before basically giving it back to its founder for $1 in 2023.
   2. They spent $2bn to buy The Score for its sportsbook technology that it was developing (and which was burning more than $50mm (CAD) of EBITDA), with the strategic goal of ultimately saving ~$25mm of costs (i.e. Kambi’s revenue share). Penn’s sportsbook has bled market share since they started phasing Kambi out.
      1. Not only did Penn incur the $2bn upfront acquisition cost and fund The Score’s losses prior to its launch, but they had to pay Kambi to run their ongoing sportsbook, plus termination fees to Kambi (these run through mid-2024).
   3. Penn then paid ESPN $2bn in order to effectively outsource their own brand to ESPN (ESPN Bet). Ironically Penn insourced their sportsbook in the name of gaining greater control over their product roadmap, reducing costs, and enhancing the customer experience, and then they outsourced their brand and ownership of customer relationships to ESPN (so much for gaining greater control!).
3. Kindred – Anders Ström (Kambi and Kindred founder) had a heated falling out with Kindred’s management team and board over their attempt to develop their own sportsbook technology. Mr. Strom strong opposition to this decision led him to sell his Kindred shares. It is possible that Kindred’s management team was aligning with the market narrative in order to best execute on a value maximizing sale transaction (FDJ recently agreed to acquire Kindred). Mr. Ström publicly stated that: “I know sportsbook and I see that Kambi builds tomorrow’s while Kindred builds yesterday’s. I can see what skills Kindred is asking for, and that is not the framework for building the sportsbook of the future.” (Source: https://next.io/news/anders-strom-kindred-five-things/).
   1. Kristian Nylen has publicly commented that Kindred has held discussions with Kambi regarding a modular software relationship after the existing contract expires in 2026. “We started talking last summer about where we want to go with the product and how we are looking into a more modularised service, which seems like it will fit very well with Kindred’s plans. I hope when the time comes that we have a service that is very much in line with what Kindred needs and wants from us.” (Source: https://next.io/news/qa-kristian-nylen-talks-ma-as-kambi-becomes-acquisition-target-with-option-to-break-free-of-poison-pill/).
4. Bally’s (owned by Standard General) – Spent over $3bn, mostly on operating expenses and software development ($225mm on acquisitions) to build their own proprietary sportsbook platform before admitting defeat and striking a partnership with Kambi. This is notable because I think Bally’s has a solid management team, which demonstrates that building out a strong sportsbook product is difficult, even for a good management team.
   1. Robert Lavan (Bally Ex-CFO) – “By transitioning to a lease-based partnership model (with Kambi), we've reduced our fixed costs and will now operate under a much more economical variable cost structure based on a percentage of net gaming revenue generated. This is a more efficient model and better positions the company to manage our risk by limiting our expenses while preserving our upside earnings potential.”
   2. Robeson Mandela Reeves (Bally CEO) – “On Tuesday, May 2, we announced partnership agreements with Kambi and White Hat Gaming, fulfilling our promise to partner with best-in-class technology providers to drive our North America sports betting platform. The North America infrastructure we had in place for sports was inefficient. I own that. And with these new partnerships in place, our cash burn and development costs will go down sharply. Our spend will be performance driven.”
5. Great Canadian (owned by Apollo) – Apollo needs no introduction on this board. They are particular sophisticated within the gaming industry (they owned Caesars for over a decade). I am sure they did their homework on the insource vs. outsource decision and also on their procurement decision (Kambi versus OpenBet).
   1. Note – Kambi also powers the back-end technology for Yahoo Sports / Wagr, which is also owned by Apollo.
6. LeoVegas – LeoVegas was acquired by MGM in 2022, but still chose to sign a multi-year extension with Kambi in June 2023 (they have renewed several times since initially beginning a partnership with Kambi in 2016) that will expand the partnership to include Kambi powering the BetMGM sportsbook in the UK. This demonstrates that even extremely large gaming enterprises may lack the scale to own and operate their own technology in certain markets and will opt to partner with strong B2B software partners like Kambi.
7. Rei do Pitaco (RDP) – Largest Daily Fantasy Sports operator in Brazil (expected to become one of the largest sports betting jurisdictions in the world) that counts the founder of FanDuel as its Chairman. FanDuel augments ownership of its own technology stack with software modules from OpenBet, so it is telling that RDP decided to partner with Kambi.
8. Bet365 – Bet365 is generally viewed as the gold standard with respect to Tier 1 gaming operators with an integrated technology strategy. In late 2022, Bet365 outsourced part of their sportsbook technology stack to a third-party CRM and data analytics vendor (Optimove). Tier 1 operators will likely outsource some of their tech stack while smaller operators will continue to demand a holistic, turnkey sports betting platform product.

Thesis Summary / Catalysts – I believe Kambi is priced (cheaply) solely based on its current contract base and that new jurisdictions opening up via regulation, new customer wins, higher bet velocity and AI adoption, and the Company’s open platform and modular monetization strategy are free options that can drive substantial upside. I think most of the catalysts are a matter of when, not if (it is inevitable that new jurisdictions are going to regulate gaming), which further de-risks my thesis.

• Visibility to High Customer Retention Going Forward – Largest customers are already migrating off the platform and can be replaced by partners with more revenue potential (Bally’s is 60% larger than Kindred by revenue, despite Bally’s weak sports betting product).
• Market Growth
  • Existing markets – Per capita / GGR growth (HSD % expected).
    • Resilience – This secular trend is strong. Online gaming and sports betting grew revenue by double digits in Europe in 2009 (Europe likely won’t hold up as well during the next downturn, but more recently regulated markets like the U.S. and Latin America likely will).
  • Newly regulated markets – Launches / expansions into new markets.
    • ~40% of U.S. states have not regulated sports betting yet. Furthermore, many of the states that have not legalized sports betting yet are dominated by tribal gaming enterprises (TGEs). Tribes are stickier customers (insourcing risk is low and tribal leaders / government officials have public sector incentives that skew toward risk minimization). Kambi has partnerships with some of the most sophisticated and large TGEs (Mohegan Sun, several under-the-radar but large TGEs in Michigan, Ilani in Washington, and the Tohono O’odham Nation’s Desert Diamond locations in Arizona). The top two U.S. states for tribal gaming (CA and OK) have not legalized sports betting yet and together generate over $10bn of gaming revenue (California tribes alone generate ~$7bn of gaming revenue).
    • Brazil
    • Japan
    • India
• Market Share Growth – I believe Kambi will grow market share by organic growth at current partners and from gaining new customers due to the Company’s competitive advantages, the economic characteristics of sports betting, more normalized economic / monetary policy conditions, and more rational behavior by gaming operators as discussed herein (Kambi has approximately matched global online sports betting market’s growth since 2017 despite sustaining several large customer losses).
• Higher Bet Velocity and AI – There is already a secular trend toward live betting and higher quality sports data. Companies that are able to harness AI should be able to lower costs, improve margins through efficient algorithmic pricing, and increase live bet offerings. I do not have to stretch my imagination very far to foresee a world where a bettor can make bets on the outcome of every pitch thrown in a baseball game, every free throw shot in a basketball game, etc.
  • Both the sheer amount and quality of sports data increases every year, which can be used to create more betting products and markets to drive higher profitability.
• Unbundled Software Module Sales to Tier 1 and Other Operators
  • To date, Kambi has only offered a fully turnkey solution but they are modularizing their product offering and creating a truly open system (each module not only can integrate seamlessly with other Kambi modules, but also with third-party software) which should drive penetration within an entirely new market and should allow all potential customers to select how to optimally complement their in-house capabilities through a single integration with Kambi.
  • Once Kambi occupies this winner-take-most position, its platform will serve as an efficient hub to distribute additional products, whether they are created through internal innovation or M&A.
  • The Company’s partnership with Bally’s is Kambi’s first partnership that possesses modularized characteristics, which allow Bally’s to purchase a limited amount of Kambi’s source code in the future and switch its relationship with Kambi to a modularized arrangement once Bally’s reaches a certain level of scale. Other potential monetization paths for Kambi’s modularization strategy could include:
    • Marketplace revenue from third-party software (Apple App Store model).
    • BetBuilder module.
    • Tesseract module (AI / algorithmic trading) – Management announced that Tesseract was undergoing testing with its first potential customer (outside of Kambi’s turnkey platform) in November 2023 and that interest in Tesseract from the market was “spectacular” since it was unveiled.
    • Sport specific modules (trading / pricing / odds making only for a certain sport)
    • In-play module (live betting).
    • Social gaming module (non-real money betting in pre-regulation states).
• Acquisition / MBO – I think Kambi is an attractive acquisition candidate at these levels and could be in play given the CEO / co-founder (Kristian Nylen) announced his intent to retire later this year. Kindred (founded by Kambi’s other co-founder, Anders Ström) recently announced it will be acquired by FDJ. The co-founders could also back an MBO if shares continue to languish as well. A buyer in the B2B gaming space could realize substantial cost synergies by eliminating duplicate sales infrastructure, etc. and realize potentially meaningful revenue synergies via cross-selling.

Risks

• Contract churn / in-sourcing.
• Operator consolidation.
  • Platform reconfiguration / modularization mitigates these risks by increasing TAM / product use case with operators that have in-house capabilities.
• Technological disruption.
• Reversal of regulatory trends or regulator issues idiosyncratic to Kambi.
• Incorrect estimates / assumptions on my part.

Catalyst

See Thesis Summary / Catalysts section above.