Category: Financial Wellness

CIRSA has announced an IPO, looking to raise 460m EURs at a TBD valuation. UoP will be to reduce debt and fund its growth strategy, likely more M&A in our view

Business Overview – The Spain + Latam Gaming Omnichannel Play

• Casinos: This includes all traditional casinos and gaming halls operated by Cirsa across Spain, Latin America, and Morocco. The Casino segment generated €988m of revenue and €406m of EBITDA (41% margin) in FY24.
• Slots in Spain. The slot segment encompasses Cirsa’s operations of slot machines in Spain’s bars and arcades (the bar “route” market), as well as Cirsa’s B2B slot manufacturing business. Mgmt. believed they are the largest operator in Spain with 40k slot machines across Spanish bars. The Spain Slots segment generated €682m of revenue and €191m of EBITDA (28% margin) in FY24.
• Slots in Italy. Cirsa operates in Italy’s gaming market by running slot machines (AWP) and Video Lottery Terminals (VLT) in bars and gaming halls. Cirsa operates about 13.6k slots machines in Italy across 2.5k locations. The Italy Slot business generates €450m in revenue and €29m in EBITDA (6.3% margin) in FY24.
• Digital Gaming. This includes Cirsa’s online sports betting and iGaming operations, primarily through the Sportium brand in Spain. Cirsa acquired Ladbrokes’ 50% stake in Sportium for €70m in 2019. The digital segment generated €466m in revenue and €85m of EBITDA (18% margin) in FY24.

Business Overview – Casino: A High-Margin Segment with Strong FCF

• Cirsa’s casino business remains the company’s largest and most profitable segment. Operational momentum has been strongest in Panama, Colombia, and Peru.
• Gaming Taxes. Gaming taxes on this segment mostly correspond to taxes on machines, calculated based on a % of GGR, ranging from 4% to 18%.
• Tuck In M&A. Cirsa has historically pursued a tuck-in acquisition strategy to expand its casino footprint rather than greenfield developments. Key transactions include entry in Costa Rica in 2015, Peru in 2017, and the DR (Casino Jaragua).
• Regulatory Risk. Although Cirsa primarily operates in regulated Latin American markets, evolving regulatory landscapes pose potential threats to profitability including Panama Litigation on Gaming License in 2023 (Ongoing) and Mexico’s ban on retail bingo and gaming slots in 2023 (resolved).

Business Overview – Slots

The Spanish slots business consists of two key components:

• B2C: The company operates approximately 25,000 slot machines across 16,500 venues under five-year revenue-sharing agreements with local bar or venue owners.
• B2B: Cirsa also operates a B2B business focused on the design, manufacturing, and sale of slot machines tailored for the Spanish bar market.

Slots Italy. The company owns 5 gaming halls in Italy and functions as a network system operator for slot machines and VLTs. This business is low margin (6%), and Cirsa continues to manage for yield.

Business Overview – Digital Gaming

• The Crown Jewel. Sportium is Cirsa’s primary sports betting brand, focused predominantly on the Spanish market. Originally established in 2007 as a JV with Ladbrokes, Sportium became fully owned by Cirsa in 2019. Cirsa’s Sportium is the #1 sports betting operator in Spain’s retail channel, with over 2,150 retail points.
• The Value Proposition. Unlike U.S. digital-only counterparts, Sportium combines extensive physical retail presence with a growing digital presence.
• The M&A Playbook. Since full ownership of Sportium in 2019, Cirsa has aggressively expanded its digital presence through M&A: €53m acquisition of E-Play (60% stake) in Italy, €20m acquisition of Ganabet in Mexico, €198m acquisition of ApuestaTotal (Peru), and €28m acquisition of Casino Portugal in FY24.

Thesis & Overview

What is Cirsa?

• Cirsa (private) is one of the largest global omnichannel casino operators in Spain, Italy and Latam. The company was founded by Manuel Lao Herandez in 1978 and was sold to Blackstone for €2.2B (~6x EV/EBITDA) in 2018, with the Argentina business carved out and remaining under the control of the Lao family. The company operates 447 casino halls, 36k slots, 654 tables, and 8 online casinos in regulated markets such as Spain, Panama, Colombia (50% JV), Mexico, and Italy. The company is currently contemplating an IPO plan to list on the Madrid stock exchange with net proceeds rumored to be used for deleveraging (3.9x/4.4x OpCo/Total Consolidated Net-Leverage as of 4Q24).

Our Thesis

1. Cirsa is a market leader in digital gaming in Spain, and expansion in Latam should position the company for further growth.
2. Land-based casino and slot business in Europe will provide sufficient FCF needed to grow in Latam.
3. Land-based casino/slots operations in Latam provide multiple touchpoints to build a customer database and acquire customers at an attractive ROI.

Valuation

• Our SOTP suggests the Company is worth 7.0x EV/EBITDA. We valued land base operations at a blended 6.5x while applying a 10x multiple on the digital business.

Risk

1. Value-destructive M&A
2. Changing regulatory environment in Latam/Europe
3. Weak consumer demand due to the Trade War
4. Heightened competition in digital gaming from better-capitalized global and local competitors

The TLDR: We like Cirsa given its leading online gaming position in Spain. We believe the company is well positioned to compete in Latam as it can leverage its existing slots halls and casinos to further penetrate the online gaming segment.

Valuation – Sum of the Parts

Overview

• While Cirsa is currently a private company, the following SOTP analysis provides a framework to estimate the potential equity valuation necessary to achieve a minimum return for Blackstone. For this exercise, we assume a minimum IRR of 15%.
• IPO and Rumor Valuation. According to market chatters, Blackstone is considering an IPO for Cirsa, potentially selling 20–25% of its stake for €745m–€1.1B. The rumored valuation implies an enterprise value of ~9x EV/EBITDA.
• What is Fair Value? We believe the fair valuation for the business is a blended 7.0x EV/EBITDA using our SOTP analysis. For the Casino Business, we assign a 7.0x multiple reflecting strong EBITDA growth potential but offset by elevated regulatory risk. For Digital, we valued at a 10x multiple given Sportium’s leading position in Spain. For Slots, given elevated taxes in Italy, we ascribe a low 3.0x multiple; Spain slots at ~6x.
• Sensitivity Analysis. The primary valuation debates center on ascribing the appropriate multiples for Casino and Digital businesses. We believe Blackstone can achieve its 15% IRR target assuming the casino gets valued at a minimum of a 6.0x multiple.

TLDR

• 3 Statement accounting sucks
• Read my notes and internalized it 🙂

Foreword

One of the trickiest parts of preparing for technical interviews is how to quickly answer questions on how changes to certain items of the income statement will flow through the rest of the statements (cash flow, balance sheet). But you shall not worry, in the below, I have outlined some of the most common questions that you might encounter during an interview. In most cases, we will start by talking about the impact of the income statement, then how that flows into the cash flow statement, and finally, you will talk about the changes to both asset and liabilities + equity side in order to show that the changes balance each other out.

Notes are outlined below: (Tax rate assumed @ 40%)

Balance Sheet Changes

• A/R +100 (If AR goes up, it means that you have recorded revenue but not collected it in cash from customers yet.)
  • Rev +100, NI +60
  • CFO is (40) because NI +60 but changes in AR caused CFO to go down by 100
  • B/S: Asset +60 [Cash (40) but A/R +100], SE +60
• A/R (100) (If AR goes down, that means you’ve collected the cash from customers that owe you.)
  • Cash +100 and A/R (100)
• Prepaid Expenses +100 (When Prepaid Expenses goes up, you pay in advance, in cash, for a future product or service but do not record the expense on the Income Statement yet.)
  • Cash (100), Prepaid Expense +100
• Prepaid Expenses (100) (When Prepaid Expense goes down, you now record on the IS the expense that you previously paid in cash.)
  • NI (60)
  • CFO +40 (NI(60), changes in prepaid expenses +100)
  • B/S: Assets (60) [Cash and Prepaid Expenses], SE (60) [NI down 60]
• Inventory +100 (When Inventory goes up, you’ve purchased products but have not manufactured or sold anything yet.)
  • Cash (100), Inventory +100
• Inventory (100) (When Inventory goes down, you’ve now turned it into finished products and sold it to customers.)
  • NI (60) because COGS went up by 100 (assumed 40% tax rate)
  • CFO +40 [NI(60) but inventory increase CF by 100]
  • B/S: Asset (60) [Cash +40 but Inventory (100)]; SE (60) [NI (60)]
• Accrued Expenses +100 (When Accrued Expenses goes up, we’ve recorded an expense on the IS but haven’t paid it out in cash yet.)
  • NI (60) because expense goes up by 100
  • CFO +40 (NI(60) but accrued expense add 100 to CFO)
  • B/S: Asset +40 (Cash); Liab +100; SE (60) because NI(60)
• Accrued Expenses -100 (When Accrued Expenses goes down, we’ve now paid out in cash an expense that was previously recorded on the IS.)
  • Cash (100); Accrued Expense (100) [Liability]
• Account Payable +100 (We’ve received a product/service, recorded it as an expense on the IS, but haven’t paid for it in cash yet.)
  • NI (60) because expense +100
  • CFO +40 (NI(60) but A/P +100)
  • B/S: Assets +40; Liab +100; SE (60)
• Account Payable (100) (When it decreases, that signifies a cash payout of an expense that was previously recorded on the IS.)
  • Cash (100); Liab (100)
• Deferred Revenue +100 (When Deferred Revenue goes up, we’ve collected cash from customers for a product/service but haven’t recorded it as revenue yet.)
  • Cash +100, Liab +100
• Deferred Revenue (100) (When Deferred Revenue goes down, we’re recognizing this previously collected cash in the form of revenue.)
  • NI +60 because Rev +100
  • CFO (40) because NI +60 but def revenue (100)
  • B/S: Asset (40) because of Cash; Liab (100); SE +60 (NI)
• Debt Write-down (100) (When liability is written down, you record it as a gain on the I/S; when Asset is written down, you record it as a loss.)
  • NI +60 because record write down as a gain
  • CFO (40) because NI +60 but subtract the debt write-down of (100)
  • B/S: Asset (40) because of Cash; Liab (100) and NI (SE) +60
• Equity Bail-Out (+100)
  • No changes to I/S
  • CFF +100
  • B/S: Asset +100 because of Cash; SE +100 because of equity injection

Hopefully, the outline above helps to memorize accounting changes a little more tolerable.

TLDR

• Software metrics are confusing, but most try to paint a picture of the potential revenue trajectory.
• Bookings show the health of the pipeline, billings represent the cash flow that the company expects to eventually receive.
• The difference between ARR and DBNR for SaaS companies represent the ARR from a new customer for any given quarter.
• Like the CAPM model, inputs in churn and CLTV (customer lifetime value) can drastically take you out of reality when analyzing marketing spend for a firm.

When most of us are trying to assess the strength of a software company, we are often bombarded by a bunch of software jargon by the management team to help describe the health of their business. In some way or form, most of these software metrics try to paint a picture of the revenue trajectory, but often with slight subtleties between them. This post will aim to provide a more defined definition across the board to help new investors into the space to better understand these metrics.

Revenue

Ah, revenue, the most basic of all. As most are aware, revenue is not the same as cash collected by the firm. Revenue is an accounting measure (score-keeping) to account for services/products that the firm has delivered to the customers. For software firms, revenue will be accounted throughout the life of the contract after the customer activates/sign-up for the product. And because of this “record as you use” accounting method, this might or might not paint the most accurate picture for a software firm growing at an accelerated pace.

Bookings

Bookings are just one of the many momentum metrics to represent the business’ ability to acquire new contacts/customers. Bookings essentially represent all the contracts value that is signed, whether from existing or new customers for a specified period. Depending on the duration of the contract, bookings can be stated either on a Total Contract Value (TCV) or on an Annual Contract Value basis (ACV). One thing we need to be aware of is that Bookings might or might not directly affect the financial performance of the company. They are just an indicator of the health of the sales pipeline.

Billings

As the name suggests, billings represent the total invoice value that you as a company have “billed” your customers. Basically, the health of the billings value shows the approximate cash that the company expects to collect in a certain timeframe. But obviously, fluctuations with billings could also be affected by changes in billing cycles or collection policies shift. The rate of collections for billings will also directly influence working capital (deferred revenue, A/R), P&L, and of course, cash flow.

ARR (Annual Recurring Revenue)

ARR is effectively the “annualized” portion of the MRR (Monthly Recurring Revenue). This is extremely important for SaaS/Subscription-based companies that have high recurring revenues. ARR is usually presented on a net basis, so investors need to be aware of where the growth is coming from. A good way to do this is to take the difference between ARR growth rate and DBNR (discussed below), to figure out the ARR that is coming from new clients for the quarter.

Formula: New ARR Growth = (1-DBNRR) – ARR Growth

DBNRR (Dollar-based Net Retention Revenue)

DBNR is measured in % terms, and it measures the amount of revenue generated for the same client over two comparable periods (Period 2 Revenue / Period 1 Revenue). If that amount is above 100%, that means there is a net expansion/upsell of the existing clients. While DBNRR is a good indicator of revenue upsell or slow-down of existing customers, it ignores customer churn. There is no DBNRR for customer XYZ if they just decide to terminate the contract in period 2.

Customer Churn Rate

Customer churn rate is essentially the % of customers that leaves you at any given period. While this might seem like a simple concept, the actual calculation and adjustments can be quite complex. Factors that could change your calculations would be:

• How do we define customer cohorts and segments?
• Do we include seasonal/promotion customers into the churn rate?
• Do we exclude episodic customers?
• What is the time horizon for a customer to be considered “churned”?

As we can see, many different factors could completely change the way you think about churn rates. At its core, churn rate is defined as: Churned Customers / Total Customers. But defining the denominator and numerator is the hardest part of the job.

Customer Life Time Value (CLTV)

CLTV is an attempt to quantify the net present value of the profit stream of a customer. CLTV is typically used by tech firms to benchmark against customer acquisition costs (CAC), with the expectation that the sum of the future cash flow should offset the current acquisition cost. The key statistics are as follows:

• ARPU (average revenue per user)
• Avg. Customer Lifetime, n (This is the inverse of the churn, n=1/[annual churn])
• WACC (weighted average cost of capital)
• Costs (annual costs to support the user in a given period)
• SAC (subscriber acquisition costs, aka customer acquisition cost)

However, just because an LTV is positive doesn’t mean that you can take marketing spend to the moon. One of the most important issues about LTV is that all the variables work against each other. If you raised ARPU (the price of your products), your churn goes up. Then you have to increase your marketing to capture more customers, but then as you scale, your SAC grows exponentially.

By now, hopefully you have a better understanding of some of the most common tech metrics that are used by management. And if you find the content helpful, feel free to share it with your buddies.

Cheers!