Evolution: 1Q25 Business Update
Stock tanked -18%: Revenue softness transitory or a thesis breaker?
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Evolution reported 1Q25 and the stock tanked -18% on the results.
Revenue growth decelerated to just +4% y/y (constant currency +6% y/y), down from +12% y/y last quarter. While it is always hard to attribute a stock movement to a single variable, we think it is this large revenue contraction that is most likely cause of the sell-off.
They attribute this slow down to “conscious actions we have taken that will be beneficial for the business in the longer term”.
The first is issues related to the Asia Cyber Attacks where they are implementing measures to stop criminal activity that is weighing on their Asian operation. This first appeared 3 quarters ago and is still on-going. Asia growth was a meager +2% y/y compared to +11% last Q.
The second—and new issue—is “self-initiated” actions in Europe to ring-fence regulated markets. This is in addition to what they did in the UK prior.
As a reminder, the UK gaming commission was investigating Evolution for potential unlicensed gambling activity and so they implemented measures to make it harder for players to play Evolution games illegally. However, this weighed on their UK growth. It sounds like rather than waiting for similar actions to come against them elsewhere in Europe, they implemented similar security measures in all of their regulated European markets.
The net of this is that Europe growth was -1% y/y, a stark contraction from +9% y/y last quarter.
Interestingly, Martin Carlesund commented in the press release that “despite the effects from the ring-fencing and the cyber-attack countermeasures, the underlying potential in both Europe and Asia remains solid”. On the call he elaborated further, saying “what is important to remember is that the underlying demand remains strong and that through the ring fence measures [we] have created an even stronger foundation that we can grow from.” This commentary is key when thinking through whether their financial results reflect underlying weakness in end markets or their offering.
North America growth was solid at +15% y/y and they also noted LatAm is doing well with their Columbian studio catering to Spanish-speaking markets. However, all across the board growth was worse this quarter. North America decelerated 400bps y/y sequentially and LatAm fell 1,000bps.
They are still invested in plenty of new studios with a second studio launching in Romania and a third in New Jersey. They also note that the Brazil and Philippines studios are on track for this year and a second studio in Michigan is coming. The studio builds do express confidence that they will continue to grow.
These measures also increased cost which drove EBITDA to shrink -1% y/y to €342mn for a 66% EBITDA margin. They noted that their legal costs have gone up as they engage in more external legal advisory to operate their global operations, but they will get operating leverage from this item overtime. Additionally, since the Geogia strike, the cost of their studio mix has changed unfavorable in the short-term. Notably, they believe the second half of the year will be stronger and thus maintained their 66-68% EBITDA margin guidance.
2025 they are still referring to as their “strongest product roadmap ever” with 110 games planned to release for the year. The few new product launches to date (notably “Race Track” and “War”) were not enough to noticeably move results though. However, they are optimistic about several other games set to show up in results later in the year (Marble Race, Fireball Roulette). Live revenues were similar to the companies total revenues of +4% y/y.
RNG revenues similarly contracted to +3% y/y from +7% after enjoying 2 quarters of elevated growth. They note that their slot brand NoLimit City is one of the most popular in the world right now though. The same factors that impacted their overall results impacted slots.
All around it was a pretty poor quarter, but the key will be to understand to the extent these mediocre financials were really the result of their own initiative versus a reflection of end market or competitive weakness. Evolution seems to think that the growth contraction was largely self-inflicted, with new studio investments to grow capacity showing their confidence in that belief. They noted nothing was new on the competitive front.
Martin closed out the press release with the following:
We will move on to our updated thoughts on the business and then valuation, but first are our notes from the call below.
1Q25 Call Notes.
Studios
New studio in Romania, which partly makes up for the capacity that was lost in Georgia.
New state-of-the-art studios in Brazil and in Philippines opening later in the year
Second studio in Michigan, while also expanding at full speed in Malta, Colombia, Argentina, New Jersey, and Philadelphia.
“Testament to our stance that we will always prioritize growth and to take market shares over margin.”
Georgia Strike Passing
The situation for Evolution continues to be stable, and they operate without disruptions.
Engaged an accounting firm which concluded that the salaries and work environments were not problematic.
Tariffs
Obviously monitoring the news flow related to the potential changes to global tariffs. At this point in time and from what is known today, they do not expect a material impact on their results.
Capital Allocation
€2.80 per share dividend going to shareholder vote
2.1mn shares repurchased for a total cost of €154mn
Reiterated intention to repurchase €500mn of shares in 2025
Ring-Fenced Europe Activity
Impacted 2 months of the quarter
When asked about the difference in channelization of European countries to get a sense of underlying growth: “I won’t comment on the growth in particular countries. In general, we have seen a blended rate of 9%. And I wouldn’t say that any of the countries stick out in any extreme way.”
No more markets to ring-fence: “There won’t be more markets. We’re sort of done what we’re supposed to do or proactively did, and it’s all more or less happened in the beginning of February. So as I said before, 2 months out of 3.”
“I personally met almost all major regulators in Europe during this period. And it’s close to 100% proactive measure.”
Understanding the negative impact:
“So we are not really affecting the channelization in the country. The channelization in the country is dependent on the parameters that the [ regulators are up ]. So if you put a high tax, 35%, 38% tax or if you put limitations to what the players can do or deposit rules or other things that actually is an abstraction for the player and against the player as well, then the channelization will go down, equal to an annual regulation of whatever that might be. So if you push the market too hard, the market will find its way to its products in another way. So the regulators, when they push it [indiscernible] down and the channelization goes down, it’s because players are not comfortable playing on the regulated side. Then the regulators, in some cases, now moved to a repressive measurement. So they want to restrict it even further. They want to [ invest money ] in the customs in the [ new parts ] supporting. And that’s where we are now. So the players, they need to want to play on the regulated side. We can’t do much about that. So that’s why, even though it’s a click away that it’s a bit slow to get back to the license side.”
Asia Cyber Attacks
“It’s very hard to quantify the Asian growth. We have now 3 quarters in a row where we are essentially flat. If you go back 3 quarters before that or even a little bit longer, you will see q/q growth. But of course, we should have a q/q growth.”
3 quarter of impact from Asia and when asked when the q/q growth pick up could happen, Martin responded “I don’t have any more insight on that right now”
LatAm Growth
“It’s as simple as Latin America, except Brazil, is doing very well. We’re growing very nicely there. And then we have Brazil, which is the regulation just came into force, and that has made that market decline and grow from a lower level. That, I would say, have taken a little bit slower start than expected, but we have not changed any of our outlook. It looks very promising, and there’s [ 230 million people ] living in Brazil. So the future looks good.”
UK Gaming Commission
Taken all actions they requested already
Cooperating and expect it to move forward but don’t know when it ends or the final outcome yet.
Business Update.
Evolution’s revenue growth has declined from growing +31% y/y in 1Q23 to a meager +4% y/y in 1Q25. While most investors assumed their very high growth days were over given their larger base of revenue, it was surprising to see just how quickly the deceleration had taken place.
Now key to any Evolution thesis today is whether the recent revenue growth softness is indeed self-inflicted and transitory, or a signal of a broader and more pernicious weakness in their business model or their end markets.
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