Evolution AB's Q1 2025: Navigating Challenges for Sustainable Growth
A review of Evolution AB's Q1 2025 slowdown and why it may be temporary
Evolution AB (EVO.ST) is the leading provider of fully integrated Business-to-Business (B2B) online casino solutions. Established in 2006, the company has significantly grown, becoming a dominant player in the industry, serving over 800 operators globally with an employee base surpassing 22,000 across studios in Europe, North America, Latin America and Asia. Evolution is renowned for its innovative product offerings, consistently enhancing its portfolio with engaging new games.
Overview of Q1 2025 Financial Results
Evolution reported its Q1 2025 financial results (interim report) on April 30, 2025. The results have prompted a significant market reaction, with shares dropping nearly 20% as performance fell below consensus expectations:
Revenues grew by only 3.9% year-over-year (YoY), reaching EUR 520.9 million, significantly below the 12% growth of the previous quarter.
EBITDA contracted by 1.1% YoY to EUR 342 million, with margins compressing to 65.6% at the low end of the company’s guidance, compared to 69% in Q1 2024.
Operating expenses grew by 14.6% YoY to EUR 217.5 million, faster than the top line, resulting in operating income of EUR 302.2 million, a 4.82% compression of operating margin YoY.
Free Cash Flow (FCF) came in at EUR 327.7 million, a 23.5% increase YoY driven by a reduction of EUR 18 million in accounts receivable and a strong cash conversion of 87%.
Earnings per share (EPS) came in slightly down at EUR 1.24 from EUR 1.27 a year earlier, despite share buybacks.
CEO Martin Carlesund candidly noted in the press release and reiterated during the earnings call, “I am not happy with the financial development in the quarter” acknowledging that profitability was indeed below expectations. He continued stating that the actions taken during Q1 2025 are aimed at strengthening Evolution’s position as a market leader in online casino:
“[…] but one must take into account that the results are impacted by necessary steps that contribute to our mission to ever increase the gap to competition.”
The sharp sell-off triggered by these headline numbers may present a potential buying opportunity for level-headed investors. As many previous supporters exit their positions, labeling Evolution a failed growth story, it may signals the kind of short-term headwind that can provide attractive entry points.
Understanding the Growth Slowdown
Evolution attributes this notable slowdown primarily to deliberate strategic decisions aimed at strengthening long-term growth and sustainability rather than fundamental business flaws:
Cybersecurity measures in Asia: Evolution continues to address ongoing cybersecurity challenges in Asia, first encountered in Q3 2024, through enhanced cybersecurity measures. These actions, while critical for long-term operational stability, contributed to a flattening revenue trajectory in the region, with a temporarily constrained revenue growth in Asia, limiting it to just 2.2% YoY, down from 11% in the prior quarter.
Carlesund remains confident in the potential of the Asian market, stating that, “we see great potential as soon as we have come to terms with the ongoing issues with the cyber criminality”.
Proactive regulatory compliance in Europe: Following the UK Gambling Commission’s scrutiny over unlicensed gambling activity in December 2024, Evolution engaged all European regulators between February and March 2025 and proactively implemented “ring-fencing” measures across all regulated European markets. These measures aim to ensure full compliance by restricting game access solely to locally licensed operators, particularly impacting markets with historically lower channelization rates. Carlesund explained that the impact of this measure was “in markets with low channelization, we have seen a drop in revenue”. As an immediate result, European revenue contracted by 1% YoY, sharply down from a growth rate of 9% previously.
Carlesund emphasized that despite these proactive measures, “underlying demand remains strong and through our ring-fences measures, [we] have created an even stronger foundation that we can grow from”.
Only time will tell whether the Q1 2025 slowdown is truly a self-imposed response aimed at countering cyberattacks in Asia and safeguarding operations in Europe, or if it signals deeper structural issues in the markets where Evolution operates. For now, my confidence in Evolution’s leadership and strategic vision remains firm.
Regional Performance and Strategic Shift Towards Regulated Markets
While the broader slowdown impacted all regions, North America showed solid 15.3% growth, although it was a deceleration from prior rates. Asia grew only 2.2% YoY and was flat QoQ. Latin America experienced mixed performance, with the newly regulated Brazilian market initially impacting growth negatively, while the rest of Latin America, notably Colombia, continued to perform robustly, growing the continent’s revenue by 9.7% YoY. Europe was flat YoY and down 6% QoQ.
The 3.9% YoY total revenue growth figure, although underwhelming, masks Evolution’s strategic shift toward stability and sustainability. Notably, regulated markets now represent 44.8% of total revenue, up from 39% in Q1 2024. This strategic pivot enhances revenue predictability and stability, reduces regulatory risks, justifies higher investor valuation multiples and establishes a robust platform for long-term sustainable growth. Moreover, regulated revenue grew 19% YoY and unregulated revenue declined 6% YoY.
Evolution’s management, heavily invested alongside shareholders with insiders owning 19.1% of the company, prioritizes sustainable quality growth over short-term figures. Carlesund asserted:
“[…] we will always prioritize growth and to take market shares over margin. Even though we had various challenges in the quarter, we do not compromise with our long term beliefs and priorities.”
Meanwhile, the operational disruptions of 2024 in the company’s largest studio, in Georgia, have been resolved. Carlesund confirmed that, “the strike is a past chapter”.
Understanding the Free Cash Flow Surge Amid Modest Growth
Free Cash Flow (FCF) grew 23.5% YoY, even though Evolution experienced modest revenue growth and rising operational expenses. At first glance, the strong FCF margin of 62.9%, up from 52.9% in the previous year, appears counterintuitive given the ongoing heavy investment phase and associated capital expenditures. A deeper analysis reveals that the improvement in free cash flow was driven by favorable movements in working capital, specifically a EUR 18 million reduction in accounts receivable. Typically, accounts receivable increase proportionally with revenue growth, but in this quarter, Evolution benefited from the timing of collections from fiscal year 2024, causing receivables to decrease despite revenue growth. Excluding these favorable working capital movements, operating cash flow declined by 2.3% compared to the previous year.
Consequently, level-headed investors should avoid extrapolating this elevated free cash flow margin into future periods, as it primarily reflects short-term timing benefits rather than fundamental operational improvements.
Despite ongoing share repurchases totaling EUR 154.1 million during the quarter, Evolution maintains a strong financial position, ending with a substantial cash balance of EUR 969.2 million. This balance includes EUR 345.9 million earmarked for its share buyback program, which targets EUR 500 million in repurchases throughout 2025, a capital allocation decision I fully endorse, given the discounted share price levels.
Ongoing Investments Signal Confidence
Despite setbacks, Evolution is actively expanding its studio network, demonstrating a commitment in future growth. Throughout 2025, Evolution will open new studios in Brazil and the Philippines, alongside a second studio in Michigan, USA. Notable expansions also include a second studio in Romania, compensating for lost capacity from the Georgia studio and further expansions in Argentina, Colombia, Malta, New Jersey, and Philadelphia, USA, significantly enhancing their global footprint and capabilities.
The proactive ring-fencing measures and expansion plans have increased operating costs, notably in headcount (an increase in personnel of 8.2% YoY), legal expenses and an unfavorable shift in studio operational costs post-Georgia strike. Nonetheless, Evolution maintains its full-year EBITDA margin guidance of 66-68%, anticipating stronger performance in the second half of 2025.
Robust Product Pipeline
Despite Q1 2025 product launches like Race Track and War games not having materially impacted financial results, Evolution maintains a positive outlook due to an ambitious 2025 product roadmap featuring over 110 new games. In the words of Carlesund:
“For 2025, we have the strongest product roadmap ever with more than 110 new releases that will further strengthen our world-leading portfolio.”
Highly anticipated launches later this year, such as Marble Race and Fireball Roulette, are expected to drive future growth.
Valuation: Is Evolution Undervalued?
Following Evolution’s Q1 2025 earnings release and the subsequent sell-off, the company’s valuation has become notably attractive.
Currently trading at a market capitalization of EUR 12.8 billion, Evolution generated EUR 1.23 billion in Free Cash Flow (FCF) over the trailing twelve months, translating into a compelling valuation of 10.4 times FCF, or a robust 9.6% FCF yield. This valuation appears inexpensive given the company’s strong financial profile, characterized by a pristine balance sheet (debt ratio sits at 0.26) and high profit margins. Additionally, Evolution reaffirmed its commitment to shareholders by initiating another share repurchase program, buying back approximately 2.1 million shares during the quarter, while meaningful insider ownership further reinforces alignment between management and shareholders.
This strong financial foundation highlights a significant mismatch between the company’s current valuation and its underlying fundamentals, a valuation more typically associated with no-growth or declining businesses, not a profitable, global industry leader.
I’ve been a shareholder since January 2024 and have been buying the dip throughout 2024 and early 2025, as the company posted underwhelming quarterly results and faced multiple setbacks. 2024 proved to be a challenging year, marked by a doubling of the income tax rate in Sweden where the company is headquartered, turmoil in its largest studio in Georgia, regulatory scrutiny from both USA and UK gambling regulators, cybersecurity incidents in Asia and, most critically, a noticeable deceleration in revenue growth for several quarters. This culminated in Q1 2025 with an abrupt slowdown: revenue declined 16.7% QoQ, operating expenses increased substantially, compressing operating margins and raising concerns.
However, at current valuations, the company does not need to deliver exceptional growth to justify its price. The combination of a healthy free cash flow yield and consistent share buybacks provides meaningful downside protection. Even modest growth could result in double-digit annualized returns, creating an asymmetrical risk-reward profile for level-headed investors.
Can Evolution resolve its issues, reaccelerate growth and return to double-digit growth?
For me, Evolution is a hold. I continue to believe in the company’s long-term potential and I want to see evidence of growth reacceleration, particularly monetization of new studio capacity, resolution of the Asia cyber attacks, positive effects of ring-fencing by expanding the regulated markets’ share without eroding profit margins while returning to sustained growth in Europe, and meaningful contribution from Galaxy Gaming1 during the second half of 2025. These will be key indicators of whether Evolution can regain its growth trajectory and reaffirm its position as the online casino’s market leader.
Final Thoughts
While Evolution’s Q1 2025 results undeniably reflected short-term pressures, the market’s reaction appears excessively pessimistic, presenting a potentially attractive opportunity for level-headed investors. The proactive regulatory adjustments and substantial investments in new markets and innovative products position Evolution to resume robust growth later this year and beyond.
The sharp deceleration in revenue growth naturally raises critical questions for investors: is this slowdown symptomatic of deeper competitive or market issues, or merely the result of strategic, self-imposed adjustments? Management’s continued aggressive investment in new studios and proactive compliance measures signals their belief that the slowdown is temporary and strategically beneficial rather than reflective of underlying business weaknesses.
Going forward, I will be monitoring revenue recovery as these proactive strategies mature and margin expansion to prior levels and beyond. Level-headed investors may find Evolution offers substantial upside potential with limited downside risk.
Galaxy Gaming, recently acquired in the USA, has secured regulatory approvals and operates in over 25 states, significantly enhancing Evolution’s market position in North America.