Genius Sports Ltd

NYSE:GENI

Earnings Call Transcript 2023-Q1

[Operator]

Hello. My name is Jean-Louis. Welcome to the Genius Sports First Quarter Earnings Results 2023. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]

I will now turn the conference over to Brandon Bukstel, Investor Relations.

[Brandon Bukstel, Investor Relations]

Thank you, and good morning. Before we begin, we'd like to remind you that certain statements made during this call may constitute forward-looking statements that are subject to risks that could cause our actual results to differ materially from our historical results or from our forecast. We assume no responsibility for updating forward-looking statements. Any such statements should be considered in conjunction with cautionary statements in our earnings release and risk factor discussions in our filings with the SEC. Including our annual report on Form 20-F filed with the SEC on March 30 of this year.

During the call, management will also discuss certain non-GAAP measures that we believe may be useful in evaluating Genius' operating performance. These measures should not be considered in isolation or as a substitute for Genius' financial results prepared in accordance with U.S. GAAP. A reconciliation of these non-GAAP measures to the most directly comparable U.S. GAAP meters is available in our earnings press release and earnings presentation which can be found on our website at investors.geniussports.com.

With that, I'll now turn the call over to our CEO, Mark Locke.

[Mark Locke, Chief Executive Officer]

Good morning. And thank you for joining us today. We're happy to begin 2023 on a positive note, continuing our momentum from the past year. We noted last quarter how 2023 will mark a key turning point for the business, as we triple our EBITDA profitability and generate positive free cash flow in H2. Our first quarter results prove that we are already well ahead of our expectations giving me even greater confidence in the year ahead.

We hold ourselves to a high standard of accountability to our shareholders and in once again delivering results ahead of expectations for Q1 2023. We feel confident enough to increase our full year guidance to $400 million of revenue, and $49 million of adjusted EBITDA, significantly ahead of where we guided at the start of the year. We will come back to the multiple ways Genius wins, but for now the operating leverage of our business model is now demonstrably coming through and the strategic position we find ourselves in remains as strong as ever.

To recap the quarter, on a constant currency basis, we grew our revenue by 19% to $97 million well ahead of our target of $92 million. More importantly, this year-on-year revenue growth also dropped through to the group adjusted EBITDA at a near 100% margin, further demonstrating the operating leverage of the business model. We delivered $8 million in group adjusted EBITDA, exceeding our $3 million target and representing an $11 million increase from Q1 of last year and growth of nearly 40%.

The profitability improvement this year is a function of the multiple growth drivers that come with minimal cost. As a reminder, some of these growth drivers include: increased handle or total volume of bets placed. Growth of in-play betting, higher operator win margins, successful contract renewals and cross-sell with existing sports book customers and new customer wins. So these growth drivers have worked in our favor and fueled revenue growth, while our cost base has remained relatively fixed and should not need to increase.

We are encouraged by these positive trends across the globe as well as in the U.S. where we continue to see solid improvement in rationalization in the online sports betting market. Our sports books are becoming more profitable, this will benefit Genius than the entire ecosystem. I mentioned last quarter that our strategic technological and financial position is the best it has ever been during my time at Genius. Our results in the quarter give me even greater confidence in the business. And as mentioned, we are raising our revenue guidance from $391 million to $400 million and our group adjusted EBITDA from $41 million to $49 million implying a group adjusted EBITDA margin of 12%, up from our prior guidance of 10% and more than double our 2022 margin of 5%.

In summary, we are excited about our trajectory towards our long-term objective of 30% plus EBITDA margins, as we persistently execute on our plan ahead of expectations.

Moving along, you may remember a version of Slide 6, from the prior earnings presentation and it is worth revisiting this list, considering these are exact growth drivers that led to our outperformance this quarter. I hope it is absolutely clear, that Genius has multiple ways to win and we incur no direct cost increases, as we pull these growth levers. This is how we achieved EBITDA margin accretion, alongside accelerated growth.

Let me provide just a few examples, of how this benefited us in the quarter, starting with Handle. Q1 saw the successful launches of regulated online sports setting in Ohio and Massachusetts. Our revenue share agreements with the US sportsbook operators, meant that we received immediate, revenue uplift at no additional cost.

Our expenses related to rights fees, people and operational overhead that would have remained the same, regardless of whether these two states had launched. In addition to the overall handle growth, we've also tracked, how much of it is driven by In-Play betting. Our revenue share agreements with the US sportsbook operators, earn us a 3 times higher take rate on In-Play versus pre-match. Again, all on the same cost base, making this a significant profit driver for Genus.

Using the NFL season as a proxy, we saw in-play betting handle increased by approximately 40% and in our second full season, outpacing the rate of the broader market. Taking this a step further, sportsbooks have also improved their win margins on In-Play bet, which increases the actual revenue earned from these bets. This is called gross gaming revenue or GGR.

In our second full NFL season, we saw in-play GGR grow by over 100% year-on-year. The next growth driver is operator win margin. Essentially this is the metric, that measures how much of the handle is being converted to revenue, from the operators and hence for Genius. You'll have heard operators talk frequently about a significant improvement in win margins, largely driven by the success of parlays and same game parlays. Genius also shares in this, in addition to, the In-Play revenue.

Lastly, Genius has had a successful track record of increasing its take rate in contract renegotiations and renewals. This represents much of the year-on-year growth of our betting revenue. Remember real-time official data is a crucial input, that powers the entire sports betting industry and something that bookmakers simply cannot operate without.

And while sports betting has existed for decades in mature market, the product of official data is relatively new and we have a long runway, to continue increasing our pricing power. We expect this to be a substantial source of growth over the next 12 to 18 months and for many years ahead.

Our business was founded on the principle of building technology-driven partnerships with leagues to: one, obtain a high-quality portfolio of official data rights; and two, position the business to capture additional revenue opportunities afforded to us, through differentiated technology and relationships. This has been the bedrock of our business, for the past 20 years.

Today, sports leagues, teams, broadcasters, sponsors and bookmakers like many companies around the world, all face the challenge of leveraging the rapid advancements in AI technologies to accelerate their businesses. We have proven without a shadow of a doubt, that Genius is the clear generative AI technology leader in our industry, and perfectly positioned to help our partners be at the forefront of innovation, within the sports media ecosystem.

Our second spectrum demo, which we held last month, detailed the decade plus of technological development and investment that is already behind us and fully costed, as part of our current plan. None of our competitors are anywhere close to where we are on this, and this will lend itself to a significant competitive moat in the years ahead.

It's why the biggest names in sports like the NFL, NBA, English Premier League, ESPN, Amazon, CBS and others are already beginning to adopt our generative AI technology to transport their offerings, as they enter the digital age. This is what makes us a sticky long-term partner to leagues, which helps us to secure our ownership of data rights and reinforce our commercial position with the sportsbooks. It is why we will maintain our position as a technological leader helping our partners across leagues team's sports books, broadcaster's brands and sponsors. At this stage of our journey, we are operating a business model with a large global scale accelerating profitability and a clear path to free cash flow, all while building a platform around second spectrum to capture the next layer of long-term growth.

While others in our space may see this changing technological landscape as a challenge it represents an incredible opportunity for us and one on which we are already actively capitalizing. We are continuing to improve the scale of this opportunity at a rapid rate and our focus remains on continuing to win contracts that will drive broad-based adoption of our generative AI technologies.

To conclude as you continue to watch us deliver on our financial targets like you have for the past five quarters and see increased adoption of our technology. You should recognize this as a clear signpost that we are proceeding exactly to plan on our near-term and long-time growth and profitability targets.

And on that note, I'll now hand the call to Nick to discuss our financials in more detail.

[Nick Taylor, Chief Financial Officer]

Thank you, Mark. As mentioned at the start, we have consistently delivered on our strategic and financial plan. And this marks the fifth consecutive quarter of meeting or beating expectations. Our strong execution in Q1 led to another period of outperformance relative to our guidance. The largest outperformance was in our betting product, where we grew revenue by 30% year-on-year to $65 million exceeding our guidance of $61 million.

On a constant currency basis, this represents even greater growth of 39%. Given this is high-margin revenue for us it contributed meaningfully to our group adjusted EBITDA in the quarter. Our Media revenue was also ahead of expectations, having generated $22 million of revenue versus our guidance of $20 million.

As we pointed out previously, the advertising landscape has changed since Q1 of last year amidst an evolving macroeconomic backdrop. This is particularly true for sports betting customers, who have monitored their overall promotional spend more closely. Q1 of last year, with a period of heightened promotional intensity for sports books. This was also characterized by a handful of one-off marketing events such as the launch of online sports betting in New York for instance which was unique to Q1 2022.

Nevertheless, our guidance implies media revenue growth in excess of 10% this year, and we're pleased to be tracking ahead of that forecast. Lastly, our sports PEC revenue was in line with our expectations earning $11 million in revenue. This equates to total group revenue of $97 million for the quarter well ahead of our guidance of $92 million and representing 19% year-on-year constant currency growth.

Importantly, this $5 million revenue outperformance contributed to group adjusted EBITDA and nearly 100% margin. As a result, we reported group adjusted EBITDA of $8 million versus our guidance of $3 million, representing an $11 million increase from Q1 of last year. The results from the quarter are evidence of the operating leverage and the scale that exists in our business model. We have achieved sizable revenue growth without the need to materially increase our operating expenses.

Going forward the business can support substantially higher revenue with the fixed cost base we have today. Based on everything you've heard today, you can likely feel the sense of excitement in the business and therefore, we are raising our 2023 guidance accordingly. We are increasing our revenue guidance from $391 million to $400 million based on our outperformance in Q1, and the positive trends we expect will persist through the remainder of the year.

Similarly, we are raising our group adjusted EBITDA guidance from $41 million to $49 million. As much of this additional revenue should drop through to our adjusted EBITDA and we do not anticipate any incremental changes to our cost base.

Just to be clear, unless communicated otherwise our guidance will typically assume an exchange ratio that is consistent from the time of our first issuing guidance, which in this case was 1.2 GBP to US dollars. We understand that foreign exchange rates will fluctuate throughout the year. However, as it relates to our public guidance, we do not intend to predict these fluctuations.

In other words, we are focused on guiding the market on a like-to-like basis. Therefore, unless these short-term movements are truly material in nature much like we experienced last year, we will continue to guide based on a consistent currency.

Looking beyond EBITDA and into our cash position, we finished the quarter with $131 million in cash which is slightly ahead of our guided figure of $130 million. As a reminder, our first quarter cash flow typically includes seasonal working capital outflow and an annual cash payment related to our CSL investment.

Looking ahead to Q2, expect our closing cash balance to be approximately $115 million which should represent our cash low point for the year. From there we expect Q3 will be roughly cash flow breakeven before flipping positive in Q4.

Overall, we expect to generate positive free cash flow in the second half of this year as guided last quarter. Again our Q1 outperformance and increased guidance demonstrate the profitability potential of the business model. And in 2023 is the year in which this begins to accelerate in the form of rapid margin expansion.We're excited about the progress we've made this quarter and from the strong momentum we have through the remainder of the year.

With that, we will conclude our prepared remarks and open the line to Q&A.

[Operator]

We will now begin the Q&A session. [Operator Instructions] Your first question comes from the line of Jordan Bender of JMP Securities. Please go ahead.

[Jordan Bender, JMP Securities]

Great. Thanks for taking my question and nice quarter. As we look out to the 2023 updated guidance, can you just kind of remind us how you're thinking about some of the shifting factors impacting guidance that you kind of walk through on page six of the slide, play and hold throughout the year. Thank you.

[Nick Taylor, Chief Financial Officer]

Hi, Jordan, it's Nick. Yes, I guess, the headline answer to that is we're thinking about it for the rest of the year how we've seen it really in Q1. And just to remind everybody what we've done is we've seen a really strong NFL season through Q4 and Q1 this year. There's a lot of tailwinds in our favor. And you've heard that from the sportsbook operators over the course of the last weeks and a half through their own earnings season. Just to give you an idea of what that growth looks like for NFL.

What we've seen is the in-play has been growing the fastest of all the different betting metrics. We've got total NHL handle has been up 21% season on season and actually in play is up 40% from that basis. When you look at it on a GGR basis, I think, Mark touched on this in the prepared remarks, total NFL GGR was up 86% and yet total imply GGR was at 100%. So they are the sort of key tailwinds that we're forecasting through to the end of the season, but we're not -- in order to hit our numbers in our revised guidance we're not looking at any material changes in those underlying metrics.

[Jordan Bender, JMP Securities]

Great. And then for my follow-up I want to talk about the US. business. I guess were you guys EBITDA positive in the first quarter there? And then maybe how we should think about that kind of trend throughout the year as well. Thank you.

[Nick Taylor, Chief Financial Officer]

Yes. I mean we don't give a geographical split on partly because it's very difficult because a lot of our contracts obviously a lot of our rights are entirely multinational. I mean what we said at the year end and I think it still is true today is that the losses that we found in the US have certainly got less and will continue to reduce through 2023. We weren't EBITDA positive. I think that's a fair comment. And I think I said at the year-end, we'll be looking at around about a single-digit EBITDA loss in the US for 2023, which is considerably better than it was in 2022 and I expect that to continue to progress to a breakeven and positive position for 2024.

[Operator]

Thank you. Your next question comes from the line of Jed Kelly of Oppenheimer. Please go ahead.

[Jed Kelly, Oppenheimer]

Hey, great. Thanks for taking my question. Just two if I may. You've had a lot of nice announcements with the second spectrum. And you had a very nice tech demo back in March on the technology. So can you just remind us, how or where we'll see that start to help some of the other revenue line items, and how that will impact the financials? And then just looking out over the next 12 months, are there any contracts up for bid or up for renewal that we should be aware of? Thank you.

[Mark Locke, Chief Executive Officer]

Hi, Jed, it's Mark. Yes, it's a good question on second spectrum. So I mean just to recap, what we've spent our time doing the second spectrum is really focusing on an investment phase. So I mean second spectrum had 10-plus years of investment and one of the important things that we think is worth focusing on is that second spectrum is fully costed or fully budgeted in the numbers that we put out both now and our guidance. And I think that's a really important differentiating factor for Genius.

The way that second spectrum impacts us is very similar to the way that we've used technology in the rest of our business. We've got a long history of building and delivering technology for sports and using that to acquire rights and drive revenues in all aspects of our business. So what you're seeing now and again already dropping through and what you'll be seeing significantly more over the coming period is a revenue increases in all aspects of our business as a result of second spectrum. So new rights deals or potential renewals of rights deals that we may have a lot of those are driven by our second spectrum relationship as well now.

The relationships we've got with the sports books, we announced something with bet365 a while ago. That will start to drop through over time. And again, the way that we engage with the leagues in all sorts of different areas.

And I guess the final area is the broadcast in the media side. I've made it pretty clear that my focus for second spectrum, one of the focus to second spectrum is to distribute our technology into many broadcasts as possible. I think we've done a good job of that. So far we've got Amazon and CBS and we're doing stuff in the UK with Premier League. And all of that is coming through really nicely in our business and gives us an enormous revenue potential from that side as well.

So I think we're feeling pretty good about where we are on a commercial basis and we're feeling pretty good about the lead that we have in this space and the investments that we've already made.

So your second question? Sorry, Jed, I think your second question was around rights renewals. Yes, there's a few rights renewal conversations. I mean the main one is the data co-rights renewal conversation. That's up shortly. So again referring slightly back to the answer I've just given you. We've got a very strong relationship with lots of different rights holders. We're using second spectrum to really drive a lot of their strategy and their growth. And I think we're feeling pretty good about where we're sitting in the position we have with any of the major rights renewals that we've got on the horizon.

[Operator]

Thank you. Your next question comes from the line of Bernie McTernan of Needham Company. Please go ahead.

[Bernie McTernan, Needham & Company]

Great. Thank you for taking the questions. I would love to just get some thoughts on with the recent investor presentation on second spectrum. Has it advanced any conversations with stakeholders in the industry for bringing this technology to market and maybe a follow-up to that? In the letter it talks about 1Q benefiting from higher take rates in part driven by contract renegotiations, was second spectrum catalysts to revisit those contracts? And if not what drove the early renegotiation of those contracts?

[Mark Locke, Chief Executive Officer]

Yeah. I mean, I'll take those questions back front if you like. I mean the renegotiations of the contracts are sort of part of normal course of business. So we're constantly renegotiating our contracts and the way that that operates in the business has been pretty consistent for years. So that's really what we're doing.

Obviously, when we've got new technologies, such as second spectrum and it really does have sort of differentiating factor in that advantage then it becomes a big part of those core business conversations. So it gives us a significant opportunity to expand those relationships and really work more closely with our clients.

On the sort of previous question, the way that we're thinking about some of the sports. Sorry – so the way we're thinking about sort of second spectrum with the rights negotiation I mean I basically touched on that on the last answer as well. All of the conversations that we're having with our rights holders, all of the conversations that we have with our partners include I think without exception uses of second spectrum and rollout of that technology. It's become a really core part of the business.

Obviously, one of the things that's so strong about the position is that it's real, that it exists, that it's already out there in the market that it's driving technology and driving a lot of those relationships. So yes, it's become an integral part of our strategy and it's become an integral part of our strategy that's really working and really delivering revenues at the moment.

[Nick Taylor, Chief Financial Officer]

Hey, Bernie, it's Nick. Just following on as well Mark's answer in relation to the renegotiation of the contract. It's worth just remembering that 30% of our revenues are from the US. A lot of those renegotiations in Q1 are actually the non-US contracts, as you know the US contracts run broadly to mid-2024. It's also not just renegotiation. It's the sort of classic one and expand position that we have with our global sports books, where it's about adding additional services. And that's exactly where second spectrum comes into play with a new additional product and the new additional technology that they're as interested in any sports leagues and federations.

[Operator]

Thank you. Your next question comes from the line of Clark Lempen of BTIG. Please go ahead.

[Clark Lempen, BTIG]

Hi, thanks. Good morning. I had a question on the programmatic ad business maybe for Mark or if he's on the line Josh, I was hoping you guys could update us on what you're seeing with customer growth and demand trends I guess between the respective sports, betting and non-betting – non-sports betting markets? And maybe also some context on how you – what you're seeing right now in the broader ad market, how that's trending? Do you feel like it's sort of weakened or improved relative to when you set guidance earlier in the year?

[Josh Linforth, MD, Media & Engagement]

Hi, Clark, it's Josh here. In terms of our overall programmatic business we continue to be really happy with its progress. To date, the majority of the revenue still are aligned on the Sportsbook side of things but we continue to win new business with the non-betting advertisers and we're really, really happy with how that's progressing. I mean as a reminder that's coming from a very low base.

I mean 18 months ago that was a very, very new area for us and we're happy with the number of new brands that we brought on over the course of over the course of the last 18 months and that continues to go from strength to strength. Obviously, it's early days. It's the start with these advertisers. So much like the sports betting business we have a land-and-expand strategy here, and we're feeling really good about it.

In terms of the overall ad market I think some of those initial jitters are starting to ease a little bit. And we're seeing new cash budgets come in from various brands. So we're certainly happy about it. We don't see the market stopping us from progressing.

[Nick Taylor, Chief Financial Officer]

Yes. Hi, Clark, it's Nick. Just to add to that as well just on the back Josh just said, is it because of that is why we've upped our guidance for example in Q3 on media by a couple of million dollars because we're starting to have some pretty interesting and favorable conversations in relation to – particularly around the start of the US sports season at that time, where I think that when we set that guidance initially we'll be relatively conservative because of the visibility we have in that space. Media, if you still look at our media numbers year-on-year then implies a growth rate of 11%, which we're pretty happy with particularly given what Josh just said about the overall market position.

[Operator]

Thank you. [Operator Instructions] Your next question comes form the line of Ryan Sigdahl of Craig-Hallum Capital Group. Please go ahead.

[Ryan Sigdahl, Craig-Hallum Capital Group]

Good morning, guys. You mentioned price increases that you took on several of the global sports book contract renewals. Curious if there was any churn in those customers as part of that negotiation?

[Nick Taylor, Chief Financial Officer]

Yes. Hey Ryan. No churn. As you know, one of the fundamentals about Genius is given the number of sports and given our long tail and given the market products we have is that if you run a legalized sports book globally, you have to work with Genius and what Jack and the commercial team have done over the last 12 months and continue to do, is make sure that we continue to drive value from the services we provide.

This is not just about taking price although pricing improvement, as Mark talked about in the prepared remarks, it's going to be certainly a large lever of our growth going forward but this is also about London expand and expanding our services, not just on the five or six key US sports books but obviously on a global basis.

[Ryan Sigdahl, Craig-Hallum Capital Group]

And then for a follow-up, so you raised your EBITDA guidance for the year. Good to see that. The cash low point is now a bit lower than what you were previously expecting last quarter. I guess what are the puts takes kind of on the cash reconciliation versus the EBITDA guidance?

[Nick Taylor, Chief Financial Officer]

Yes, hey Ryan. Yes, we didn't actually give a previous cash flow point number. So it's actually pretty much in line with what we have previously said. So they're around about $115 million. And then, we are forming what we said last quarter and indeed I think probably the quarter before that is that we'll be positive in cash in H2 and then expecting to be positive cash in 2024 as a year.

[Operator]

Thank you. Your next question comes from the line of Michael Hickey of Benchmark. Please go ahead.

[Michael Hickey, Benchmark]

Hey, Mark, Nick. Good morning, guys. Congrats on a strong quarter and your updated guidance here. Nick, I had trouble getting online here but did you talk about 4Q, looks like you raised every quarter about 4Q, if I saw that right just curious why you didn't bump up 4Q?

[Nick Taylor, Chief Financial Officer]

Yes. Hey Mike. You're right. So we've raised Q2 by a couple of million dollars. We obviously have much business at visibility of quarter two and some of the tailwinds that we're seeing, particularly in the betting sector in Q1 we're seeing play out again in quarter two. I think just one of the previous answers talked about our increasing confidence around media spend at the start of the sports season in Q3.

Q4 it's purely just visibility right now, Mike. We're only just one quarter in. We're pretty confident of those numbers. We're delighted to raise our guidance to 49 and we'll continue to monitor, we'll come back once our Q2 performance is in the bag to discuss what the rest of the year looks like.

[Michael Hickey, Benchmark]

Okay. Cool. And then also, I mean 100% contribution margin for the quarter exceptional. You raised your EBITDA guide for the year so sort of contribution margin maybe 56% for the year. Can you just talk about sort of your success here in controlling expenses like you have and how you think about sort of the progression from 1Q into the remaining quarters here in terms of your expense control?

[Nick Taylor, Chief Financial Officer]

Yes. I mean Mike, you and everybody else has heard us talk quite a lot in the past around our operating leverage in the business and the levers that we have our disposal to increase revenues come with a zero increase in cost base. And we've always said that that requires a certain level of scale, and we're at that tipping point now, which is why we are going to go from a $15 million EBITDA position to a $49 million EBITDA position in 2023.

And those conditions we should see continue to exist from 2024 and beyond. If you look at Q1 year-on-year position you look at our cash operating expenses, are actually in total, it's $24 million this quarter versus $27 million in the previous quarter last year. So the business is very focused on driving profitability and driving cash profitability as well and we're really beginning to see that happen in this quarter and expecting that to continue through for the rest of the year.

[Operator]

Thank you. There are no further questions at this time. This concludes today's conference call. You may now disconnect.