Gaming Innovation Group Inc
OSE:GIG
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Good morning all, and welcome to this quarterly presentation by Gaming Innovation Group. It's good to see you all here today. My name is Robin Reed. I'm the CEO of the company, and I will take you through this Q1 interim report. Just some housekeeping before we get started. I'm here alongside my CFO, Tore Formo; and our new Head of Investor Relations, Anna-Lena Astrom. Welcome. And we will have a presentation in which will last approximately 25 minutes, followed by a Q&A. There is a microphone here in which Christopher will give to those who wants to ask questions after the presentation. You can also go into gig.com and ask questions online during the presentation.GIG was founded 5 years ago and have seen tremendous growth. After we went on the stock exchange, we've seen 11 consecutive quarters with all-time high growth. We've had a really strong quarter in Q1 2018, and we're happy to take you through our progress towards the vision of opening up iGaming to make it fair and fun for all.I will start to just give a brief overview to those who are new to the company. GiG is a technology company. We are creating and offering solutions throughout the entire value chain in iGaming. We were founded in 2012, I said, and we have a headquarter in Malta, but we also have offices in Denmark, Norway, Spain and Gibraltar. We are at 700 GiGsters, and we are looking to disrupt the iGaming industry.We are providing services across all verticals within the iGaming value chain. We're unique in that we are the only company doing so. Our mission is to collapse the value chain and disrupt it. I'll quickly take you through the business areas for those who are new. And first, we have GiG Media. It is an online performance marketing company for the iGaming industry. We find paying users online, and we refer them to partnering operators. Our business model is primarily charging a revenue share on the players that we refer to the operators, so we will be paid parts of what the players would pay for with the affiliated operators.GiG Core is a platform. It is an enterprise software used to operate any sportsbook, poker room or casino within our industry. We are reselling services online, and we're charging a revenue share in between them. So we're selling sub-suppliers integrated to the software, and we're selling it as a markup separate to our partners. GiG Sports and Games is gaming services. It is odds, and it is casino games offered operators. Also here, we're charging a revenue share. Finally, we're offering gaming portals, so end user-facing portals in which all our products are present at and where we also contract the sub-suppliers, and our business model is essentially bets minus wins. We're calling it the GiG ecosystem. The idea is to integrate all these services across the value chain in iGaming, as such, achieving synergetic effects, achieving volumes and reducing our cost of sales by having all the services in-house. Our products is also connected to the sort of wider supplier chain in iGaming, so all the sub-suppliers such as casino games suppliers, odds providers that are outside of the company.A quick look at the financial highlights. For the quarter, we made EUR 37.3 million in revenues. It's an increase of 62% year-over-year. This is our second strongest quarter ever in the history of the company, only beaten by the remarkably strong Q4 2017. Worth noting is that Q4 is by far the strongest quarter in terms of seasonality effect in iGaming, and we're very happy with the result we achieved in Q1.Cost of sales increased to EUR 6.9 million, a 57% increase, lower than the revenue increase. We had a special effect on cost of sales this quarter in that the Payment Services Directive 2 from EU enforced that we could no longer charge payment fees towards end users in our gaming services, and therefore, these were added to cost of sales so the underlying development seems stronger.Marketing remained relatively flat. So this is primarily borderline marketing at TV and other performance marketing companies for our gaming services. And they remained relatively flat as we're happy with the current spend. And other operational expenses increased to EUR 14.3 million. It is primarily related to investments into new products and services which have not yet launched. We will talk more about this later.EBITDA came in at EUR 4.3 million, an increase from EUR 0.4 million in Q1 2017.I will go back and talk a little bit about the highlights for this presentation. In the quarter, we achieved a sports betting license in Germany. We are paving way for a launch in the second largest sports betting market in Europe with this license. It's a Schleswig-Holstein sports betting license, so it's offered by one of the member states in Germany. We will launch Rizk.com under new sportsbook there in Germany shortly.We signed an agreement with Hard Rock International for an online gaming platform. We will take their brand to the U.S. market using our system and services, and we're also building their front end.We are now entering the largest gambling vertical, sports betting, with a cutting-edge enterprise offering in May. So GiG Sports has completed. It is now in testing in production environment, and we will launch it shortly.We are also happy to announce that the board has started the process towards a possible listing on the NASDAQ Stockholm exchange. NASDAQ Stockholm, I believe, is a center of excellence within iGaming. It is where the cluster of the most knowledgeable investors is. It is where the community of the most seasoned and professional iGaming workforce is. And we are very happy to be working towards Stockholm at the current stage. We won't talk too much about it in this presentation because it is still relatively early days, but we're decided on moving to Stockholm, and we think it is important to update the market with this development as soon as possible.I will then take you shortly through the financial update. Looking at the revenues from a 12 months' rolling perspective, we're achieving an all-time high of EUR 135 million. EBITDA is also all-time high at 7.2 -- EUR 17.2 million. It is a very strong development in the company, in which we think will continue.The cash position is strong. We started the quarter at EUR 12 million, EUR 2 million derived from operating activities whilst we spent EUR 3 million on investment activities. And the cash and the cash equivalents at 31st of March stood at EUR 11 million. In addition, we are having a bond, and there is an incurrence test on the bond, but it also allows us to tap an additional EUR 33 million. So the financing power of the company is also strong.Proceeding into the business update. GiG Media, our online performance marketing company, performed strongly. Revenues are up 155% over the year, and EBITDA is up 100%. There was a slight decline over Q4 in which was primarily related to the withdrawal or temporary suspension of our affiliate websites in the Dutch market. As signaled in Q4, they're introducing new legislation in Holland, and we are expecting licenses to be handed out in 2019. Meanwhile, we have temporarily suspended our advertisement at affiliate-based websites in Holland. We will be able to reopen these as soon as the market is reregulated.In addition, there was a larger Tier 8 sportsbook the U.K. market who temporarily suspended their affiliate marketing, which affected us, and this is now open again as they have sort of restored the affiliate program and the processes there. So if we are adjusting for the withdrawal from the Dutch market, the revenues were increasing 3% from Q4 2017.The first-time depositors, so the customers referred to the iGaming operators and were 32,400 in Q1 in comparison with 35,000 in Q4. So the slight decrease here is related to the 2 same matters, the withdrawal of the Dutch market and the pause in marketing from the client in Q1. So this will go up again now in Q2. 68% of the revenues were from revenue share agreements. These are perpetual agreements, recurring business-to-business agreements. So this is money that we will be paid going forward on traffic that we have already sent.GiG Core continued to perform strongly. The underlying NGR, so net gaming revenues, of the combined clients on the platform increased 4.5% in Q1 over Q4. Revenues were up 145%, and EBITDA was up from EUR 0.3 million to EUR 1.5 million. The Q1 revenues were, however, impacted by a EUR 2 million one-off settlement fee that we collected in Q4 2017 and then a reduction in overall fees of EUR 1.3 million. Now the reduction in overall fees charged to our clients was in order to support their long-term growth. Many of the clients on the platform have achieved a scale and size where we believe that by offering them even better fees, they will grow faster. So we'll still collect the revenue share, and the NGR is increasing, but we're offering the services at a slightly discounted rate. This is also to support the increasing cost of regulation that is suffered by our operators. As such, we might say that we're set back one quarter, but we're continuing the strong development.Our third segment is GiG Sports and Games. So these are the development of sports betting platform and odds service as well as casino games, which will be sold B2B. And we're now closing in on the launch of GiG Sports. We're launching a full suite of enterprise products, everything you need to start and operate a sportsbook, ahead of the 2018 FIFA World Cup. We're aiming at a May launch with our internal brand, Rizk.com. We're highly excited about this. It has taken us 30 months to get to where we are today. It is a brand-new platform built from scratch featuring the most modern architecture there is. For those who are especially interested, it is a micro services-based multitenant architecture we have coded using the actor model. It provides unprecedented scale and cost efficiency, so we're very happy to say that the integration of the client on this platform can be set up in a matter of a week or a little bit more. Following the Rizk.com launch, this will be sold to B2B clients. So we will run with it in a testing period now in May, and probably during the World Cup, we expect the operation to run smooth, and we will then sell it to other B2B clients. In addition to this, we have development of casino games. As signaled in Q4, we have now 3 casino games currently in production. We built our own [ tax deck ] in the casino games vertical as well, so there is no supplier cost and no thirdhand-party fees. There is 0% cost of sales in these games. We are expecting to launch the first 3 games during H1. And we will, towards the end of the year, also be live with an additional 3 to 5 games, bringing the games portfolio up to 6 to 8 games by the end of this year.I want to spend a couple of minutes to talk a little bit more about these offerings. As mentioned, GiG Sports has been under development for nearly 30 months. It is featuring 3 different products, which all can be bought independently or as a bundle. GiG Sports Connect is an aggregation service of odds and also a distribution platform for odds. So we will distribute our own in-house odds using this platform, but we will also contract thirdhand parties who themselves create odds. The idea is to be able to sell all odds in one feed. We are pricing up football and soon, tennis. Football account for more than 50% of the share of wallet of the customers. So GiG will run with 0% cost of sales on more than 50% of the sports betting once we are live with this product. It can be integrated to GiG Trader. GiG Trader is a back-office tool which you can use to intelligently trade your odds. So there is risk management, trading tools, all the reporting, the BI that you need in order to run a sports bet. Finally, we have our middleware and CMS and front-end development labeled GiG Goal. It is a front-end website in which we are selling to other operators, which we will use internally on our products which are offering sports betting. All these products will be sold on a revenue share in addition to set-up costs and fixed flat monthly fees.We are also developing the casino games vertical. GiG Casino Connect is a distribution and hosting system for casino games. We will distribute our own internal games using this software, and it is also integrated to the major games suppliers of the industry. So the idea is that you can buy one integration to all games across the world.And so GiG Games is our proprietary games. We are well underway with the development of these games, and hopefully, we can launch the first games as early as August. But we will be live with all the games by the end of the year. GiG Magic is our middleware and front-end for casino. So with this product, we can offer not only the front end for sports betting but also for casino. All of these 6 products combined with our platform allows us to offer the entire [ tax deck ] needed for any casino operator, any sportsbook operator. We're very happy with the development of our software, and by the completion of these products, we will be present in the entire value chain in iGaming. We work towards this goal now for several years, and we've had significant investments to achieve this. We're now nearing the end of our expansion across the value chain and can then focus on vertical growth rather than horizontal expansion.Our final segment is GiG Gaming. So that is our B2C portals, where users can register and play casino games and place bets at the sporting events. We're very happy to have achieved the first quarter of profits. The EBITDA increased by EUR 2.8 million to EUR 0.8 million (sic) [ EUR 0.1 million ] year-over-year. The marketing cost was 46% of GiG Gaming's revenue. It is comparing to 60% in Q1 2017. So whilst the marketing is remaining flat, we're aggregating in an increasingly large player database who is staying active and loyal with us. I would also like to mention that in Q1 2017, we were live with several markets in which we closed down due to regulation, which are not factored in to the revenues this year then, obviously. Now when you're adjusting for the revenues in which we shut down after Q1 2017, the growth is 68%. So it gives us that delta on revenues of marketing of 46% versus a growth of 68%. It makes GiG Gaming one of the fastest-growing companies in the world in that segment. The earnings were also impacted by 2 factors: the introduction of the Payment Services Directive 2 from the EU. There was an implementation cost of EUR 1.2 million. So this was removal of transaction fees from end users. We also provided a discount in core fees, so fees paid internally to GiG Core of EUR 700,000. The active real money player base increased to 189,100, which is up from 188,900 in Q4. And 96% of the revenues in gaming is derived from our core markets, which we define as the Nordics, Central Europe and Western Europe. So these are markets where we either are operating under the European economic agreement or are having a gaming license in the market or are locally taxed. As more of these markets is moving towards reregulation, an increasing proportion of our revenues are becoming regulated. We will talk more about regulation in the subsequent slides.I'd also like to mention that from 1st of April 2018, I took over as the Chief -- for this department, the Chief Marketing Officer. That is related to the fact that I see great potential in this vertical. I believe we can build one of the leading operators across the markets in which we're present. I'm very happy to endeavor into this journey, and I'm looking to stay for as long as needed until we are showing even better growth and profitability on this vertical.I will take you through the regulatory update now because it has been very significant in the quarter that has been -- it has been heightened in [Audio Gap] but the company has also been working intensely with the General Data Protection Regulation. We think security of end users' data has the highest priority. The new data protection act is coming into effect now in May, and we have focused intensely on being prepared for this.There has also been the Anti-Money Laundering Directive 4 in which have put pressure on iGaming operators, including GiG. So there has been 3 major regulations across the EU in which we have had to prioritize. Apart from the regulation from EU, we are also keeping a close eye on the gambling legislation across the continent and the world. We are in the process of acquiring a license in New Jersey, a casino enterprise license. We have submitted the application, and we are on track to obtain the license ahead of the launch of our partner, Hard Rock, in the U.S.In the United Kingdom, we've seen a tightened regulation for iGaming, and there is ongoing compliance work that have significantly increased the sort of threshold for operations in the U.K. And we have to focus intensely on this. In Holland, as mentioned, we're awaiting new legislation in 2019. And meanwhile, you'll have to be very conservative with the marketing. We're allowed to operate there, but we tend to target Dutch end users. But we will acquire a license once the framework is out and available later. In Sweden, they are reregulating. They're issuing remote gaming licenses. We can apply shortly, and we will have a license once it is available. The application work has commenced, and we are expecting to be ready with a license if the government is ready the 1st of January 2019. The framework in Denmark is very similar to Sweden, and we will work on the technical implementation of their licensing framework in accordance with the Swedish regulations. So we will hopefully achieve a license in Denmark at about the same time as in Sweden.In Germany, we have obtained the sports betting license in Schleswig-Holstein, allowing us to target the market there with our sports betting services. And finally, I want to talk a little bit about Norway because there was some news in Norway recently about the sort of regulatory environment. The opposition parties, they're expected to introduce a restrictive bill. So a so-called DNS blocking will most likely be implemented in Norway. It will give players a warning that they're leaving the Norwegian jurisdiction and territory when they're entering our services. We will not be significantly impacted by this according to our estimates. We'll take questions on Norway afterwards if there is any.So I will then finally proceed to the outlook before opening for the Q&A. We have built up a significant and strengthened compliance functions within GiG. We're currently having a compliance operations team. We're having a strong legal team, and we are now also introducing a technical compliance team and a player safety team. The player safety team being dedicated agents who are monitoring actively game play of the customers, trying to spot patterns of problematic gaming behavior for them to proactively contact customers. It is our vision to make iGaming fair and fun for all. We think the winners of the future within our industry will be those who are most adept and those who can capitalize on the regulated markets going forward. We've spent a large portion of our resources this year into preparing for what will soon be a 100% regulated iGaming industry.We will launch the new compelling GiG Sports offering in May 2018, and we are on track with the casino games offering in H2 2018. This will have revenue impact on our company this year, and it will have significant upside going forward. We're launching Hard Rock's online gaming platform in the U.S. market during 2018. I received a lot of questions as to when and where, and I can only sort of comment according to what Hard Rock has released, and then let people sort of speculate on when the client wants to launch. However, we are progressing well. We're on track, and we will be ready when they want to launch.We have a solid foundation now, and we're driving forward sort of a dynamic and expanding pipeline of prospects. Not only do we have the in-house products and services, we're growing across all verticals and we're launching new verticals, but as mentioned in the Q4 report, we also have a strong M&A pipeline. We have been engaging in several talks over the last months. Haven't materialized yet, where we have passed is because we believe there is a price pressure currently in the affiliate vertical. So we have not jumped on the opportunities that we had simply because we believe that what might be good in a 1- or 2-year perspective might not be so good in a 3- and 5-year perspective. However, we still believe that there is very strong opportunities out there and companies we can acquire at a reasonable price, so we're expecting more affiliate acquisitions going forward. We have also looked at other opportunities, both within the operator space and within the technology space, and we will see whether something materializes. We will remain disciplined, and we will only take the opportunities where we can defend it with a strong strategic rationale and where we believe the price is attractive. But as mentioned earlier, we have the financing power and the cash to engage in acquisitions.So with that, I would leave the microphone open for questions-and-answers. And we will also take questions from the website. Thank you.
Yes.
You mentioned some reduction in overall fees on GiG Core. Could you say something about the magnitude and what the competitors are doing? And if this a split of duties, how is this split between the operators and the suppliers? Is it a 50-50 split of the increased costs? Or what does it look like?
Yes. So the main effect was the PSD2. We had significant revenues from marking up payment services to the operators. When they could no longer charge end users fee, we took parts of that bill by reducing our markup on the payments offer. In addition to that, we have reduced fees. That is in order to sort of bear the cost of the more invisible burden they have of compliance cost. So more of an alternative cost by them having to focus on the compliance operations as well. Going forward, there will also be gaming taxes suffered by the operators, and we felt that in order to put them in a competitive spot to grow their volumes ahead of all this regulation, we thought it was smart to reduce the fees currently and allow them to sort of invest into marketing and into growth. So that's the main reason for reducing the fees.Thank you. Any questions from the web, Tore?
Yes. We have some questions here. So there are some interest on the sportsbook. So first, can you give some color on you when you expect to break even in the sportsbook business. And we also have questions about any prospects of contracts with clients on the new sportsbook technology.
Yes. We are currently running with a burn rate of EUR 500,000 in the sportsbook. Entering sports betting is a huge undertaking. It is the largest vertical within gaming and probably also the most complicated vertical within gaming. We are launching Rizk.com now internally, and then the sort of sports betting vertical will start to get the revenues. We haven't opened up the sales pipeline entirely yet. We have been in dialogue with several clients, and we have great interest in the product. However, we would obviously see how it performs with a live client before signing contracts. So I won't comment on exactly when we receive -- when we will achieve profitability now. It is still too early to tell. But we have a strong sales pipeline. We will launch an internal brand already in May, and we're expecting significant traction on the product going forward.
Okay. And back to New Jersey on the U.S. license. How is the work on obtaining the license progressing? Do you expect to have it shortly?
Yes. I think I should be careful with comment on sort of decisions that is outside of my sphere. And we are obviously dependent on the regulator. We have submitted the application. It has been deemed complete. It is progressing well. They're happy with what they have received so far. We have meetings with them. Exactly when we'll receive it, I'm not sure. But I hope it will be very shortly.
Okay. And you have been relatively quiet on the M&A side in the last 2 quarters. Is this intentional? Do you see increased M&A going forward?
Well, we have engaged into a dozen of acquisitions over the last few years, so I think we have been very active and aggressive in the space and successful. We will continue to be active in the acquisition space. It is all a matter of hitting the right opportunity, and we will pick carefully. We're disciplined. We don't have to do anything. We're going across all verticals, and we're doing well. But as I said, there is attractive acquisition prospects out there, and we are in dialogue with them. And hopefully, we can close something soon.
There are also some questions about how we want to enter the Stockholm exchange, through M&A or just a straight listing.
Through a straight listing, yes.
And there are also some questions about the impact of Norway if something happens around the size of Norway on our revenues both in B2B and B2C.
Yes. If the government puts an increased pressure on remote betting companies, it will be slightly negative. However, we don't believe they will be very significant, the effects. We will also see what we, in that case, do with marketing in Norway, where it is proposed to stop TV marketing. So on the EBITDA, short and mid term, I don't think it would have an effect at all. If anything, positive as we were investing into long-term growth, so we're not worried about the increased legislation in Norway.
Okay. I think we have covered most of it now. Let me see if someone is popping up here. I have some questions here about the stock price, but I don't think we should comment on that. Will there be an in-house creating department for all sports in the future? Or will everything be done B2B?
The way we're generating the odds is that we're using models and big data, so we're automatically generating the odds, meaning that we can cover a wide range of leagues of events without a lot of manual sort of labor needed. However, we do have a trading department, which will more look at the sort of risk aspects of it, the customers coming in and the trading. We will also have some manual trading of odds simply to create very sort of unique sports betting markets. And we're having those people in place already, but we do not expect sort of a huge department within trading and risk. Thank you.
So one last question here, and that is you have recently entered into new partnership solutions. In what other areas of your business do you see partnership as a natural way to expand? Do you have new partnerships in the pipeline that you can shed some light on?
We're thinking open and connected. Whatever we do, we think it's right to sell it. If we can't utilize our products and services in the best possible manner, if somebody can do it better than us, then we rather want to be disrupted by the world outside on our platform than sort of not being there. Whatever we do, we try to achieve scale advantages, synergies by selling it B2B. We're currently present in the entire iGaming value chain, either with live products or with products that we're about to launch. We will sell all of those products B2B. We are very happy with the product portfolio that we would muster by the end of the year, and we don't see any sort of short-term new verticals that we would enter into. There might be micro services that we would sell, new products that we will add such as GiG Comply, a compliance tool, but these ain't major verticals as such -- as those we have entered now, so we don't foresee any sort of significant expansion. We are, however, looking at the payment sector, and we are looking at PCI compliance and payment gateway. And we might do something there, but we will be very patient there. Thank you.
Yes. One more here. Can you please comment further on the quarter-over-quarter OpEx increase on the B2B both on the platform and in affiliate? And how do you see this going forward?
Yes. GiG has been for a period of significant expansion. To take over the value chain in iGaming is no small undertaking. We need manpower to do so. More so, we need tenancy within the people that are going to carry sort of this company going forward. We thought it was better to recruit early, to teach the people, to train our people and then have a strong workforce going forward than to sort of hire along the way. We have now achieved more or less the scale in which we want to be at. We are soon live with all products. We have the capacity to maintain them and to grow them, and we do not see sort of any significant increase in manpower needed going forward. So that's the primary reason for why we have expanded the staff and an indication of where we will be at.
Okay. I don't think we have any further questions. Most of it has been covered by your presentation and the answers afterwards so...
Any more questions from the audience here? Then I would like to thank the viewers for their attention and for the people who came here today. Thank you. I'd see you in 3 months.