Gaming Innovation Group Inc

OSE:GIG

Earnings Call Transcript 2021-Q1

[Douglas Forsling]

Hi, and welcome to Redeye. My name is Douglas Forsling. And I'm an equity analyst here at Redeye. We are today hosting a live Q&A of Gaming Innovation Group's first quarter of 2021. [Operator Instructions] Here to present today is Richard Brown and Tore Formo, the CEO and CFO of Gaming Innovation Group. Gents, the stage is yours.

[Richard Brown, Chief Executive Officer]

Thank you very much, Douglas. Good morning, everyone, and thank you very much for joining me for the Gaming Innovation Group's Q1 2021 Interim Report. I'm very pleased to deliver a strong result for the company in Q1, where we saw the results, the efforts and hard work across the company's divisions continue to deliver, what for us remains the start of the progress towards our long-term objectives of the business. Today's presenters, I'm joined by Group's CFO, Tore Formo, who will be available during the Q&A. To introduce GiG to those of you watching for the first time, the company has split into 3 divisions, covering a range of key areas within the iGaming industry. Our Platform division, which provides cutting-edge and highly scalable technology to the industry, in essence provides a technological backbone for an operators online offering. Our proprietary Sportsbook platform, operational and performing in both the U.S. and European markets. And our Media division, which connects end-users to operate on a global level by a multitude of localized websites and marketing channels. Each vertical is also complemented by a managed service offering towards our customers ranging from bespoke front-end development through to customer operations, compliance and responsible gaming. Just briefly, GiG is listed on both the Oslo Børs and Nasdaq exchanges, with offices in Malta, Spain, Denmark and approximately 430 full-time employees. Our Platform has licenses in 10 highly regulated jurisdiction and an additional 7 in the integration pipeline. And our Media business has a diverse global portfolio with primary assets in over 25 countries. I will now look at some of the headline figures for the quarter. Normalized revenues grew by EUR 1.3 million versus previous quarter, up to EUR 15.4 million, equating to a 9% quarter-over-quarter growth and was up 44% versus the same period last year. With an EBITDA margin at 29%, the EBITDA result itself was driven up to EUR 4.6 million, 674% versus Q1 2020 and up 11% versus Q4. I'll move over to some key takeaways for the quarter. As mentioned on the previous slide, the business continues its positive development with significant year-over-year growth, both on revenues and on EBITDA as well as delivering a good growth comparatively to the previous quarter. We had a strong start to the year with the Media division, which delivered all-time highs in both revenue and FTD generation or First Time Depositors. The Platform business continued to secure future growth by signing 2 new long-term agreements in the quarter and one more in the first weeks of Q2. In addition, 2 new brands went live on the Platform in Q1. Importantly, the business delivered a positive EBIT result and EBIT in the quarter. I will just touch a little bit more on the EBIT performance. The business has performed well here with an EBIT result of EUR 1.3 million, up from a negative EUR 4.7 million in Q1 2020, a positive step or a milestone on our path towards our long-term financial objectives. The Media assets acquired in 2016, 2017, 50% of the useful life has now been already amortized, and we performed a reassessment of the said useful life in accordance with IRFS best practice. And the majority of these assets are actually performing better than at the time of acquisition. Therefore, in those cases, useful life has been extended in relation to the performance. Over, of course, just to note, using historical useful life, the EBIT result delivered still was a significant improvement and would have been at EUR 0.9 million for the quarter. I will now cover off a couple of short strategic updates with regards to Q1. I talked previously on positioning GiG towards markets in early regulatory process or pre-digital maturity, as we aim to capture market share early and grow with the market in conjunction with its share capture by the high-quality tailored product offerings that we have, and we continue on that path in the first quarter. With a good pace on long-term contract signings in the Platform business, as mentioned, with 2 contracts signed in regulated markets and the third contract in April, including a contract for the U.S. market signed in Q1. Media also launched new website assets in 7 new markets and launched 15 new websites across its paid and publishing departments. These activities continue to secure long-term recurring revenues across multiple geos in both business units. Again, I would like to just cover off a kind of guiding model as the revenue build for the SaaS clients, given that is a focus point for growth going forward with 2 examples used, in the bottom graph, you see the scales as revenue builds with the operators over time. These SaaS contracts generate long-term sustainable revenue source. There is often a build period from the contract signing to launch, followed by operator revenue growth post ramp up of that business and operation. Go live times can vary significantly depending on the contract scope, specific market entry and regulation and related certifications for those markets and should really be viewed in relation to the full term of the contract lengths. Contracts are long term with the majority having an average initial period of around 4 years. And while the contract values vary, we could look at an average contract value of between EUR 0.6 million and EUR 1 million per year over the term of the contract. On the top right, you see a graph, which gives an indication of the revenue ramp of our clients and value of contracts signed across the previous years, with the growth and retention of the existing customers combined. Therefore, the addition of new contracts in 2020, 2021, along with new signings will continue to scale up the Platform business over the coming years. And if you compare the volumes of clients onboarded onto the SaaS model versus the current run rate, in 2018, I think we onboarded 1; in 2019 2; in 2025 and in 2021, we've already got live with 3 and have an additional 2 in the pre live or development complete phase in the first 4 months of the year, with a further strong onboarding and sales pipeline throughout the remainder of the year. In conjunction with the previous mentioned new market entries and new website assets that complement our existing business portfolio within the Media division, I wanted to talk about how we secure future recurring revenues or revenue share deals. As you can see, the FTDs we sent to the operators were up across the board in Q1, and 95% of the players that we actually referred have a revenue share component to the earnings. This is in a perpetual lifetime of the customer. And in the graph, you see a little more of the detail of how this is broken down. 45% of the players are sent on pure revenue share deals, 50% on hybrid model, which is very effective in our paid media business, in particular, where we cover an upfront marketing cost, and earn off the player's revenue share. I know only 5% were sent on CPA in their entirety. We balance this mix depending on the market, the value and -- the value players generated and as well as seasonal impacts. I will now look at some of the business unit performance in more details. For the Platform Services, normalized revenues were EUR 5.2 million in the quarter, a 36% increase year-over-year. And the Platform Services delivered a positive EBITDA for the quarter at EUR 0.3 million, up from a negative of EUR 1.6 million in 2020, 120% year-over-year improvement. 2020 client onboarding, market entries helped drive the Platform business's underlying growth during the quarter. And as you can see from the graph on the bottom right, where excluding Germany and white-labels, the business increased revenues by EUR 1.1 million quarter-over-quarter. And just to quantify those impacts as well that we experienced, approximately EUR 0.3 million decline Q-over-Q comparables came from white-label agreement cessation as part of the long-term strategy. And one of those businesses have been converted to a SaaS in Q1. The implementation of the new German regulations has impacted the revenues across the industry and, for GiG specifically, by approximately EUR 0.6 million in the quarter versus Q4. However, we see that the numbers have bottomed out now. Well, we anticipate them to have bottomed out, so the existing clients will be able to grow from here in conjunction with several new clients launches and signings targeting the post-market regulation in July. Overall, a focused SaaS business has continued to deliver positive growth mechanisms, an indicative -- and indicate an exciting period ahead as onboarding program continues to roll out. GiG continues with its aim to operate in globally and locally regulated jurisdictions with 7 new markets in the integration pipeline and 73% of the current GGR was from locally regulated or soon to be locally regulated markets. Sales remained strong in Q1 with the addition of the 2 new contracts in a total of 3 for the year. The onboarding program is progressing with 2 new clients live in Q1 and 1 so far in Q2 with the 2 further in development complete phases awaiting client go lives. In addition, we have 10 launches that are being worked on in the integration pipeline. Moving to Media Services, it continued its positive momentum from Q4 into Q1 this year with an all-time high in quarterly revenues. Revenues were up 23% year-over-year at EUR 10 million, which continues quarterly growth trend at 12%, a very strong result, and I'm very happy with. Paid media continues to see quarter-on-quarter improvements, with revenues up 76% year-over-year and 22% quarter-over-quarter. The EBITDA for the Media Services ended up EUR 4.6 million, and First Time Depositors delivered close to 44,000 in the first quarter, a 56% increase year-over-year and 31% up versus Q4, with growth across both paid and publishing verticals, driven by asset performance in new core and emerging markets. The recurring revenue share continued to account for more than 60% of the business unit's earnings, and there were exciting new launches in both paid and publishing units in key new markets, such as LATAM, Southern Central and Eastern Europe that we believe will enable further growth in the periods to come. Slightly lower -- when we move to Sports Betting Services, slightly lower than normal margins influenced a marginal drop in revenue versus Q4. And thus EBITDA ended at EUR 0.4 million -- is negative EUR 0.4 million, which due to a significant operational cost reduction, resulted in a EUR 1.3 million improvement year-over-year. Now that the business is an appropriate cost base and the completion of the multi-feed handler, data-feed handler and Betgenius trading is fully in place, we can begin to work towards ramping up the division in a prudent and assured manner. GiG continues to see strong potential value driver in its Sports Betting segment over the coming years and work towards realizing this, however, from a sustainable cost base. Just to cover off some notable points from the business progress during April. We've signed a new long-term customer onto the platform for regulated EU markets with an experienced iGaming operator and an additional brand with omnichannel solution went live in the first weeks of Q2, with 2 additional launches anticipated. The sales pipeline remains strong, and demand across the products and the markets remains high. The Media business delivered another monthly all-time high in FTDs in April, and normalized revenues in April for the company were up 35% versus the same period last year. Just to recap on what we presented at the end of last year in our financial target -- long-term financial targets. Our ambition is to deliver annual double-digit organic revenue growth over the next years with an aim to achieve an EBITDA margin in excess of 40% by 2025. The performance in Q1 indicates we continue to track towards these targets, and I'm very pleased with the overall development. In summary, GiG again delivered significant year-over-year growth in both revenue and EBITDA. We had a strong EBIT improvement year-over-year, resulting in a positive EBIT of EUR 1.3 million. The business has leading product portfolio and a growing Platform business with an exciting onboarding program, securing future growth in a multitude of regulated markets. GiG has a highly profitable and growth-focused Media business with an expanding global reach, and the business continues to take strong steps forward in its long-term targets and value potential -- to create value potential as a result of the dedication and hard work of the teams across the company. GiG will continue its focus on execution and expansion and the numerous actions and projects taken on in 2020 and into 2021 will positively impact the operations going forward. Thank you for your time today, and I will hand back over to Douglas at Redeye for the Q&A.

[Douglas Forsling]

Thank you for that, Richard. Very good presentation. And congratulations to a very good quarter report. So you see that pipeline is having a lot of good -- like signed -- 2 newly signed in this quarter and then 5 done in development phase, launched 2 in [ the same ] and then you have 10 of them in the pipeline yet together. How do you see it forward like for the rest of the year and after 2021?

[Richard Brown, Chief Executive Officer]

We still -- we see a continued strong dynamic within the demand for Platform Services. There's a multitude of new markets that are opening up to regulation, whether that be in North America or Latin America, several areas within Central and Eastern Europe. And you also have a growth of some more regulated markets in the sense of Southern Europe. There's some very interesting markets on a global scale. And we see that the transition from online -- from off-line to online continues to be a driver in conjunction with the digital adaptation of societies. And I think those continue to be -- remain strong drivers over the coming year for the demand of our products and therefore, as we continue to work towards that and refine the offering that we still see strong demand in the sales pipeline going forward. And we would anticipate that a good momentum through that, of course, depending on the complexity and scale of some of those contracts would determine potentially how many clients we would like to sign and which ones we would like to focus on. But overall, we see a positive step. Obviously, coming out of this year, 3 contracts in 4 months, and we continue to see a strong momentum going forward as well and strong demand from various markets and jurisdictions.

[Douglas Forsling]

Yes. So you're touching a little bit on it, but which markets do you see is the most interesting for the specific segments of GiG?

[Richard Brown, Chief Executive Officer]

I don't necessarily think there's any one in particular. There's a multitude of very interesting markets. The gambling industry is the global industry, one that is developing at different paces throughout the globe. There's some early market movements or earlier, at least less mature digital markets that will take time to grow, but they are extremely exciting, I think, across Latin America, some parts of Eastern Europe as well. And then we also have the Australasia developments. We would anticipate, hopefully, for casino in the kind of mid-term at least. So -- and of course, there's an opportunity across in North America, both in Canada and in the U.S., as those markets continue to open up. So again, a global industry, which we are well placed. We have contracts ranging from New Zealand all the way through to North America as of today. So we see the business as a global one. And that's not just necessarily for the Platform, but also for the Media business as well. We want to do a lot -- there's a lot of opportunity in a multitude of markets.

[Douglas Forsling]

Yes. And on that question, we actually got one from the audience. Can you mention any of the new markets where Media is doing really well and gaining momentum?

[Richard Brown, Chief Executive Officer]

I don't want to go into the specifics of some of the markets, actually, but we see strong development, as I said, in several of our core existing markets, which have ranged in Central Europe and even the U.K., et cetera, historically, and they have developed well. But we also see that some of the newer markets in Latin America have also started to develop positively. So a broad range in that sense of markets. And again, with regulation opening up, it opens up new channels to our paid media division as well. So across the the board, there wasn't specific -- anything specific in a single market that drove the improvements. And that's the strategy that the team have and that they continue to support with a diverse approach to how the business should develop over the coming years.

[Douglas Forsling]

So talking still a little bit about the group. You came in with a high EBIT margin compared to last year, like 29% and a growth of 674% on the EBITDA level. As your goal is 40% financial targets in 2025, are you moving forward? Or this is just 1 quarter that we saw the scalability is coming?

[Richard Brown, Chief Executive Officer]

Well in Q4, we also had around 29% on the normalized EBITDA margin. So I think we're at the kind of level now. It will obviously fluctuate [ to ] degrees over a quarter-to-quarter and 3 months to 3 months period. But we've seen it steadily increase over the last 12 months, second quarter in a row where we hit 29%. And I think there will be -- we see so much potential across the business in both the Platform, Media and as a total industry. So we believe that we were on track towards our long-term goals. We will continue to do what's right for the company in terms of investing where we see opportunity that will help leverage us towards that 40% over the longer term.

[Douglas Forsling]

Yes, super. And I think the question that everyone is asking still, but I think it's kind of one. But still, corona effects, are you seeing like any pull forward in demand for more digitalized for your platform? Or is it more like a pent-up demand that you're waiting for to serve?

[Richard Brown, Chief Executive Officer]

I think it was -- I think we've seen it across the industry and not just the gambling industry that the coronavirus has obviously accelerated several retail decline shifts on to the digital, et cetera, and the gambling industry is no different in that sense. I think it's -- you see also that it leverages governments towards new tax regimes, and you've seen that in the U.S. now, in particular, in some of our areas where they're looking to fill tax holes and governments from the support work, so they're looking for -- to regulate on our gambling. That will obviously be a driver as well in certain markets and across the board there. So I think it's a trigger for longer term or a shift that was already occurring prior to the pandemic, but it has accelerated it somewhat. So we see demand coming from that as well. But as I said, it's not necessarily down to just the pandemic itself. I think it's a trend that has shifted. You see also in markets such as Italy that have not been regulated for quite some time, but have had still a very high propensity to retail betting, sports betting and gambling. And that has started to shift online. How much of that will return to retail? There will naturally be some return to retail. But I think that a large shift will have happened already as consumers have become familiar with the digital products.

[Douglas Forsling]

Yes. Broken down into Media Services. In Q4, you mentioned that the Google's change in the algorithm was favorable for you guys? And is it still the case? Or how do you see the risk here in the algorithm of like Google?

[Richard Brown, Chief Executive Officer]

I mean what the teams do is continually to work to enhance the product's performance, quality for the users as the end goal. And essentially, that's what Google is also trying to determine with their algorithms is the quality of the assets that serve the users' queries best. So we continue to work towards that path. We've been -- we've shown with historical performance. And we've navigated the changes that happen very well and that we also continue to build better and better quality products that will hopefully serve well in the long term. We also have a diverse portfolio, as I've mentioned several times, both globally, but also from an asset perspective. We run a multitude of assets that are all targeting different niches in specific markets, et cetera. So we believe that that diverse and robust nature of the business enables us to continue to push towards a continually better performance business all the time.

[Douglas Forsling]

Yes. And you talked a little bit about the Sports Betting now they are on appropriate cost level. So what is the expectation from here? Is it to grow the business and keep the cost level in kind of level with the growth?

[Richard Brown, Chief Executive Officer]

Yes. Exactly. I think that's well summed up in the sense that we will try and keep the cost base in level with the growth expectations and stuff like that. As I've mentioned several times before as well, I really believe that there's a strong potential for our Sportsbook product and Sportsbook market to be able to grow that business. But it will take some time. We've had some priorities in terms of over the last 12 months, the team have managed to do some significant product enhancements in conjunction with a reduction in cost base, but in that sustainable position that we can then move forward from and into the years ahead where we would see more and more opportunity. So we continue to manage and go along that path. We have some priorities that we've completed now, that now the next steps start to move forward. We already have several clients signed in the onboarding pipeline in that big part of the business that will go live during the year. That will help also to bring up the revenues. And yes, we see a strong potential, stronger demand than we did this last year for the product as well within the sales pipeline. So we continue to go forward, as I mentioned, from a kind of reassured and confident cost base that we will continue to manage very prudently as we go along in order not to become wasteful in that sense. But we will also make sure that we aim to realize it in contractual obligations that we -- or contractual opportunities, I should say, that we will try and pursue with that segment in conjunction.

[Douglas Forsling]

Yes. Super. So we are taking some questions from the audience. Regarding trading update, is there anything we need to keep in mind relating to the comparable period April Q2 given COVID and so on? Or is it -- it's pretty straightforward the data points?

[Richard Brown, Chief Executive Officer]

I would say it's relatively straightforward. I mean, no different from [ things like ] COVID from last year. We saw the business perform as per normal on a kind of group aggregate level in a sense, no necessarily large impact there. So I would say there's nothing particularly impacting from related to that.

[Douglas Forsling]

Okay. Super. Can we expect Sportsbook EBITDA to grow in line with the revenues? We have already asked this, but if you want to elaborate on it. Is it an additional cost considering going forward?

[Richard Brown, Chief Executive Officer]

Yes. As I mentioned in the previous question as well, I think we would anticipate we have some new signings and new contracts that will come in. We continue to optimize that business. The -- as I said, the team have done some really strong product enhancements over the period as well. And we continue to build that business, particularly for the longer term.

[Douglas Forsling]

And we have quite some questions about the refinancing of the bond. Can you elaborate a little bit on that?

[Richard Brown, Chief Executive Officer]

Yes. So we decided to engage with both Pareto and ABG to begin the process of bond refinancing. We see the -- yes, we see it as an opportunity to look at that potential and exactly how to manage that now. So we wanted to engage with advisers early in order to be able to progress with that. It's more or less what I can say right now.

[Douglas Forsling]

Yes, I understand. But more -- not pointing -- with financing and so on and the opportunities in the market, are you looking into any M&A at the moment?

[Richard Brown, Chief Executive Officer]

We continue to investigate the various opportunities there are on an M&A basis. I think we now will start to look forward where it would be complementary in the business, et cetera and if the right price points would come in as well. So we continue to always keep our eyes open and look at that opportunity as and when they come through, the ones that would make both the strategic sense and also financial sense. I would like to remain pretty disciplined in that area in this particular period as well.

[Douglas Forsling]

Yes, super. If it's possible, could you elaborate a bit on the margin outlook for the Media Services, the balance and dynamics and the factors impacting the profitability?

[Richard Brown, Chief Executive Officer]

Can you repeat the question, sorry?

[Douglas Forsling]

Yes, sorry. Could you elaborate a bit on the margin outlook for Media Services, the balance and dynamics and the factors impacting the profitability of Media Services?

[Richard Brown, Chief Executive Officer]

We have a very strong EBITDA margin, obviously, within the Media business. There is around [ 400,000 ] in additional costs that they take from a central cost once we divested the B2C business, which impacts the comparables to Q1 last year. However, we also wanted to make sure that we're investing in the business for its long-term future. And as you can see, we work predominantly on revenue shares as well. So we would anticipate revenue shares to come through. Our paid media business has a strong margin and one that we continue to support. I think you can see that while the marketing cost has gone up meaningfully, but the margin within that business has remained. And we continue to invest in our products, and we look at some of the market opportunities ranging from the U.S. where we have some strong initial assets that we would like to be able to support as well. So I think we're happy with where we are with the margin. And we will continue to do what we believe will be the short, mid and long-term best in terms of how we support that business's growth in the coming years.

[Douglas Forsling]

Yes, super. So I think it was all of the questions for audience. And my only question is, what you're looking forward for in Q2? And what can we expect forward here in 2021?

[Richard Brown, Chief Executive Officer]

I think, as I said, as I outlined as well. For me, this was a very strong step forward for us. But it's only the start of what I want and what this business wants to go out and achieve. And the team behind it are exceptionally dedicated and extremely hard-working and very focused on what we want to deliver over the next periods. So I'm just very excited about what we can do along the path in order to be able to bring this company to its full potential over the coming years as well.

[Douglas Forsling]

Super. That was all my questions and all the questions from the audience. So I want to thank Richard and Tore for your presentation. And congratulations on a good quarter.

[Richard Brown, Chief Executive Officer]

Thank you very much, Douglas. Thank you for everyone for listening in.

[Douglas Forsling]

Thank you. Bye-bye.