Gaming Innovation Group Inc

OSE:GIG

Earnings Call Transcript 2019-Q2

[Robin Eirik Reed, Founder, CEO & Interim CTO]

So good morning, everyone, and welcome to this Q2 Interim Presentation of Gaming Innovation Group. So summer day in Stockholm. Welcome back after the summer. There is also quite a few people watching in Malta. You've been working all through summer, but thanks for the effort. We are in a good position for the quarters to come. This presentation will last about 20 minutes, before we will proceed into a Q&A. You can ask questions through the web page that you're following, and you can also dial in after the conference. I'll get straight to it. My name is Robin Reed. I'm working as the CEO, and I'm the founder of the company. Today, I'm also here to speak about the outlook of GiG and of the quarter that has been. We'll also touch the strategy and have a general look at the company and the business case.So I'll start on that note and explain GiG to those who are new to the company. GiG is a global technology provider of products and services in iGaming. Online gambling, as we were calling the iGaming industry, is an attractive industry through its more than EUR 50 billion in revenues and is growing at a compound rate of 6% every year. The industry is currently being transformed. Countries are reregulating their gambling laws in order to cater for online gambling. As such, increased taxation and the pressure is on the operators who are feeling the margin pressure and the -- so are suppliers. In this industry, GiG is well positioned. We are providing products and technology throughout the entire value chain of iGaming. We're a full-service provider. We have the operational experience to support these operators in the industry.So what we are doing is that we're providing a platform in which allows operators to share their costs, to improve their time to market, and as such, meet the increased pressure from regulations in the industry. GiG is accelerating this network by having its in-house marketing business and operators. All our services are offered in what we call a fair and fun environment, and GiG is increasingly focusing on the compliance, sort of capitalizing on the trends by offering compliance software, which gets sold to several Tier 1 operators. In GiG, we have a very experienced management team with decades of experience in this industry and aboard. We have a strong and dedicated workforce, and we're focusing on the execution and targeting strong growth.A quick view on the products and services we're offering and the business model. So GiG is operating across the entire value chain in iGaming. We have built our own proprietary platform called GiG Core. It is all the tools, all the features, all the hardware and the software that you need in order to launch and operate an online sports betting, poker, casino and soon, lottery business. We're selling it on primarily a revenue share basis. We have what we call content and ancillary services, which is games, odds and other apps that are complementing the technical platforms, such as trading software and so forth, also sold primarily on a revenue share basis. We're doing digital marketing services. We're one of the largest so-called affiliates in the online gambling industry. So we're sending traffic towards operators in this industry and our own in-house operators. And about 60% of the revenues in our marketing business is coming through revenue sharing agreements, while the balance is flat and fixed fees. Finally, we are having our own operators and the business model there being, of course, that's minus wins.The strategy of GiG is to become the global operator and partner for strong brands in iGaming. We want to take the position as the B2B supplier in this industry. The company has grown fast. Over the last 12 months, we had a revenue of about EUR 141 million. It is a slight decrease over the previous quarters, mainly because of the increased regulation in the industry. However, we have evidenced our ability to meet these challenging times. And nevertheless, we have increased our last 12-month EBITDA in the quarter over Q1.Looking specifically at the Q2 financial highlights, revenues are decreasing, with 16% the balance, primarily due to the Swedish regulation, which we will talk more about in this presentation. When the cost of sales have increased with 3%, it is due to the increased taxation coming from primarily the Swedish market. Marketing goal was reduced with 32% coming in at EUR 8.9 million and other operational expenses with 17%. As such, the EBITDA was increased at 49% over the comparable quarter last year.To look at the Q2 operational highlight and start to talk about that way ahead and the outlook for the company, I see a very positive outlook for the company. GiG have now entered into an agreement with SkyCity. It is the largest tourism leisure and entertainment group in New Zealand. As such, we have expanded our B2B business, which is now ranging from New Jersey in the United States to New Zealand. It is a true global reach. We now have a very strong pipeline of both what we call turnkey and modular customers. We embarked on a journey to target the land-based operators, who would onboard the digital space as the growth in the gambling industry is primarily coming from the digital part of the industry. We have changed our offering. We have improved our offering to target these clients specifically, and we're now gaining increased traction. Not only have we sold our services to Hard Rock, one of the most renowned brands in the world for the U.S. market, we have now also sold to SkyCity, and we are in dialogue with a range of other such land-based brands.Rizk, our in-house operator, have had a strong and profitable growth despite the regulations in Sweden. We had all-time high revenues in our Paid Media business and a robust overall Media performance. In the quarter, we also received 2 licenses in Spain, sports betting and casino. So we are soon allowed to operate there, and we also received the license to conduct affiliation, so marketing in Romania. I'm also happy to announce that GiG has after the quarter, divested its brand, Highroller.com, for a total price of EUR 7 million, whereas the acquiring party will become a B2B customer of GiG.Before talking more about the business update, I want to proceed to talk about the strategy. As mentioned, our intent is to become the global operator and partner for strong brands in iGaming. What we want to achieve is to enable cost and scale advantages for the industry, so it can continue to grow its margin albeit, increased regulation. So what we are doing is that we're connecting operators and suppliers and end users through the GiG platform through our back-end and front-end services, and we're trying to increase the network.What we are currently focusing is to develop the technology and the products to enable the full business potential. It is crucial for us to operate at the lowest possible delta of IT costs to revenues in order to provide these scale advantages. We want to offer the richest, the most powerful suite of apps to the operators and suppliers alike in order to capture as large as possible market share of the B2B market. In order to scale the network, we're operating in-house brands and our marketing service, which we're using to accelerate the growth. We are currently focused on attracting and training the best management and staff, so a key strategic goal of the year is to significantly strengthen the leadership and the staff of the company as we're targeting increasingly large and demanding businesses, with the ever-growing and rich product portfolio.First, I want to discuss the B2B development. As mentioned, we have signed New Zealand's largest casino and entertainment group, SkyCity. We are providing SkyCity with a full turnkey solution. So they're buying the platform from us, the back end, front end, managed services. We're even providing them with a gaming license. The site was launched on the 8th of August 2019. As mentioned, we now have a very healthy pipeline of potential customers that is supported by our track record, our capability of delivering a fully-managed iGaming solution globally, and that we have new modular products such as GiG Trader and GiG Comply, which we can also sell to potential operators. Our Media Services have stable profits, and they continue to enable investments into future growth and the technology portfolio. We have an opportunity to grow both our Paid Media and Publishing in current markets such as Romania and North and Latin America and Asia. We are using the Media business to grow our networks. So we're aligning the markets in which we're targeting our marketing business with, with the markets that we're operating in-house operators in and the B2B network.In the quarter or after the quarter, we divested Highroller.com for EUR 7 million. I want to talk a bit about this decision because it is very important. So GiG has pursued a strategy of focusing our marketing spend on Rizk.com, which was the strongest product we had for the casino category. That is, in order to improve earnings quality by increasing brand equity in target markets. So by focusing our marketing spend and helping the unaided awareness of Rizk.com in the key markets, we're increasing the customer engagement and loyalty. Previously, we pursued a multibrand strategy but we're now increasingly focusing on a single brand strategy.We launched Highroller at the end of 2017. It is a very good product. It is a strong brand, and it has been returning decent KPIs. However, as mentioned, we're focusing on managed growth. We want to grow profitably, and therefore, we needed to consolidate our marketing spend. As such, a good route forward for this brand and product was actually to divest it to a B2B partner that has a very strong marketing and operational capability, and who will, of course, operate on our platform. We have invested about EUR 3.5 million into Highroller since launch. That covers the domain acquisition, the pre-revenue work and the investments done into marketing and staff following the launch. H1 revenue was EUR 1.4 million and EBITDA was minus EUR 0.2 million. We have now sold it for EUR 7 million, which gives us a good return on the project. The acquisition price is to be paid over the contract duration of 48 months in equal installments.To talk more about the B2C development, as mentioned, the strategic review in 2018 is yielding positive results. We focused on fewer and larger brands. We're now operating 4 brands. It has improved EBITDA by driving a lower marketing spend. It has improved the marketing efficiency. We have a strong growth in the group's leading brand, Rizk, which now accounts for 73% of the revenues. We want to achieve healthy margins and good earnings quality through expanding in what we call less mature and high potential markets. So these are markets where the competitive theme isn't that developed as it is in some Northern and Western European markets and where regulation online has not been introduced yet, but where we're expecting it to be introduced. So these are markets where we can come in early and take a strong competitive position and operate in a healthy margin prior to regulation being introduced.Now we need to focus on regulated markets as well. So a key initiative for us is to continuously improve the competitiveness of our sustainability model in regulated markets where, of course, increased taxation means that you can't achieve as high margins. However, the blend between these various markets should yield a good margin for our B2C business.I want to just touch briefly on the sustainability model. It is increasingly important to display that you were able to not only follow applicable rules and regulation as it is being introduced, but that you're also able to excel on that. In the quarter, GiG introduced a predictive model and machine learning model, which is now trialed on all GiG's B2C brand. What the algorithm does is that it calculates the probability of a player, self excluding. So a player would self exclude when they develop a problematic gambling behavior. And we want to predict that and avoid that. We have a team of agents that are trained in responsible gambling, who would proactively interact with these players, and who would help them and guide them towards setting limits and ensuring that they don't develop problematic gambling behavior. This predictive model has been very successful. We're able to predict these type of patterns at a very early stage on a large quantity of our players. We think this is a very valuable asset as an increasing amount of markets and the marketplace is getting regulated.To touch a bit on the operations, we had by the end of the quarter, 709 staff. It is a decrease over last year, but a slight sequential increase. About 30% of these people are working with what we call Platform Services, so primarily engineers. About 16% is working in Media Services and 10% in Sports Betting services. So more than 50% of our staff is engaged in developing and improving the B2B offering. Now we also have about 25% working with our gaming operators and the balance working with our admin functions, such as compliance, as well as in-house games production.With that, I'd like to proceed to a business update. So our gaming operators achieved EUR 19.6 million in revenues and an EBITDA of EUR 0.4 million. Now that was an increase in EBITDA that came in at minus EUR 2.8 million last year, however, a decrease in revenues. Now the decrease in revenues is entirely explained by the decline in the Swedish market following regulation. However, Rizk now represents 73% of the B2B revenues and albeit the increased regulatory pressure, had a year-over-year growth of 17% and was also quite profitable. The EBITDA improved year-over-year to EUR 0.4 million, as mentioned. The primary driver of this was increased marketing efficiency. The marketing costs decreased to 37% and now represents the delta of 42% of the B2C revenue, down from 54% last year. Almost half of our revenues are now generated from regulators or new regulated markets, which is a blend that I think is good and something we should target going forward.GiG Subsidiary, Zecure Gaming Ltd., was sanctioned by the Swedish regulator, and I want to talk a bit about this. We received a fine of EUR 350,000 and the reason was because we had listed an international football match with players under 18, participating on the field. We had this match out for a very brief amount of time. We didn't accept any bets. We discovered the match ourselves and removed it without anyone contacting us. Nevertheless, we received a fine. We have, of course, appealed this fine because our interpretation of the regulations is that you need to accept a bet in order to breach the regulations, which we didn't do. So we will see the outcome of this event as soon as the appeal is being treated. Nevertheless, I want to assure you that we have taken all necessary steps to avoid that anything can happen in this regards going forward.With regards to our Media Services, we had a solid development. We are comparing this quarter to Q2 2018, which was, of course, significantly boosted by the football World Cup. We had about 29,000 first time depositors referred, with 5% were referred to own brands and an additional 5% was referred to platform customers. The paid model, so media buys, so traffic arbitrage for platforms such as Facebook, Google and so forth to operators, was representing 16% of Media revenues. Following a tough year in 2018, driven by the regulations in U.K. affecting the Tier 1 sports fix and operators there, we were very happy to see that this business area regained profitability in Q1 and now in Q2, we showed all-time high revenue growth. 60% of the revenues are from revenue sharing agreements, providing a sustainable and recurring revenue base; 17% was on so-called CPAs, so upfront fees paid for players; while 21% came from listing fees, so operators paying for good shelf space.I would also like to mention with the Media business that we sold our first FTD in New Jersey through the website, wsn.com. Now this is a Pan American website that is gaining increasing amount of traffic. We have a license to sell customers in New Jersey, and we will, of course, pursue more licenses in more states as they open in the U.S., and we find it a good milestone that we were able to sell the first player to an operator in the quarter.Our Platform Services achieved revenues of EUR 4.4 million, which was down from EUR 6.3 million last year. And the EBITDA decreased from positive EUR 1.1 million in Q2 2018 to negative EUR 1.1 million this quarter. The decline is explained by the termination of a major customer, where revenues impacted the quarter of about EUR 2.2 million and transferred almost its entirety to the EBITDA. We started on the transformation of the platform business from primarily a white label model to target established businesses with their own licenses. That is due to the increased regulation, which increases the risk of allowing other companies to operate on your license, which also consolidates the business to those who has a strong position in the marketplace. So GiG has decided that our strategy is to partner up with these strong brands, with these strong players in each individual market as they're getting regulated throughout the world. As mentioned, we are successful in this transformation. We have signed Hard Rock for the New Jersey market and now SkyCity for New Zealand, and we're looking to add additional clients in the coming quarters in additional markets.The EBITDA was impacted by a negative contribution of EUR 0.8 million from our Games service. So that is proprietary casino content that we're developing. The total database transactions was up. This is a very good indicator for the underlying activity in the network. It was up from 4.6 billion transactions to 4.7 billion. In the quarter, we signed a new brand, 2 brands launched. And with 3 brands in the pipeline and 4 brands discontinued their operation, 35 brands are now operating on the platform.We started developing our Sports Betting Services a couple of years back. It is of very large strategic importance to GiG. The sports betting vertical is the largest vertical in the iGaming industry. In a regulated future marketplace, it is increasingly important as you can target a larger portion of the population. GiG has decided that we want to have an entirely proprietary offering in order to have the flexibility we require and ultimately, the margins we require to be competitive in the marketplace. We are now on a path to achieve profitability in the sports betting segment. Going back to Q3 2018, we launched this low, we were then at minus EUR 2.8 million. We improved to minus EUR 1.8 million in Q4 and Q1, and we have now improved to minus EUR 1.5 million in Q2. And we're expecting to reach profitability in H1 2020. There is now 4 external customers live on the platform, and both internal brands, Rizk and Guts, is utilizing the platform. This is also a milestone for us because Guts was operating a legacy software that we discontinued in the quarter. So now we are entirely focused on growing the state-of-the-art GiG Sports Betting Services.In the quarter, we issued a new SEK 400 million bond, with a SEK 1 billion borrowing limit. The bond matures in June 2020 and will be listed on Nasdaq Stockholm in H2 2019. SEK 350 million of the bond was used to refinance part of the existing bond, which then was reduced to the amount of SEK 300 million. The balance was used to pay down a parent company's working facility on short term loan. At 30th of June, 2019, the net interest-bearing debt was EUR 52.4 million.I want to talk about the guidance and the outlook of the company. We are now expecting sequential growth in both revenues and EBITDA in H2 2019. Behind this growth will be accelerated B2B sales, both large turnkey contracts sold to such land-based operators and modular sales. The improvement in our technology allows us to sell individual models of our platform to operators, as such complementing their platform. We have had very good success with our marketing surveillance software, GiG Comply, which allows operators to meet marketing laws and requirements and sold that to several Tier 1 customers. We have now also sold GiG Trader to 4 external clients, and we will continue selling both full turnkey solutions and such modular products and services.With the launch of SkyCity, we launched our new front-end service, Wand. So as mentioned in the B2B platform update, the EBITDA was negatively impacted by what we call front-end services. So this is a platform offered to B2B clients, allowing them to utilize our in-house development resource to obtain their websites and products. We have now launched a new front-end framework. It is a so-called web component base system and multitenant system, which, ultimately, all the front-ends that GiG is hosting will be migrated onto. This will allow us to significantly scale down cost and achieve scale advantages.In Q4, we're expecting to launch our new data platform. This will also allow us to drive down costs, primarily storage costs and data costs, and while of course, increasing the capability significantly. We're going to continue. There is growth and expansion. We're going to maintain healthy margins and earnings quality for a mix of regulated and high potential markets. We are expecting a stable development in the Media business with strong margins, and we're going to continue reducing our nonmarketing-related OpEx through a strong focus on execution. OpEx that was nonmarketing-related, also was significantly reduced over last year. And it is a testament to how we're becoming better and stronger in the organization and with our tech, and we're expecting this to continue.So with that, I would like to pass the microphone on to the audience, if there is any questions. And as mentioned, you can also ask them online. Thank you.

[Unknown Analyst]

Robin, great presentation. I have a couple of questions. Could you tell us more about your operating tech costs going down, going forward in -- after Q4 and 2020? And how will it speed up the company from signing Tier 1 customers to launching Tier 1 customers? Do you have an estimate on that?

[Robin Eirik Reed, Founder, CEO & Interim CTO]

Yes. I was working as the CTO until recently. And one of the items I focused on was to hire really, really good engineers through the organization. If we are going to empower the entire iGaming industry with the best platform and provide those scale advantages, we need to have the very best engineers. Chris, starting as CTO shortly, has a fantastic track record. Stephen Borg working with data. Jonathan Gauci working with software development. Jan Flores started as the Director of Production operations. I feel confident that we have potentially the best, and if not the best, one of the apps with strongest managements in tech within iGaming currently. These people have immediately started to assess our production operations, so our IT hosting and infrastructure costs. And they've seen that we can make significant improvements throughout 2020. It will require some upfront investments into a hybrid cloud solution so our own data center as well as the cloud provider we're using. However, we can reduce the hosting costs significantly. GiG is a tech company, and we're currently having quite a large Delta of tech expenses to revenues, while they will be able to significantly decrease this from. We are already seeing some advantages and it is partially explaining the decrease in costs. We'll continue to see some, but it will greatly accelerate in 2020.

[Unknown Analyst]

And from signing Tier 1 customers to go on live, is this -- is the time going to decrease as well? Because SkyCity probably took 6 months.

[Robin Eirik Reed, Founder, CEO & Interim CTO]

Yes. Well, from when we actually signed the contract with SkyCity, we were live in 2 months. And I think that's quite an achievement. It is a full turnkey solution to New Zealand. And if you compare that to, for instance, the time it took us to get Hard Rock live, you get an idea of the traction. As we're continuing to improve the data platform, as we have produced the new front-end framework, and as we ultimately will produce a new core platform and roll it out, I'm expecting to significantly decrease time to market.

[Unknown Analyst]

You mentioned Hard Rock. It's probably the biggest customer that we have right now. Can you explain more about Hard Rock and why they haven't been pushing the brand to the other countries?

[Robin Eirik Reed, Founder, CEO & Interim CTO]

So we are under a contractual obligation to not discuss commercial decisions and insights with our clients. So I prefer to not comment on their market plans.

[Unknown Analyst]

Okay. Tell us more about sports then. Are we going to ramp up the sports sales, as we've had the same external customers now for 2 quarters? I think it's been 4: Hard Rock, 11.lv and Metal Casino and someone else.

[Robin Eirik Reed, Founder, CEO & Interim CTO]

Good Luck Have Fun.

[Unknown Executive]

Exactly. Are you going to ramp up the sales on sports? Or what are we waiting for?

[Robin Eirik Reed, Founder, CEO & Interim CTO]

As I showed in the presentation, we have managed to decrease the EBITDA loss from EUR 2.1 million to EUR 1.5 million over the last quarters. Our goal is to reach profitability by H1 next year. Now that will come from a mix of gearing up our own internal operator, Guts.com, and signing new customers. So yes, we're looking to sign more clients to the Sports Betting platform.

[Unknown Analyst]

Now lastly, what are you most thrilled about, H2 2019?

[Robin Eirik Reed, Founder, CEO & Interim CTO]

If I were to choose, I would say my organization because I'm so amazed by the growing leadership we have and the strong execution strength we have developed. Now for the outlook, we're now in a position where land-based casino chains are coming to us and where we can't necessarily cater to all the demand again, where we have to choose which clients we will sign and partner with. Now we have an increased capacity compared to what we did the 12 months prior to that. So I'm very proud that we come to a position where we have matured the sales organization, where we have improved our reputation as a B2B provider through the partnerships that we have and that we're in the position to sign more full turnkey contracts.Any questions from the web, Tore?

[Tore Formo, Group Chief Financial Officer]

Yes, I have some question from an investor that's been sent by e-mail, but do we have any questions from the audience on the webcast, first? Okay. We have some questions from the investor from the -- that have sent in their questions. So why so few of the FTDs from Media Services referred to internal brands?

[Robin Eirik Reed, Founder, CEO & Interim CTO]

That's an interesting one. We -- let's compare it to Hotels.com, where there is a top list. You wouldn't go to Hotels.com, if there wasn't Hilton on this website. You need a broad range of offers. And you can't only focus on the offers that is on your platform or your internal brands. With that being said, the stats is quite deceptive. If you look at the alignment of traffic, so traffic coming from markets where we have a strong operational foothold, the amount of FTDs choosing to click-through to our operators, either on the platform or internal operators, is much higher than the 10% overall volume. So what we are focusing at, is to align the Media business with our B2B and B2C operations, so that we can direct an increasing amount of traffic. I believe the last time I looked at this KPI, it's 28%, 30% of the applicable traffic, so traffic coming from markets that we accept in our B2B business or B2C business or have a strong brand, was choosing to click through one of our operators. Off that traffic, we're earning more money. These players or the customers, so the clients in this case, will pay the same amount for this traffic as they will pay from any other affiliate business. However, if we're sending the traffic to either B2B client through ourselves, we will also earn revenue share or even keep the entire profit and they went off our only operators being chosen. So it is a very clear strategic goal of our Media business to align their reach with the reach of our B2B and B2C business, so we can direct more of the traffic to those operators.

[Tore Formo, Group Chief Financial Officer]

Okay. How do you see the impact of the continued lowering of marketing spending on the long-term growth of the company?

[Robin Eirik Reed, Founder, CEO & Interim CTO]

As mentioned before this quarter, in Q1, we're looking to slightly increase the marketing budget. So we have decreased the delta of marketing to revenues. But the absolute spend, we're looking to increase, okay? So we will be more efficient, and as we're getting more efficient, we will increase the marketing spend to grow the revenues.

[Tore Formo, Group Chief Financial Officer]

Okay. And the question to Games, GiG Games has so far launched around 5 games in 1 year. The estimates earlier was higher than that. Is still the plan to launch more games going forward?

[Robin Eirik Reed, Founder, CEO & Interim CTO]

As mentioned in the Q1 report, we are now focusing on launching strong titles for games. We have launched 5 brands -- 5 Games, whereas 1 was returning good KPIs, whereas we wasn't happy with the performance of the other 4, which is not unusual when you launch against the deal. It takes some time to find your footing and to develop the competitiveness. However, following the analysis of that performance, we decided to postpone slightly the release of next game in order to improve the quality. We, of course, want to be known for launching the best games and to improve the sort of portfolio and the asset quality and make them more attractive.

[Tore Formo, Group Chief Financial Officer]

Okay. And we have some questions for U.S. and Hard Rock, what is the driver of the revenues and profits for the Hard Rock account? And why have we not seen any big effects of this yet?

[Robin Eirik Reed, Founder, CEO & Interim CTO]

Hard Rock has grown to, I believe in the last update, EUR 2.5 million, which is a very good achievement. The numbers are, of course, public from New Jersey. So you can follow that. There was, however, a large upfront investment into not only developing the entire platform for Hard Rock, also connecting it with our land-based system, but also into regulating our entire set of products and services for the U.S. market. So DGE, the regulator in New Jersey, is sort of serving as the early adopter as state-by-state is regulating the U.S. marketplace. And in many cases, their regulation is mimicked in new states. So there was of tremendous importance for us to vet and validate our offering to get in a good standing with the regulator and with the client and to ensure their success before looking at further expansion.

[Unknown Analyst]

Okay. I have another question surrounding our B2C. We're seeing the risk is growing, and we sold Highroller. What's the plan for the other 2 Betit brands, coupled with Rizk? Because they're having a negative impact on our B2C numbers. Are we going to sell them, divest them or put just -- let them rest in peace? Or...

[Robin Eirik Reed, Founder, CEO & Interim CTO]

I think that the route of action that we have sort of embarked on now with selling such brands to B2B customers is the right path. So I will be looking to do that with additional brands.

[Tore Formo, Group Chief Financial Officer]

Yes. One final question then also regarding the U.S., is that the first priority in U.S. to expand with Hard Rock? Or is GiG competing for tenders from other casinos as well?

[Robin Eirik Reed, Founder, CEO & Interim CTO]

Again, I won't comment on the expansion with Hard Rock. I'll leave that up to the operator. What I can say is that we have a very attractive platform, and we have evidenced our ability to produce what I believe is the best product in New Jersey and of course, that's interesting to all the parties.Good? Thank you all for coming, and see you again for Q3. Thank you.