Gaming Innovation Group Inc
OSE:GIG
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Good morning, and a warm welcome to Gaming Innovation Group's quarter report presentation and Q&A. My name is Jonas Amnesten, and I'm an equity research analyst at Redeye with focus on the online gambling industry. And I will also be the moderator during the Q&A session that will follow after the presentation, so in about 20 minutes.And for those of you viewing live stream, you're welcome to send in your questions at this point, and that's easiest done through the form on the live streaming website just below the live stream. And due to the extraordinary situation with the COVID-19 outbreak, we have GiG's CEO, Richard Brown, with us through video link.Welcome, Richard. The stage is yours.
Thank you very much, Jonas, and good morning to you all. It is my pleasure to present Gaming Innovation Group's results for the second quarter of 2020. I am joined today by our CFO, Tore Formo, who is available during the Q&A session at the end of the presentation. I will kick off with a brief overview of the company. GiG is a dedicated iGaming B2B supplier. The company is based on innovative technology with end-to-end solution and product offering. The business is divided into 3 main operational units, our iGaming platform services in addition to a proprietary Sportsbook offering in conjunction with our media and marketing services.We are currently approximately 470 full-time employees across 3 primary office locations in Malta, Copenhagen and Spain. The company is dual-listed on the Oslo Børs Stock Exchange as well as the NASDAQ in Stockholm. The business has a global reach. Our media business, having primary assets in over 25 countries, and the platform business is licensed and certified in multiple regulated and soon to be regulated jurisdictions ranging from pan-European markets to also to -- operational in 2 U.S. states and pending certifications in Latin America.Key takeaways for the quarter. I am very pleased with the development of the business over this quarter with the execution of several strategic initiatives completed and others rolling out. These will place the company in a fundamentally strong position to capture future growth. GiG has improved its performance in the quarter across all of its business units.On a group level, business continued quarterly growth with revenues coming in at EUR 16.7 million, which equates to a 47% growth year-over-year. EBITDA in the second quarter was EUR 2.8 million at 93% up versus 2019 and 382% up versus the last quarter, therefore, resulting in a corresponding EBITDA margin of 17%. EBITDA for the Sports Betting Services improved 44% with -- despite a reduction in revenue due to the global pandemic, interrupting and impacting the sporting calendar. This was driven by a reduction predominantly in operating expenses and those actions will continue to have a positive impact on the segment as we move through the rest of Q3.B2C vertical was divested to Betsson effective from 16th of April, and now with Betsson signing a long-term agreement as part of that transaction and the SEK 300 million bond was repaid during the quarter. Despite delays in the sales pipeline due to the COVID-19 impacting our platform customer target group of land-based operators, we signed a long-term agreement with GS Technologies for platform provision. And as the impact has started to reduce, we have seen the work put in during the quarter result in a number of signings in the third quarter. Just to reiterate on the head figures, development revenue increased on a quarterly basis by 49%, adjusting for a normalized revenue recognition of one of our customers, SkyCity, it was up by 23%. This shows a strong development, both quarter-over-quarter and year-over-year. Combination of improved cost control and the increase in revenue led to an EBITDA increase of 93% versus the same period in 2019 and was up, as mentioned, 382% versus the first quarter of 2020.I will touch now on a strategic update. In Q2, GiG focused its strategy fully towards becoming a global Tier 1 B2B supplier in the iGaming industry. The B2B segment of the industry provides -- presents a significant growth opportunity in the years to come. The overall gambling -- online gambling market is estimated to grow at a compound annual growth rate of 9%. This growth is largely driven by 2 main factors. One is the adoption of digital in emerging markets. And then the second one is the regulation and reregulation of multiple jurisdictions. The growth in regulated markets increases barriers to entry but also is driving many land-based operators to move online or add digital offerings to their customers. Our B2B platform, omnichannel solutions and media offering enables us to enter such markets and provide partners with a cost-efficient, high-quality product to enable their business and act as a growth engine for GiG itself. We have been strengthening our client base for future revenue. As mentioned previously, the COVID-19 has impacted the sales pipeline by delaying the negotiation process during Q2. However, as the world has come to term with the new normal, we have signed 4 platform customers in the last 6 weeks. Two, the customers are local land-based operators where regulation is enabling them to move online. And the large entertainment operators with multiple properties and multiple entertainment venues across their locations. We've also added 2 digital-only operators who have had strong track record of performance historically.As with many various industries, we are seeing an accelerated -- acceleration of economic trends. And we believe that the gambling segment is no different. And that the pandemic will accelerate the growth in digital gambling. Therefore, by targeting that sector of the industry with both the product and the sales, we anticipate additional agreements to be signed in the remainder of the year. GiGs' core strengths are actually positioned us very well to capture that target market. We have an end-to-end product and service solution, first-class technology and product offering, operational knowledge and experience strong rep track record partnerships and media marketing performance and an expanding omnichannel experience. GiG has, therefore, positioned itself very well in terms of both product and operating experience.I will now touch on some more detail on the business unit's performance. In GiG media, very pleased with the performance despite historical exposure to Sportsbook revenues, the unit has delivered an increase of 22% in first-time deposits are generated, and revenues are up by 5% versus the previous quarter. FTD is equated to or equaled the all-time high previously generated in Q1 2019.The paid media segment continues to see quarter-on-quarter improvements, revenue up 27% year-over-year and 21% quarter-on-quarter. Google's algorithm update that changes constantly, there was a significant update in May. It had a slight negative effect on the publishing business. However, the team acted quickly to address that and resulted in a positive trend back upwards from the update.Initiatives and projects in the previous quarters have enabled FTD growth, driven largely by -- more by a diverse geographical spread in the various acquisition channels and web assets. We continue our long-term play towards the U.S. Sports Betting Market and affiliates licenses were granted in Colorado with more states in process. The switch over from -- in paid media from Sportsbook over to Casino laid the foundations for revenue growth in the second quarter and GiG sees a positive development in the paid segment overall.The media business is maintaining focus on developing businesses outside the current core markets and new acquisition channels. Revenues for the platform service were up EUR 8 million to EUR 8.2 million in the second quarter on an adjusted revenue basis, when adjusting for a normalized revenue recognition for SkyCity, as mentioned, the revenues were up still 22% versus the previous quarter. EBITDA for the second quarter improved significantly, as mentioned previously, 18% year-on-year and 41% quarter-over-quarter. The sales pipeline continues to develop positively, and the platform received regulatory approval and certifications for Croatia. We're anticipating launches in both Spain and Croatia, shortly and which will provide further revenue uptick in current markets. There are 34 brands currently operating on the platform, and there are around 9 in the integration pipeline for launch. I'm very pleased to see the improvements of the quarter, and the segment is moving towards its mid- to longer-term goals and ambitions.In the sports segment, of course, revenues were impacted by the closure of the sports events in the quarter, but the restructuring initiated and rolled out in April, significantly reduced the costs and improved the margin by around over 40%. We anticipate further cost savings to be felt in the Q3 and into Q4 via these various actions.Key games to target emerging markets in conjunction with end-to-end platform solution, including the Sportsbook offering, we see a large addressable market in the middle ground of Sportsbook suppliers. And I'm pleased that we added another Sportsbook contract after the quarter in emerging markets of Argentina. We're moving to make GiG's platform Sportsbook agnostic. That continues and this process -- progress is being made well with regards to the integration of third-party solutions. We continue with a focus on operational improvements in cost control, and the second quarter resulted in seeing various actions beginning to have an impact. Our tech costs were down 33% versus Q1 as the key team continues the infrastructure migration projects. We continue to -- the headcount declined overall in the quarter. And on a like-for-like basis, adjusting for IFRS principles around continued and discontinued business. OpEx was down around 12% year-over-year and Q-over-Q. Other cost-saving initiatives are in progress and progressing to plan, which is expected to further reduce the operating expenses throughout the remainder of the year.Events. I will just touch on some of the events after the quarter. I've touched on it several times already that we have signed 3 new contracts already this quarter for Platform and Sportsbooks. Most of those are focused around our target group, land-based casinos, emerging markets that where the growth of digital gambling is estimated bid is highest. We continue to pursue a globally diverse new customers and looking further at retail gambling businesses looking to go online.Revenues in July on an adjusted basis were up 38% versus the same period in 2019. In summary, GiG has delivered a year-over-year and quarterly growth in both revenue and EBITDA. GiG's media business has delivered growth in all KPIs for a second consecutive quarter, a testament to the agility, growth potential and sustainability of that business. GiG has repaid the SEK 300 million bond and reduced its debt position significantly. GiG completed a strategic repositioning towards a fully focused B2B company. During the quarter, as the B2C was divested. GiG signed new agreements over the last weeks. Several initiatives implemented have significantly reduced the burn rate in sports. We put -- place it in a sustainable position over the longer term. In order to provide better clarity as well, we are restating the guidance now as B2B only. Revenue guidance on an adjusted basis for continued operations increased to EUR 52 million to EUR 57 million, up from EUR 47 million to EUR 52 million, with an EBITDA range of EUR 12 million to EUR 15 million. GiG has had a good second quarter, which highlights both the operational improvements to the performance and the potential of GiG as a diverse B2B company, well positioned for future growth in the transformative online gambling industry.I would like to thank you for your time today. I look forward to answering your questions, and I'll pass you back over to Jonas at Redeye.
All right. Perfect. That gave us a quite good view of your quarter report, but let us follow-up with some questions. [Operator Instructions] And the first question, the COVID-19 outbreak has boosted the overall revenues from the online casino industry during the second quarter. Could you elaborate a bit on how the impact has been on your revenues?
I think as the whole industry has seen that there has been a jump. I think, in particular, we benefited with our land-based customers, who have a traditional large following in the retail sector. And with the closure of their operations locally, that's obviously had a positive impact. And as I mentioned earlier, I think it will accelerate the trend and -- for the digital adaptation in certain markets as well. So it had a positive impact. However, of course, now that we see that things have started to return to normal, in particular, in some of our core markets or in the European or English-speaking markets. Levels are still up at a high level despite the kind of ease of lockdown. And as you can see that in July, revenues for the group were 38% above the same period in 2019 so while a positive impact has also remained despite the kind of ease of the lockdowns.
And do you see like any long-lasting player behavior changes? Or is it too early to see that?
I think a little bit difficult to specify on player behaviors. It's still quite early. I think we need some more months to look at that. However, we can see that, in general, the players have remained the ones that have been acquired during the period have remained quite well in various markets, so it's [indiscernible]. And I think the fundamental understanding as well of a lot of the land-based and retail operators is it's essential for them to have an online offering, which obviously strengthens GiG's positioning.
All right. And you mentioned that July has performed quite well with 38% growth. Is that both the media and the platform? Or how is the impact there?
It's -- that's on a total level. I won't go into specifics of the various business units, but both units are growing or have grown comparatively to the numbers in July last year.
Yes. And is that also still the COVID-19? Or is it actually the underlying performance and development of the industry?
I think it's an underlying performance. We've launched some clients in the last year that have obviously grown and some others have grown in new markets, et cetera. And if we look at, obviously, SkyCity, it's having an impact on the revenues as a total. And they -- in July last year, they went live. So it's also new clients driving the additional on top of the growth from the existing client database as well. And the media performance, of course, has remained strong. And what we had while sporting events were not as strong in July towards the tail end as well. So that's a positive [indiscernible].
Cool. And one of the, I guess, the major events during the quarter was that you completed the transaction of the B2C operations to bets on and -- but how are you doing that? Because the agreement is over 2 years to a 0.5 year? What are you doing to ensuring that these assets will stay on your platform?
Of course, I think a primary objective for us is to ensure that the quality of the service that we provide and the quality of the platform that we provide speaks for itself, so that it would -- that we will be able to extend that contract. That is a primary objective of the company, of course. And I'm of the strong belief that our platform is market-leading in the casino segment and one of the top suppliers there. So I would hope that we can demonstrate that and continue to demonstrate that to -- in order to secure that contract long term. I think that goes for all the companies and suppliers, of course. But I really believe that the platform will speak for itself.
Cool. And you mentioned the SkyCity bit in your report. Could you elaborate a bit how this collaboration is working with SkyCity? And there were quite high impact on the revenue side. Is this like a onetime? Or how should we view it?
The structure of the contract -- the nature of the contract -- and they're operating on our license, and we are running the majority of the operations, causes us to recognize the revenue in that way. And -- but it's been a very positive development. They have a very strong brand in New Zealand. We've been live with them now for approximately 1 year. The development, therefore, has kind of come over that period as well. So we're very pleased with the client and the services that we provide to them across in almost a full managed service as well.
And they didn't have any online presence before the agreement with you or...
Correct. They were retail or land-based only.
Cool. And how has the -- again, the COVID-19 outbreak. How has that impacted your collaboration with Hard Rock in the U.S.?
We continue to work very well with Hard Rock, supplying them on the casino side in the U.S. I think the New Jersey numbers are public, you see that there's been an acceleration of all of the digital offerings and groups. Hard Rock has captured good market share over that period as well, which obviously benefits us as they're running on the platform. But of course, that's also a land-based operators in New Jersey who have experienced that growth often because of the lockdown as well. So in that sense, it's been a positive quarter. But again, the New Jersey casinos have opened up, and levels remain pretty strong coming out of -- in June as well.
Yes. Perfect. And you have signed several platform deals during the quarter. Could you elaborate a bit on how large a potential there are in these deals? And there are also, like several of them are land-based? Is there like -- are the land-based operation huge that could actually be converted on line have a great impact? Or is it too early to determine this?
iT'S maybe a little bit early. I think the important thing is that, for instance, the land-based one that was signed in North Macedonia, they have 2 properties. There are only a handful of properties within -- in the region. The market is in the process of regulating, which would -- for one of a better word, kind of block out external operators. We also believe that once further down the line when we integrate omnichannel solutions, the conversion from the land-based sector becomes a very important driver in the revenues. And in Argentina, Grupo Slots are a premier supplier in that jurisdiction. And I think in terms of online, the market we're entering there is the Buenos Aires city, which is the -- anticipated to be the largest provincial market in Argentina where the majority of the wealth is held and volumes of people as well. They have properties throughout Argentina, both Casino, Slot Hall, Bingo Hall, in addition to hotels and racetracks as well. So I think we have a very strong partner in Argentina now, and we would like to see continued growth for them. It is an emerging market. The market size for gambling in Argentina is large, but I think only around 7% is online. So it's in its very early digital transformation stage. So therefore, it's important for GiG to find a very strong partner in the early phase as the regulation and digitalization, grow the online space at that rate, that will enable us to be able to capture its share there.
Okay. Interesting. And I guess also that the COVID-19 outbreak has affected your -- or has it affected your ability to sign new agreements? Or is it preventing you from meeting face-to-face and slowing the process? Or how is that...
It, of course, it slowed things during the peaks of the crisis. And of course, the pandemic is at various stages in various locations across the world. It has limited our ability face-to-face. But overall, we've responded very well as an organization to work from home policy and a lot of phone calls and such. So in that sense, there was a delay rather than a negative impact, if you will. But of course, we start to see that now as things open up in various markets that we can start to progress again, especially our land-based target audience. They deal with their own businesses is having to be physically shot, which is, of course, a drain on the time and ability to act with speed. But as I said, mid to long term, we anticipate that being a driver for GiG itself, actually.
Okay. And looking at your -- the revenue model for the platform, you have stated that you're moving towards more fixed fees than the rev share, but is it still that the new operators can decide whether they want a rev share or fixed fees? Or how does that work?
We started off with -- we've done a few fixed fees as well this year, and it was very well received in certain regions and in certain markets. So we've tried to be a bit agile, especially during COVID where people are a little bit conscious, perhaps potentially of fixed fees. So we've tried to adapt the pricing model to suit your client base potential clients and the various different market conditions, if you will, in order to be able to take those clients online as well.
Okay. So it's a bit mixed, but is the golden in the more long-term to have like only fixed or...
I think we will -- in a similar -- I can draw like a comparison, if you will, to the media business, which also operates in kind of a diverse revenue generation. You have revenue share and then you have portions of it on fixed fees and CPAs. I think it's a good balance to try and achieve some similar kind of structures in the platform business where we -- both for the benefit of the percent of customer and also for the benefit of GiG that you can be quite flexible and mix those different pricing models.
All right. Cool. And looking a bit on the media services, what opportunities do you see in the U.S. market for the media services right now?
We have a long-term plan in the U.S. with our assets there. In particular, in the sports betting market of WSN. The strategy we've approached is a long-term play, which is a state-wide asset, wsn.com. And I believe that, that is a long-term potential, significant long-term potential. It is a strong market. However, the way we're approaching it is on a long-term basis with the -- on a corresponding investment levels as well.
All right. So it's still quite small revenues then compared to the total?
Yes, correct. This is -- the majority of the revenue is not coming from the U.S., let's put it that way. And we see the sports betting in the market opening up state-by-state basis. And therefore, it's very much trying to position ourselves for when those markets open up and regulate, which can take time.
Cool. And looking at the Sport Betting Services, are you expecting to reach breakeven during 2020? Or what are your expectations regarding that?
Yes. So I think, obviously, in conjunction, new clients, growth of our existing client database, but also the kind of aggressive operational cost reductions that we only initiated in April, you can already see a significant impact in those weeks. Remaining of the last quarter -- of the second quarter, and we anticipate that, that to continue to bring the unit down into a position of breakeven in conjunction with some revenue generation.
And the deal that you mentioned in Argentina is -- will that be the Sportsbook service? Will that be your -- the GiG's own? Or was it that some?
The Argentina deal will be based on GiG's proprietary Sportsbook.
Okay. Great. And we have a question regarding your long-term EBITDA margin goals. I guess it's a bit of -- I guess, since your business a bit mixed, maybe it is a bit difficult to say. But what are we looking at there? Is -- do you believe you can reach 30%, 40% for the overall business in the long term? Or...
We're not going to guide specific sort of set targets externally on what our EBITDA margin should be. We're pleased with the way it's developed, I think, 17% in Q2 was good. It was a strong quarter for us in that regard. And we will continue to both improve the operational performance. And also, we believe that we have scalable products and technologies that will enable us to deliver margin -- improvements in margins as all businesses strive to achieve, and we're confident of being able to do that over the long-term as well.
Cool. And we have one question regarding your offices. You have 3 offices in Malta, Spain and Denmark. If I remember correctly, you once had both Oslo Stockholm and Gibraltar as well, are these offices closed?
Yes. So we actually have 2 offices in Malta. We're after the B2C divestiture, et cetera, that we're also in the process of leasing out one of the offices in Malta. In Norway, we're also in the process of subleasing the 2 spaces there as we've closed out the proprietary odds team that was based there predominantly during Q2. So therefore, we don't need those offices anymore. The Gibraltar office historically was related to the B2C assets. So that went to back soon, I believe, as part of the transaction.
Cool. And regarding your -- the headcount, will it be quite stable now going forward? Or will you continue to decrease the OpEx more during the year? Or what development should we expect?
As we kind of mentioned, we have several initiatives running and already executed, where we're carrying costs that will dissipate throughout the year. So we anticipate OpEx to improve through the remainder of 2020. We talked about headcount in the previous quarter. We are still -- we are obviously on track to do similar numbers. As that was presented, of course, it remains fluid. We are in the process of onboarding several clients at the time being. And also the transitional service agreement with Betsson is still in agreement, and there's a potential to extend that, perhaps. And so we are happy with the number we are today, and we're moving according to plan.
Okay. Cool. And we have one question regarding the IT cost, cloud computing. Is that the cost that you are decreasing as well? Or what's -- how is the development for that?
Yes. So that's obviously a significant portion of -- and the objective of that is to reduce as we started the project in Q4, I believe, last year. You can see that the tech costs coming down even already now. I think it was 33% versus Q1, so the positive impact there. Of course, there was some slight delays as we did the Betsson transaction that required some heavy lifting in the infrastructure setups. But we still anticipate to be able to move forward and well with that, some slight delays, but nothing largely material or preventing us from reaching the objectives.
Okay. Cool. And you also project EBITDA of EUR 12 million to EUR 50 million during the full year. How will that convert to the bottom line? Do you have any projection that you can share regarding that? Or should we just stay with EBITDA?
At the moment, we're going to guide on revenue and EBITDA. We also have conscious that net result is impacted largely by currency fluctuations with relation to the bond. I'm sure Tore will be able to interject if I'm getting anything wrong here. But those currency fluctuations also would mean it would be quite difficult to guide on that principle.
Okay. Cool. And we have another question regarding the Sportsbook services. How much is your currently saving each month? The guiding was EUR 4,000,000, when would you reach that?
We anticipate to reach that in Q3 and as the full impact of restructuring costs are absorbed. So obviously, the numbers now are actually still carrying some overheads related to restructuring.
Okay. Cool. And the next question is actually our last question. And it's more a general one. Which market do you see the most potential is? Is it the U.S.? Or is there quite large potential in Latin America and Asia as well for you in the midterm?
I think there are actually multiple markets that are in various different stages of their digital transformation and also, therefore, the growth of the demand for our products. So the U.S. is, of course, a large market, and -- but there are significant markets in Latin America, Eastern Europe and also even in some of the reregulating European markets as well, which have large sizes and that reregulation will drive demand for our product, we believe. Asia is an interesting one. It's a very difficult regulatory environment, especially for our target customers to have their online presence. We, of course, monitor the situation and build up early-stage leads in that market. But there is a significant growth globally -- growth potential globally for the products and offerings that we have.
All right, cool, exciting times ahead. All right. That was our last question. So we'll wrap this up. I'd like to thank GiG with Richard and Tore as well as our viewers. I hope to see you all next time. And until then, have a great day and take care. Bye.
Thank you.