Gaming Innovation Group Inc
OSE:GIG
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Hi, all, and welcome to this Q3 interim presentation of Gaming Innovation Group today live from our offices in sunny Marbella.My name is Robin Reed. I am the CEO and the founder of the company. And I'm here alongside of Tore Formo, our group CFO; and Anna-Lena Åström, our Head of Investor Relations.A quick look at the outline and the agenda of today. We will start by giving a pretty thorough overview of the company and our business model and strategy. We will then move into the highlights of the company in the Q3 period that has been. We will then take a look at the strategic and business update before proceeding into the summary and the outlook. We will conclude with a Q&A.New today is that we have a telephonic conference. You can dial in and ask questions. We have an operator online now. The instructions is found at the [ Wiscobels ] web page where we have released a message of how to dial in and ask questions. As usual, you can also ask questions online. We will then proceed into the overview of the company.Quickly summarized. GiG is a technology company with the iGaming industry. We're unique in that we have products and services catering with the whole value chain in the iGaming industry. The company was founded in 2012. Today, we are 740 people looking to disrupt the iGaming industry. Our headquarter is in Malta. We have offices in Denmark, Spain, Gibraltar and in the U.S. and Norway. We're listed on the Oslo Stock Exchange with the ticker symbol GIG.For those who are new to the iGaming industry but also for every professional and investor in the iGaming industry, this should be one of the most interesting graphs that you can look at. It shows the total revenues of gambling worldwide and the digital transformation to online. By 2017, gambling worldwide was expected to drive revenues in excess of EUR 330 billion annually. It is growing at a rate of about 1.7% compound, about in line with the world economy.Online has surpassed EUR 40 billion in annual revenues, and it is growing at the rate of 6.4%. So what you're seeing is, in fact, the strongest growth driver in the iGaming industry, a conversion from offline to online. We are now looking at just north of 10%, 13%, 14% of revenues being online. In 5 years, in 10 years, in 15 years, this share of wallet will significantly increase. So the companies that will win online are those who's well positioned to capture the new traffic coming from land-based gambling to digital. Indeed, we have defined what we call the digital gambling life cycle. It shows the conversion from offline to online. A company or a player will start at a land-based casino or a betting house. He will get the digital interest before developing an intent, and find later would be a digital launch and from there it's all about digital perfection. GiG's sweet spot is to cater to businesses from their digital interest and take them all the way to digital perfection.We are supporting businesses through a partnership model. As such, we're uniquely positioned to capitalize on the growth from offline to online gambling. In GiG, we're offering a suite of products and services, which we have named The GiG Ecosystem. We're a full-service company. We are offering the entire value chain in iGaming, and we're the only company, to my knowledge, doing so.We have Media Services, marketing services. We're referring paying users to online operators, predominantly on a revenue share and fixed fee model. We are offering Platform Services, all the tools, all the integrations, all the licenses and all the hardware you need to run an online gambling operation. We are offering sports betting and game services, all the odds, all the games, all the content you need to run an online gambling operator. And finally, we're offering online gambling operators ourselves B2C business, which is also now paving way for us to offer -- manage the services. The operational expertise we have from being a gambling operator ourselves is something we're utilizing to offer managed services through online B2B partners. All of our products and services are connecting end users, operators and suppliers to this ecosystem. We're thinking open and connected. We're not separating. We're not discriminating against other company providers, other odds providers, other ancillary services. We believe that by opening up the iGaming industry, by connecting the iGaming industry, you can create a sharing economy for all. We can create the best user experiences.So to summarize quickly, GiG is now moving to a position of becoming the one-stop shop for every company, series of both its iGaming business.And with that, I would like to take us into the Q3 and period that has been look at some of the highlights. First, I would like to point our Gaming Operators. We had a loss in Q2. Due to the strategic review and the actions we took, we lead to a positive EBITDA, a strong development. We had our all eyes on the company in context with the launch of Hard Rock Casino in New Jersey. The most sought after B2B tender in 2017 culminating in the launch this summer. We've had a very strong start together with our partner in New Jersey. We have signed the first Sportsbook agreement with 11.lv. Following 2.5 years of development, we launched our own proprietary sports betting platform in Q2. Now we've sold it to the first client. In Q2, we also finalized GiG Comply, a service helping operators and the industry staying compliant by monitoring marketing partners, ensuring that all marketing that is outdated from their partners are in compliance of marketing guidelines and regulations.This product has also been sold to Mr Green.With that, every single product that we have developed through this very heavy phase of investments over the last 2 years has been sold. Proceeding to some events after the quarter that is also important to bring up in this presentation. Whilst said that the 2017 tender for the casino contract the mega brand Hard Rock to go online with their online gaming offering was won by GiG. Well, this year, they published the sports betting tender. The whole industry, again, competed for this tender and GiG won face up with companies with more than a decade of experience. We therefore proceeded to sign a letter of intent at Hard Rock, and we hope to complete the agreement shortly.It is a incredible mark of quality on the new Sports Betting Service. Having just been launched, we're already competitive with the most prominent players in this category.After a quarter, we also launched our first game, that being the online slot machine, Wild Reels. As such, we concluded the expansion of the ecosystem. This was the final vertical in which we hadn't developed our own proprietary offering for. Now we are growing it. We have signed a contract with the game studio, Jade Rabbit. We have developed our own remote gaming server, our own platform for slot games. And Jade Rabbit is a game studio that will develop games on this platform. These games are targeting the U.K. market.We are also created a reseller agreement with Join Games, the first of many contracts where we will scale up scales. Join Games had strong reach in Latin America and in Italy. They will help distribute the games in those regions.We signed MetalCasino for Sportsbook in the period, deferred contract already following launch. Finally, we relaunched Thrills as a Pay N Play brand in this quarter. Pay N Play being a trend that helps users quickly register with their favorite bank and allows them to immediately cash out funds through their bank with no real delay. 5 minutes from the operator to the customer's bank wallet. A supreme useful experience that we've seen catching significant traction in Sweden where it is supported, but also in Finland and Germany, where they also had some market reach. And GiG is now joining the mix of Pay N Play brands with a highly competitive offering. We're expecting Thrills to grow relatively rapidly following the launch of Pay N Play.I would like to add in the end that, again, we've been through a very strong period of investments. We expand across the whole iGaming value chain. We have now completed the ecosystem. And we're starting to scale up our business by selling.And if you look at the development of the company, in terms of last 12 months, rolling revenues and EBITDA, you see how we have continued to grow both our revenues and EBITDA despite all of this investments, despite offering all the products and services across the value chain in iGaming.In Q3 2018, we had last 12 months revenues of EUR 151 million, all-time high. We also had all-time high EBITDA of EUR 18.9 million for the last 12 months. A very stable and positive development for the company and very strong given our investment levels.Proceeding into the Q3 financial highlights. The company came in at EUR 37.3 million in revenues, a growth of 21% over the year. EUR 6.3 million in cost of sales was an increase of 28%. Important to note is that last year, Payment Services Directive 2 had not been introduced. And as such, we had about EUR 1 million in balance, negative towards cost of sales, this year, due to PSD2. So the company is actually becoming more efficient. We also had some increase in gaming taxes.Marketing EUR 10.6 million was a decrease of 11% year-over-year. Finally, other operating expenses came in at EUR 15.3 million, an increase of 40% year-over-year. Important to note though, is that in Q2, we signaled that we were fully scaled up to support the ecosystem.Quarter-over-quarter, we declined 3% in other operational expenses. Finally, EBITDA of EUR 5 million is a strong increase of 66%, and it is showing how we, following the investments, are now becoming more profitable.I would then like to take us through -- to the strategic update. As mentioned, GiG is offering now a full turnkey gambling solution for the whole iGaming value chain. If you are an offline casino, if you're a media brand, or you are a digital company looking to save cost on your development, you can come to GiG, and we can offer you in a modular fashion all the products and services that you require. If you're strong in something, you can retain that in-house. If you want help to accelerate your growth by outsourcing something, you can come to us.Not only are we offering the digital products, we have also intertwined them with land-based terminals for slots and sports betting. As such, GiG is now the only company as far as I know in the world, that is offering a full omni-channel solution for both sports betting and casino. As mentioned, we have launched our first in-house developed game, and we have many strong games in the pipeline now, both proprietary developed and with the use of partners. Finally I would like to add that we were granted a permission to offer sports and games as B2B products under UKGC license.In this quarter, we also received a coveted ISO 27001 certification. This is the highest mark you can get on information security online. This will further help us not only win large contracts by showing to the highest possible security standards, it would also help us drive down cost. The amount of resource that has gone into audits with various gambling regulators, with general regulators, with auditors, proved such advanced systems that we are offering, has been excruciating. Now, we would only have to show this certificate.With that, I'd like to proceed into the B2C update and take a more close look into our operating segment. As mentioned, we performed strong in the quarter, following a set of strategic review, mainly focusing on changing the marketing mix, as well as reducing the focus on the amount of operators. So in essence, pitting our resources behind fewer brands, we were able to drive a very positive EBITDA development quarter-over-quarter. Our marketing cost was lowered to 42% of revenues, down from 57% in Q2. The strongest performing brand in our portfolio has been Rizk.com, which quickly has grown to be a profitable and relatively large operator in the casino space, lately also launching a Sportsbook. Tim Parker has been the Managing Director of that brand. We have now promoted Tim Parker to become the Chief Marketing Officer of GiG. I was, until this quarter, holding that position on the interim, and I'm so happy with the development of the team and on what Tim have done, that I'm fully confident that Tim will be able to take the gaming operator forward and into the future.With that, I would like to take a look at the Hard Rock and our partnership with them. We, as mentioned, signed a letter of intent of producing their omni-channel Sportsbook, meaning both the retail terminals and over-the-counter systems as well as digital. We're expecting to go live already in Q4 2018, and I think this evidences the lightning speed in which GiG is moving at. In this year, we did not only get license with our casino platform with our player management system in the top first jurisdiction there is on this planet, New Jersey, we also finalized the development, not only of our digital sports betting offering, the full suite of products from trading tools to odds [ celebrate ] platform, to middleware to front-end, we also did it omni-channel, and we're ready to go live in the same year. Show me the company that has done this at the same pace. I don't think there is one.We've had a very positive start in the casino since the launch. And I believe this was heavily contributing to Hard Rock signing the sports betting contracted us. It shows the power of the ecosystem. How one positive success story leads to the up-sell of the next. We're now very much looking forward to go into period, where we can increase and demonetize the partnership following all the investments we have done. And I'm very much looking forward to next year and to see how this partnership develops.With that, I'd like to go into the business update and have a look at each of our various segments. Starting with Media Services, where revenues increased by 33% compared to Q3 2017. I believe the growth was 11% organic. We had about 29,300 FTDs, it was referred in Q3 2018. 12% of these FTDs was referred to the GiG ecosystem, meaning either external brands using our platform or internal brands using the whole stack of GiG owned by us. What is important is that this 12% that we are referring in-house is something we're getting a huge up-sell effect on as compared to an independent affiliate company. Of course, we're retaining more of the revenues, if we are referring a customer and end user to a client on our platform. And if they're playing a game or betting on an odds that is provided by us, we are further getting an increase in share of wallet.The media business, as you see in, has been relatively flat since Q4 2017. That is partially due to us closing the Dutch market in Q4 last year, whilst awaiting regulation. And I believe that the Media Services is set for continued organic growth going forward. We have also seen that the margin has been declining slightly. The reason being that we did a range of acquisitions a year back. And these were mainly asset purchase agreement. So while we took on assets and that immediately helped boost the revenues for affiliate accounts and so forth, we had a tale of hiring in order to support these products. We're fully staffed up in GiG Media and all, and we believe that we can retain a margin of 50%-plus going forward. Noteworthy is that 72% of our incomes on Media Services are from revenue share agreements. So these are perpetual recurring revenues. 13% is from CPA and 15% is from listing fee. CPA meaning that we have front-loaded incomes, that we're selling players for upfront payments.Moving on to our Platform Services. I would first like to update you on the major KPI of database transactions going through the systems. So these being bonuses awarded, debts being made, deposits received, withdrawals requested, all of it constituting transactions in the database. Compared to Q3 2017, it was 50% more activity in our platform. This led to revenue increase by 33% compared to Q3 2017. 86% of these revenues came from external operators. It's not the internal brands we're having using the platform but external B2B clients.In the period, we sold the first poker agreement to an external client, with OneTimePoker signing GiG Core. There was 4 new brands live on the platform in Q3, and a total of 37 brands operating on the platform in the quarter. If you follow the graph, you will see that the revenues increased slightly from EUR 6.3 million in Q2 to EUR 6.8 million in Q3. And subsequently, the EBITDA increased as well. Worth mentioning is that heading into the first half of next year, we're expecting increased regulatory pressure, which will have an impact on the top line and bottom line of the company.With that being said, GiG Core is growing. We're expecting to sign more clients this quarter than we did in Q3 and Q2. We had agreed with Hard Rock Casino that whilst integrating them and putting the service live in New Jersey, we would not sign additional clients than those already very far in the sales pipeline. Therefore, we had a slow onset of new clients in the first half of the year and the period where we saw their launch through. As we're now live and performing well, we are having increased bandwidth to sign new clients. We're, therefore, expecting that the onset of revenues from new business and from the existing ecosystem will offset the decline we will see from increased regulatory pressure and taxation from Q1 and going forward.Looking at our Sports Betting Services, this is still a new product. We are very much under development as we have only recently launched the service. Nevertheless, as mentioned, we have already started monetizing the product for the launch on the internal operator Rizk.com, and we have sold it to 2 external operators, whilst we had the letter of intent with Hard Rock. Currently, there is a burn rate of about EUR 700,000 to EUR 800,000 per month on the sports betting platform. And with revenues now starting to increase, we're hoping that by the end of next year we will start to see revenues climbing up towards the burn rate or with even very strong performance exceeding the burn rate. Historically, we have also being using our odds to trade against the market. We have used this to verify the development of proprietary odds. With now all of our B2B products being in full force and live and under heavy development, we have ceased the trading activities against the market and are now fully focused on delivering the B2B products.I would then like to go to the final area, which is Gaming Operators. Revenues increased by 11% from Q3 2017. Marketing cost was 42% of the gaming revenue compared to 54% in Q2 2018. As such, you can see that revenues came in at EUR 24.4 million, it's a slight increase over Q2, while EBITDA increased to EUR 1.4 million. The amount of active real money players increased to about 191,000, and the gross deposits increased by 18%. 95% of our revenues was generated from our core markets in Q3 2018 and in Northern, Central and Western Europe. The growth we had seen in the underlying business of gaming has somewhat been offset by regulatory changes in the U.K. primarily, but also competition from Pay N Play casinos in Sweden. We have seen that it's very tough to the business in the U.K., following our very strict adaptation of source of wealth and source of fund checks in the U.K. We have also seen that the new and more supreme UX than what has historically been offered in Sweden through Pay N Play had led to companies having such products increasing heavily in revenues, making it more challenging for companies who has not introduced such implementation yet. We have now done that with Thrills, and we're hoping to see a strong growth in Sweden.So to summarize. Over the last 2 years, we have invested heavily into building an ecosystem of iGaming products and solutions covering the whole value chain. It continued in Q3, but now all products are live and have been sold externally. This is also why we are seeing a strong EBITDA development of 66% compared to Q3 2017. A new Sportsbook is running out of the gates. We have sold it to external operators, and we have an LOI with the omni-channel offering for Hard Rock. We have launched our Proprietary Games, and we have seen a significant strengthening of the operational aspects of our gaming brands.Finally I would like to take us through the outlook of the company before we're heading into the Q&A.We are now ready to leverage on our complete ecosystem. It is now only about developing our [ turn ] products and selling them, not expanding into further product verticals. As such, our whole company is now focused on gaining increased market share and outcompeting in all our categories. We are focusing on attracting new customers by converting land-based business and traffic from offline to online. It is these strongest growth mechanisms for digital gambling, and we are working towards a very well -- towards strategic position. We're focusing in geographical expansion. We're focusing on regulated and soon-to-be regulated markets, New Jersey being the latest market in which we obtained a license in.Finally, the guidance for the full year has been updated. We are expecting revenues in between EUR 149 million and EUR 152 million and EBITDA between EUR 16 million and EUR 18 million for the year. Slightly lower than what we guided in Q2, main reason being the continued negative effect from the UKGC toughened regulations and the competition for Pay N Play casinos in Sweden.In the end, I would like to say that we are proceeding well towards the listing at NASDAQ Stockholm's main list. It is planned for Q1 2019 pending market conditions.With that -- conclude my presentation. And I would like to hand it over to the phone operator for questions and answers. Thank you.
[Operator Instructions] Okay. There appear to be no audio questions at this time.
So any questions from the web?
Yes. We have some questions from the web. Can you give us a timeline on when you expect to have a Danish license? And any other markets you might enter?
We're focusing heavily right now on the Swedish license that will be active from Q1 next year. What we're seeing is that the work we're putting into the Swedish license is very similar to the work we need to do for the Danish license. We're, therefore, expecting to have the license not too far after the Swedish license, but we won't communicate a specific time line. It is important for us though because we have a sales pipeline both B2B, and we are obviously also considering investing B2C into the Danish market.
Okay. I can take some more from the web, while we're waiting for some more on the conference call. Can you say something about structure of the Hard Rock Casino deal in terms of revenue?
I need to be very careful commenting on the commercial structures. But of course, we're now in a situation with Hard Rock. We're delivering their player account management system. We're delivering a casino solution to them. And we're delivering -- hopefully, we can finalize the contract for sports betting soon. So of course, this is a valuable contract for us. And of course, given the success we are expecting together with our partners. So it's a very good partnership we're getting.
Yes. And when we are still in the U.S., we also have questions about expanding our other business, both affiliate and B2C brands into the U.S. Do you have any plans for doing that?
Yes. We're in the process of applying for a license for our affiliate business in New Jersey. We are investing heavily into product development in the U.S. and we will hopefully go live with our U.S.-facing domains shortly.
Okay. And we have questions. How we see our operating expenses going forward into 2019? And I can answer that.We have said in report that we expect operating expenses to be lower compared to revenue that we had this year. So we have a strong focus on reducing our operating expenses. So hopefully we will have lower percentage of revenue in 2019 that we have to date. Is there any questions on call? Or should I continue with web questions here?
There still appears to be no audio questions.
Okay. I continue then. You have any plans for the Asian market?
No. Currently, we are invested into the company who are developing games for the Asian markets so indirectly, yes. But as GiG and all, we're not looking into the Asian market currently.
Okay. And question about depending market conditions in regards to the move to NASDAQ Stockholm. And I can also answer that one. That is, we just want to look at the overall market for stocks and bonds before we make the move. So if it's really bad, overall, market condition, it may be delayed due to that. Okay. And there's also some questions about Sweden. And apparently, are we going to have a Pay N Play in Sweden?
We are already live with Pay N Play on thrills.com. We went live about a week ago. We will come back to it in Q4 as to the performance as the product is new but we're very happy with how the launch went. No bugs, no issues. And we're seeing increased traction in the week following launch. Marketing only started a couple of days ago. So it is too early yet to tell how the success of the product will be.
Okay. And we have a more general question here. In the iGaming sector, you think more consolidation will follow the potential acquisition on Mr Green? Has it been approached by the potential buyers?
We would, obviously, never comment on mergers and acquisitions. Yes, I believe, that the industry will continue to consolidate.
Just a second. For GiG Sports, do you expect it to be a negative contributor to the bottom line throughout 2019?
Yes. The company product is still new. And it would be too early to expect the full year 2019 profitability. However, with a very strong performance, we might be able to break a profit towards the end of the year, which should be a really good result given that we would then be essentially having a start of profitable 1.5 year following launch. And a more realistic scenario might mean that we are getting closer to profitability by the end of the year. What is important is that I expect our costs to not increase significantly. We're already having a good workforce, working on the product. We come far in the product development. We can use these people to continue in developing the product and the road map that they have ahead of us. But the revenues will, of course, increase as we're now live on already 1 operator with 2 contracts signed with [ V ] and a letter of intent signed. But with full effect, yes, we can actually reach profitability by the end of next year, but I won't promise that.
Okay. And so you have any plans of selling or divesting any of the B2C brands or the B2C segment as a whole?
As mentioned earlier, we can -- or in previous presentations, we are in a strong position with our multi-brand strategy. We can both acquire and sell brands currently. No very specific plans. We're happy with the product portfolio we have. We are happy with the improvements we have seen in gaming, and we're expecting them to continue.
Okay. So a few more questions before we close down. For GiG Media, why do we see such a slowdown in FTDs? And why is only 12% being referred in term of the ecosystem?
What we've seen is that following a shutdown of one of our larger sites in Holland, we have seen a slowdown in the amount of FTDs. There is, however, an underlining growth organically of 11%. Of course, previously, we focused a lot on acquisitions as well. And since the multiples have been very high on acquisitions in this category, in this space, over the last 12 to 18 months, we have chosen not to invest so much in acquisitions. A lot of the FTD growth, we had seen earlier, was fueled by accreditive growth. So until we are seeing a better merger and acquisition landscape or there is very specific deals which we deem to be highly profitable, we won't continue to do accreditive growth. And with that being said, we have a strong underlying growth in GiG Media. We are happy with the performance of the company and the development, and we do expect it to go up going forward.
Okay. Can you say anything about the Sportsbook deals and how they are structured? Is it fixed-fees percent of transaction? How does it work?
Yes. We are selling our sports betting platform on a revenue share. Of course, there is some fixed fees and typically minimum fees in addition to ensure that we would always make money. But it's typically revenue share. And the revenue share is sold on similar rates, as to what you'd typically expect from the competitors. They're not cheaper, but they're neither more expensive than the competitors. Of course, by buying the full suite of products from GiG, you will get additional scale advantages. So you might be able to buy your whole technological platform cheap.
Okay. It's the last question from me. What is the expected impact of the Swedish regulations on number of potential customers? And the revenues going forward in Sweden?
It is hard to tell short term. We're, of course, expecting decreased competition since there will be less companies advertising. That being said, there is an 18% tax coming, and we are, of course, then expecting some margin pressure. And we'll have to see what is sort of the volume growth that we're hoping to see from being decreased competition is offsetting the margin pressure. And what we are seeing, though, is that there is interest among media brands in order where a interesting potential B2B companies that once move into the category, now that there is a private license. And of course, we will over time see if we can compete for these contracts, and be the main provider for these companies.
Okay. Then, I think, we stop from here. Do we have any questions from the conference call?
No. So with that, I would like to thank you all for tuning in. And remind you that early December, we're having our Capital Markets Day. And I promise you that we will be loud. Thank you.