Gaming Innovation Group Inc

OSE:GIG

Earnings Call Transcript 2020-Q3

[Tomas Otterbeck, Analyst]

Good morning. My name is Thomas Otterbeck, analyst at Redeye. And we have the CEO at the Gaming Innovation Group, Richard Brown here to present their Q3 report. So good morning. And yes, you can start, I think, Richard.

[Richard Brown, Chief Executive Officer]

Perfect. Thank you very much, Thomas, and good morning to you all. Welcome to Gaming Innovation Group's Third Quarter presentation of 2020. My name is Richard Brown. I'm the group CEO, and I'm joined today by Tore Formo, our group CFO, who will be available at the end of the presentation for the Q&A. An introduction to Gaming Innovation Group, GiG is a dedicated iGaming B2B supplier. The company is based on innovative technology with an end-to-end solution and product offering. The business is divided into 3 main operational units, our gaming Platform Services, Media Services as well as a proprietary Sportsbook offering.To cover briefly the company, we're approximately 460 full-time employees across 3 primary office locations: Malta, Copenhagen and Spain. The company is dual-listed on the Oslo Børs and Stockholm Nasdaq Exchanges. The business has a very much global reach with media having primary assets in over 25 countries, and the platform business is licensed and certified in multiple jurisdictions and markets, across Europe, 2 in the U.S. and pending certifications in Latin America with an additional 8 new regulated market entries in the pipeline.I will now move to the group financial development for the quarter. We delivered a strong result with continued quarterly growth in -- with revenues in Q3 of EUR 17.9 million. On an adjusted basis, revenues were EUR 14.2 million, which corresponds to a 42% growth year-over-year and 8% up versus the previous quarter. EBITDA in Q3 came in at EUR 3.2 million, up 850% versus the same period last year and 12% up versus the second quarter. The adjusted EBITDA margin corresponded, therefore, to 22.5%.Some key takeaways for the quarter, the sales pipeline and contract negotiation developed positively. 6 new agreements were signed on the platform services during the quarter, combining to add a total of 10 so far in 2020. Our Sports Betting Services restructuring continued with a further reduction in operating expenses quarter-over-quarter, and we signed a significant partnership agreement with Betgenius to help further grow that area of the business and placing sports betting in a sustainable position for growth and future contract wins.WSN, our flagship U.S. affiliate website, continued to grow in that market and is now present in 9 states, and has gained further traction in that exciting area of the business. We would consider beyond the normal level of focus on efficiency that our restructuring of the company post the strategic review is now complete. For instance, the move to -- move of our infrastructure from cloud-based model to a hybrid structure is progressing well. We anticipate that to be completed by the end of the year. And tech costs were reduced by about 38% compared to the same period in 2019. And overall, OpEx was down 14% versus the same period last year. We also, importantly, have -- with the new signings, we have 15 clients on the platform in the pre-LIBOR integration phases, with the majority of these expected to go live in the next 3 to 9 months.I will touch on a strategic update as the gambling industry's dynamic continues to change. GiG is extremely well positioned to capitalize on the projected growth, in particular, in regulated markets by positioning itself in high barrier to entry, reregulating or regulating markets where the drive of offline to online has high potential. Local regulation is really driving demand for the products and securing us future revenues. 80% of the new contracts signed in the third quarter were from regulated markets. And the implementation of that local regulation for online gambling is driving real demand. In the shorter term, in several European markets, such as Hungary, Croatia, Romania and others across Latin America, this enables GiG to enter new markets where it's currently not present and drive future growth. In the more mature markets, where there is a presence already, such as Germany, while there are short-term earnings impacts of the new regulations that came in, in October, we see an increase in demand and sales for the platform driven by that regulation as retail companies continue to look -- continue now to move into the online space.Our recent signing with TipWin is a perfect example of this, a company with a large retail sports betting base is moving into online casino for the first time post the regulation of the market. And by signing these, and we see new contracts in these local markets, having a much greater potential, not only to make up for any shortfalls of current market activities, but to actually push the growth beyond those current levels as those markets mature and regulate further. Also, revenues generated in regulated environment tend to be much less volatile or susceptible to significant quick change, which we believe will create a stable long-term value creation for gaming innovation group. Regulation is also driving opportunity in our media business. It's increasing the time to market, especially in our paid media verticals where we have proven a successful formula for working in regulated markets. And as new markets are opening up, and Google and social media platforms allow iGaming post regulation, we expect to be able to enter those markets with force as well.The platform will grow now based not only on the organic growth of our current customer bases, but also by the signing of the new multitude of new clients that we signed this year, and in particular, in the last quarter. Despite the delays COVID-19 has caused during the actual time when we expected to secure the contract, we are now signing at a significant pace reoccurring revenues in multiple geographies. We anticipate further agreements to be signed before the year-end. Over -- as I said, over 80% of these new contracts are in locally regulated environments, and 75% of those contracts were of retail or land-based gaming operations moving into online.In the quarter, we also, as I mentioned, made a deal of partnership agreement with Betgenius, which resulted in the signing of the head of terms with a large Latin American retail operator for both sports and casino platform services during the quarter. Just to explain a little bit more about what this does and how it capable -- enhances the capabilities. By combining the offering and specialties of these 2 companies, we have enhanced the overall product offering that GiG has, and presents us with an end-to-end Sportsbook and iGaming platform as well as a first-class managed trading and risk management product from Betgenius. This allows us -- this allows GiG, in particular, to reduce its own OpEx and gives a scalable trading and risk management service to future clients.GiG's core strengths are positioning us well to capture our target market. By combining our platform, Media and Sportsbook businesses, we have an excellent end-to-end product and service offering, we are based around first-class technology and products backed with strong operational knowledge and experience. Our ability to work with our partners and -- as true partners with our customers, combined with our omnichannel offering and solution remains a key strength. And these core strengths together position us well to capture our target customers in our target markets. I will delve now a little bit deeper into our business update, and there were various business units starting with the platform services. Revenues for the platform services were EUR 9.1 million in Q3. Adjusted revenues for SkyCity's accounting were EUR 5.4 million, a 50% increase year-over-year and 15% up versus Q2. The platform services also delivered a positive EBITDA in September, and EBITDA for the quarter ended at minus EUR 100,000, a 96% improvement year-over-year and up 91% versus Q2. We signed, as I said, 6 new agreements in Q3, and we've already signed 2 in October of this quarter.If we look at the next slide, we see that 23 brands are operating on the platform during the quarter. And as mentioned, 15 brands are in the integration phase for launch. The strategy to move away from the white label model and over to SaaS-agreements-only is progressing well. This reduces operational complexity, overhead costs and significantly reduces risk and strengthens the overall sustainability of the company. As part of the strategy to own the white label agreements, GiG has rescinded its Swedish and U.K. operator licenses, which enables further cost reduction, while still supporting the market on a SaaS basis. The platform also went live into highly regulated markets, Croatia and Spain. As stated, now we are licensing in 8 jurisdictions and live in 8 jurisdictions with more than 8 more regulations in the integration phase.Our Media Services had stable revenues in the third quarter, up 7% year-on-year and in line with Q2. Media's core markets returned to a more normality in terms of demand in the third quarter as the general COVID-19 restrictions were eased and sports events started again. Seasonality also had an impact in some of the markets historically in Q3, and it was the same in this quarter. Our paid media division, in particular, continues to see quarter-on-quarter improvements with revenue up 50% year-over-year and 10% quarter-over-quarter, which bodes well, in particular, as these new markets are expected to open up in the upcoming year as Google amends their policies.FTDs, or first time depositors, was up 13% year-over-year, but decreased Q-on-Q, mainly due to the consumer demand surge that we experienced during COVID lockdowns in Q2. However, I'm still very pleased to see our numbers in FTDs outperform those of Q1, which is historically a strong seasonality quarter. WSN and our efforts in the U.S. continued to accelerate, the U.S. market -- in that U.S. market with all-time highs in September and is now -- the assets are now present in 9 U.S. states. We continue to maintain focus on developing business outside of our current core markets and drive that into this quarter and into 2021.As we spoke about -- or as I spoke about earlier, restructuring initiatives were rolled out in April, and they were completed during the third quarter. We will see the full effect of those in Q4. EBITDA for the Sports Betting Services improved due to that reduction in operating expenses by 21% in the quarter. And if we had adjusted for nonrecurring expenses, it would have improved by 41%. I said, we signed 2 new clients in Q3, including the agreement with Betgenius, and the head of terms with the Latin American supply contract.I will now look at the events after the quarter. We continue the strong momentum in platform sales, signed 2 new long-term agreements in October, one of which is a land-based casino group where GiG can provide an omnichannel offering and assist with capturing emerging local markets. The sales pipeline remains strong with globally diverse new potential clients, and the trend continues as land-based and retail businesses look to go online and regulation is driving that demand. In October, reported revenues on an adjusted basis were up 48% versus the same period last year.In summary, GiG has delivered significant year-over-year and quarterly growth in both revenue and EBITDA and continue to build for future growth in 2021, securing multiple contracts that will enhance the reach of its product portfolio. Sports has been placed in a sustainable long-term position for the competitive initiatives to reduce the burn rate and is evident from Q4 onwards, in conjunction with the strategic partnerships and demand we are seeing for that particular product. Restructuring program, we consider as completed post a strategic review that was initiated at the end of last year. In terms of guidance for 2020, we have adjusted due to the uncertainty around the short-term impact of German regulations that came in, in October and a delayed go-live or onboarding of new customers due to the COVID-19 delays in Q2 and into the beginning of Q3. With a corresponding reduction in EBITDA, we expect to be slightly in the lower end of the range of EUR 52 million to EUR 57 million in revenue, and EBITDA is expected around GBP 11 million now. Gaming innovation group continues to improve and move towards its long-term goals, what we would consider a significant marked improvement in the financial performance year-over-year, it is a diverse B2B company, well positioned for future growth in a transformative online gambling industry.I would like to thank you for your time this morning. And now I think we can move to Q&A.

[Tomas Otterbeck, Analyst]

Yes. Thank you for the presentation, Richard. I have some questions here from Jonas Amnesten, our analyst, and some from viewers as well. I start with the first one.You mentioned that you had a breakthrough in customer acquisition in the U.S. market for the media segment. What was the driving force behind this breakthrough?

[Richard Brown, Chief Executive Officer]

We've been working on that project for the last 18 months to grow that up organically. So I think all of the efforts and the focus that the team has put into is starting to deliver results. It's also combined with the opening up of new states. If we look back maybe 18 months ago, there was potentially only 1 state that was actually open and taking traffic, that's now up to around 8 or 9. So because of our strategic approach to look at the asset as a nationwide approach that means when states open, we already have some form of entry into it. There's still a huge potential in that market. And we have a long way to go to get to where our strategic goals are for that asset. But we believe that we have made at least a breakthrough now as you put it in the third quarter.We also see our paid media also working well initially. We started that also in the third quarter, and we start to see some fruits coming out of that particular effort. And also, we're hopeful that as more states regulate and Google adopts the new policies into various different states, we'll be able to accelerate that as well. So we're very pleased with the development. It's still very early days. But it's kind of a testament to the effort and the work that the team have put in and we believe that we're on the right track there.

[Tomas Otterbeck, Analyst]

You mentioned paid media. Could you perhaps specify which markets are driving the growth in paid media?

[Richard Brown, Chief Executive Officer]

It's across the board, if you will. We've been traditionally strong in the U.K., even in Denmark as well. We've also looked at other markets such as Belgium and various others, Romania, other regulated markets that allow the PPC. So it's actually, I would say, a broad range of markets that are delivering results.

[Tomas Otterbeck, Analyst]

Yes. Thanks. Yes, this one, I don't know if you can answer, but I ask it. The company has signed 9 agreements since June. What is the combined revenue on a monthly basis for those contracts? Is it to a specified question? Or I can go ahead.

[Richard Brown, Chief Executive Officer]

No, I understand it's a little bit difficult for us to guide specifically on the contract values on -- and especially over periods of time because each one has kind of contract length normally around 3 to 5 years. So you may see the kind of value of that contract increasing over time and begin. So specifying it to a kind of specific month period depending on when go online as consolidated value is quite difficult.

[Tomas Otterbeck, Analyst]

I understand. And 1 question about the U.S. market. Now when you are released from the exclusivity agreement in the U.S. with Hard Rock, will you make extensive efforts to add new platform customers? And how do you view the opportunity?

[Richard Brown, Chief Executive Officer]

I think the U.S. is obviously a large and significant market. I think it will also come in slightly different waves. I think you obviously have sports betting now and you have casino happening, perhaps 1 or 2 years after that. And I think that would obviously be where we are specialist and where we probably have our strong points. I still think there's a lot of opportunity for us with sports betting as well in the states. However, I look at the gambling market as a global one and one where we're present when -- ranging from Latin America to Australasia, and the U.S. So I think that it's important for us to also look at the opportunities in other markets, not just the U.S.We will continue to pursue that with force as we do with all markets, but there's a lot of growth in a lot of other markets as well that I think we're well positioned to capture the way that it's fragmented -- fragmentally opening up in the U.S. as well with states. You also have countries with similar gambling spend levels at some U.S. states and similar population levels well outside in Eastern Europe as well.So I think there's a global potential, and that's something that we have a capacity to deliver on as an example of the current clients we signed, which are very geographically diverse.

[Tomas Otterbeck, Analyst]

Yes. The company has signed a partnership with Betgenius. How does GiG look at this partnership? And would there be more contracts out of this partnership, you think?

[Richard Brown, Chief Executive Officer]

We view the partnership as very complementary to what we wanted to achieve in terms of reduction of our kind of OpEx and also have a very scalable risk management and trading offering. So by combining their expertise in conjunction with our expertise in the kind of technical platform and betting engine provision, I think it's a really nice offering towards the third parties or towards the customers. So I think we continue to work well. We get -- we worked well with them over the last transaction and are ahead of terms that we signed, and we believe that we will continue to try and support each other and get the benefit from the partnerships for both companies.

[Tomas Otterbeck, Analyst]

Okay. Yes, this one. You continue to get closer to breakeven for the sports betting segment by lowering expenses. But what is the long-term revenue potential for this segment, you believe?

[Richard Brown, Chief Executive Officer]

I think, as I said, we signed 2 contracts for sports betting, specifically in the third quarter. And we see that there is definitely a significant demand for our type of product. There is a lot of emerging markets that -- and a lot of transition on to sports betting, where we believe that we are very well fitted in terms of our product offering and price points and execution and skill sets around, which I think will function very well.So I think it's important to remember as well that providing a sports betting platform or betting engines and services is probably one of the most difficult to do so in the gambling industry. There's very few suppliers who are at scale and have the ability to scale their products. So I think by positioning ourselves in there, in that kind of middle ground, in these kind of emerging markets, we will have significant success over the longer term.

[Tomas Otterbeck, Analyst]

Yes. And here's a viewer's question that came in. How do you regard your cash position? Will you be able to increase net cash held over the next year?

[Richard Brown, Chief Executive Officer]

Yes, we believe so. We had a prepayment with the Betsson transaction, which we utilized to pay previous bond. That will -- when that extinguishes, we believe that the business then becomes very cash-generative in that sense.

[Tomas Otterbeck, Analyst]

Yes. Okay. And regarding the new German regulation, what impact have you seen so far since the start of the compliance period? And what are your main concerns regarding the new regulation?

[Richard Brown, Chief Executive Officer]

So we've seen an impact. It varies very much, not all of our clients are approaching it in the same way. Some clients have actually decided to close off the market already. They decided it's not a long-term strategic goal. Others have implemented the compliance changes. So there is an impact. And then there will be changes in -- later on in the quarter as game suppliers also will adjust how the gameplay is made, which has this short-term impact that we've spoken about.However, I think as I said, for the longer term, contracts, us winning contracts like TipWin is a really good testament to -- we wouldn't -- they would -- them as a business would not move online until the regulation had occurred and was concrete. And we believe that the potential of those -- that contract as well as other contracts will eclipse the current run rates we were at pre-regulation over the kind of midterm period. And I think that speaks very well to the positioning of the company in general as well. So while it is obviously some form of impact to deposit limits and the game suppliers introducing max bins as well as max bets, that will have an impact. But we believe the long term on the platform business will be better off for this as well. We also remove the volatility of what's happening as of today over the longer period as well.

[Tomas Otterbeck, Analyst]

Okay. Will you communicate any guidance for 2021? And when?

[Richard Brown, Chief Executive Officer]

We're not going to communicate anything at this stage. I think there remains some levels of uncertainty, both around COVID as well as German regulations. We will continue to consider whether we will guide for 2021 as a management and Board.

[Tomas Otterbeck, Analyst]

Okay. So here's one from viewers. At which time will all the 15 brands or customers currently in integration phase be live on your platform?

[Richard Brown, Chief Executive Officer]

We're estimating between 3 and -- well, all of them will be live, I would estimate, within around 9 months. So by the end of the first half of next year, they vary and go-live date depending often on the level of bespoke work required by the client and/or by some regulations where we have to go through a regulatory process, certification of the platform, applications, et cetera, et cetera.So there's varying time differences between the onboarding of the various clients. But my estimate would be that those 15 in integration phase now would -- should be live approximately by the -- all should be live approximately by the end of Q2 next year. Majority, I would say, around April, I would estimate at this stage.

[Tomas Otterbeck, Analyst]

Yes. And another question. In previous quarters, you announced contracts for GiG Comply. And we have not heard much about it since. Have you continued to sell this product to clients or have the sales stagnated? It's a question from a viewier.

[Richard Brown, Chief Executive Officer]

Yes. We continue to develop the product as well, and we start to take it into new markets. I think we made significant traction in the sales of those who were active, in particular, in the U.K. and Swedish markets when those market regulate. I think, again, when markets regulate and there becomes a new wave of advertising compliance in a specific jurisdiction, there becomes new operators who then also would like to be able to take such services on.An example, again, here, we're talking about we have Germany, we have Netherlands coming up next year as well, and there are lots of clients who we don't currently service with the product today who potentially weren't interested if they weren't active in the U.K. or Sweden before. But as new markets regulate, then we're also -- will also enable us to move into those new sales phases as well.

[Tomas Otterbeck, Analyst]

Yes. I believe we're done here. So thank you very much, Richard. And congratulations to a strong report.

[Richard Brown, Chief Executive Officer]

Thank you very much, Tomas. Thank you.

[Tomas Otterbeck, Analyst]

Bye-bye.

[Richard Brown, Chief Executive Officer]

Bye-bye.