Bragg Gaming Group Inc

TSX:BRAG

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Bragg Gaming Group Q1 2020 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Yaniv Spielberg, Chief Strategy Officer. Please go ahead, sir.

[Yaniv Spielberg, Chief Strategy Officer & Company Secretary]

Hi, guys. Good morning, everyone, and thank you for joining our first quarter 2020 earnings conference call. During today's call, we'll review Bragg's financial and operating results for the first quarter of 2020. Following our prepared remarks, we'll open the conference call to a question-and-answer session. In the call today is -- I'm joined by my colleagues, Dominic Mansour, Bragg Chief Executive Officer; and Ronen Kannor, Bragg's Chief Financial Officer. I'd like to start the call with some brief cautionary remarks regarding certain statements that may be made on this call. Certain statements made on this conference call and our responses to various questions may constitute forward-looking information or forward-oriented financial information within the meaning of the applicable securities laws. Statements about expected growth, respective results, strategic outlooks, financial and operational expectations, opportunities and projections rely on a number of assumptions concerning future events, including market and economic conditions, business prospects or opportunities, future plans and strategies, technological developments and anticipated events, trends and regulatory changes that affect the corporation, its subsidiaries and their respective customers and industries. While we believe these assumptions to be reasonable, they are subject to a number of risks, uncertainties and other factors, many of which are outside the corporation's control and which could cause the actual results, performance or achievement of the corporation to be materially different. There can be no assurance that these assumptions or estimates are accurate or that any of these expectations will prove accurate. For a complete discussion of these factors, please refer to our recently filed press release -- releases and our other publicly available disclosures. And with that being said, I'd like to turn the call to our CEO, Dominic Mansour.

[Dominic P. Mansour, CEO & Director ( Leave of Absence )]

Thanks, Yaniv, and good morning, everybody. Thanks for taking the time to join our earnings call today. On the call today, the -- I'm planning on providing an update on our business operations and results. When I finish, I'm going to hand over to our new CFO, Ronen Kannor, who will run through the financial results for the first quarter. So just to kick it off, and it's a bit of a reminder, we're a gaming B2B technology provider. We offer the full turnkey retail online, mobile, iGaming platform and technology solution. We also have a very advanced content aggregator, being casino content, a sports bet lottery. And also we provide things like marketing and operational services. Our aggregator platform, in particular, has been performing exceptionally well with some bespoke and various exclusive content partners. So I'm going to go over 3 core topics today. Firstly, our product offering and the advancements we've made in the technology primarily around the casino products, which is the driver of a lot of our growth coming from a combination of the aggregator platform and the casino games. We've now 8,000 games on there, seamlessly integrated access through one single -- what we call an API integration. It's not really about the number of games. It's about the quality and the supporting features and functionality that ensures the games through our platforms generate the most revenue, and we'll expand on that a little bit later. Secondly, I'm going to go over the customer expansion, our revenue diversification, some of the partnerships. As our global customer base is growing, and our footprint is growing with a number of new big customers, including LottoLand, Admiral Group, Seneca, Kambi and Mr. Green, amongst others, but also on our focus of customer diversification not just on an individual customer level, but also geographically expanding and, ultimately, achieving our goal of decreasing our dependence on our top 5 customers. And then finally, I'm just going to touch on the Q2 outlook and give some high-level indication of how the business has performed during that period, which is also known as the COVID period, as you know. So kicking off with Q1, as you would have read this morning, we continue to grow rapidly. We've really built on the growth trajectory that we established in 2019. Revenues grew 44% in the first quarter to EUR 8.8 million. We also generated EBITDA of EUR 0.8 million, which is 100% growth year-over-year. Our customer base, as I was saying, has continued to grow. So we've signed 9 new customers in Q1 and, in addition to the guys I just mentioned a moment ago, including Gamesys, SkillOnNet, Leon, CasinoSecret and Hub88. The high-level revenue retention that we're experiencing is a very clear indication of the customer satisfaction with our platform. And to date, we are still yet to lose a customer, he says, touching wood. And we do believe that is down to the quality of the technology and the seamless, simple integration that we're able to provide. On top of that, we've derisked, as we've set out to achieve throughout the year, and we can see that in the quarter in some of the key numbers. So 47% of our revenue in Q1 came from our top 5 customers as compared to 68% for the same quarter in 2019, which is a very material improvement. And we're particularly happy with that given that the underlying revenue growth has been quite substantial. Geographically, we're now compliant in more than 10 countries worldwide, so whether we carry a license or we are compliant to distribute our games and content to our aggregator platform in there. And some of the highlights include Croatia, Colombia, Sweden and Denmark as well as a bunch of others, but these are new revenue streams for us. As you know, 2019 was sort of the big milestone for us was the U.S. market entry. And we're absolutely focused on building and expanding into this market into 2020. So we're keen to explore and find the right partners going forward, and we hope we'll be able to talk a little bit more about that in the coming conference calls. In terms of revenue concentration, Germany continues to be the most concentrated geography. Today, it represents about 30% of group revenue, and that's down from around 40% at the end of 2019 and 46% in the same periods being Q1 2019. We do anticipate some more clarity on the German legal landscape. There was a lot of development in the first quarter, and some various changes to the regulatory regime are being proposed and, ultimately, were passed. We expect these to be beneficial for us. We believe that regulatory certainty provides a very solid foundation for significant market growth. And whilst the new regulations do impose some limitations on game play, we don't believe that those are going to materially affect the growth potential that we expect to see coming out of Germany. That doesn't mean, though, we're not focused on diversifying our revenue into new geographies and reducing our exposure on any single country. And we've made real progress here in the first quarter with new clients in Croatia, Romania and Columbia but, in particular, seeing the revenues that we're getting contributed from those territories are starting to make more of an impact into the overall revenue. And we'll continue to explore these opportunities accordingly. Moving on to the sort of technology side of it and the platform updates. We've dedicated a lot of resources to the ongoing improvement of our platform, and especially now with the uptick in our revenue due to the recent increase in migration to people playing games virtually and in home entertainment. But some of the things that we've built that have made a very good impact on immediate revenue would be, for example, a real-time tournament functionality. There's a leaderboard tool. It's something that lets operators set up slot tournaments across multiple game providers. It's a real-time data feed that allows players to track and compare their results with others. And this is just taking player engagement on to the next level. And ultimately, the goal here is increase customer retention, increase revenue and increase revenues that are going through games on our platforms. One of the reasons why this tool is not unique. It exists in the industry today. But one of the reasons this is so powerful for us is that we have built it through our aggregator platform with one simplistic single integration. We don't require a complex integration into the depths of the technology of the partners or our customers. As a result of that, we can close contracts very, very quickly. And we can integrate even faster than the industry standard with a more comprehensive product. And in some cases, that can be a low-digit weeks as opposed to quarters that we see our competitors doing. So we expect a lot more growth throughout the rest of 2020. We've very advanced conversations with a number of new customers across Europe and Latin America. And we've really experienced a significant increase in revenue recently as people are looking and exploring entertainment alternatives they can enjoy in their own homes. And we really hope to build on this momentum throughout the rest of the year. We'll continue to invest in our platform and integration capabilities to provide the best products to our customers.So looking ahead, I think this is a real foundation for future growth. Our internationalization into more regulated markets is one of our top priorities as well as building more strategic partnerships and customer bases internationally. And a word on COVID, and it is worth acknowledging the adverse impact this has had on people, but it has made a very big benefit to this business over the quarter -- over the second quarter, that is. Summer is now coming. So in Europe, we're seeing COVID plateauing, in fact, declining in many of our key markets. And with the onset of summer, we'll -- we're expecting to see the typical seasonality kick in as well. And as usual, I look forward to sharing several pieces of more exciting news in the coming months. And with that, I'd like to turn over the call to Ronen Kannor, our new Chief Financial Officer. Ronen?

[Ronen Kannor, Chief Financial Officer]

Thanks, Dominic. Good morning, everyone, and I will take you through the financial performance of the first quarter of 2020. The total group revenue for the first quarter was EUR 8.8 million, up by 44% from the EUR 6.1 million in Q1 '19, which keeping consistent quarterly growth momentum. The positive revenue growth was derived from organic growth of our customer base, alongside onboarding new customers, such as Croatian-based Admiral Group, SkillOnNet and LottoLand. The revenue growth was mainly in the games and content services, as demand for the group's unique games and content proposition continue to grow. With regards to the gross profit, for the first quarter, was EUR 4 million, up by 38% from the EUR 2.9 million from Q1 '19, with subsequent margin decreasing by 2.2 basis points to 45.5%, but it's mainly as a result of revenue classification and growth towards content and aggregator. Selling, general and administrative expenses were EUR 4.1 million, up by 10% from previous quarter of EUR 3.7 million, mainly driven by the increase of salaries and subcontractors as the group expanded its software development, product and analytics function. The group expansion also increased other cost compared with Q1 '19, but we consider them as insignificant. The adjusted EBITDA, just to reiterate, is it excludes income or expenses that relates to exceptional items and any noncash share-based payment, increased by 100% to EUR 0.8 million as opposed to EUR 0.4 million in Q1 '19 and with the subsequent adjusted EBITDA margins increasing by 2.2 basis points to 8.7%, which achieved mainly as a result of reaching high scale and tight cost control. The total net loss for the first quarter was EUR 5.7 million compared to net loss of EUR 2 million last quarter. This is mainly the result of the remeasurement of the deferred and continued consideration due to the vendor of the ORYX Gaming business acquisition in a sum of EUR 5 million. Just to remind, in Q1 '19, we didn't have this adjustment. We just literally bought the business, and representing reality and actual outperformance and solid forward-looking earnings for the remaining of the year. The cash flow from operating activities amounted by EUR 2.5 million during the quarter as comparing to negative EUR 2.7 million in Q1 '19 as a result of working capital movement. The cash flow from investment activity is attributed materially to EUR 0.4 million to capital software development cost. And ultimately, the cash and cash equivalents in the end of the period and the quarter was EUR 2.5 million as opposed to EUR 1.8 million on previous periods. We can definitely -- you can definitely find more information and detailed information about our financial statement in the Q1 financial statements and also in the management discussion and analytics from the SEDAR or any other Investor Relations page on our website in Bragg Games.With that, I will turn the call to the operator for any Q&A session. Thank you.

[Operator]

[Operator Instructions] Our first question comes from [ Peter Wheeler ] with [ Chatham ].

[Unknown Analyst]

Can you just maybe give us an update for your funding needs and your sort of funding plans for the next 6 to 12 months?

[Dominic P. Mansour, CEO & Director ( Leave of Absence )]

Sure. I can take that question. I think it's -- as we announced in our full year 2019 numbers, we -- the business is now, I think -- and as you'll be able to see when you read the financial statements, you'll -- the business is now generating cash flow -- positive cash flow, in particular with the divestment of the media business in the first quarter. So as a result, we don't have cash needs for the operational activities of the business. But what we do have is the amount owing in contingent consideration to the founder of the ORYX business. That earn-out was due end of June this year. And as we announced in the first quarter, it has been pushed back to September 30. As it stands, they are the only amounts outstanding.

[Unknown Analyst]

Yes. And just maybe give us your thoughts or your thinking around your slots. Do you think you might push it out again? Or just your thoughts on how you might potentially settle that obligation.

[Dominic P. Mansour, CEO & Director ( Leave of Absence )]

I mean to be honest with you, it's not a -- it's not something I can disclose any further details. Suffice to say that the founder of the business was comfortable to give us the extension through to the end of September. And our conversations and planning is ongoing with Canaccord Genuity, who we've employed to support us in this process.

[Operator]

[Operator Instructions] Our next question comes from Russell Pointon with Edison.

[Russell Pointon, Director of Consumer and Media]

A couple of questions, please. First of all, just in terms of the revenue growth. It's notable that the Q1 growth was very strong on top of Q1 growth last year. I guess you mentioned the seasonality, which I kind of get, but is there anything -- any other seasonality in the business in terms of winning new customers and how they think about their spend? Second question is on the gross margin. Could you just elaborate a bit on the -- at this point about revenue classification, et cetera? And third question in terms of the revenue growth by segment. Could you just talk a little about the growth rate in turnkey, which was down 25% in the quarter year-on-year?

[Dominic P. Mansour, CEO & Director ( Leave of Absence )]

Russell, yes, that's fine. I'll take the first question on the seasonality and the revenue growth and hand the gross margin and revenue -- other revenue growth question to Ronen. So if I just go first for you there. Seasonality, I guess, as you're aware tends to, in this sector, be very much reflective of -- certainly when it's -- the revenues online or digital, as you like, linked to poor weather and daylight hours, with the worst the weather and the less the daylight as being the better for the business. And typically, we tend to peak towards November, December. And then we get a nice overflow of that into Q1. So Q4 and Q1 would seasonally be our strongest periods. That is, today, while the majority of our revenue is European-based, that seems to be the pattern. I think if we are successful in growing our Latin American base, which is the trend, then that will counter some of that seasonality and smooth the trend over the course of the year. And in terms of the second part of that question in winning the customers, it's not -- we haven't seen anything like that. It's -- we're in that kind of hyper-growth stage where we are -- we have a lot of leads. And we're able to integrate customers very, very rapidly, which means our sales cycle, in particular, on the aggregator platform, is very, very short. And as I said earlier, in some cases, that can be down to weeks, not months. And so that's a quick sales cycle. If we're selling turnkey and PAM solutions, they're much slower and make a less material part of our revenue as a result of that, but it is a longer sales cycle because it's a much more material integration from a technical perspective from the operator side. And if I can just pass over to Ronen to take the other 2 questions.

[Ronen Kannor, Chief Financial Officer]

Russell, thanks for the question. So as you know, our revenue is a composition of 3 layers of revenue. One is gaming and content, which is the biggest chunk of our revenue composition. Then there's software and platform licensing, let's call it the platform fees. And of course, turnkey management services. So as you rightly said, the margins decreased -- the gross profit margin decreased by 2.2 basis points, and it's purely because the way the growth came from. The growth can come from gaming content as opposed to the other services, which literally don't really have material cost of goods associated to that. But what we're doing, what we're seeing that is the more we're growing, and this is actually the catalyst of the growth of the business, but we're also constantly looking on improving our commercial terms with our suppliers. These are our main suppliers of gaming content. And we're looking into it, and we're trying to make better terms to increase your profitability in that particular point of view. But if you look at the financial statements in Note 3, you will see that the composition of this particular line and you see the massive growth came from gaming content. As a result, the cost increased, respectively, higher than we expected. But we are working right now to agree on better terms with our suppliers to be more competitive in that respect.

[Operator]

And I am not showing any further questions at this time. I would now like to turn the call back over to Yaniv Spielberg for any further remarks.

[Yaniv Spielberg, Chief Strategy Officer & Company Secretary]

Thank you, everyone, for joining the call today and for your interest in the Bragg story. We do appreciate your time and look forward to providing updates on our progress over the next few months. Thanks a lot, everyone.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.