Q2 2020 Inspired Entertainment Inc Earnings Call
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I'll begin today's conference call by referring you to the company's Safe Harbor statement that appears second quarter 2020.
Our press release, which is also available in the Investor section of the company's website Www Dot I see I S. P dot com.
The Safe Harbor statement also applies to today's conference call.
The company's management will be making certain statements that will be considered forward looking under securities laws and role I've actually seen.
These statements are based on management's current expectations or beliefs are subject to risks uncertainties changed.
Circumstances.
In addition, please note that the company well discuss both GAAP and non-GAAP financial measures.
A reconciliation is included in the earnings press release.
But I completed.
I would now like to turn the conference all over to born wheel, the company's executive Chairman Mr. Weil. Please go ahead.
Thank you operator.
Good morning, everybody.
Okay. Thanks, once again for joining.
Second quarter conference call.
With me this morning as usual our group Spears, Yeah, Joburg and Stuart Baker.
It would be an understatement to say that the second quarter of this year.
Worst starts to adapt to circumstances that hopefully.
Only come once in a lifetime or maybe even less often than that.
For years, we have the here just the paradigm articulated many years ago bye.
Jack Welch, it's easy to make money.
Don't have to grow.
And it's easy to growth you don't have to make money.
But the real tested the management team.
Is its ability to be able to do both.
So just when we thought we had its figured out the first time, we were hit by the impact of the Triennial review.
And then when.
As I think clearly evidenced by our strong performance.
The fourth quarter of 29 teams, so two quarters ago.
We thought we had its figured out the second time.
And then of course, we encountered cold.
So temporarily.
The paradigm because I'm not can you make money getting grow at the same time.
Comparatively speaking that's actually right now looking to be pretty easy.
But can you still make money while virtually no warning.
Your revenue suddenly shrink by 75%.
We think of the fourth quarter Oh 2019.
As an effect.
Our benchmark corridor.
'cause it was the first quarter in which we had integrated.
And all the magic acquisition, and it's a attendant revenue in full cost structure.
But also unfortunately, the last quarter that was on impacted by coated.
Between the fourth quarter of 2019.
And the second quarter of 2020.
Our revenues declined deed by 75%.
From about 66 million in the fourth quarter of 2019.
To 16 at the half million two quarters later, so would drop.
Of course quarterly revenue of $50 million and yet.
I think actually somewhat miraculously we were able to earn.
$2 million, an EBIT dollar second quarter as it happens compared to about 17, and a half million in that 2019 benchmark.
We remain cash positive throughout.
At the under the quarter, we had about $40 million and cash.
We managed to achieve this because at the onset of cold that.
We were able to drive an uninterrupted acceleration in our online business.
Aided usually by product development efforts, but Fortunately, we're underway would call it started.
And were deliberately never cut back in a moment Brooks, we'll talk about some of these developments.
And the trend tremendous concomitant expansion in our customer base.
And we combine this with very aggressive furloughing staff, which saw or head count declined temporarily trip over 1800 to about 300.
And so on the basis, so before going as we have reported previously.
We were able to very successfully amended our debt agreement.
Established new debt covenants.
And give ourselves very significant runway going.
Going into the quarters ahead.
Our overarching thesis, which we articulated during our call last quarter.
Was that our retail business could recover it relatively quickly.
Because it consisted primarily of small wide area local then use.
Located predominantly in Europe, which lease comparatively speaking seem to have.
Oh, the Corona virus more under control.
Towards the latter part of the second quarter.
We began to see this scenario play out successfully in Greece.
And then it for their Italy.
And the UK.
The same time, our online business continues to be extremely robust.
While our cost structure overall is not returning Jeffrey code levels at least in part.
Due to synergies in the domestic merger.
As our retail network continues to reopen the key performance indicators.
Income per machine per day.
Or virtual as income per shopper per day as examples.
We continue to be very positive that's fish that both to the same time last year.
As well as the levels that prevailed immediately pretty cold.
No again in a moment brooksville talk in some detail about the development at each of our markets.
And we'll explain that although we've seen an enormous rebound in our retail revenue we are not 100% there yet.
And so you would not expect.
In the upcoming third quarter, two have reached a level of our benchmark benchmarks Q4, Johnny 19.
Assuming the dynamics, we're currently seeing continued.
We would expect to get closer to this benchmark in the fourth quarter of this year.
And I'll conclude in hand things over Brooks by saying absent the second cobot Spike in Europe.
Sure.
Bridged our regarding 2021.
As we build on a very simple.
Three legged platform.
A continued reopening of our retail network.
The tremendous strength in our online business.
And and the reconfiguration of our cost structure, which is.
Into the future will be a considerably more advantageous and so with that I'll hand, it over to books.
Okay. Thanks, Lorne I'll give you some more details on on each segment other business and how we're recovering and what we're seeing prospectively as well as some of the key metrics that reinforce our view that the business is coming out of the cold shutdown as long as discussing with good momentum.
And our server based gaming segment, we now have all of our key markets back up and running, albeit some fewer numbers of machines due to the restrictions in operations and the closure of some bedding shops, primarily by William Hill in the UK.
In Greece for example, we're operating at full capacity of 8619 machines to be precise.
And performances exceeding three calls at levels. We've also deployed 380 valor terminals in the market and they're now the highest performing cabinet and Greece gaming hauls, which reinforces our view that this trauma terminal will perform.
As it has in both Illinois, Greece and.
In any market, we deploy it [noise].
We're encouraged by the resiliency of our UK market with win per unit exceeding pre cope with levels, but with a fewer number of machines as mentioned due to the way how closures as well as the machines and bedding shops in Scotland still turned off we're cautiously optimistic that the machines in Scotland will be turned on yet in quarter three.
We've seen a good performance in our machine business in Italy, largely returning to pre coping levels as well. However, these numbers are slightly lower than in prior years due to the position of mandatory I'd cards for players.
To play as well as another tax increase.
And finally on the SPG segment were seeing that retail business and Illinois start to return to prior levels and our sales pipeline to our operator customers has started to build significantly.
However, the operators in Illinois are proceeding deliberately as they measure demand and have implemented the specific p. requirements mandated for their facilities, we expect sales and some sales in quarter three but we expect more of the sales to occur in quarter four.
We're also pleased to announce a recently about the award of 100 Bauer terminals from the Western Canada Lottery Corporation, which would be our second market in North America and as we've said in the past we believe its performance of our terminals in both the Illinois, Greece form the basis of our strategy to be a competitor and all.
Route markets in North America going forward.
Moving onto the virtual sports side of the business. Our Q2 performance is noteworthy due to the outstanding performance from the online virtual as part of that business, which increased over Q1 by 76% and was 109% hides in the same quarter and 29 team.
We believe this is due in part to retail being shut down and the lack of live sports, but also frankly due to the notoriety gain from some of our marquee events, including the virtual Grand National as well as the Kentucky Derby Triple Crown showdown.
We hope to be able to announce similar events like this in the very near near future.
I'm also in the segment, we've announced a number of deals in North America worldwide with some key operators, such as Draftkings and Fanduel and expect watches with many of these operators in Q3 in Q4.
Interestingly, we also launched our first virtual his contract in the social gaming space with a company called fend off and the early numbers have been very encouraging and lead us to believe that this is yet another channel for expansion of our Virgils business going forward.
The retail verticals business, which was entirely shut down for the period due to covert has also recovered very well with Greece again, leading way was improved numbers over their pre covert levels.
Our UK and Italian virtual businesses are also open again and have approached rickover levels as well with little softening of the demand for our online churchills, even with the expansion of why sports in retail back being open. We think this bodes very well for the future of this key segment of our business and look forward to reporting our progress on the recovery and.
Conscious of the new customers as mentioned.
Our interactive swap business moving on to that side has shown dramatic growth in quarter, two with 60% growth over quarter, one and 86% growth over 20, a quarter to 2019 on a pro forma basis, we've seen similar levels through July and we believe that this growth at the risk.
Both the combination of a number of factors, but is predominantly due to the caliber and quantity of games, we're releasing including two major titles. This summer with the launch of Centurion Mega ways, and real King Mega ways, leading to record high turnover in this segment.
We've also expanded our footprint into North America, specifically into New Jersey, where we're seeing excellent results.
And then near future upon receipt of licensing approvals will expand into Pennsylvania in Michigan is that allows as that market opens up.
From a strategic standpoint, we want to expand beyond the core businesses and we've moved into the core markets and we've expanded our presence into other markets like Sweden, and then our into very early days increase but with the popularity of our product and the grease market already we're seeing some very encouraging numbers coming out of Greece online.
Many of our key customers and other parts of the business like our SPG and virtual citizens are also key customers of the arch yes.
Practice slot segment.
Including William Hill that Fred Slaughter, GBC add Bethree six fives.
This portfolio approach strengthens our relationships with these customers and we work hand in hand.
As they expand into other markets.
Finally, some commentary on the acquired businesses in the markets and TG acquisition that on referenced before and the markets they serve and the UK, including pubs motorway services and holiday parks.
Over the impact on these businesses, it's been more pronounced since pubs have had to restrict machine utilization for social distancing requirements ads have leisure parks that have had to reduce the number of reservations. They can accept as well as restricting the number of people that are loud and gaming and end market venues.
Pubs only started opening on the fourth of July in the UK and performance on a per unit basis has been solid.
But we haven't seen yet the full return of the numbers of machines that we had pretty code.
The numbers have improved sequentially, each week, and we expect to get back to pre covert levels, but the recoveries, taking a little longer and the impact of Scotland's not allowing either gaming and clubs where the opening of holiday parks has impacted the business. We're managing expenses very closely as Lauren talked about in each part of the business, but losing them.
Month, or two and the holiday parts business that only operates for five or $6 per year is tough and will be difficult to make up and 2020.
So in summary, we've had very strong headwinds each of the last few years as long metro at the implementation of the stakes reduction due to try and Neil and then obviously the impact of Kogan.
Thus far this year, we're very encouraged by the performance of that business as it has a return and are confident that as we go through the rest of this year and into 2021, but the thesis we had on this portfolio of businesses will be confirmed pipeline of opportunities in watches this year and the reduction in our operating expenses throughout all of that business.
I will lead to margin improvement at a much stronger business going forward.
Let me pass it back to born.
Okay. Thanks, Brooks that was a great recap.
Normally at this point I would turn the program over the Stewart.
To give a detailed financial overview, but I think considering the unusual nature of this quarter.
And the fact that basically every answer would be due to colder due to cold it due to cold that.
Will.
We'll have skipped storage.
Report for this quarter, but the way things are looking now.
The third quarter should be back to looking pretty normal and you can all look forward to.
Hearings from storage.
Quarter from now and so.
With that operator, we can open the program up to questions.
Thank you well now begin the question and answer session.
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To withdraw your question. Please press Star then Tim.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from David Bain with Roth Capital. Please go ahead.
Great. Thank you very helpful color and congratulations on navigating through coveted hopefully I'll that maybe even stronger in some way.
Can you help us a little bit further maybe Brooklyn, the retail landscape in the UK I think you're trending around 16000. This machines pre Kobe, where you are.
Maybe as a percentage of that and we're kind of the market is you know are there more William Hill openings versus GBC are ours competition, all fairly level at this point in terms of number of posts.
Our hopefully post covered reopening.
Yeah and in terms of and David we talked about this before one of the things that we've seen in the resilience of the businesses as even as shops close I'm, a big portion of that revenue shows up and the adjoining areas. So even though William Hill closed.
120 shops in the easiest way to calculate that from our last numbers is just take a 120 times for and that's the number of machines that are that are less than what we had going in.
But the things that we had seen in the past or are holding true and I think even William Hill, and some of the others GBC and they're reporting talks about the fact that they're actually holding up and doing kind of similar numbers with fewer numbers of shop. So it's certainly proving to be resilient I don't know Stuart if you have anymore.
Color on that.
Yes, you think that I mean, any try that little bit more to low Brooks is saying then senses.
Number is basically machines and as we said, Scotland is still closed in Scotland traditionally accounts for about 10% to vote in little bit less than a intensive tend to Lincoln. So those yeah. We hope they will be relatively soon and then there's only a handful of relatively handful a number of stores, which haven't opened up.
So approaching the high Eightys intends haiti's intensive percentages of machines open and then as Brooks that said that performing very well, there's often though.
Awesome, and just Oh I'm sorry.
Just going to add David its Lorne Uh huh.
You know, where where we do as Brooks pointed out where we do see that.
One of our customers.
Closes, let's say 100 shops, but the.
Revenue was picked up in other shops.
That actually significantly benefit to us because our cost structure is primarily driven by the number of shops, we have to communicate with the number of shops, we have to send a maintenance guys too. So if we have a 100, let shops, but forgetting that say revenue than our barges are actually going to go up.
Oh interesting. Thank you and Ah just final two if I could just as a follow up to that.
Is there any data on how bedding shops outperformed in the past during our UK recessionary time or has that been fairly resilient.
I was trying to.
The numbers on that.
My my recollection.
Going back to.
I guess 2000 and said them.
When.
When we were you know still at scientific games.
And we had bought.
You know what is now the scientific games, a competitor to us at the better jobs in the UK is that.
The business here I don't have any statistics that I could tell you anecdotally.
The business historically is a remarkably.
A resilient to you know what the economic downturns I'd love to get back.
Got it Okay, and then final one just a interactive if we can tell just a little bit more deeply I was hoping to bifurcate that revenue a little further you gave some some some figures like the 1.2 million from the acquired business service.
The remainder in virtual sports bar know what percentage of just trying to get a kind of a dollar estimate maybe a geographic breakdown, although I expect <unk> with expanding carriers I know thats going to change and then.
Any kind of potential regulatory happenings that we should monitor I mean, there's been some things in the press, but it doesn't look like much of.
Of substance, but wanted to get your take.
[noise], Bob you want to handle yeah, I would say Stuart you can handle that number's part I can tell you in terms of David just make sure on I understand your question, you're you're asking about the rgs the online slot part of the business or you're asking about the okay. Yeah. So in terms of.
The short term and North America for US obviously, it's all New Jersey, right now but were.
I'm going through the licensing process in Pennsylvania, and I think you I'm sure you know Michigan.
Looking like it could happen either this year the beginning of next year.
There's a number of markets that we are not participating in yet that we will staying probably being the first one foremost and then as we look into next year.
It's looking like both Germany and Holland.
Well regulate.
And become kind of black markets, as well or or or legal markets as well. So we certainly I think we had talked about at least one of the main thinks that we focused on is not only the caliber and quality of our content and it's interesting.
One of the things that we got from the and TG acquisition were all these titles one of which was real kings and we made a real kings Mega waste game, which has been the absolute highest performing game that we have in the market. So theres a lot of synergies that we've gotten from into GE acquisition, but clearly this is on a going forward basis on your read.
Thing about it in the states as well it sure seems like the Domino's are starting to fall to expand this this product line across more geographies. That's that's my view and I'm stored on an all in terms of any numbers you want to give.
I mean, the intend the numbers David so much like we anticipate any questions. Thanks to the Tim I think in the.
Back in the earnings release, we've added that breakdown of online revenues.
On a pro forma basis.
Moving to the online vigils interactive and then you acquired interactive business do you see that the online vessels is more than doubled as has any kind of magazine threat difficulties that what does that and then there's also been growth in the interest decided they quite business.
Okay. Thank you very helpful. Thank you.
Our next question comes from Chad Beynon with Macquarie. Please go ahead.
Hi, good morning, Thanks for taking my questions [noise].
Wanted to ask about SPG I guess in MTG customers at this point and understanding that each market as different I guess, what we've seen in the U.S. is little bit of a migration towards a younger player where the 50 560 year old and and and.
Older customers have been a little hesitant in terms of coming back.
Not sure if you have the tracking information or just anecdotal feedback, but are you seeing these types of trends in your markets as well, which you know when.
That's six year old customer gets comfortable getting maybe you do see a little bit of a benefit yeah. In the next in the next couple of months. Thanks.
In terms of the demographics, we don't have access to that information, but I think something that is kind of interesting is what we see because we're we're server based we can actually see kind of every keystroke. So what we're seeing is that people are coming into the the to use our products.
And our actually staying significantly longer than they had stayed in the past and our spending more money when they're in facilities, but we believe that actually maybe going less frequently than they had in the past, which kind of if you take the combination of all that is probably explains a fair bit about the recovery, but also hopefully.
We'll make it such that as you know more and more people get comfortable going into these environments that we could see an uplift as well.
Okay that makes sense. Thanks Brooks.
On the cost containment measure and I guess, the second quarter result, which I think came in ahead of your expectations and analysts expectations is there a quicker opportunity to bring back maybe some of these roles or I guess more importantly, how should we think about R&D. How you guys may have been thinking about.
Some cost cuts.
Beginning of kind of it and then maybe how that looks now given your your cash position.
Sure well I think one of the things again, maybe if you try and find the silver lining and this covance stuff is is we made a conscious decision even though as you already mentioned the total numbers of people that we furloughed. We're obviously very substantial but we made a conscious decision to maintain our R&D.
Resources, and then just refocused.
On our online businesses that we had actually been spending a lot of time and effort and money on previously so we actually got to a product that we didnt really talked about but what we called virtual plug and play VPP, which allows us to enter grade.
Online virgils much faster than we've done in the past. So we spent a lot of time working on that in terms of integrations and then obviously in terms of the of DRG outside of the business more and more slosh content. So we made a conscious decision to maintain and this time period, even though it cost us a little money the technical.
Sources, and we just refocus them on the businesses that were actually up and running and you can see from the results that probably was a was probably a smart thing to do.
Okay great.
Lastly, just on the the announcement with the Western Canada Lottery Corporation Brooks are there other opportunities like this in these types of markets I know you're kind of walk through some of the the strategic drivers you know in the near term, but are there other opportunities I guess in North America to have somebody.
These major placements like you announced here.
Yeah, I mean, I think certainly one assumes that we wanted to do was view I think Joe as you know our results in Illinois been extremely strong.
And obviously, we kept all of the potential customers are aware about and then western Canada made to the purchase I think they purchase from us and one other supplier, which its kind of unprecedented but certainly we think that all of the G. Two S market. So Oregon clearly the rest of the can.
In provinces that have GE to us will be key customer potentials for us as well as frankly some of the markets that would probably I'd say would be in the next tier down for us would be in the west Virginia, as Montana's et cetera, et cetera, but I think long term, we certainly as were getting traction.
In the markets, we certainly over the long term think about where we can take this product beyond just the route based markets, where we are today.
Great. Thank very much guys best of luck.
Thank you thanks, Jeff.
Again, if you'd like to ask a question. Please press Star then one.
Our next question comes from Ryan Macdonald with Craig Hallum Capital Group. Please go ahead.
Good morning, guys. Thanks for taking my questions.
Good morning.
I just want to start just for clarification. You noted strong performance in July on an average customer growth win per unit per day basis, So up year over year tracking above creep critical but levels what percent of machines were turned on it and not equation.
[noise] Rux can you answer that I expect a ordered you probably actually have the you probably have the most.
Up to date numbers.
Yes, intensive hey rights intend to the and said that they scanning them because.
The goal of Greece is back on to where it was pretty 'cause it.
To me is approaching a high 80% says is the UK 70 on them as we say a machine.
Hi machine basis are there any performing days in commissions pretty David.
Gotcha so.
But that was the kind of the ratio in the quarter as well yeah alright.
And then.
Just on Opex going forward you guys have cut a lot of cost some temporary some permanent the way it sounds and quarter can you break out kind of what the number is or quantify it permanent versus temporary and then what the timeline as to bring back those temporary cost.
Well, certainly some oh, yeah, yeah sure.
So I mean right I think it's again, it's a good question and think about S. DNA, where it was in the quarter. This is say Q4 and with loan growth last quarter are down significantly sit down nearly 70% and clearly a lot of that was temporary right would love to that the people on cost out, but we're not going to asking that out.
And a lot of that it's filling and some of the reduction is permanent for the synergies, which we already talked about I guess this quarter, but.
Going well and on track to where we said before and then and then there's a split between the temporary savings in the permanent savings in our challenge is clearly he tried to keep as many costs are coming back as we can now I think like everyone. We've seen ways of operating during the love downtime as.
That's ways, if eliminating costs, so clearly nodal cost will come back and and yep, it's difficult to quantify at the moment exactly how much though base any challenge of Alison.
I'd say, it's going to be a meaningful number and that's the seven digit number at the quarter, but putting that exact numbers is [laughter].
And then last one from me. So it seems you know encouraging performance metrics since reopening you know any commentary.
You can give about when we can expect at an inflection back to free cash flow generation.
Well I think you want me to say that well.
Sure.
Yeah I think.
She said where revenues are encouraging well are recovering they know where they all well not when they were before but they're on the web and asked DNA is on its way down on the long term trend.
The other big component that is these capex and actually missing opportunities and you know again, if we look at silver lining is that I think capex will be reduced over the next 12 months compared to it wouldn't be where it would have been.
You know, we don't make predictions, we don't have an down intensive when free cash flow has come back in the quarter by quarter basis, but if you think about those there's different components. I think you know you can see that we've got a clear path to getting back there in the in the relative to filter.
That's it for me guys I'll turn it over thanks Good luck.
This concludes our question and answer session I'd like to turn the conference back over to align meal for any closing remarks.
Thank you operator, or I don't really have anything to add too.
What we've talked about so far.
I think generally.
Where we are right now is at or ahead.
Of where we.
Had any reason to expect we would be wouldn't hold co would think started back in March.
July was very good extremely good we think August will be better.
The as we've said the Cape size, our continued to remain solid as more of the retail market opens up.
The opening up of the retail market and the coming back on of like sports does not seem to be having.
Much if any impact on the online business.
And as Stuart said.
Our costs win win when all of the retail.
World is back.
We'll definitely be.
[music].
Let's say more attractively structure than they were before the cold, but so everything seems to be.
Moving the way we want and.
You know I wish we could be.
Somewhat more precise in terms of guidance, but I think everyone can appreciate that in this environment.
No. That's you know difficult, but again I would point everyone back to what.
We consider to have been our benchmark corridor in the fourth quarter of 2019.
And in effect you know that's guiding the way.
So we're thinking about the evolution of the business.
And I think it's one that you can use as well so.
Thank you for.
Calling in this morning, and we look forward to hearings are speaking to you in another quarter. Thanks.
Right.
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