Q2 2020 Edison Nation Inc Earnings Call

Please continue to standby.

The program will be good momentarily.

[music].

<unk> results conference call.

At this time, all participants are in I'll listen only mode.

A question answer session will follow the formal presentation.

If you would like to ask a question. Please press star one on your telephone keypad.

If anyone should require operator assistance during the conference. Please press star Zero your telephone keypad.

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Todd Mactavish, Chief Legal officer.

Thank you Brock good afternoon, everyone.

And second quarter earnings release was issued today after market has posted on the company's website, that's can dot com.

With me, representing the company today or <unk>.

Chief Executive Officer, and accounts for as Chief Financial Officer.

Before I begin we'd like to remind you that except for the financial statements made today.

Information contained in this conference call, including any financial and related guidance to be provided consist of forward looking statements involve risks uncertainties assumptions that are difficult to predict.

Words in expressions, reflecting optimism and satisfaction with current prospects role statements in the future trends identify forward looking statements, but they're absence does not mean by the state and that's not forward looking.

Looking statements should not be interpreted as a guarantee of future performance or results.

As such statements are subject to risks and uncertainties, but could cause actual performance or results to differ materially from birds expressed in works to justify the forward looking statements.

It's important factors that could cause such differences are discussed in the risk factor section of gains are pure perspective.

Prospectus dated May says 20 twond.

Forward looking statements speak only as of the date statements are made and the company assumes no obligation to update forward looking statements to reflect actual results changes in assumptions or other changes in factors affecting forward looking information.

Except to the extent required by applicable securities laws.

With that I'd like to turn the floor <unk> <unk>. Please go ahead.

Thank you told and good afternoon, everyone.

[noise] gun imported an excellent second quarter, driven by nearly 100% you run your revenue grid with the largest part of our revenue principally derived from U.S. real money Internet gambling growing up phenomenal, 110% year on year on the back of $129 million Ingersoll breeder revenue.

Our revenue exceeded consensus estimates for the quarter. We're currently executing on significant growth through the rest of the year I'd reiterate our full year revenue forecast.

37 $39 million.

Well, it's interesting of all aspects of this quarterly performance was the gravity to fight year on year leap in U.S., Chris operator revenue derived from Internet Casino gaming.

Which jumped 392% comparatively and 53% sequentially.

I'm also indicated in the earnings presentation, we've not made available.

34% total gross operator revenue in the second quarter last year was derived from U.S. real money in an account.

Compared to 70% in the second quarter over this year, which illustrates our phenomenal growth path right here in America.

In fact during the seven months of this year, we delivered more cruise operator remedies for clients then in the entire calendar year 2019.

The current quarter, we continue to see high levels of activity revenues and engagement continually despite the reopening our clients retail casino properties.

Looking ahead, a few weeks into the fourth quarter, we anticipate the launch of Michigan technical deployment for several of our clients already underway and our licensing applications and good order.

I'll now take this opportunity thank our shareholders for that continuing support all again as the leading provider a b to B enterprise software solutions for U.S. land based casino operators.

We anticipate maintaining and strengthening our leadership position as we continue to focus on new client wins and execution.

We're driving our success in part by serving as a highly efficient a capable partner to several of the largest and fastest growing names in gaming and sports betting.

Parks Casino Sandal Ocean Casino resort. The Cordish group. These are just some of our clients and we're proud to surge each one as a key technology provider.

We anticipate 10 plus client launches in 2020, I remain well on track to achieve that go.

To this point I'll open the observation that we've recently delivered two major client launches elite days apart.

With cordis groups real money Internet gambling website now available play like Docomo in Pennsylvania launched in record time from signing contracts and some months, even before Cordish will open air retail casino property in Philadelphia, which I believe is the U.S. industry first.

From start to finish this took and just over two months underscoring the time to market advantage enjoyed by U.S. casino operators, who choose Gan technology platform for Internet gambling.

Initial results from play like the O'connor pretty promising and we look forward to evaluating additional opportunities with this client in other states overtime.

Yesterday, we launched Penn National's use social casino on our stimulate a gaming platform.

Now available on my choice Casino, Dotcom, and incorporating Hollywood casino Dot com as well as being fully integrated with Penn National's Mychoice rewards program for the first time and offering a full range of social engagement features such as avatars achievements and leaderboards coupled to our industry leading range of recognizable class III.

Tim derived from Americas retail gaming floors.

Simulate a gaming experienced many of the same tailwinds as real money Internet Casino gaming in the second quarter, and we look forward to delivering substantial grades in the coming quarters from all of our clients now, including National who is the largest retail casino accretive online social casino gaming in this country.

Looking forward. We're currently focused launching the state Michigan in Q4, which represents the next two major component of this multi billion dollar opportunity forget as clients to capture.

Internet gambling continues to proliferate when he state by state basis.

As flagged in our last earnings call, we expect to announce and launch our newest tier one multistate operator client in the very near term I look forward to update in the market in full shortly.

Furthermore, the Q4 launch of Internet Sports study and Internet Casino gaming in Michigan is now highly probable with this accelerated market commencement logically implemented to help ameliorate the code at 19 impact not states reduced tax income from Michigan's retail casinos.

Regarding sports betting that is being very successful and working with great partners, such as Fanduel and parks in bringing their platforms online quickly in order to meet end user customer demand.

It's still a relatively small proportion of gains overall revenues. These a proven to be excellent partnerships as we've been able to develop and quickly deliver a sports betting option alongside Internet casino gaming in multiple states, while simultaneously serving as their exclusive provider of Internet Casino gaming.

To note Q4 beyond will exclude sports betting revenue for Fanduel I take migrated to the in house sports account in alignment with our stated strategy and our governing commercial agreement.

Moving forwards, we expect that the revenue and earnings contribution from the Fanduel client relationship will continue to substantially grow the expansion of real money Internet Casino gaming, which launches in West, Virginia, and Michigan before years end as they continue to leverage our Internet gaming account capability within games died while also continuing to rely upon our ice.

Not office and diverse technical systems for promoting player loyalty.

Continuing on the subject to sports betting.

We are evaluating several opportunities to acquire complementary sports betting technology and in the event, we make any such acquisition the applicable criteria.

I will require that any target acquisition will be highly complementary.

Well for significant synergies and will be made available to you as clients as just one option to choose from alongside existing integrated sports content.

I think these sports capability together with incremental casino gaming content is a logical way to rapidly expand our share of clients gross operator revenue flowing through our platform and any such acquisition will prove immediately accretive to both revenue and earnings.

Our continuing mission is to bring retail casinos online with our technology platform focused principally on delivering all forms of internet gaming content, including casino gaming and sports betting.

But retail casinos in those states without Internet gaming legislation, we offer stimulated gaming now, but the opportunity to upgrade to real money and I can't really a state by state regulation continues to emerge.

Turning to the broader U.S. industry landscape.

In the intervening months since or NASDAQ listing many shareholders would be asking the question how has a total addressable market changed as a result, okay. The 19th.

At the outset this year pretended most forecasts for U.S. Internet gambling indicated that online sports betting would dominate the revenue opportunity at market maturities some years out.

Today I consensus of industry analysts forecast models, all point to the new post coded reality, the Internet casino gaming will generate the majority of this nascent U.S. markets revenues with an estimated $17 billion all that $30 billion plus total addressable market derived specifically from into.

Casino gaming.

Dan is a casino gaming first company with a long track record and delivery and then a casino gaming and Internet sports betting to our clients our market position has therefore never being better and we look forward to developing or Internet casino gaming business further as the market evolves over time.

Afghan we focused largely on formnext.

Attempted to prepare the business in light of a changing planets Randy to 90.

We have invested in our U.S. market position over several years, but the original continuing premise of multistate legislative approval of regulated Internet gambling.

We continue to see 'cause it 19, accelerating intrastate regulation of Internet gambling, particularly in large markets such as New York for again has a substantial presence through multiple existing client relationships and continues to market. The availability of simulated gaming to new York's Native American casinos with a view to preparing them for the real money Internet gambling opportunities.

Uh huh.

Outside our current focus on New York nationally Americans continue to spend more time consuming online entertainment of all kinds.

In many states politicians continue their search for incremental revenue opportunities to replace lost taxing can.

We see all of this is creating a favorable coin that for incremental regulation on the internet gambling and each state that regulators a positive catalyst for Gan with New York very much plan to watch list of states, which could surprise us all Justice, Illinois did last year.

And planning for a post cobot industry environment, or perhaps a continuing cobot industry environment.

We have invested in our people by expanding our leadership bench and creating the personal engineering resources required to deploy game stack for existing and new clients.

I'm delighted to announce deployment of markets Yoder as our senior Vice President of sales charged with expanding our sales and marketing capability inline with our expansion in engineering resources.

As we increase our capabilities are delivering multiple clients online simultaneously.

See Marcus and his team when new points of new markets across the nation for but similar to gaming and a real money in a gambling.

First of all bandwidth amongst our engineering groups worldwide remains a high priority in Las Vegas continues to be fertile ground as we execute on rapid controlled expansion.

Now turning to guidance.

This time, where again reiterating our previously stated revenue guidance of 37 $39 billion.

We are excited for all of our upcoming client launches I look forward to continuing to update the market as we announced new client wins in due course.

Also reiterate the 100% of our revenue continues to originate in heavily regulated online markets.

In line with our unswerving commitment to compliance and regulation here in America.

The second quarter is one of which we're very proud to deliver as our second set of NASDAQ results. Despite the substantial one off costs associated with our NASDAQ listing which are now firmly in the rear view mirror.

So with that I will turn this dialogue over door CFO and board member Karen floors care.

Thank you Dermot and Hello to everyone on the call today.

Hi, Ministry continue if we concluded another strong quarter.

The nature of gas business and secular shift to online real money Internet gaming allowed us to continue to thrive generating 8.3 million of revenue in the quarter.

This represents an increase of 4.2 million or 99% versus the prior year quarter.

As outlined in todays filing our revenue trends reflect continued strength in the growth of Igaming insinuating gaming offsetting declines in sports betting cobot 19.

Real money Internet gaming revenues increased by 2.1 million or 99% year over year.

Real money Internet gaming service revenues increased by 900000 or 149% year over year.

Lastly, simulating gaming revenue increased by 1.2 million or 79% year over year.

The underlying growth is attributable to our strategy continued expansion of existing you have client and new clients.

As well as the result of new states popping regulation, allowing for remedy Internet gaming and sports betting.

Underlying these positive trends in revenue are notable changes and some of our quirky I.

As Gary mentioned gross operating revenue derived from Internet gaming increased 390% comparatively and 53% sequentially.

Additionally, with the revenue mix shift towards Internet gaming, we observed a record quarter farmed out with an overall monetization rate of $23 per active player day. This represents 100% increase comparatively and 46% increase sequentially versus our previous record at $16.

In Q1 of this year.

We are extremely pleased with the results, we are seeing and managing performance and execution for our clients as well as our continued penetration of the U.S. internet gambling market with our new client wins to serve the long term opportunity, which today stands at only 6% of the expected total addressable market at maturity.

In relation to this period of continued growth for our company as well as the recently completed IPO in NASDAQ listing.

Operating expenses increased year over year to 13.7 million.

As compared to 2.7 million in the second quarter of 2018, and 4.4 million last quarter.

This was an unusual period in which we did see number expenses.

Second quarter operating expenses included 8.8 million in one time charges associated with our initial public offering.

This included 5.4 million of cash expense and 3.4 million of non cash expense.

That's charges were comprised of 800000 have direct legal financial and accounting related expenses.

1.8 million in cash bonus compensation paid two directors officers and employees and 6.2 million in cash and noncash expense related to the acceleration of vesting and to exercise of options under our equity compensation plan, including share based payments related to my auctions issued.

Under the 2017, Dan plc share option plan.

Share based compensation expense related to new brands that occurred primarily engine with 500000 for the quarter.

Adjusted EBITDA was 1.9 million versus a lot of 200000 in the prior year quarter.

Adjusted EBITDA margin remained healthy at 23% contracting versus the prior quarter margin of 34% driven by expanded resources and public company costs.

The increase in adjusted EBITDA was driven by topline growth and expanded segment gross profit margin as our business continues to scale and gain operating leverage inline with our strategy of delivering long term profitable growth and higher margin markets.

Finally, I would like to highlight our strong balance sheet as a result of the recent IPO.

We ended the quarter, we held cash and cash equivalents 63.8 million and remain debt free, allowing us to remain comfortably capitalized to capture additional market share NSS other future opportunities in the market.

With that German back to you.

Okay. So with that were concluding remarks for this period I will open the line for questions.

<unk> over to you.

Thank you Sir.

At this time will be conducting a question answer session.

If you would like to ask a question. Please press star one on your telephone keypad.

A confirmation code indicate your line is in the question Q.

Press Star too if you would like to remove your question from the Q.

Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Our first question today comes from Josh Nichols B. Riley FBR. Please proceed with your question.

Yes, Thanks for taking my question not clearly some nominally strong performance I gave me a segment you did reaffirm guidance for the back half of this year could I ask what are the underlying assumptions that are built into the second half guidance as far as.

Potential Michigan launch in Fourq.

Yeah at this point because the launch of Michigan, It's still uncertain. Although we've noted it's highly probable we have not included it in our forecast.

Got it so if you got a like a football season right for Fourq you in Michigan, then that would be potentially upside to what you're currently guiding to correct.

Correct anything from Michigan would be considered a fine.

Joe cents worth adding that.

We're preparing is that the market actually commences in October of this year.

Great and then how should we be thinking about the second half clearly I mean, Q twos seasonally a bit slower quarter, and then you ramp up in the back half.

You had about a 6.4% take rate on gross operated revenues that expected to increase materially in the second half or what's the thought process for that.

Yeah, we've talked a lot about the take rate historically, so we know.

One other things that can increase that is on our thing you any gaming revenue because our revenue share I think the league gaming is typically around 30% and so with the launch of Penn national meaning in the simulated platform. There we do expect take rate to come up and then.

I can happen here.

Thanks for that and then last question for me and I pass the Baton could you help provide any I mean, now that and National Smith gaming has launched as far as what's the expectation for kind of the revenue opportunity for the SAP or if you could extrapolate a little bit even potentially but next year.

Yeah, So Penn National and of course, we just launched that we do expect there can be a around let's say over the course of about six months I'm until that is sort of running at full capacity. We do have a that included a as far as our.

He sends and be in the second half of your forecast.

Well be able to talk about that more as we come out with our next quarter earnings.

Great. Thank you.

Thank you Josh.

The next question is from Chad then young of Macquarie Group. Please proceed with your question.

Hi, good afternoon, Thanks for taking my question.

Wanted to just go back to that for a second so just so we understand the previous guidance of 37 to 39.

Did that include Sandal, Oh SP revenue.

And now that is being removed after August so that's being replaced by I guess stronger non fanduel revenue. The recent launch of of course, <unk> and then Penn ramping in the back half is that the best way to think about it.

Yeah, I mean, I think you know, we've we've always bank conservative relative to the fourth forecast a portion of that of course was.

The possibility again for Fandel migrating often they have the rights under the contractual terms to do not have we knew that there would be other customers that we would be watching in the second half of the year.

You know replaced that it as far as the 2020 revenue stream. So it wasnt a balanced approach relative to the Q3 Q4 guidance, which is why we're not changing in at this point.

Okay. Thanks parents, and then just for what competitive standpoint on your player account management I know there's been a few other.

Companies that have received their licenses do you think that the competitive landscape kind of is you know how you saw it in the past few or I guess since past has repeal or do you think that's changed dramatically basically just thinking about your market share opportunities and.

And in what you guys offer versus what some other competitors might offer.

Chad, we don't see any material change the competitive landscape since we last reported earnings a we've seen you know the very same names appear in a client's discussions or prospective client discussions. So there hasn't been any significant increase in new entrants or more to the point.

Medical optimize technology platforms coming to the table so.

Of course, and they will change over the medium term, but as of right now, we're putting new difference and.

We are heavily engaged with various different opportunities in sales pipeline right now.

Okay. Thank you and then lastly, just wanted to ask about your your cash and potential M&A opportunities you mentioned complimentary.

Sports betting opportunities I think previously you had talked about maybe some content opportunities on the high gaming side.

How do you I guess, how do you view the two different segments and really what would make a your offerings more more wholesome and that's all for me. Thanks.

Yeah, Charlie I mean, I'll take the M&A references so.

Naturally.

Current market position, we being the recipient of multiple overtures inbound to us asking us what we had any any interest.

So we've been evaluating opportunistically various different sports opportunities.

To add sports content and trading capabilities to gains overall product mix. It's a it's candidly quite difficult to survey the over a landscape.

And identify ideal candidates for it but if we do any sports related acquisition. It will have to be from a cultural fit ideal from a people's standpoint technology standpoint, again completely ideal err on the more probable aspect on M&A is online casino content, it's something we touched on as part of our IPO Roadshow, there's a very large.

Number of interesting online casino content portfolios that would allow us to increase significantly or share all gross operated revenues flowing through our Klein from online casino gaming Ah. So I think that's that's certainly the deep more probable side of the arc and to eat continuing M&A review process, but.

At this point, we'll of course update the market as we run up to Thanksgiving.

Okay. Thanks.

Okay.

The next question is from Greg gave us of Northland Securities. Please proceed with your question.

Good afternoon determinant care and thanks for taking the questions. It looks like your guidance implies at least and total new launches. This year was just wondering what we're at year to date and then how we should think of the timing of those remaining launches maybe Q3 relative to Q4 and then maybe if you could provide the breakdown of stimulated real money gaming.

Uh huh.

Yeah that we've had a number of watch as year to date.

For two of which for this month.

And again, that's a combination of real money gaming and anyway to gaming again, as we just announced.

Penn National.

As far inside the back half of your pipeline demand do you want to comment on Michigan, obviously being included in that and then yes, we have a world working towards opening the state of Michigan in Q4. This year, that's already October as a target. Good last month, we believe we have three operator.

Clients a in the glide path to to launch in October and we think its if it does launch and that's of course subject to regulatory approvals and it will be a materialize to the full year guidance.

Got it that's helpful and then with many of the retail casinos reopening partway through Q2 is there anything you can share maybe relative levels of activity that you're seeing.

Online today, you know versus when you know there was no retail gaming or it was practically nonexistent back in April and May.

How do those activity levels there.

Right, we actually touch on this as part of our presentation deck. So slide nine that presentation deck, you have a pretty interesting visual on could impact beginning in March of this year and then as our clients all largely within the same timeframe reopens. So we saw continued heightened levels of activity there was a.

A significant acceleration in online adoption, but real money and simulator gaming Sue the continuing tepid environment has continued to result in a lot more Americans continue to consume casino gaming entertainment in various forms online.

Okay, Great last one from me. We're just if you could provide maybe the level of revenue share percentage I guess, that's implied in your full year guidance.

And then also just a follow up on the previous question you mentioned that the tier one client was very near term.

As there was this something we would expect to see in 2020 financials or is it more of a 2021 rollout and.

Assuming that none of these contributions are included in guidance from this client.

Yes, we are we certainly hope that we'll see the a tier one client contributing TARP you know this side of the Thanksgiving, We'll also see.

You know, how how the whole infrastructure deployment cycle or goes forward over the course next few weeks and we look forward to imminently updating the market in specifically to that client relationship as to breaking out the revenue share percentage on a full year basis. That's just not something we're going to do so with a suitable apologies will decline.

To give you any more specific information on that right.

Okay. Thanks.

As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.

Our next question is from Ryan's adult of Craig Hallum. Please proceed with your question.

Great. Thanks for taking my questions guys.

What started I guess I'm curious when you were informed that Fanduel sports was leaving the game platform.

The the target date, it actually let me just clarify that they don't leave you again platform in that we remain a key technology supplier to what is a very positive client relationship where we are in technical custody of a very very large and lucrative portion of their business and in fact, the largest part of their business.

Year to date. So it's a just just very important make that terraform power find statement right. However, the actual target date was really only put in place tend to 14 days ago. So.

So it's a it's something that was very much from contractual standpoint of design tool and we're delighted to have.

Helps support the medium to long term technology ambitions and a it's a relationship where we continue to see significant growth in revenues and earnings for again going forward.

Yeah, Yeah, I'm sports is what I was referring to.

And then you know switching over what are you seen in the pipeline for license in your awards integration frameworks to the pop you have you know we've heard several tier one operators talking about how important cross promoting their tens of millions of rewards members outline what do you. What are you hearing from various tier ones and the pipeline there.

Yeah, we've not seen any of them actually implement the patented technical framework or processes that sits within ghansham intellectual property, but we are in commercial licensing discussions with a number of them right at this point in time.

Good last one for me so nice to see Penn National Some Dan box. This morning, you mentioned in there in marks the beginning of a partnership may grow beyond the opportunity of social gaming curious if you can elaborate on what other potential opportunities exist there.

Well I suspect the Penn National a executive group will have plenty of all the prepared comments as to when the next report their earnings so I'll defer to them. So.

So just you picked that up with that depend national team, but I would hope that they would market as to the multiple databases within their possession of the today and as a consequence of the recent Barstools acquisition activities.

Again, that's entirely within the control of the client and we'll see how that business progresses. The early signs of certainly highly encouraging.

Sure Yeah makes sense.

That's it for me I'll turn it over guys. Thanks, Good luck.

Thanks Ryan.

With that I'll turn the call back to management for closing remarks.

Thank you all for joining today for a second earnings call as he was with the company again, we would like to thank the substantial group of U.S. investors, who back to our market leadership position, which we intend to extend in the coming period.

Our team is executing exceptionally well to expand their client base. Despite the challenges presented by couldn't 19, and the derivatives limitations on our business travel our technology team continues to grow here in the United States and we remain one of the few active employers in hearted local economies such as Las Vegas or future has remained bright as is the future of American down.

Which will continue to move online we look forward to speaking with you all again before Thanksgiving Please stay safe.

This concludes todays conference you may disconnect your lines at this time. Thank you for your participation.

[music].

Oh.

[music].