Q4 2020 Inspired Entertainment Inc Earnings Call
Yes.
Okay.
[music].
Good morning, everyone and welcome to the inspired entertainment fourth quarter and full year 'twenty 'twenty conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions. Please note. This event is being recorded.
I'll begin today's conference by referring you to the company's Safe Harbor statement that appears in the fourth quarter 'twenty 'twenty earnings press release, which is also available in the investors section of the company's website at Www Dot I N S E I N C dot com.
The Safe Harbor statement also applies to today's conference call as the company's management will be making certain statements that will be considered forward looking under securities laws and rules of the S. E T D.
These statements are based on management's current expectations or beliefs and are subject to risks uncertainties and changes in circumstances. In addition, please note the company will discuss both GAAP and non-GAAP financial measures. A reconciliation is included in the earnings press release with that completed I would now like to turn the conference.
Over to Mr. Lorne Weil, the company's executive Chairman Mr. Weil. Please go ahead.
Thank you very much operator.
And good morning, everyone else.
And thank you for joining our fourth quarter and year end conference call.
I'm joined as usual by Brooks Pierce Stewart Baker, and Dan Silvers.
At the risk, stating the obvious let me begin by saying that the fourth quarter of 'twenty 'twenty tried our patients like no other.
Quarter I can recall over the course of my career in this industry.
And I'm sure of Brooks feels the same.
As all of those of you who might have for all of us going back.
So our scientific games years, or even before that to our auto total years.
You will know that we have dealt with some pretty strange quarters are.
We began the fourth quarter.
With the predictably very strong October continuing the month to month ramp up that began in the third quarter of 2020. Following the worldwide Lockdown that had occurred in the second quarter.
In October we earned $6 8 million in EBITDA.
Pretty healthy margin of 32% on revenues of 21.2 million most importantly.
The October EBITDA was nearly 20% above the EBITDA, we urge of October 20th 19.
And yet as mentioned in the press release the dog.
Over performance itself was well below what.
What we feel its potential was.
Because we were dealing with pub curfews from the beginning of the month.
And then the introduction of the tiered system of UK closures in the latter half of the month.
Which significantly impacted bolt pub and betting shop revenues.
Against the which unfortunately, there was a story of little cost offset a possible.
So I think we can say with the very high degree of confidence that absent. These factors are.
October revenue, EBITDA, and especially margins.
Would have been very considerably higher than the October actuals.
And this begins to give us again some sense.
Of the true earnings power of this business and this is further underscored by the fact.
The debt at least 90 per cent of our business.
Is derived from recurring revenues and therefore.
The sustains itself for a month to month, except of course, when there is a mandated government shutdowns.
Yet despite the handicaps just mentioned the bulge of October for apartments was the strong as it was a and as I said, 20% above.
2019.
It was largely because of the realization of the increased synergies from the no rheumatic acquisition.
And most importantly, the tremendous growth in our online business, which.
As mentioned in the press release doubled between the fourth quarter of 2019.
In the fourth quarter of 2020 and here again, the vast majority of this growth.
Was for multi year is for a multiyear recurring revenue contracts.
To refresh everyone's memory.
We earned about 19, plus millions of dollars at current exchange rates and EBITDA are in.
In the fourth quarter of 2019.
And the and this is important because that was the first quarter. Following the completion of the know the Maverick acquisition.
But before.
The issue of Covid had struck.
That's why we talked about having a high degree of confidence that we can establish the baseline annual EBITDA level.
Of about $80 million I think we referred to that at the time is is our par EBITDA.
And given the impact of increased synergies.
Seen since then.
And of course, the tremendous growth in our own business that we had begun to see clearly over.
We would've expected the fourth quarter of 2020 to come in well ahead of 2019.
Just as October.
Uh huh.
Yeah, and well ahead of October 2019.
And so therefore establish an annualized EBITDA baseline.
It was proportionately greater.
Then that $80 million baseline.
But of course, this is where the strangeness of the quarter kicked in and our of.
One step forward.
It was quickly followed by the proverbial two steps back.
The month of November saw the U K go back into complete locked down.
And then in November and increasingly complicated and disrupt the tiered system was reintroduced.
Debt despite significantly impacting revenues made effective cost management are very difficult if not almost impossible.
Notwithstanding the carnival and the nature of the fourth quarter.
We ended the year with about $47 million in cash.
And then undrawn revolver of nearly $28 million for total liquidity of about 75 billion.
Aided of course by the VAT.
The value added tax refunds.
We have discussed previously.
Great. Thanks.
Ah I can say that our year end cash balance would have been quite significantly higher had we not used a good part of the VAT refund to repay debt.
So we entered the first quarter walk down with the strong liquidity cushion and because of the ground rules were clear and simple from the outset and aided by the continuation of the UK furlough scheme.
I believe now has been extended until.
September of 2021.
We were able to get our cost structure, well aligned with the shutdown.
As was the case during the lock down in 2020.
We have in the first quarter continued to spend very heavily in support of our online business.
And the business continues to grow.
Response to this based upon the most recent announcement by the UK government.
We're planning on the reopening process beginning in April.
And then our retail business will be back of essentially to normal by the end of June just as we begin the third quarter.
During the third quarter of 2020.
Which is seasonally by far the <unk>.
This quarter for our holiday Park business and actually there for.
Should be seasonally the strongest quarter for the whole company.
The contribution from the holiday part business was minimal because of severe restrictions that were in effect throughout the last summer.
Conversely, we're cautiously optimistic that this number will be much stronger for the holiday Park business.
With far fewer restrictions other than travel restrictions in the U K, which ironically will be a very bell so should be beneficial to us we think.
In addition, we project that synergies for the nomadic acquisition will have increase further.
And finally as discussed at length of previously, but will nevertheless be discussed in greater detail of the moment by Brooks our online business.
Comprising both virtual sports and I gave the components will in the second and third quarters of 2021 be far ahead of comparable periods in 2020.
Taking all of these factors to get.
The impact of the summer.
The the increasing synergies and the tremendous growth.
The online business I think this gives us the way to think about not only the second and third quarters of this year of 2021 once the lockdown and.
At the end of this month.
But also a way of thinking about an annualized EBITDA level.
That will go far beyond the $80 million baseline we.
We discussed at the end of 'twenty of 19 prior to the Covid interruption.
And with that I'll hand, the program over to Brooks.
Thanks, Lauren and I will add some more details to your commentary and doing it in the new reporting format that we've outlined in the release, namely starting with gaming and then virtual sports and interactive and then leisure.
So I'll update on the businesses that we're operating in the fourth quarter and are currently in the first quarter of 2021, which our interactive business as well as the online part of our virtual sports business, but also try to give some perspective on the reopening of our retail businesses in key markets like the U K, where the government has laid out of very specific.
Volume for segments of the industry, the open and the operating conditions in which we will be able to open.
So starting with gaming the retail aspects of our business as we've talked about have more of that's been closed in our key operating markets such as the UK, Greece, Italy, and North America since November as Lorne outlined and continue to be largely locked down as of today other than Illinois the.
U K has announced the betting shops will be allowed to open as of April 12, albeit with some restrictions on the number of machines per shop there.
Of that are opened as well as the dwell times in the facility, Greece, and Italy have yet to confirm when theyre betting shops will be opened but we are projecting that during the second quarter and with capacity at full by the time, we reach the second half of the year.
As experienced in all territories of since the first and second Lockdowns in 2020, we expected to turnover will return to prior levels quickly and there'll be at 100% going into the second half of the year.
As you'll see as you'll have seen in the release, we're migrating our business in Italy into a recurring revenue model for game content and platform only and will not be providing service to this market going forward with diesel being the first customer of Merck to move to this the move to the new model.
We expect to increase our margins significantly by doing this and play to our strengths and providing leading content and an open platform that will be working to migrate to our Italian gaming machine business in total for this model.
Please note that this will not change our operating models in the Italy for both of our virtual sports business at our interactive business.
We're also pleased to deliver the first hundred terminals to our second North American.
Customer of the Western Canada Lottery Corporation, and we believe that there are further opportunities in the Canadian provincial markets going forward and we will be pursuing these are games continue to perform well in Illinois, and we expect accelerating sales in that market going forward as operations there build back to a steady state.
Moving on to our virtual sports business.
That's the only commented previously the online segment grew dramatically.
And we grew that part of the business our recurring revenue by 90% in the fourth quarter and 58 per cent for all of 2020 due in part to retail virtual being closed for most of our markets and real sports either being shut down or reduced.
In this environment, we accelerated the development on our key product initiative of ours, the launch of our virtual plug and play of our V. P. P. As we call. It <unk> and this is a product that seamlessly integrates into our customer's existing website with all 14 of our sports currently.
Hum product went live with the number of customers in the fourth quarter of 2020, and we will be going live in 2021, the number of key new customers, including bet MGM Caesars standoff and others to give you. An example of our launch in Turkey with this product with our partners for both seasonal and missiles.
<unk> has been very successful and is on a run rate of producing over $1 million in annual revenue to us just literally yesterday launched our match day product with them, which is on <unk>, where players can bet on a simultaneous virtual soccer games of all at once and create a number of.
Interesting wagering option similar of what you would see with Parlays and sports betting in the states are.
Obviously the results are very early but.
Day, one was dramatically.
The bigger than we had expected.
In terms of our land based virtual customers, we've talked over the many of these quarters about the Pennsylvania lottery.
We're very happy to report that the.
P. A lottery has shown dramatic growth in 2020 with sales increasing by 255 per cent compared to 2019, even with sports bars in Pennsylvania close for a large part of the year and also after normalizing for promotions from the P. A lottery, we believe that those outlets will start to reopen the sports bars that is.
We're looking to launch an updated football product. So the second channel with our Horseracing product in the market later this year.
We're also very happy to be launching our second North American lottery with the D C lottery.
And we will go live with that in the second quarter and interestingly it'll be the first installation in North America, where we will be replacing an existing product. So we will have a measuring stick to the base against.
And finally, we signed an agreement with Larry column, who is the announcer for all of the Triple Crown races, and did our virtual Kentucky Derby race. This.
The summer.
To be the voice of our virtual Horseracing product in North America, which is really part of our strategy to localize our content.
So moving on to the interactive segment.
The the segment has shown obviously tremendous growth as we discussed in the release basically doubling in size in 2020, and we're continuing to see the strength of that segment in the first quarter of the year, thus far and it's really comes down to a strategy that we have consistently articulated on these calls and is based on the few key drivers which include.
The following the number one successful integration, we had 42, new customers and five new Aggregators in 2020 across multiple geographies.
And the increased pipeline of delivery of new content to our customers by increasing our game releases by 55% in 2020, and adding some very successful titles, including century and Mega ways Reocurring Mega ways, our entire line of cash about games and gold cash free spends.
We have a number of new titles that will be released this year, including cops and robbers Mega ways, and we're building bespoke new content, specifically for the North American, Greece, Belgium, and Italian markets.
Speaking of Greece, which is one of the new geographies that really grew substantially.
And it really validates our omni channel strategy as we've talked about many times about how we're positioned and the retail side in Greece. This was really borne out with the number one online game being the same as our number one retail game, namely Super Hot fruits.
Lastly, a pipeline of new markets to come online in 2021 day, we're obviously very excited about the Michigan and West Virginia.
Upon successful completion of our licensing in Pennsylvania that one will come on board as well.
The recently just gone live in both Spain, and Germany, and see key new international markets like the Netherlands, Romania, and Colombia, all being added yet this year. So in summary of the combination of our online business really is a key focus of the strategy of the company and growth going forward, even as we expect our retail businesses to rebound.
In 2021.
Last but not least talking about our leisure business, which includes the pub side the holiday parks of motorway services.
Which have been as we've talked about the most impacted by the restrictions in the U K is a low.
Why completely on football traffic. So we showed in the third quarter last year, even with some of the restrictions Lauren mentioned the power of the earnings of this business between the Lockdowns and would expect these to benefit the most with the lifting of restrictions in the U K.
The U K government has advised the indoor hospitality and leisure can open for may 17th.
And advanced bookings are extremely strong with most most locations already actually sold out for peak holiday weekends.
And the the phrase they use staycation, so folks staying in the U K.
Travel is expected to be very robust through 2020, one we've right sized for the business through the integration process in 2020 and would expect margins in this business to improve substantially with the increased demand across a significantly lower cost base.
So in summary of all indicators are leaving us to forecast internally that the second half of this year will be a clear demonstration of the earnings power of inspired with significantly growing online businesses combined with the recovered and I think as the key local spaced retail business.
So with that I'll pass it back to I think it's going back to Lorne.
Thanks Brooks.
Sure.
That was great.
I think operator now we can turn the program over to Q&A. Please.
Okay.
Great. We will now begin the question and the answer session to ask a question press. The Star then one on your Touchtone phone.
If you're using a speaker phone please pick up your handset before pressing the keys.
If at any time of your question has been addressed and you would like to withdraw your question Press Star then two.
At this time, we will pause momentarily to assemble our roster.
And just the first question comes from David Bain with B Riley. Please go ahead.
Great. Thank you and congratulations on what looks like an excellent run rate as we normalize.
First my first question would be you know some of the checks that were speaking with their site Inc.
The potential online restrictions in the U K debt could actually come in tandem with sort of of pruning of gray area of science and.
Our assumption would be that that would boost traffic to regulated sites. The carrier content understanding there could be of headline risks and the other is to consider can you can you discuss your view as to what we may see out of the UK as it relates to regs.
Brooks do you want to talk about that.
Sure Yeah, No I think your thesis is right in terms of of the directing more business to the regulated markets and that I think will benefit us in terms of the potential regulations. The U K gambling commission has sort of or input.
As there are forming what will be probably of revision of the gambling Act coming some at some point the summer. So we've had of voice and in doing this and obviously, we're very mindful of responsible gaming.
But we don't think that the the changes that we that we believe are going to come down.
<unk> will materially impact our business going forward.
In terms of in terms of if theres any stake limits or game design for you.
For us because many of these things we've already been incorporated so where we're not expecting a big impact for many of the changes that might come down.
Okay great.
I'd just add to that slightly.
You know if you look at.
The the pattern of the matched debts.
On our businesses online, let's say, a particular virtually <unk>, what what tends to happen is.
Players placed very large bets.
On the few number of.
All of live events like this one soccer game that takes 90 minutes they might bet.
You know 1000 or $5000 on that and then they'll play.
A bunch of virtual soccer games out of <unk>.
All of our $2, while debt games playing out.
So I think if the.
He said, what we've been reading one of the.
Main things, they're thinking about is lowering the maximum bet.
Online bedding.
You know I think certainly it could impact the.
The segment of the business, where people are betting you know very large amounts of money on live sporting events, but are not only not impact of ours, but again, we might benefit because we could see some switching from some of those large bets to the the small size of bets the people typically make on virtual.
Okay, Great that's very helpful I.
I guess my next one would be just to better understand the forward strategy on route penetration domestically.
So as you are well aware of you know, Pennsylvania distributed gaming could arise from budget negotiations are there other strategies for of partnering and prepping for you know new routes as the primary plan or is the primary plan to penetrate existing more mature out what what what do you think we'll see.
Uh huh.
Go through 'twenty, one 'twenty two.
So while we'll certainly be going after the existing routes.
Recipe as you know as we've talked about going into the WCS. The will help us and we will have some performance data.
We'd be able to report on next quarter and certainly in Canada, everyone knows what everyone else is doing so it would be very interesting to see how you know how we stack up live similar to when we went into Illinois.
And you don't have our games performing at kind of the first or second in pretty much every venue, where and so if we get that kind of performance in Canada, we feel very confident about that in terms of the new markets like Pennsylvania, it'll be interesting to see how it develops I mean, if it develops like Illinois, where it's the the.
The route operators like on the sell in of J&J and if it happens to be operators that are already in the Illinois and go into Pennsylvania, but certainly we have a relationship with them, but if it if it ends up being the existing casino operators you know the Penn National's the parks whoever it may be the taken over we certainly more of.
NII from our experience of being in the business 25, 30 years know all of these folks very well and obviously they'll take a look at the Illinois, Inc. And candidate experience and I think David as you know this market has been pretty much two of our competitors have had the space to themselves for a long time.
So I think everyone in the from the operator side is quite happy to have kind of a new entrant, who has proven performance to kind of make it a bit more competitive.
Yeah.
Very good alright, thanks, guys.
Thanks, Dave.
Thanks, Dave.
The next question comes from Ryan Sick Dog with Craig Hallum. Please go ahead.
Good morning, guys. Congrats on all of the morning customers wins and the execution of a challenging quarter to say the least.
Uh huh.
Do you want to start with the UK market. So we know of visibility to reopening what are you hearing from your key customers.
When when we come back online are you expecting kind of steady state.
Going forward potentially new business operators looking to slim down operations et cetera.
Well I would say that you know they've had experience with this from the from the prior locked down and we were very happy and that is I think they were to see how quickly things rebound it and certainly what you read in the UK papers as you know the.
Whole country's been locked down for quite a while and there's this as determined in the U K of the coil effect that they are expecting which will be on people get laid out and have lots of money in their pocket. So so we're we're looking very positively towards the return of of retail.
I think as you would know there's the whole issue of the.
William Hill side of the business and you know who made by that part of the business and still yet to be determined but we.
We feel very good about the return of the retail business.
[laughter].
Then just out of shifting over to the online piece really nice sequential growth new wins.
So looking at October November December kind of the sequential growth. How do you think about that potentially continuing to grow in 2021, and then if I just kind of run rate exit trends on 2020 of it and it indicates another near triple digit type growth here in 2021.
Is that reasonable I think about there.
Yeah.
Well I'll give my version in the Stewart once the two either.
Some of his version or say the my versions too aggressive.
Give him the chance to do that I mean, all I can tell us for what we're seeing in January and February is that the you know the the paces continuing to accelerate certainly what we don't know is when retail comes back when you were expecting that there'll be some softening, but obviously not in the early down to the rate of where we were.
Before and I think we're encouraged by the the number of new markets that we're going into and some of the new market. Instead of just come on like Greece. For example, but you you would see the the numbers you've seen out of Michigan and thus far we are obviously not participating in Pennsylvania at this point, which is a very big market.
So, Spain as I mentioned before I, just think we have any softening that may happen by having the retail come back I think we will be.
Probably more of that mitigated by the potential of the new markets that we're going into the win and obviously.
We've made great gains, we still have a bunch of great games to go and we will continue to increase our pipeline to produce more and more games. So that's the I don't know if that answers your question, but that's my view of it.
Yeah, No and I don't have much of the lab I think sorry, just as Julia just to jump into it and if the protest of the need to add but.
No I think you've hit the right points of that month.
And then the last one for me just.
The point of clarification, I guess Loren I thought you mentioned significant debt pay down with the proceeds I guess it looks like you know debt was relatively unchanged sequentially. So I guess, what are you talking after a quarter or am I missing something there.
So you wanted to.
Clarify that just exactly when we paid.
You know the debt down on the revolver, yes.
Yes, I think that's the key point it was on the revolver, which we paid down in the quarter. So we know of none of the revolver utilized and then there was also a effectively a six month interest payment right at the start of the is the quarter in question and which again would use the the liability paying for.
Of the lenders.
Great. Thanks, guys. Good luck.
Thanks, Ryan thank.
Thank you.
As a reminder, if you have a question press Star then one to be joined into the queue.
The next question comes from Jakob Bang on with Macquarie. Please go ahead.
Hey, this is Aaron on for Chad. Thanks for taking my question.
You know I appreciate the comments on the holiday Park business and the recovery in the second half.
Can you just give any details about your recovery in your other markets and how you're thinking about seasonality there.
If you.
I know you're referring to.
No I was just just to clarify the question are you talking about just the the leisure part of the business are you talking about the return of of all parts of the business in other markets I just wasn't sure about the question.
Yeah, sorry, I mean, all parts of the business.
Yeah, well I'll take a shot of it and then more of an I V C.
And I I think the the dynamic and it's probably less about seasonality.
Other than it is the other than the leisure business, which clearly is about seasonality, but I think the rest of the business is really more about when retail comes back how strongly does it come back. We do you know we have a thesis for that and we've seen it from the past locked down.
And then I'll be see what impact that has on both the online.
The virtual sports as well as online slot content and then we expect that there'll be some softening, but coming from a significantly more than double as we've talked about baseline case.
And and really in terms of the leisure business.
It really is a very the I think Lauren mentioned, the third quarter and the leisure businesses, where we get the the lion's share of our revenue and we haven't really since the acquisition of the Strummed Overmatter, we haven't really had a clear clean.
Season, where we've had the the holiday park side of the business not impacted so we're looking for them to that.
Do you want to talk about.
What you think.
Or what what we think is the likely that the the timing of the trajectory say of the Italy or Greece or other.
In other words, the the geographic part of the problem or the issue rather than the.
The the.
The market segment issue.
Yeah, I mean, I think what we what we think in Greece, and Italy as you probably remember Greece was the first country that came back and the Lockdown last last time, and where you know the.
The word we're getting is that.
We we expect Greece, probably to come back before Italy.
But as we've mentioned we expect the both of them will come back at some point in the second quarter.
And the history is any indicator should be back to kind of of 100% run rate by the second half of the year.
Okay.
Got it. Thank you that's very helpful.
Sure thing.
This concludes our question and answer session I would now like to turn the conference back over to Lorne Weil for any closing remarks.
Thank you operator.
I don't have too much to add to our to what Brooks and I have already talked about or does the Q&A.
I think you can sense from.
Our comments debt.
The.
From what we're seeing.
Across the business.
And trends that we're seeing debt where.
Uh huh.
I think it's probably fair to say I have never been more.
The positive or optimistic regarding.
Again, what we're talking about we've referred to as the earnings power of the business.
And.
As of the the retail part of the business reopens.
Oh, along with has continued.
The tremendous growth we've seen in the online business of that.
We're going to reach levels.
Of the of income that are.
Considerably beyond not only of anything we've ever done before but.
Even that we've talked about.
The other point of all makes and then I'll wrap up is.
One of the things that we're seeing clearly in the industry. Now is this idea of the on the omni channel or multi channel.
The strategy.
Ware.
The major operators are bolt in the retail channel and the online channel.
I think is is is becoming a more and more and more powerful.
Phenomena and.
If you look at the.
The results that most of the major operators had bid.
<unk> had been reporting you can certainly see this.
In their revenue growth and you can really see it in the profitability.
So while we talk a little bit about maybe there'll be some attenuation.
In the gross of our online business as the retail business comes back on I actually see it differently debt.
Because so many of our major customers are omni channel players.
Debt.
And where is their retail footprint.
He is a tremendous driver of traffic to their websites, where we supply the content that as the retail business comes back I actually think it will help the online business not.
Non attenuating, the obviously, we won't know until it happens but.
I have a strong suspicion debt actually we're going to see an acceleration.
So anyway I think that's about all we want to say today, where again.
Whereas a volume.
If you pardon the expression as we've ever been.
Notwithstanding the walk down.
We are continuing to spend.
Really as much money as we can driving.
The growth parts of our business.
And Oh.
Obviously, we appreciate all of you sticking with us and we look forward to talking to you in another quarter of thanks.
And thanks, operator, you can wrap it up now.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
[music].