Q1 2021 Inspired Entertainment Inc Earnings Call

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Good morning, everyone and welcome to the inspire entertainment first quarter 2021 conference call all participants will be in a listen only mode for the duration of the call there will not be an opportunity to ask questions should you need assistance. Please signal conference specialist by pressing the star followed by zero. Please note that today's event is being recorded.

I'll begin today's conference call by referring you to the company's Safe Harbor statement that appears in the first quarter 2021 earnings press release, which is also available in the investors section of the company's website at Www Dot I N. S E Inc. Dot Com. This 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. C. 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 that 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 call.

All over to Lorne Weil, the company's executive Chairman Mr. Weil Goodbye.

Thank you operator.

Good morning, everyone.

And thank you for joining our first quarter conference call.

As you might have read earlier this morning, Relaunching the capital markets transaction today.

This morning.

And as such we will depart from our normal practice.

Doing Q&A at the end of day.

These conference calls.

<unk> be doing.

Q&A today.

That being the case won't try to provide as much information in our prepared remarks as we can.

Again, recognizing the same sensitivities are what they are.

Also apologize.

First starting our call so close to the scientific games call.

But again, because we're launching the transaction this morning.

And given the time change between here and the U K, we need to get going on that.

Literally the second we're done with this call.

Given the constant refrain of COVID-19 COVID-19 COVID-19.

It has for months a bit of feeling depressed free reminiscent of the film, which I'm sure you've all seen groundhog day.

But lately given where we are pretty confident I believe we are in the COVID-19 cycle.

Getting to feel more like.

At the moment Dorothy.

The steps out on the monochromatic nightmare of Kansas.

And finally into the Technicolor world of ours.

In this connection.

I might also mentioned that.

The landscape is further brightened this warning.

By the U K pound, which is trading at a.

A little over $1 41 so.

A lot of very good news.

As we have outlined on.

More times than we care to.

We haven't had a normal quarter.

Yeah.

We will define as one that was unaffected by COVID-19 since the fourth quarter of 2019.

When consolidating dogmatic results for the first time.

We earned a little under $20 million in EBITDA.

By the middle of the first quarter of 2020.

We were already sliding into walk down.

And we were in full walk down throughout the second quarter 2020.

We began to ramp up in the third quarter of 2020.

Turning about $16 million in EBITDA for that quarter, but importantly, ending the quarter at considerably ahead of where we had started it.

This ramp up continued into October 2020.

At which point, we were performing at a level equal to.

We're ahead of where we were in the fourth quarter of 2019 notwithstanding.

It continues our continued existence at that time.

A certain meaningful restrictions.

And we were projecting to go considerably higher as we moved into 2021 but then.

As we all know we went back into lock down in November and December.

And remained in locked down through the first quarter of 2021.

Okay.

Finally began to reopen in April and as Brooks will discuss in more detail in a moment.

We expect to fully open beginning may 17th.

Oh and by the end of June as we move into the third quarter, we believe that all of our markets will be open.

While our retail or bricks and mortar business wasn't meshed in this 15 month version of the Groundhog day.

Some very important dynamics, where otherwise taking place in the company.

First and foremost was the evolution of our online business at no time during the COVID-19 Lockdown.

We cut back our spending in support of this business.

Sponsor monthly revenues and the combination of our legacy virtual sports and interactive gaming businesses about tripled over the course from 'twenty 'twenty.

And that's continued to grow strongly year over year, so far in 2021.

At the same time, reflecting the tremendous scalability of this business our margins have expanded.

On a very significantly during the same period.

Develop months still often is our mantra on this business.

And as growth in revenue profitability has been driven by a week or a combination of new products sold into.

New geographies and new customers.

We continue to believe that our greatest opportunity is in North America and indeed, just this past Friday, we launched I gave me in Michigan.

A new market that is showing phenomenal growth.

At the same time, we have continued to implement the synergies inherent in adult rheumatic acquisition, which we now expect to approach $20 million a year.

It's substantial majority of which has already been answered.

In addition to cost synergies from the areas of content development manufacturing back office functions and field operations, we have begun to see positive revenue synergies as we market the game libraries.

Of each company to the others vertical customer base in both retail and online sales.

Yeah.

So where does all of this bring us right now.

Historically, we've chosen not to provide quarterly guidance.

Instead prefer to give overall color on the state of the business. However.

Yeah.

Just going through an unprecedented 15 month period.

At the end of which we recognized that investors would benefit from having some incremental visibility to near term outlook.

It's very difficult to project the exact slope of the ramp up that we will experience as our markets reopen in the second quarter.

But assuming our markets are fully open as we entered the third quarter.

We have a pretty clear competent picture of what the third quarter will look like essentially.

We can take the roughly $80 million base stabilized annual EBITDA level debt. We believe we have established at two or three different points in time over the last 15 months.

Add to that the benefits of both the growth in our online business.

And the realized synergies on the mill romantic acquisition.

And on this basis, we would arrive at a third quarter EBITDA guidance of 28 million to $30 million.

About 50% ahead of where we left off at the end of 2019.

As we mentioned in our press release it is not our intention to initiate a regular quarterly guidance.

Because this is something we continue to philosophically believe that does not make sense for this business.

But given the.

Craziness of the past five or six quarters, we felt it was important.

To make an exception at this particular time.

And with that I'll turn it over to Brooks to give us a little more color on the activities of the individual businesses.

Okay. Thank you Lauren I'll give some detail on the schedule and ramp up of our business globally and give some further detail by business segment on our Q1 results from some of the key initiatives. We're working on for the remainder of 2021.

So the retail betting shop business in the U K is more mentioned reopened on April 12th, albeit with the following restrictions.

Only two of the four machines were allowed to be played a player could only play for a 15 minute session and players were limited to two visits per day.

Even with these restrictions we've been encouraged with the early results that validate our thesis of pent up demand with G. G are being about 8% above the results. When the shops were ended the same restrictions in December <unk>.

K government has stated that these restrictions will be lifted as of may 17th and the only remaining restriction, which has to do with social distancing will be lifted in June.

Our leisure business consists of machines in pubs motorway services and holiday Parks will also fully reopen on may 17th.

The early results from pubs, thus far being open for a few weeks, but only with outdoor service has far exceeded expectations and holiday park bookings or some of the highest that we've ever seen.

Combination of all of these factors as well as a number of economists forecasting a major spike in demand for hospitality services in the U K bodes well for our reopening in May.

Moving geographically so in Greece shops have been reopened for several weeks for virtual sports only in our revenue has come back to approaching 100% of its pre COVID-19 levels and we expect that our VLT business will reopen on increase in midway mid may as well.

Italy is looking more likely to be a June opening and therefore it is it's our view that will be on full operation across all of our segments by the time, we get to the third quarter on those more on remarked earlier, we fully expect Q3 to be the highest revenue on adjusted EBITDA quarter in our history, excluding the impact of any VAT related income.

So let me just go down into a little bit more detail on a on a segment basis. So on the gaming business as we mentioned on the gaming business in the U K has returned strongly and we expect to be back to pre COVID-19 levels or greater by the time, we get to the third quarter. We've also successfully launched our second customer in North America.

Sale of 100 terminals to Western Canada Lottery Corporation and early performance numbers have been outstanding and we believe this validates both our cabinet and content strategy beyond just the initial Illinois market. The Canadian market is certainly one of the major target markets for inspired going forward just to comment a little.

More on Illinois, we sold 40 games in Illinois, and the first quarter and are starting to see accelerating demand in that market with our Q2 machines sold already eclipsing knows in Q1 with only half of the quarter complete.

Moving on to virtual sports so our online virtual sports continued to grow in Q1 with revenues, increasing by 18% compared to Q4 of 2020 and by 51% compared to Q1 of 2020.

Turning to see organic growth from a number of key customers and successfully launched our V. P. P product on line with our partner Cecil some in Turkey in the fourth quarter of 2020 with 11 channels scheduled virtual sports via our proprietary rgs platform into their existing web site. Following the initial success we've sent.

Deploying two channels of soccer match day, providing.

Providing players with the ability to bet on a concurrent matches every two minutes across both English and Turkish soccer leagues.

Our products will launch in by the end of the second quarter and in time for the Euro 2021, a soccer tournament.

C P P product that day.

Just outlines what we'll be using in our key North American markets.

And.

Our first launch will be with that MGM is scheduled to go live yet this quarter.

In virtual sports our retail business was limited in the U K with virtual is allowed but without screens being allowed to be turned on which obviously impacted the business substantially we expect to have the screens turned on with the full reopening of the betting shops on may 17th and importantly, the Republic of Ireland, which is another key market for US will also returned on may 17th.

As mentioned previously Greece's returned almost completely and we have several new products that will be released in both Greece, and Italy before the start of quarter, three which we expect will accelerate our growth in those markets.

Moving on to the interactive gaming business. The interactive business continued to grow as Lorne mentioned in Q1 with revenue growth of 22% compared to Q4 of 2020 and 143% growth compared to Q1 of 2020, we originally forecasted some softening of the interactive business with the retail business.

This being reopened in mid April but the numbers have continued to grow which gives us encouragement from the stickiness and sustainability of this segment of our business.

North America has quickly grown to be our second largest market with companies such as bet MGM called Nougat, Lotto, Quebec, Caesars Draft Kings and others, all showing consistent growth validating our content resonating with players on a global basis, we look forward to launching and growing our footprint in Michigan, which as Lauren mentioned just went live last week.

We expect West Virginia next quarter, and then obviously, Pennsylvania once we have successful successful licensure in Pennsylvania.

Lastly to our leisure business, we're anxiously awaiting our opening of all of the segments of the leisure business starting in mid May and look forward to a full summer season for the first time since our acquisition of the pneumatic UK business in October of 2019, along with our increased revenue from this segment, we have delivered beyond the original expectations in terms.

The synergy and look forward to having increased scale and margins from this segment of the business going forward.

Finally, I shared orange bullish sentiment about the earnings power of the business going forward coming out of the Lockdowns and we would expect to see in the third quarter and the second half of the year to clearly illustrate the momentum we see internally and with that I'll hand, it back to Lawrence for closing remarks.

Okay.

Oh, Okay. Thanks, Brooks that was Oh terrific.

Terrific reveal.

And thank you again, everyone for joining this morning.

Again, I'm, sorry that we.

We are not going to be able to take Q&A today.

But I hope you can appreciate the.

The sensitivity of the issue.

And again I also apologize for scheduling.

Hopefully not too close to the completion of the scientific games call.

But as Brook said and as I indicated earlier.

I think we are really on the cusp of.

Something fantastic in this company.

I really don't think we've ever been.

More.

Our bullish or felt more volume about what was happening.

Basically because.

Really everything we've been working on.

For the last two or three years is coming to fruition.

It's obviously as I said, a few times before.

Tried our patients because of the stop and start nature of a lot of this stuff, becoming obvious but I think.

We really are at the point now where it is all becoming very clear.

And over the next.

A couple of quarters I think the results will.

Well, we'll validate that so.

Thank you all again for joining this morning.

And we look forward to speaking with you in another quarters. Thanks operator.

You can now on the call.

Thank you. The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.

Yeah.