Q2 2021 Inspired Entertainment Inc Earnings Call
Morning, everyone and welcome to the inspired entertainment second quarter 2021 conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions. Please note today's event is being recorded.
I'll begin today's conference call by referring you to the Companys Safe Harbor statement that appears in the second quarter 'twenty 'twenty. One 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.
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 the securities laws and rules of the SEC.
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 be discussing 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 over to Lorne Weil, The company's executive Chairman Mr. Weil. Please go ahead.
Thank you operator, and good morning, everyone.
And thank you for dialing into our second quarter conference call.
I'm joined this morning as usual by Brooks Pierce.
Our CFO Stewart Baker, who.
We will once again have a speaking role.
And Dan Silvers.
I'll try and keep our comments relatively brief.
So we have plenty of time for Q&A.
Looking back on the second quarter, we can say with a modest degree of satisfaction that the narrative.
Followed the script for if you will.
Across both business units and geographies, our retail operations opened in stages during the quarter.
And by mid July pretty much operating at full tilt.
A couple of weeks later than we had originally expected or.
Notwithstanding the strong.
And immediate resurgence of our retail business, our online revenues continue to accelerate through the second quarter.
Most recently with I gaming establishing record revenue in July.
And performing very very strong so far in August.
Going back over the last year or so we've talked about looking to return to the.
The earnings standard that we established in October 2020.
Which was both the peak profitability months following the <unk> acquisition.
And at the same time the peak months prior to the November 2020 locked down.
At this point, we can say that July 2021.
<unk> ahead of October 2020, despite July not having fully opens until July 19th.
And August is looking even stronger.
Accordingly, midway through the third quarter, we're comfortable reaffirming our earlier third quarter EBITDA guidance.
Of $28 million to $30 million.
At the same time, we are committing increasing resources to our principal growth initiatives.
<unk>, perhaps most importantly, our retail and online initiatives in North America.
Whereas Brooks will discuss in more detail, we're seeing impressive results in the I gaming virtual sports.
And video lottery channels and quickly laying a strong foundation for an exciting new business and I lottery.
As importantly, we achieved a couple of critically important financial milestones during the quarter.
As Barry Jonas pointed out in his very thoughtful and very comprehensive initiating report.
We were one of the first companies first gaming companies to go public through merging with us back.
Since the time of the stack merger, our largest shareholder with Trubion through.
Through its land gain entity has been extraordinarily supportive shareholder is helpful and supportive of a major shareholder as anyone could want.
The nature of the Beast is that we struggled with the twin issues of the perceived as a truly be an overhang.
And the associated diminished liquidity.
But as many of you know on this call.
And we are enormously grateful for your enthusiasm and commitment.
We were able to assist vitruvius selling their entire position, thereby simultaneously illuminating of every large overhang and.
And bringing in dozens of new institutional shareholders, which we think should greatly enhance our liquidity.
We crossed another important financial milestone during the quarter as well in this case with respect to our debt.
When we acquired the Nova Matic technology business in the fourth quarter of 2019, we put in place a new debt facility that bolt, 100% debt financed the acquisition and refinance the debt we had at the time.
Having now got two words no rheumatic businesses are operating at full potential together with the projected synergies.
We feel that both the acquisition itself and the associated financing are far more than justified but at the same time.
Particularly in the aftermath of the Covid shutdowns.
<unk> was less than optimal from several points of view.
And our new facility positions us much more favorably Stuart will address this in a little more detail the moment with that.
Now I'll hand, it over to Brooks, who will discuss.
In greater detail, our operations and I think you'll find this very interesting Brooks.
Thank you Lorne and.
Now I'll update on the progress that we're seeing across the four segments of our business and the momentum we're carrying forward in each of these into the third quarter. So starting with the gaming business, we're back to operating in full with no restrictions.
Now and are encouraged by the results that we're seeing in the U K, our OBO gaming machine performance is back to pre covid levels.
Greece, we've seen the business return as well with performance actually exceeding pre covid levels.
And Italy is also showing positive trends with our plan is still intact to transition to a game and content provider only model by the end of the year.
In North America, we continue to see strength in our game performance and pipeline in the Illinois market.
We're proud of the performance of the terminals delivered previously to WCS Western Canada and are encouraged by the game performance in that market and believe it bodes well for further penetration into the Canadian VLT market.
As we've said on previous calls we expect to enter other VLT markets. This year and early in FY 'twenty, two and have just recently hired a very experienced VP of North American sales to help drive our growth plans.
Moving over to the interactive business as you'll see in and release, we are continuing to see tremendous tremendous growth in this part of the business <unk>.
69% year over year, and I think it's important to note that we are really in the early days of this story.
Give you some context North America has vaulted to our second largest market behind the U K and that is with only approximately 65% customer penetration and new Jersey, only approximately 40% penetration with just two customers in Michigan and we're not licensed yet in Pennsylvania and would hope to be yet this year.
Additionally, we see opportunities on the horizon in Canada, where we already supply content a lot of Quebec very successfully as well as additional states like Connecticut once the regulatory framework is finalized.
Continue to we are continuing to release high performing content with our games, making the topless of a number of operators and consistently releasing up to four or five new games. Each month. We just released our first online separate game in New Jersey called bullion bars grab to gold and it's doing amazing numbers, thus far as meant.
And in the release July was our highest revenue number in the interactive segment.
And a month in our history and we're confident that we can continue to grow this business not only in North America, but in the UK, Greece, Italy, and some future markets, such as Spain Holland in Romania.
Moving over to virtual sports.
Our strategy has been to continue to innovate the product with our existing customers to drive player engagement and to get wider distribution of our part of our product, particularly in North America.
The results in our existing business that we're seeing in the last two months in the second quarter and the first month of the third quarter are very encouraging as our retail segment is coming back strong and growing while the online part of our virtual are maintained and even slightly growing over the same period, producing overall growth in revenue EBITDA and margin.
Percentage.
The second quarter and the first part of the third quarter were exciting with the launch of the DPP product with bet MGM in New Jersey, and with plans to take this product to their market in Michigan. We also have contracts and expect to expect to launch with Caesars Fanjul resorts and others in New Jersey, yet this year.
We worked with our operators to build player awareness and acceptance of this product as most of you know it's fairly new in North America, and we will continue to report on the progress of these initiatives.
We've launched on the <unk>, we've launched some new products into Italy, Greece, and Turkey and the early results are extremely encouraging.
Also mentioned on the product side, we have started to show our homerun Derby product I think that this will be a popular addition to our lineup of virtual sports, particularly in markets like Latin America, and Asia as well as North America.
Finally, we continue to show double digit percentage growth in our Derby cash product with the Pennsylvania lottery, but our launch with the DC lottery, which we had hoped would be the third quarter has now been delayed until the fourth quarter.
In summary, we feel very good about the growth and development of this segment of the business, particularly on the online side with all our new customers being added.
Moving over to the leisure business, it's showing progress as we've been talking about for some time with the restrictions finally lifting in full on July 19th the holiday parks in particular have had their best month since 2019 in July and we've seen that continuing to build as we are heading into the busiest month of the year.
August of course for that part of the business.
The staycation phenomenon in the UK is really helps both our holiday parks as well as our motorway services business very encouraged by the trends we're seeing in the pub sector post the elimination of the social distancing requirements and we can see a direct direct correlation and machine performance.
Second half of July and the first two weeks of August has seen significant improvements in footfall, both in pubs and in our machine income.
As Lauren mentioned, we also have plans we've spoken about our plans to enter the lottery market and we've made very good progress on that front in the second quarter.
Demonstrated several games and game concepts to a number of potential lottery customers and have received some very positive feedback still early days for this segment, but our experience in the lottery world along side, our strong game development capabilities and positive feedback makes us feel very bullish on this opportunity over the next 12 months to 18 months.
In summary, we believe that this strategy and operating plans that we've been discussing on these calls over the last few quarters is coming clear.
Clearly to fruition and we look forward to reporting back as we progress on these initiatives with that I'll hand, it over to Stuart.
Thanks Brooks.
We're going through all the numbers and explanations in the quarter because of the anvil will inevitably be due to the nature and timing of lockdowns in either of the current period or the comparative period, but I did want to give a little bit more detail on three areas.
Firstly, the ramp up during the quarter, just given a bit more color here to April was mainly locked down with the only meaningful land based revenue coming from gaming machines and betting offices in the UK for the second half of the month.
But even these were operating with a with a number of restrictions, including any two of the four machines available to play.
However, we did need to incur most of the costs. So April was a breakeven from an EBITDA point of view.
May was the month, where in the U K most of the machines, which are known partway through the month and EBITDA was approximately $2 million.
This leaves June with EBITDA is about $6 million and I think it's important to understand this was still not a normal month.
Although we needed to incur the majority of the costs not all of the markets were fully open the whole of June or their own or they were operating with restrictions, which have now fallen away. So for example, Italy reopened in stages during the month and the puts and holiday parks in the UK still have a number of machines to endo.
So as Brooks mentioned it was there any really from the 19th of July that restriction is fully dropped away and we consider this to be the point, where we fully opened up.
Secondly, and GM product sales were lower than we would believe a normalized level is so as we saw last year. These take a little bit longer to ramp up to normal levels a bit longer than the recurring income, but the visibility in the pipeline gives us confidence that they will absolutely and indeed are returning to normalized levels.
So the second topic I wanted to briefly touch them with a net loss for the three months nearly $44 million, which was approximately $25 million higher than we would've expected on the suppressed level of revenue we saw in the quarter.
Strangely previously the two items, which led to the accounting charges totaling this amount versus driven by positive events.
Firstly charge in relation to the increase increased warrant liability of about $11 million in.
This is a little strange and the better we do as a company the higher the stock price the highest reliability and the high of the P&L Jonathan.
Secondly, whilst the refinance resulted in a reduced cost of capital pushes out maturity and removes a number of restrictions. It doesn't mean that we needed to write off the fees in relation to the financing of approximately $40 million the majority of which was structuring fees.
The final topic I wanted to talk about was cash which is the start of the quarter was about $41 million and at the end was approximately $25 million. So a reduction of about $16 million.
And of course, the cash flows are naturally susceptible to small changes in timing of payments and are now in this quarter is no different so I think that makes a bit more sense look at six months as a whole and these decreased by about $22 million.
Now the refinanced in the quarter was broadly net neutral after repaying off the prior debt swap and the legal fees.
The timing did mean that after about as I said, we paid about eight months of interest during the first half which totaled about $17 million.
In addition, we didn't see much benefit in terms of receipts from opening up partway through the quarter given the time taken between revenue and then receiving the cash but we did have a lot of the cash expenditure given the nature of the large proportion of our cost base being staff costs, which obviously incurred in months.
So after cash flows approximating two about six months of Lockdown. We are confident now that we're going to be an innovative positive cash flows going forward and whilst we don't typically give cash forecast I will say that we are projecting the cash position at the end of the call to win now and to be in the mid to high 50 millions of dollars.
So hopefully that explains why are we confident adjusted EBITDA accounting profit and cash flows are all very much on an upward trajectory with some large negative headwind in the quarter, we reported on today.
So with that I'll hand back to loan for closing remarks, before we open up to Q&A.
Okay.
Okay.
We will now begin the question and answer session.
To ask a question you May press Star then one on a touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
And the first question comes from Barry Jonas with Truest. Please go ahead.
Hey, good morning, guys.
Wanted to start with.
The covid resurgence that we've been seeing guidance reiteration I think is very positive, but how should we think about your positioning across the segments in light of SEC.
Some of the resurgence we are seeing.
Brooks do you want to try that well yeah, maybe Barry you can just when you made when you mean positioning across the segments. What maybe just elaborate on what you mean by that.
If you look across your different business units, how do you feel the business can respond to.
Increased delta Covid cases, obviously, hopefully we're not moving towards full lockdowns, but if we start seeing increased restrictions should we how should we think about that flowing to the business or do you feel.
Right.
You can sustain any incremental increases whether it's masks or any other sort of.
They don't restrictions, you're you might see in your units.
Sure well I think in terms of again, assuming all of the venues are open we've seen in the past where.
Our customers have had to wear masks and it hasn't had a meaningful impact on the business. So I think the only way, we'd really have a meaningful impact on the business as if some of the operations were shut down storage probably as good an expert on the U K, but I think all of us have probably read about.
About how the U K in particular is doing extremely well as it relates to Covid and that's obviously a big portion.
Our market, but I think the for US what we've done is we've built a ton of resilience and with the growth of our online businesses kind of across the geographies.
What we're seeing is even when the retail businesses come back in full.
There's no.
Diminishing of the online business. So I think we've built what we feel is both in terms of geography and product mix and everything else, a very sustainable business, regardless of what happens with Covid.
Great. That's really helpful. And then I wanted to touch on virtual <unk>, what do you think needs to happen in the U S. For virtual is to hit the same penetration levels. As maybe you have seen in European countries like Greece, and any structural reason it can't get there over time.
Well I think it's Okay go ahead Juan.
Ahead, Brooks and I'll I'll jump in here.
Sure well I think.
The biggest thing Barry is going to be it's going to be a customer education process, because clearly there's not there's not the familiarity with it is there is in Europe.
Very very early days with that MGM, but I think the combination of they're getting behind it and promoting it and introducing it to their players we're already starting to see kind of meaningful.
Increases on a I'm pretty much on a daily basis as people get used to the product and I think that MGM has done a very good job of putting it not only on their casino tab, but also on the sports tab and they're out marketing and promoting it and tried to cross sell with sports betting so.
I'm encouraged by the early early numbers were seeing with that MGM and would expect that kind of all the other operators will kind of follow on lockstep.
What I would add to that Barry.
Laurent is.
I think it's just going to take a little bit of time.
For both the operators as Brooks said and the players to understand.
What the distinct advantages of virtual sports.
Is it.
And it might be worth taking a second just to talk about that because there are three or four that I think are very important that are that are clearly understood.
In other parts of the World and we're just getting there in the state for the first obviously.
Is it it's great because it can be bad on at any time, whether there is live sports or not so that's late in the evening or.
Or a dark day for live sports.
There is an infinite number of things to bet on and for people, who happen to love baseball or football you can bet on at any time during the year not just in the you know the.
The natural season.
The second is that from the point of view.
Oh the operators they can set the margin anywhere they want.
And there is absolutely no risk so unlike.
Betting on life sports, which can be very competitive in terms of margins and clearly there is always a risk that the.
The outcome of the game is not where the line predicted.
Uh huh.
There are none of these issues with virtual sports so from a financial point of view it's.
It's a tremendous product for operators and.
There are a number of people, who really like the idea of watching a sporting event and betting on it but <unk>.
They are intimidated by.
What they think is the complexity of of sports betting and the fact that they're playing in a pool with players who are much better informed and are much more sophisticated than they are whereas in virtual sports.
None of this comes into play so it's a much more comfort in product for sports fans, who may not be mathematicians and so I think as.
People start to get this and we're already beginning to see it that the product will get more and more traction in North America.
Perfect I appreciate all the color and congrats guys.
Thank you.
And the next question comes from Chad Beynon with Macquarie. Please go ahead.
Good morning, Thanks for taking my question.
Regarding the your interactive success.
Noted that you're expanding with new customers and I believe you said your your deploying four to five new games per months can you just talk about how you're leveraging the studios are these games that are working in the land based environment and how this should look going forward and then maybe just talk a little bit more.
About.
But how we should think about the momentum given that you're still getting started in some states and with some key partners. Thanks.
Sure.
Yeah, I think we are leveraging Chad we've talked about this before we really do have an omnichannel strategy.
Stingley, though what you'd see in North America, because because with less penetrated in the gaming machine market. We're actually at least the data is showing us that for the non big four gaming suppliers were actually the highest producing content on an interactive basis. So our content is resonating across markets, where we don't have.
The retail exposure like we would in the U K or Greece, or Italy, where pretty much all the players will have seen our products and know our brands and our games by going into the retail shops. So that gives us a lot of encouragement for the growth prospects in North America, and we've spent a fair bit of time as you've seen with the success in our retail.
In both Illinois, and Western Canada, we've had our game designers and developers spending a lot of time looking at this market. So we're now designing kind of spoke content for the North American market as I mentioned, a separate game, which probably wouldn't resonate so well in Europe. It is doing phenomenally in North America. So I think it's a combination.
Nation over a number of things, but it certainly makes us feel good about the progress in that side of the business.
Alright, Thanks, Brooks and then Loren I know, you're not giving annual guidance I know before you had talked about an 80 million dollar number post synergies I think that was given pre covid so given that your.
Reiterating the 28 to 30 in the third quarter, you talked about August potentially being a record is there any reason why on a forward TTM basis those prior goals.
You may actually be conservative here, just any color around how to think about seasonality in kind of the go forward there.
Yeah.
I I think.
You've.
You got to have to be careful because we.
You know, we don't or at least hasn't been in the.
And the practice of doing annual guidance, but I think given.
What we're seeing now that the.
The you know.
Really the coming back full blast of our retail businesses.
<unk> has not in any way attenuated the growth that we're seeing in the in our online business.
And some of the other trends that Brooks talked about.
I would say that I'm cautiously optimistic.
Given what we're seeing and.
And being mindful of Berry Jonases.
Questions about the potential.
The impact of.
Covid, but.
Taking everything that we see now together I think I feel.
Pretty good debt.
Going ahead, we're going to.
In the same way that July.
Is comfortably outpacing October 2019 in terms of our what we've called at par.
Earnings month.
I think in the same way.
We feel that we're running comfortably ahead of that 80 million par.
Annual target yeah.
Okay. Thank you very much I appreciate it.
Yeah.
As a reminder, if you have a question. Please press Star then one do we joined into the queue.
The next question comes from Ryan <unk> with Craig Hallum Capital Group. Please go ahead.
Good morning, guys. Thanks for taking our questions.
One follow up on on that last question, but given the UK didn't fully reopen until mid July and we're still kind of working through the reopening it seems like early in the quarter is it reasonable to assume that but normal for Q3 would actually be better than where you guided to.
Well certainly the.
The the logic would say that yeah, I mean, if we werent.
Fully open.
Till the 19th of July, but we're still comfortable with.
With.
28 to 30, then I think you could deduce that had had July been opened for the entire month that we would we would be running ahead I just think that that's.
Kind of the math right yeah.
Fair enough.
And then just as you look at the retail across countries are you seeing greater upside and the return of foot traffic and players or is it really the average play per player or is it both.
Yeah.
Brooks.
T D.
Yeah, I mean, I'll take a crack at it and Stuart can add if he likes.
I think what we're seeing and in particular in the U K is it's not necessarily that the the football the footfall and at least in the betting shop business has changed that much. It's just that people are coming in and they're staying a little bit longer.
And so playing a little bit more.
I would say in the pubs. It has a direct correlation to footfall because you know up until July 19th you had to reserve a table you couldn't get a drink at the bar, but after after July 19th in there as you can see it in the numbers.
The increase in footfall in the pubs and the ability for people to go into a pub and kind of move around the.
The machine income is kind of kind of clipping each week is getting better and better. So I think I don't know if that answers. Your question, but that's it's a little bit of a combination of both but I would say, it's primarily footfall in the pump side, and then kind of player staking and the betting shop side.
And then as it relates to Greece, you said above pre Covid levels, you think thats pent up demand or do you think there's structural reasons that that can be sustainable.
Yeah, I think I think it is a bit of pent up demand, but I think it's also we've because of covid and the restrictions with regulators et cetera, et cetera, we hadn't had a chance to get new content into Greece, which we now have been able to do and we're seeing a pretty direct correlation with our with the new.
Content and the increased play.
So.
Seem sustainable to me.
Brooks, we might want to add to that the fact that.
Uh huh.
Every.
So often.
In Greece in the machine side of our business, which is.
Critically important component of what we're doing in Greece.
They reallocate.
The number of machines to all the suppliers based upon the.
The performance in the preceding X period of time.
And as a result of this last.
Go around even though we already are by a considerable margin the largest.
Supplier in Greece were going to get an increased allocation.
So.
Further reinforcing what is happening with the player base will be the fact that we will have.
A meaningful a greater number of machines operating increase as well.
Great one more for me.
You mentioned, 65% online penetration in New Jersey, 40% in Michigan.
First did I get those right and then second what's the main constraint there of getting closer to 100%.
Yes, you did get those right and it all really has to do with with customers.
And some of it is timing of but probably the biggest customer that we have a contract signed with but we have an integrated with yet.
I won't go into the rationale behind the sandals, so sandals the biggest customer that.
You would see that.
We haven't added but we have a contract and we'll add them as is our rush Street.
I guess that by the end of certainly by the end of the third quarter, Our Rush Street will be on in the markets and hopefully soon thereafter, Fandel and I think when you see those will be much closer to 100%.
In both markets.
Great. Thanks, guys. Good luck.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Lorne Weil for any closing remarks.
Thank you operator.
Thank you everybody again for joining this morning.
I hope.
So at least some part of our enthusiasm.
<unk> has been contagious.
I think we're.
Where it's positive.
The business right now as we could possibly be.
The outlook I think is terrific all the businesses are.
Our operating as well as they possibly can.
And.
We look forward to.
Speaking to you all again in another quarter at.
At which point hopefully.
Outlook that we've been talking about today will become even even more positive and more clear. So thank you very much.
Operator, I think we're done.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.