Q3 2021 Neogames SARL Earnings Call

Ladies and gentlemen, thank you for standing by welcome to the Neo gains third quarter 2021 earnings Conference call.

At this time all participants are in a listen only mode.

A question and answer session will follow the formal presentation.

Please note that this conference call is being recorded today November 11th 2021.

I'll turn the call over to Jacques Cornet with IC.

C R.

Okay.

Yeah.

Thank you operator, and good morning by now everyone should have access to our third quarter 2021 earnings release, which is available on the Neo games web site at Www Dot Neo games Dot com in the Investor Relations section.

Before we begin our formal remarks, we need to remind everyone that the discussion today.

<unk> forward looking statements. These forward looking statements, which are usually identified by words, such as will expect anticipate should or other similar phrases.

They're not guarantees of future performance.

These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect and.

And therefore, you should exercise caution when interpreting and relying on them.

We refer all of you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition.

We encourage investors to review, our regulatory filings, including the form 6K for the quarter ended September 32021, when it is filed with the SEC.

During today's call, we will discuss non ifr S financial measures, which we believe can be useful in evaluating the company's financial performance.

These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with I F. R. S. A.

A reconciliation of these measures to the most directly comparable I FRS measures is available in our earnings release and on the Neo games Dot Com website.

Hosting the call today, we have Motetema Louisville, Neo games, Chief Executive Officer, and Rajeev Adler Chief Financial Officer of the company.

They will provide some opening remarks, and then we will open the call to questions. So with that I'm, turning the call over to Marty.

Thank you Jack and good morning, everyone.

Welcome to our third quarter earnings earnings call.

This morning, I will highlight some key points about the third quarter performance and provide an update on the trends we're seeing in the market.

Afterwards, I will turn the call over to Rajiv to run through our financials and business performance.

This quarter, we continued to progress our goals across key aspects of our business.

For example, the.

Despite the expected seasonality, we have seen growth in several of our account such as the Virginia, and New Hampshire, which continued to outperform expectations.

<unk> III programs flourish and received strong reception in these markets.

In Canada, we continued our investment in additional expense of expansion of gaming verticals to power the very successful play, Alberta, Brent by launching online sports betting.

Further to previous quarter of investments and draw games and.

Light Delever ethical.

We continue to create and rollout unique content and enhanced player experiences.

During the quarter, we began to rollout over a multi game progressive jackpot feature across selected instant games from our nail game studio with three of our customers significantly diversifying their games offering.

The attraction and engagement of players with this feature and they build part of the growth we have seen in the quarter.

Overall.

We continue to significantly grow our business year over year.

For the third quarter revenues were 12 for $12 million, while our share of NPI revenues for the quarter was $8 $3 million.

Looking at the two components added together, they equate $22 million for the third quarter of 2021 representing growth of approximately 30% year over year.

In terms of EBITDA.

The third quarter of 2021.

We generated adjusted EBITDA will be.

Seven $5 million.

As a reminder, our EBITDA margins fluctuate and reflect investments in technology and operations.

As we continue to rollout across the new markets. We are entering for example, this quarter much of this investment has been due to recent launches in Alberta of draw games late in the second quarter and sports betting in the third quarter, which introduced both new tech investments.

As well as some operational learnings.

Most of these product investments have been one time in nature.

And we do not expect further extraordinary spending for the remainder of this year.

Well, we have gone to some other business updates in Michigan.

As anticipated results were impacted sequentially due to the various factors we have mentioned in previous reports.

A combination of seasonality post COVID-19 patterns as well as heavy marketing spend by the gaming competition and distinct.

Especially towards quarter end.

We continue to work closely to support the measured and disciplined approach demonstrated by the state lottery with the title III program building on foundations that we are confident.

<unk> will lead to sustainable long term growth of the program in the state as we have seen in other markets with similar landscapes.

On the games front, we continue to view two view.

Our constant rollout of games with more customers around the world.

As an investment into future growth in this regard.

Sequent to quarter end.

We launched our first retail premium instant games with lot of Mexico, and Italy further expanding our footprint in the Italian lottery market, where we now serve both Italian lotteries with our games content.

One other good point of progress is our strong partnership with Caesars Entertainment, which continues to evolve and expand.

In this quarter, we went live in Arizona, where our technology is integrated into their unique liberty platform for online sports betting and I gaming, which is now live in 10 markets and growing into the future.

The regulatory environment and state authorization in the U S for <unk> III continues to develop.

This quarter.

We have seen two states in different stages of the procurement process.

The Connecticut lottery commenced a public procurement process for in Idaho to a solution and services and the West Virginia Lottery conducted an RFP process to gather information and insights unsuccessful I lottery deployment as a precursor to a potential full procurement process, which may.

Expected in 2022.

With that I'll now turn the call over to Rajiv.

Thanks Marty.

Before I get into the results as a reminder, when we discuss our results I would point out that all of our luxury business in North America operates.

Operates through a 50 50 joint venture new appalled interactive or NPI.

Except in Michigan, which is reflected in our topline revenues.

Our contracts in Virginia, and New Hampshire, and North Carolina Province of Alberta run through NPI.

Except for the NPI contracts, who conduct all of our business through new games.

As a result from an accounting standpoint, as many of you know we generate revenue and earnings through our only owned operation and through our equity interest in NPI.

Our revenue is reported on the income statement, which excludes our share of NPI revenues was $11 9 million during the third quarter of 2021 down eight 8% over the same period last year.

Sheriff NPI revenue was $8 $8 3 million during the third quarter of 2021, compared with $2 5 million last year.

Sum total of these two numbers was $20 2 million during the third quarter, representing an increase of about 30% year over year.

Moving to EBITDA update for the quarter, our adjusted EBITDA was $7 5 million, which is down three 8% compared with $7 8 million last year.

Sequentially, it's important to note that the fluctuation in our EBITDA margins is generally driven by two main factors.

The first.

The first is that the new accounts and products ramp up we often see in it.

Increased costs earlier in the lifecycle of that.

But stabilized overtime.

Secondly, differences in the product and services mix and gaming verticals offering drugs growing margins.

For example, on one hand accounts that have limited offerings, such as draw based games.

Only or on the other hand accounts with very wide offering, including gaming verticals, where we incur costs with third party content drive lower margin than our average.

As Monty mentioned this quarter, we have seen an impact on our EBITDA, mainly associated with investment in both technology as well as an operational earnings primarily in our operations in Alberta.

These investments by most have been onetime in nature and therefore, we do not anticipate similar impacts in the remainder of the year.

Overall, we're comfortable with where margins are and where they will be as the business matures.

Diversifying and growing not only the customers the customer base, but don't but also product types. He is an important element of our growth strategy.

We wish to provide turnkey solutions to our customers.

Turning to our balance sheet, we ended the quarter with about $68 2 million worth of cash alright, extending that to the quarter was approximately 33 meal at a weighted average interest rate of 4%, leaving us with a net cash position of $35 2 million.

We have $25 2 million shares outstanding at the quarter end during the quarter, we successfully completed an underwritten public secondary offering.

By one of our shareholders of almost 4 million shares of common stock significantly increasing our public float.

Regarding guidance, we are encouraged by the trends towards the end of the quarter and into early fall with some of our key accounts enough to allow us to increase our overall annual revenue guidance to be between 82, 5% and $84 $5 million.

At the midpoint. This revisions represents an increase of five 2% compared to our prior range represents year over year growth of approximately 42%.

As we've indicated in the past the revenue guidance does not include launching any new turnkey it comes.

With that I will turn the call back from Ot.

Thank you Ravi to summarize.

We believe we are in a great position to continue executing on our growth strategy for both internal and external growth opportunities.

And are excited by the momentum we are generating.

This month actually in about a week from today, we will see the first anniversary since our IPO last year.

We firmly firmly believe that our results continue to demonstrate the strength of our model in generating significant value for our customers and best for Neo gains in all of our shareholders <unk> remains well positioned to continue to capitalize on the current landscape as the leader in the rapidly expanding.

The global lottery market.

With that we thank you for joining us this morning, and we are happy to answer any questions.

Operator, please open the line for questions.

Thank you to ask a question you will need.

One of your telephone.

Your question.

Keith.

Please standby, while we compile the Q&A.

Hey, Ross.

Our first question comes from Jeff <unk> with Stifel. Your line is open.

Hey, great. Good morning, Lucky Rajeev, great to hear from Ebola and thanks for taking our questions.

I wanted to start on the mid range of guidance.

Good morning, I wanted to start on the revised revenue guidance. If possible you know at the midpoint implies about 20 million for Q4, which is stable quarter on quarter. I was hoping you could just walk through some of the puts and takes that you've contemplated there on the one hand, you do have seasonality.

Ramp momentum in Virginia, Albert et cetera, going in your favor heading into Q4 on the other hand visibility into.

Because some of these reopening headwinds you highlighted in some of the marketing spend in Michigan is still somewhat limited, but just curious how you guys think about the various puts and takes when you think about sequential growth Q3 into Q4.

Yes. Thank you.

It's basically a combination of.

Two factors the first one being as you rightfully mentioned is <unk>.

Is the trend that we sequencing in Michigan.

As opposed to continuing continuation of growth in other accounts in Virginia.

Alberto.

Those are going to be played out altogether into <unk> into Q4 Q4 guidance. So Q4 expected revenues. So the three those are the three main.

It generates revenues for <unk> for our business and the way they are going to play out during Q4 together with the seasonality effect.

And if we see normally in Q4.

Is the main the main assumptions built into our guidance.

Okay perfect really helpful. And then for my follow up we've heard one of your peers this earnings and a little bit in the prior talk vocally about rolling out a cloud based solution across their I lottery contracts are you considering updating any of your U S contracts or something more comparable to your solution in Alberta, and if so how should we think about the finance.

I went back.

Yeah.

First of all yes, we are already there when it is allowed for example, we deployed Alberta in Canada purely over over a cloud environment.

And it's working phenomenally well in the U S. There has been certain combinations of regulatory.

Constrains as well as guidance specific guidance from lotteries that have prevented the move in a more massive way into the cloud so far.

That other vendor are good partners of IGT that you have mentioned have actually done that specifically with a game server and.

And it's definitely our intent to start with that front as well and into the future maybe be able to convince more and more states to the ability to deploy bigger parts of the solution than just a game servers into into cloud environment. It's a bit too early to suggest what what type of cost saving this would have on the business because there.

As a fundamentally a few hybrid models that may impact that model.

Okay, great helpful encouraging as always thank you both very much.

Thank you Jeff.

Our next question comes from Barry This choice.

Securities Your line is open.

Hey, guys how are you.

Hey, good morning, Barry.

I think I'm going to go forward from here and ask if there are any updates.

And the RFP you originally submitted there.

Not specifically to the RFP itself, but generally speaking yes.

David in last quarter, and it's even more intensified there are significant discussions among the bigger topic one game.

The gaming expansion on the different fronts in the states. There was also a significant discussion taking place on how to approach <unk>.

We're obviously embedded within these discussions and we can't say if final decisions will be taken this side of the year.

Or into a into next year, but we're.

We're definitely seeing.

Seeing good traction in discussions with the different stakeholders in the states, whether it's the legislation cycles or other stakeholders.

But nothing that we can report as being final at this point of time.

Got it and then.

How should we be thinking about the market opportunity for new games to expand its scope into I gaming further and maybe just with that can you remind us are there any competitive limits tied to your caesars relationship.

Yeah, we definitely see it may be a topic that requires more than just a minute or two sentence of AR over response, we definitely see growing trends of convergence into into gaming, even with our core lottery customer base not in the.

But outside of the U S. The demonstration of that is what we're doing in south cause very successfully in what we're doing in Alberta, very very successfully and we're seeing that elsewhere. When it comes to U S. Specifically so to answer your question. There is no limitation on us to explore other gaming opportunities from a legal binding perspective.

With.

What do we do with Caesars I remind you that our relationship with them is very strong and dedicated.

And and we're very happy with how that is.

That is trending.

Great great great. Thank you so much guys.

Yeah.

Thank you. Thank you. Our next question comes from Chad Beynon with Macquarie. Your line is open.

Hi, good morning, Congrats on the results and thanks for taking my question.

Wanted to ask about.

The consultation process you talked about a few states, where you're you're you're currently exploring that and helping the governments given your strong spend per adult in Virginia, and given how quickly that has ramped.

Now you have multiple property or multiple states, where you've been very successful.

Does this further help your positioning just in terms of future market share or is it still based on other factors just kind of technical scores that arent related just trying to figure out if the better that you do the better positioned you are for new U S expansion. Thank you.

Oh.

Hey, Thanks, and good morning, Chad first of all we think that our position as the market leader in the U S is very strong it hopefully.

It would put us in a.

In a position to win more and more of the deals that come into the market. Obviously, you know we're not expecting to win.

All of those deals, but we are definitely well positioned and yes. The more we provide consistent success in each and every <unk>.

States that we open up a.

And not only Virginia, but also all of the others.

<unk> puts us in a good position for future wins as well I would also say, though that it gives us the ability to do something more than that it gives us the ability to take the.

The vast amount of data that we collect from not one state but from quite a few in order to educate legislators in the different.

State side by side with the potential lottery customers.

What that could do for them and I think that's our focus today our focus is.

And foremost to help lotteries within their states to get state authorization and that is done through educating legislators do to impact the good impact a dialogue, where we can have into state.

The different good causes in the state.

And there's a significant interest in the last couple of months as to the comparison.

Revenues from Iot programs can give to the states.

When compared to a tax revenues from online sports betting.

I think that we knew that at some point this will be a discussion topic and we're definitely seeing that it is becoming one.

Nothing against sports betting whatsoever, we think is great and we can see that there is a parallel growth for the programs in Virginia and I'm sure in anywhere that we that we have with sports betting in the state, but I think the data we have from four states in the U S helped us a lot to demonstrate the impact that it can get.

Two good causes so that's another another point of assistance that we provide to our to the lottery industry.

Great. Thank you.

And then with regards to M&A I know you've talked about this.

On the last couple of calls obviously following the IPO you wanted to take your time, but now you have a pretty good cash position and you're generating free cash flow quarter. After quarter. How are you thinking about M&A and maybe some of the areas within <unk>.

The tech stack that that that you could look to benefit from thank you.

Yeah of course, yes, indeed, Chad as you recall in the last earnings release, we've updated that we have conducted a strategic session together with our with our board and management gave recommendations and as to quite a few different domains in which we think we will get into a better position and these domains of dish.

Based on what we want to achieve a geographically U S has different requirements for nonorganic organic growth than than for example, Europe or Latin America or others.

And so we have mapped those into the different ones and yes. We are actively in the search process Theres nothing to report as of this point, but it is something that now we are way more active than our than we have been in the past after the strategic decision that we took.

Thank you Mike I appreciate it.

Thank you and I'm currently showing no questions at this time I'd like to turn the call back over to Moshe.

Closing remarks.

Yeah. Thank you operator, well again as I said at the closing of my in my earlier remarks today, we're looking at the clock and we can't believe that in a week from now it will be a year since we went public.

It's an exciting journey for us and we are hopeful that we will continue to be able to drive good value to our shareholders and continue to have good interactions with our broader stakeholders.

In the industry. So thanks, everyone for joining us this morning.

Today's conference call. Thank you for participating you may now disconnect.

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