Q3 2021 Inspired Entertainment Inc Earnings Call
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Okay.
Good morning, everyone and welcome to the inspired entertainment third quarter 2021 conference call all participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing Starkey followed by zero.
After todays presentation, there will be an opportunity to ask questions.
Please note today's event is being recorded.
I'll begin today's conference call by referring to the two referring you to the company's Safe Harbor statement that appears in the third quarter 'twenty One earnings press release.
Which is also available on the investors section of the company's website at www.
And 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 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 discuss both GAAP and non-GAAP financial measures.
A reconciliation is considered an M D 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.
Everyone.
And thank you for joining our third quarter conference call.
Here with me today are Brooks Pierce Stewart Baker, and Dan Silvers.
As we anticipated in our last conference call in August we had a strong third quarter.
And we're quite pleased with the result, EBITDA of $30 1 million exceeded the high end of our guidance.
We achieved these results despite the modest decline in the value of the pound as compared to $1.
And the fact that the U K fully reopened in July a few weeks later than we had expected.
Effectively imposing headwinds on us for about 15% of the quarter. Nevertheless.
Some historical comparisons I think are very interesting excluding last year's one time that income.
The $30 1 million EBITDA in the third quarter of this year was 89% higher than the $15 9 million in the third quarter of 2020.
With jazz.
You might recall was a ramp up quarter.
Year to this second walk down in the U K in November of 2020.
And it was 70% higher than our prior high watermark of $17 7 million.
Dabbling in the fourth quarter of 2019.
Immediately following the nomadic technology group acquisition.
Finally, if we go all the way back to the first quarter of 2019.
Which was the last quarter prior to the implementation of the triennial.
We were 120% ahead of that.
So I think it's safe to say, we're hitting on all cylinders at this point.
The overarching narrative behind these trends is pretty much what we have anticipated for several quarters.
Our retail gaming businesses in the UK and elsewhere rebounded to pre pandemic business levels.
And at the same time, our virtual sports and interactive businesses continued unabated along the growth path. They had established at the outset of the pandemic.
The comparatively high margin and low capital intensity of these content businesses.
Is the primary reason our net cash flow was so impressive in the quarter about $13 million as highlighted in our press release.
From where we stand now we expect that the interactive and virtual sports business will grow on a combined business to account for about 50% of our EBITDA in 2022.
Further enhancing our overall margins capital intensity and inherent growth rate.
At the same time, we believe that by the end of this year, our net debt to run rate EBITDA will have declined to below three <unk>.
The target we established for ourselves at the time of the nomadic acquisition.
Our expectation of course was that we would have reached this point sooner, but in the meantime, there was the small matter of dealing with Covid.
In a moment Brooks will discuss in detail some of the developmental activities that are driving our growth.
Each of our virtual sports and interactive businesses is growing through expansion into new jurisdictions, new customers and.
New products and content.
And virtual the major League Baseball players Alumni Association licensed Homerun hidden competition is the latest in.
And most exciting example of new content.
In our interactive business, we continue to exhibit impressive growth.
As we introduced three or four new games every month and improve our shelf space within the existing customer base.
Earlier this year, we launched an initiative to diversify our interactive business into the lottery space.
And a couple of weeks ago, we announced our first I lottery initiative with lot of Quebec.
One of the Premier lottery operators in the world.
And lastly, as Brooks will discuss in a moment, we continue to get great traction in the more in the North American VLT market and with that I'll hand, it to Brooks.
Laurent Thanks, it's great to be able to speak about the operational aspects of the four segments of our business win as you say everything is hitting on all cylinders I'm also excited to give some additional color on a number of the business developments that we've discussed in previous calls.
I'd be remiss, if I didn't thank the entire inspired team for their hard work to produce the results that you just covered it in your remarks, and it's rewarding to see what this business can do when so many of the headwinds, which we face have dissipated.
I know I speak for the entire team when I say that we will continue to stay laser focused on the things that brought us to this stage of our development and we're incredibly encouraged at the opportunities yet in front of us and as Warren mentioned, we increasingly see our business evolving into content word primarily online businesses on the one hand and retail gaming on the other hand.
Excuse me, so let's start with retail gaming in the leisure segment specifically.
We just finished a record quarter with 92% revenue growth over the comparable period and for the first time, we've been able to see the true earnings power of the business that we acquired from <unk> in 2019.
Across the holiday parks part of the business. We've seen excellent results that have continued through October as well.
In our pumps business, we've seen the business rebound as restrictions have abated and we continue the investments. We've previously discussing this business to get us to a 100% connectivity and a larger portion of these savings digital going forward in 2022 and beyond.
We believe we have already had the highest performing content and cabinets in this business, but we also believe that we have plenty of runway left as we develop content specifically for this sector that can widen our lead.
Finally, our motorway services business has benefited from the increase in travel within the U K, which led to growth in this segment.
Looking to build on this momentum in 2022.
Moving over to the interactive business, we continue to see growth in mature markets like the UK in Greece, which we built upon with growth in the North American market from existing jurisdictions, like New Jersey, Michigan in Quebec, and as well as the prospects of additional jurisdictions, including Pennsylvania, Connecticut, Ontario, and Alberta.
Our interactive revenue grew 70, 273% over the same period last year and we currently sit at just over 60% penetrated in New Jersey, and Michigan with the addition of draft Kings in the Michigan market.
Also gone live with about 365 in the Netherlands is one of the early operators in the market.
This growth in the number of markets in which we operate and our share in these markets is being driven by the quality of our content as well as the number of games. We are releasing every months. This is truly building a network effect and we expect this trajectory to continue.
An example of some of the product innovation that we're bringing to the market is in the fourth quarter of this year, we will be launching our space invaders license game, which is getting a lot of anticipation from operator customers.
We're also able to announce as Warren mentioned, our first I lottery customer recently with the first two games go into lot of Quebec already we've had great feedback from the lottery industry on our entry into the market as they believe the addition of instant games to be a big part of the digital digitization of that industry.
We expect this to be an area of focus for our business going forward and we will report on the progress of that as it develops.
Next we are excited about the growth of the overall of the virtual sports segment around the world and in particular the growth online virtual sports overall revenue grew 27% compared to the same quarter last year and grew 67% online.
As we've mentioned in our last call. We believe the North American market has vast potential and we've now gone live online with bet MGM in New Jersey and are in the process of understanding the nuances of growing a product that is completely new to players in this market.
That MGM has been a great partner and we've done some joint promotions that have proven successful.
Furthermore, we are in the midst of doing a major customer focused project with your players to make sure. We are hitting the mark with the product or if theres anything that we need to tweak.
In terms of the rest of our markets. We are seeing great results and traction with new products in Italy, including marbles match day, ultra and penalties and with the U S basketball product and Greece, and finally on the product side. We're excited to announce our licensing deal with Major League Baseball Players Association Alumni Association for our home.
Mountain shoot out and we think this product will resonate in North America, Latin America and Asia.
We had mentioned previously a number of players that were part of the deal, but I'm happy to announce today that we have secured license to now include deep roots in the game and our development team has already started creating some interesting ways to showcases property.
And our core gaming business, we're happy to see this business return to at or above pre COVID-19 levels in our key markets of the UK, Greece, and Italy, even with some of the restrictions on needing show proof of vaccination or negative Covid test in some key markets to enter a betting shop.
This demonstrates the resiliency of this part of our business.
In Italy, as we've discussed in the past our plan is to move to a content and platform business as opposed to a full service business and we took the first steps in that process with the sale of our existing terminals in Italy to our customers' seasonal.
We have plans to be fully completed with this plan by the end of the year and we will expect modest improvements in the margin contribution of our Italian retail gaming to our bottom line <unk>.
Our virtual sports and interactive businesses in Italy are not impacted by these changes and as discussed we see tremendous growth potential in both.
Moving over to North America, we continue to see growth of our machine count in Illinois, and we've already exceeded our.
Our Q3 sales in the first month of Q4.
In Western Canada, our Vlccs are the top performers and will be responding to the WC LCR SKU without experience now under our belt, which we believe can only help there and in other provinces in the future in Canada and finally, we've shipped our valor terminal to the Oregon State Lottery for their early review and we would hope to qualify to go to trial.
They are in 2022, and we see not only Oregon, but west Virginia as key future markets for us.
With that I'll handle it over to Stuart to go through some details on the numbers, but needless to say, we're excited about the business, we've built and its prospects going forward.
Thanks, Brooks and good morning, all so I want to take a little bit of time running through the financials still making sure. We have a lot of time for Q&A afterwards.
And we've been saying for a while that the third quarter of 2021 would be the first quarter, where we would be able to demonstrate the benefit of the no domestic acquisition and the associated cost synergies as well as the growth in the online businesses, which continued to grow strongly even if the land based businesses would come back.
All without lockdown impact in some part of the business and that is exactly what we've seen in the numbers reported today.
Overall revenue grew 29% on a reported level of 21%.
Constant currency basis against the same quarter a year ago.
And with the changing lock down landscape over the past 27 months I think it is worth reminding you when we went to the relevant comparable quarters and the answer to that is in most areas. We were in a similar position in terms of what was open.
All of our segments were fully operational throughout this year's third quarter. Although we did have some headwinds in terms of relaxing of social distancing in England not happening until the 19th of July.
And the introduction of vaccine passports increase in Italy in the second half of the culture.
During last year's third quarter land based venues, where pretty much all open in gaming and retails virtual sports, but we did have a more challenging landscape in leisure.
Venues, we're opening and ramping up last year, and then the holiday parks whenever capstone visitor numbers.
Additionally, last year's number included battery related revenue of $9 $3 million and to be clear. There is no about related income in this year's third quarter.
Excluding these VAT related income last year's results to give a more comparable basis.
<unk> grew 53% in the quarter with all segments growing versus the same quarter in the prior year.
Virtual sports by 27% interrupted by 73% leisure by 92%.
In gaming by 28% and in this segment I think it's noteworthy that in the U K LBO area gross win per terminal per day was the highest since the reduction in stakes in April 2019.
In terms of how these revenues compared to pre COVID-19 levels, we saw lambaste incomes overall at 94% of pre pandemic levels in July and approximately 100% in each of August and September.
Within these numbers as you can expect some parts of the business are higher and some are lower but the.
<unk> point is we don't see the overall return is being driven by pent up demand that will wane over time.
Stead. We believe these results are reflective of a return to normalcy.
It's also worth noting that by the time, we got into September online incomes were approximately 250% pre COVID-19 levels.
Now moving further down the income statement again, excluding VAT related income in the prior year.
<unk> EBITDA grew 89% on a reported basis and 18% on a constant functional currency basis growing across all segments virtual.
Virtual sports by 28% interactive by 54% leisure by nearly 300% and gaming by 49%.
And within that overall adjusted EBITDA margin was 38, 8% up from 31, 4% last year again, reflecting the operating leverage and scalable nature of that business.
Now below adjusted EBITDA, we incurred no integration expenses during the quarter, reflecting the effective completion of the program.
Depreciation expense declined by 20% year on year, reflecting our reduced capital expenditure in recent years.
Something we continue to be quite focused on.
One area, which doesn't merit an explanatory comment is the change in the fair value of the warrant liability, which resulted in a $17 million benefit.
And as we touched on last quarter since warrants are now treated as a liability.
Fair value movements are taken through the income statement, which does cause some big swings.
The movement this quarter was driven by changes in the share price and also the quoted price of the public warrants.
That is important to note even absent this warrant liability gain the net income or profit after tax would have been positive by nearly $8 million.
Turning attention to cash flows we started the quarter was 24 and a half million dollars in cash and ended it with $37 $1 million. So an increase of $12 6 million.
Well, if there was no cash interest payment in the quarter, there wasn't meaningful working capital outflow, particularly with an increase in accounts receivable.
You can expect that the business had been effectively restarted.
So not only did we grow from a revenue and EBITDA viewpoint across all areas of the business. We also saw the fruits of what we've been spent a long time focusing on in recent years increased cash flows.
So to reiterate what loan and Brooks, who said, we do feel like we're hitting on all cylinders.
And with that I'll hand back to the operator to open up to Q&A.
Yeah.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
If you're using a speaker phone.
Pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Barry Jonas with Truest you May go ahead.
Hey, guys. Good morning, and thank you for taking my question I wanted to start with.
<unk> how are you thinking about the ramp in that business and should we expect.
Some early investments to flow through the P&L before revenues start to meaningfully grow.
Yeah sure Yeah.
Good morning, Barry.
Yeah. So I think we'll start we probably won't start to see meaningful income from that until D or revenue from that until probably the second half of next year, but we are we plan to be live in the first half next year with a lot of Quebec, and we are in discussions with a number of other customers. So it's kind of what the spend will be.
Be is on what we need to do to build a library of games, but as you would probably expect what we're taking is kind of existing content that we have in our in our gaming business and modifying it as well as some kind of new stuff. So yes. So there'll be some increased spending on on game development in the short term, but the revenue.
Impact to come in the second half.
Great Great I appreciate that and just as a follow up any.
Anything any thoughts on the M&A environment here pipeline anything.
Out there that are that interest you.
I'll, let <unk> answer that one.
Yeah.
Uh huh.
Well.
Yes.
Most recently barriers I think you know we've been.
Focused on.
All of the things we need to do to take full advantage of the opportunities we already have.
Hum, but.
Yes.
We're always open and looking for M&A ideas.
As I mentioned.
I think our leverage is.
He is now going to be down to where we.
We are we.
Have significant financial flexibility our share price has obviously moved in a way that helps us so.
The the M&A search process continues to be.
An important part of what we're doing from a business development point of view, but.
Obviously, if there were anything specific.
Right. This second and I wouldn't be able to talk about it anyway, but.
Certainly the opportunity to enhance.
The development of the business through M&A is something that we are.
Ah, we're well aware of and we're pretty heavily focused on.
Okay, great if I could just sneak in a quick one any updated timing for <unk>.
For interactive license or any expectations there.
No. Unfortunately, we had kind of every month, we hope that this is going to be the months that it happens.
Now internally since we're kind of through or through a good portion of November.
We would expect even if we got on the agenda in December that we wouldn't be live until the first quarter of next year, but it's completely subject to.
The Pennsylvania gaming control board, putting us on the on the meeting agenda.
Understood alright, thanks, so much guys.
Sure thing Gary.
Yeah.
Our next question comes from Ryan Cig Dahl with Craig Hallum Capital Group You May go ahead.
Good morning, guys nice results.
One question to follow up on the lottery opportunity how much of your content do you think can be used for iron lottery relative to I gaming and then do you think there's an opportunity to be integrated into the U S. I lottery states.
Yeah, I mean, thats, where our that's certainly where our target is North America. So even though the first one was was in Canada.
And we're having discussions with a number of lotteries within the states.
And in terms of the content Library I think we're up to now just over 150 games.
So there's there's some mechanics that you need to change and some game style and themes, but but it is a good basis for us to be able to evolve into the into the specific needs of high lottery games. So we're not starting from scratch, which is great. So and we think quite frankly some of the stuff that we've shown.
As the lines are tend to be blurring, a little bit between I gaming and lottery and we've shown some stuff that we think with the experience. We've had in I gaming will resonate and the lottery market very well and I think that's the feedback we're getting from customers that were showing that too as they feel the same way.
An interactive switching over any update on the launch timing with fan dual and Rush Street interactive there.
Yeah.
I would.
I would say <unk> is going to be longer than.
Than we had hoped that you've got some we just actually had some folks meeting with them.
Earlier this week, they've got a big pipeline of of <unk>.
Issues that theyre dealing with from a technical resource side, so, it's probably going to be a little longer than we had hoped but I would expect that would be in the first hopefully in the first quarter, but certainly in the first half next year Rush Street.
As could be eminent where we're just dealing with one last issue with Rush Rush Street.
I would I would expect <unk> to be pretty imminent.
One more for me.
Anything that would lead you to believe gaming leisure and really the whole company.
Is down year over year in Q3, you're trying to get a sense for kind of normalized earnings profile here and then adjust for seasonality from there. Thanks.
Okay.
Ryan can you just clarify that I think we all looked at each other.
Okay.
Sorry, so looking at Q3 numbers anything in there to adjust for one time acceleration cost et cetera, where it's not a good number to run rate kind of at the true normalized profitability of the firm, albeit adjusting for seasonality between quarters, but looking at this as kind of everything coming together.
Ah moment.
Yeah, I don't think yes, hi, Ryan its lorne.
Certainly to the best of our knowledge and understanding there isn't.
Anything.
Either on the plus side or the minus side.
In the third quarter that.
What caused the third quarter not to be.
Well to be modeled other than the one point I mentioned, which was that we werent actually completely open for the entire third quarter of that half of July.
Was.
As I mentioned, let's say a headwind so.
A normalized third quarter without.
The delay in the opening would probably meant that the third quarter would actually have been a little better.
Helpful. Thanks, guys. Good luck.
Thanks.
Our next question comes from Chad Beynon with Macquarie You May go ahead.
Hi, Good morning, Thanks for taking my question and congrats on the quarter wanted to ask actually kind of the same question just in a slightly different way, if we lumped together I guess virtual and interactive which have less seasonality.
You currently generated a little over $16 million of revenue of $12 million of EBITDA.
Combine that was up I guess about $2 million sequentially.
Is this kind of the foundation of maybe those combined businesses I believe the only seasonality aspect to that would be maybe the virtual the retail virtual is in Italy, but I guess I'm kind of asking the same question, but are those segments is this kind of a good place to be.
Grow from going forward, given all the content and new partnerships that you talked about thanks.
Yeah I mean.
As I said I said in my prepared comments Chad.
We expect that the continued growth in <unk>.
Jewels and.
Interactive.
Wood and let's let's make the assumption that we don't have any anticipation that.
The the retail part of our business.
It won't grow.
Modestly certainly won't won't decline year to year.
So if on that basis, you know analytically, we expect that endures.
Interactive and virtual B will be half of the EBITDA in 2022 then.
Can do the math to figure out where it needs to grow to from where it is this year and I think that's consistent with the observation you just made.
Okay perfect. Thanks, a lot.
And then Brooks just on the on the North American gaming business.
Could you elaborate a little bit more just in terms of you said Q4 sales into Illinois exceeded Q3, and then you talked about some potential opportunities in Oregon in West Virginia can you just talk about the similarities of the games in Illinois, why or why they would.
Maybe not.
Perform as well and in Oregon, and in West, Virginia, and then maybe if you could just kind of frame out the total market size, if you want it mined as well thanks.
Sure.
Well in terms of the of the games themselves. Yes, there is some <unk>.
Some modest differences in West Virginia.
In Oregon from Illinois on bonus features and things like that but frankly, and we actually have teams.
Heading to both jurisdictions, yet this week to see kind of the latest greatest.
So we don't think Theres, a whole lot of work that will need to do on the content side.
To be able to make the games.
Succeed in those other markets like they have so far in Illinois and in Western Canada in terms of Oregon, you probably are familiar with the process, but basically what you do is.
If they are interested in you. They first take a look at your terminal just to make sure that.
It's something that they want and then eventually what they do is give you a trial.
And that can be anywhere from 500 to 1000 machines.
And then assuming you're successful in the trial then you go forward.
In terms of West Virginia, there in the midst of the beginning or probably the beginning parts of a replacement cycle.
It's a mature market the route based VLT business in West Virginia.
So we've been pretty consistent on the focus that we've had for going after the the route based businesses.
<unk>.
Taking everything that I, just talked about plus additional provinces in Canada. We think there is there is plenty of addressable market for us for the for the certainly for the next couple of years.
That's great really appreciate it thanks guys.
Thanks, Chad.
Last but by no means.
Again, if you have a question. Please press Star then one.
Our next question comes from David Bain with B Riley you May go ahead.
Great. Thank you congrats on a great quarter and I appreciate the new presentation bifurcation of segment, it's nice.
I guess, what I would.
Start since most of mine have been asked.
Virtual sports online mix are there some data points that you can offer to give us a sense as to how penetration is progressing in the U S relative to.
The mix that we see in Europe.
If that's varying by skin are there certain data points you can take from those that are maybe promoting the product differently.
He used within your captive customer base to kind of help move that that segment forward.
Yeah. Unfortunately, it's probably just too early to do that.
I think a quarter or two from now we can probably give some color.
I think where we're focused right now and the states on making sure as I talked about in my prepared remarks, making sure that we've got the product exactly right.
And that MGM has been a great partner in supporting of that so I think we're not going to rollout.
This product to additional markets or even frankly, two additional customers in new Jersey.
We're 100% sure that we've got the product right and that we understand what the North American players because remember this is a brand new it's brand new product for North American players in the ecosystem of sports betting is really very young in the states as well so most of the growth almost 100% of the.
The growth that Youre seeing in the numbers is coming outside of North America, but that obviously gives us.
Great Hope as we go forward that we're just in the very very early days in the states.
Okay, Great Yeah, David just as Florida, I'm, sorry, do you have locked up but.
I was going to mentioned is actually a second ago when Brooks was talking about.
For answering the question about the.
The lottery business and the.
The opportunity to use the content that we've developed in our gaming to let's say re skin it to be used in <unk>.
Lottery, which.
As it happens we think the opportunity to do that is obviously enormous but.
The thing I was going to add is as we actually think.
That there is a great opportunity in lottery should use the virtual sports content, obviously not games that last.
60, or 90 seconds like they do in the virtual business, but to use.
The graphics and the platelets like this homeland hidden competition that Brooks was talking about a minute ago.
Redone.
In a way I think.
Could make a phenomenal I lottery products, so I think.
One of the other ways, we're going to see it and it may at the end of the day would be the dominant way our virtual sports.
Technology.
Monetize in the states I think I personally think its going to come.
Much more than we might have thought before from the lottery business.
Okay.
That's great and maybe as a follow up to that and I know this has been sort of asked but.
I lottery EBITDA margins.
If you could speak maybe to the cadence of that just given what you were just saying one with regard to content sort of already being there can we see margins near interactive or online virtual.
I guess the intermediate term can.
Can we get to margins were you know.
Those types of margins faster than we did when you've launched interactive I mean any way to think about how profitability looks in Iowa.
Sure.
I think the it's reasonable to assume that the margins will be.
At least as high as <unk>.
Has interactive if not higher.
We are seeing.
And interactive.
The beauty.
Of being an a b to b business, which we're in obviously as opposed to.
B to C business, which has.
Very different economics in our business.
Is that the we can already see that our business scales tremendously because when we create.
A new game.
If we have 50 customers to sell that game too then obviously the margins are going to be.
Hugely higher than when we develop that game and we only had one customer yourself to so that.
The big margin determinant in that business for us.
Is how much we can scale the content development. So the benefit that we have.
And I lottery is we're piggybacking on the content we've already developed.
In the gaming business, so all other things remaining equal.
I would expect that our I lottery margins.
Of course, it also depends upon how we allocate the cost.
The content development people, but just to all things remaining equal and to keep it simple.
There is every reason to think that the I lottery margins would be at least as good as interactive if not better.
Fantastic alright, thanks, so much.
This concludes our question and answer session.
Like to turn the conference back over to Lorne Weil for any closing remarks.
Thank you operator, I don't really have anything to add to what we've talked about so far. This morning, obviously we are.
We're feeling pretty good about where we are but.
By the same token.
We're not taking anything for granted.
We understand that too.
Maintain the leadership that we have in the businesses. We're in that we have to continue.
To invest.
And all of the parts of the business that.
Determine our competitive position and we have every intention of doing that.
And therefore, we.
We're pretty bullish in terms of where we think the future is so.
Thanks for joining this morning.
And we look forward to speaking to you in another quarter.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.