Q1 2022 Gan Ltd Earnings Call
[music].
Good afternoon, ladies and gentlemen, and thank you for standing by welcome to gas Q1, 2022 earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation should you require operator assistance during the conference. Please press star zero to signal.
Operator. Please note this conference is being recorded.
I'll now turn the conference over to your host Robert Shore head of Investor Relations for Gan. Thank you you may begin.
Thanks, David and good afternoon, everyone <unk> first quarter 'twenty two earnings release was issued today after market close and is posted on the company's website again dot com with me today are Jeff storey president and CEO and care, Florida CFO . Please note except posts around a set of Powerpoint slides to accompany our prepared remarks, you may access these slides in the investor really.
Section of our website I'd.
I'd like to direct you to the second slide presentation, we posted on the IR portion of the website that talks to our forward looking statements and legal disclosures along those lines I'd like to remind our audience that we may make forward looking statements at the call under Safe Harbor Federal Securities laws, which in each case are qualified by the forward looking disclaimers contained our earnings release the risk factors contained in our SEC filings from time to time.
And those statements may or may not come true.
We also reference non-GAAP financial measures, such as adjusted EBITDA, which tend to supplement not substitute for comparable GAAP measures reconciliations of certain non-GAAP financial measures are provided the appendix to the presentation with that I'll turn the call over to our CEO , Jeff Let's start with Devon go ahead. Please.
Thank you Bobby and good afternoon, everyone. Please join me in the fourth slide of the presentation to discuss our first quarter 2022 financial performance and operating segment results encompassing both our <unk> enterprise software segment, and our international B to C. Internet gaming segment.
The first quarter was a record quarter in nearly all aspects of our business with 38% growth in revenues driven by both our <unk> segment and the performance of our recurring <unk> revenues with underlying <unk> to be real money Internet gaming revenues grew 50% year on year.
Better scale achieved from this revenue growth coupled with our cost rationalization delivered $3 million of adjusted EBITDA in the quarter, which sets the scene for the remainder of 2022 and continued delivery of profitable growth.
Our BDC revenues and Kpis remained very strong indeed, we saw a 71% increase in topline revenue driven by a 57% increase in handle or turnover.
Our active customers were up 106% from the prior year.
Sports margin was seven 2% for the quarter were essentially in line with our normalized margin of approximately 7%.
Fortunately, our marketing spend as a percentage of <unk> was 17%, which is about one third domestic USB to see operators are currently spending.
This is driven by our unique in house setting of lines, our local approach to sports related sponsorships and market leading features offered within our sports product experience favored by both recreational and veterans sports gamblers. Unlike coupled of course to the growing strength of our increasingly recognized <unk> brand cool that dock.
<unk> represented by our trademarked unruly polar bear character.
Collectively this enables a profitable cash generative business.
On the <unk> side in the first quarter, we delivered a 39% increase in gross operating revenue year over year with the recurring revenue portion of the business that we referred to as platform and content and fees growing by 17% from the prior year driven by an all time record of $300 million in gross operating revenue.
<unk> delivered to our clients through our <unk> platform.
Turning now to the operational highlights it's been an incredibly busy few months for the BW Division I will take the opportunity to express my thanks to divisional President Mr. Don Ryan.
And extreme admiration for our entire <unk> team for their tireless efforts to launch our leading <unk> technology platform in Ontario early last month, and then just over one week later launching play Eagle Dot com for soaring Eagle casinos in Michigan, The states largest tribal casino operator, as well as our fourth <unk> client in Michigan.
The state, which continues to demonstrate not just growth, but also the online profit opportunity available to our client BDC operators.
Gaming is legislatively permitted to complement online sports betting.
With the domestic online profit opportunity still limited to just five states equipped with full I gaming, where six if you include Ontario, We believe we will see many more states implement I gaming legislation over time as licenses BDC operators, who are our b to b clients increasingly direct lobbying efforts towards passive incremental gaming legislation.
<unk>, which most industry analysts take knowledge is critical to generating significant indirect profit from online sports betting.
I'll also of course congratulate Mr. Anders Karlsson and as BDC Division for delivering solid sports margin performance. During the first quarter driving continued efficient marketing performance and securing a prestigious industry award from the International Gaming Awards organization, which acknowledged cooled that dot com as the international.
Mobile operator of the year.
All of US I can couldnt be more excited to bring the highly compelling koubek mobile sports betting experience to the newly regulated and target market, which is comparable in size to the population of Pennsylvania we.
We've already seen an impressive ramp in active end user players with many transitioned successfully from dot com to adult country with a native app waiting in the wings. We believe there are many years of profitable operations available to our <unk> division on the northern Doorstep of America armed with one of the most exciting mobile sports betting experiences available online in any market.
Now jumping to our outlook for the full year 2022, we are reiterating our full year revenue and adjusted EBITDA guidance currently despite the uncertainty in the macroeconomic environment, we aren't seeing any signs of a pullback in gross operating revenue trends, which remained robust.
Historically <unk> has been extremely resilient to changes in the broader economy and with 20 years of experience under our belt, we know firsthand the internet gaming tends to be recession resistant as consumers look to stay at home and engage more often online that said, we continue to refine our cost structure, and we will proactively adapt as necessary to the.
The environment with an overarching focus to generate increased levels of adjusted EBITDA profitability and free cash flow.
We expect this focus to continue to yield positive adjusted EBITDA in every quarter of 2022 as profitable growth is our number one priority.
Our continuing focus on optimizing our cost structure has caused us to reevaluate the timing of pursuing select international BDC market expansion opportunities.
Clearly in light of the foreign currency headwind already created by the U S dollar strength during these uncertain times.
Accordingly, we now view, our prior 2023 revenue target of $225 million as more aspirational and contingent on certain material to be market opportunities such as California regulating sports gambling later this year and a successful <unk> launch in Mexico anticipated well before year's end that said our expectation of continued.
<unk> profitability improvements as the business achieves better scale, coupled with our cost rationalization efforts and our expectation for improved adjusted EBITDA generation going forwards remains unchanged.
Focusing on the continuing domestic BW opportunity, particularly with our one stop shop capability as validated recently by Red Rock resorts continues to sit at the heart of our investment thesis remaining <unk> to be in the U S is still the right path to follow here and remains an unshakable central tenet.
Our industrial strategy aligned with our value creation strategy for continued implementation of efficiencies margin expansion and delivering continued profitability.
<unk> growth is now our primary agenda, we remain highly confident in our existing full year guidance for 2022, but with regards to 2023, we will take a more opportunistic and measured approach consistent with our current priorities, while keeping a close watch on California, which may create substantial opportunities for our <unk> platform and of course.
<unk> sports Omnichannel solutions.
Moving on to the next slide please slide five.
Those strategic priorities for this year are focused on three key disciplines I am pleased with the progress we've made executing against them in the first quarter and the momentum we now have to make meaningful additional progress.
Our first priority is centered squarely on profitable growth this past quarter, we reduced our largest expense line adjusted G&A by 16% year over year, while growing revenue nearly 40%. This demonstrates the inherent potential and our operating model with the appropriate level of scale.
We continue to see opportunity to achieve meaningful efficiencies, including accretion of what we call game stack 2.0 prepay.
Third for operational launch in early 2023, and bringing together the best elements of <unk> technology with the best parts of our <unk> offering under the clear leadership of our global CTO, Mr. Jan Rus, and as new technology management structure now firmly in place this drive towards gain stacked 2.0 has.
Two outcomes. Firstly this ensures we will continue delivering a best in market offering for our domestic BW clients and our BDC end user customers and then secondly, this means we will benefit from $10 million in real and identifiable cost savings over the next year, reducing our expense structure.
To further drive positive adjusted EBITDA growth.
The second key initiative playing out through the balance of this year is the rollout of our prior year investment strategy, including Gan sports and the Super Rgs. This summer we will launch can sports in Mississippi, which will be followed by Red rock resorts to operate their entire Omnichannel sports offering throughout the Las Vegas locals market with a technical trial.
Kicking off in the fourth quarter.
Finally, our third priority is organic growth across both <unk> and b to B to C divisions in the coming months, we will launch <unk> in two additional states, Mississippi and Arkansas, the latter of which will have a very limited number of operators and we therefore reasonably expect to garner our fair share of the sports betting opportunity there.
We are also planning to launch in Mexico in the fourth quarter, a new regulated PTC opportunity for cool that coming relatively hot on the heels of a regulated BDC launched oven in a gambling in Ontario, Canada.
Moving onto slide six and here I'll conclude my remarks, which recaps the flurry of activity, we had last month in Ontario, and just across the border in Michigan.
Starting with <unk>, we launched our <unk> technology platform for a leading sports first BDC operator, leveraging our entire gamestop platform to enable both online sports and of course gaming.
Well, we wouldn't want to extrapolate too much from what is essentially one month's worth of data so far but we are happy to say that we're seeing initial customer sign ups and deposits on a similar ramp to the initial launch results from the state of New Jersey back in early fall of 2018, which appears highly encouraging.
Concurrently in Ontario, We brought our award winning BTC offering live via the website, <unk>, CA, which transitioned to existing player activity successfully from dot com to adult country.
[noise] Koubek don't see a certain specific advantages in market, specifically around ice hockey or a sports trading team members will be setting ice opioids for more than 20 years.
We've also been leading into our strategy of local sports sponsorships and are thrilled to announce as our Canadian ambassador the Olympic Gold medalist, Mr. Andre Digress, otherwise referred to as Canada's fastest man.
Our marketing efforts inventory remains strategic and laser focus to generate day one profitability.
And so just 10 days after launching in Ontario, We launched play Eagle Dot Com for soaring Eagle Casino and resort in Michigan.
<unk> largest tribal casino operator.
This launch represents the very best of Gans BW division delivering not only the enabling platform technology, but also supporting our native American client with operational marketing services led by Mr. Meredith Deutsch and is capable team in Tel Aviv, who are now delivering efficient user acquisition digital marketing and deploying our clients' marketing caps.
Responsibly.
<unk> services is an increasingly important aspect of our BTB divisional services and we now service three separate BTB clients in three separate states for user acquisition and retention marketing of real money Gamblers marketing services represents the lucrative cross sell opportunity and our Israeli team now has a harder and compelling track.
Record right here in the U S.
As I mentioned last quarter, the U S. B to B opportunity is taking longer than we originally forecast given some near term headwinds, although we remain bullish in the mid to longer term.
We also remain in the very early innings of native American retail casino operators getting involved in online gambling of any kind <unk>.
Collectively native American casino operators represent nearly half of all land based casino gaming revenues here in the U S and so it's not unreasonable to assume that all being equally major part of the U S online gambling opportunity as the market develops and we're seeing them increasingly as participants in our <unk> sales pipeline.
We are well positioned for this wave given our success in Michigan and other relationships with some of the largest trials, including those in my home state of California, many of whom are longstanding simulating gaming clients of ours.
Before turning the call over to Karen I'd note that while I'm pleased with this quarters results and the start to our year. We are still in the very early innings of a massive opportunity in both domestic b to b and our international <unk> markets.
While the timing of new market openings and the general macro environments are uncertain. We continue to focus on what we can control and find additional ways to run the business more efficiently and ultimately more profitably.
The results will be accelerated adjusted EBITDA strong topline growth a great product for our clients that I'm confident will drive increased stakeholder value and with that I'll pass the discussion to our CFO Karen Flores Karen.
Thank you Jeremy and good afternoon, everyone and brief housekeeping items first my comments today around our consolidated results will focus on year over year comparison, given the effect that the <unk> acquisition on January one 2021 as both periods now include the acquisition.
With our consolidated financial results on slide eight.
Record first quarter revenue of $37 5 million increased 38% from the prior year.
Our revenue performance was driven by organic growth in both our BDC NBC segments.
This comparison.
<unk> 3 million in one time patent licensing revenue in the prior year quarter and excluding this revenue was up 55% year over year.
Q1, BDC segment revenue increased with organic growth across most of our operating markets.
OSB hold returned to a normalized level this quarter at seven 2%, which is modestly above our historic normal hold at 7%.
Active customers of 230000 were up over 100% from 112000 in the prior year, which is around $584 million and handle at 57% from the prior year.
Overall Q1, DTC segment revenue of $24 4 million increased 71% versus prior year based primarily on expansion of the customer base in existing markets.
Q1, <unk> segment revenue of $13 1 million increased 2% versus the prior year, which again includes $3 million in patent licensing revenue.
Recurring revenue represented 82% of segment revenue and increased 17% to $10 7 million.
The increase was driven by 39% growth in gross operator revenue with the strongest growth coming from U S real money gaming, which increased 49% year over year with a corresponding increase in net revenue.
Our strong organic growth in Michigan, New Jersey, and Pennsylvania, along with our new state of Connecticut, and West Virginia.
Our Italian and simulated businesses were down, 4% and 1% respectively.
Adjusted operating expenses were $22 8 million in the first quarter versus $17 9 million in the prior year quarter.
Looking at adjusted Opex as a percent of revenue expenses were 61% of revenue, which is down 500 basis points from 66% in the prior year.
In this quarter, we also incurred $1 1 million of restructuring charges are.
Our biggest operating expense G&A was $8 3 million adjusted or 22% of revenue, which is down materially from 36% in the prior year quarter.
The growth in our revenues in conjunction with our cost rationalization efforts resulted in 3 million of adjusted EBITDA as compared to 500000 in the prior year quarter.
So the current quarter includes a significant foreign currency impact of 900000 versus an immaterial number in the prior year quarter. Our net loss was also reduced as a result of our scaling and cost discipline to $4 5 million versus $5 6 million in the prior year quarter.
This April we successfully completed a $30 million term loan the new loan provides us additional flexibility to execute our balanced capital allocation plan centered around investing in our <unk> offering and growing pullback in our BDC presence.
We will opportunistically consider share repurchases given we believe our share price currently does not reflect the long term opportunities. We see ahead of us.
However, we are still in hyper growth mode, as a company and given the broader macro uncertainty all capital allocation decisions will be appropriately contemplated.
We are reiterating our full year revenue guidance of $155 million to $165 million and adjusted EBITDA of $15 million to $20 million.
We expect international seasonality in the second quarter, and our strongest quarter. This year it will be the World Cup occurring in Q4 over the months of November and December .
As such we expect a stronger second half of the year.
That said, we continue to expect to be adjusted EBITDA positive in every quarter. This year driven by our profitable <unk> business scaling of our <unk> business that is largely recurring and cost controls we are implementing throughout the company.
Our focus remains squarely on execution and cost control to drive near term profitability, while strategically investing in new market opportunities <unk> and Super Rgs.
Moving on to the next slide slide nine.
We have been implementing cost controls along with other strategic initiatives that are expected to accelerate adjusted EBITDA generation and improved profitability. The early signs of this were evident this quarter looking at our three functional opex areas, we see an opportunity to improve both the short term cost structure and the longer term scalability.
I'll still meaningfully growing our topline first I'll touch on our sales and marketing expense.
The cost of <unk> trace trade shows such as global gaming Expo or <unk> are largely fixed in nature on the marketing front well that's local sponsorships generate high rois are carefully contemplated and are a fraction of what a similar cost would be in the U S.
The second item is product and technology.
Dermot already touched upon we are developing gamestop to point out which will result in considerable operational efficiencies in the organization without impacting the pace of client deployment. The outcome is an anticipated $10 million in annualized cost savings.
Looking at G&A, we continue to bring more corporate functions in house, including tax legal and accounting, which is resulting in notable cost savings. This line item is highly fixed and scalable.
Moving on to slide 10, and to wrap up my remarks, we delivered strong growth this quarter scaled down our opex and delivered $3 million of adjusted EBITDA.
Operationally, we recently launched our fourth client in Michigan, our first CDB client in Ontario, and brought pulled that into Ontario, as well that said, we still have a lot of work to do as we focus on launching <unk> and continue to improve the cost structure to drive accelerated adjusted EBITDA and ultimately free cash flow.
I'll now turn the line over to the operator to open it up for questions.
David back to you.
Thank you at this time, we'll be conducting a question and answer session.
I would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. If at any time you wish to remove your question from the queue. Please press star two for participants using speaker equipment may be necessary to pick up your handset before pressing the star keys once again to ask a question. Please press star.
And we'll pause a moment to poll for questions.
Yeah.
Our first question is from Chad Beynon with Macquarie.
Hi, good afternoon, Thanks for taking my question.
Wanted to talk about Ontario for a second you spoke about the transition from Dot com to Dod country. I'm wondering if you could expound a little bit in terms of what the near term impact could be for cool bad in the second quarter. It sounds like the Dod country you're in.
<unk> customers are transitioning customers pretty well, but just wondering if there's a near term impact and then just from a competitive standpoint is the market kind of as expected or more or less operators in the market. Thanks.
Thanks, John I'll take the last part of the question first and then invite Karen to comment on the first but.
No the market is pretty much as expected our client appears to be ranked.
And third place in the market and we're very happy with initial ramp up but it's been a year.
Eerily similar to the September 2018 ramp up when you launched online sports betting and gaming in the state of New Jersey. So that's that's all very positive and were happy with the competitive position of both our clients and.
Cool beds in Quebec has a native app that the waiting on which is waiting in the wings currently will be at some point in the second quarter and I think the operational marketing.
<unk> been very very efficient and very conservative care and any other comments on that.
I mean, I think it's the the rollout so far.
The early innings into it but we haven't seen any.
Notable differences otherwise from what we were expecting so I think we're off to a great start on both sides.
Great. Thanks, and then on the revenue guidance last quarter, I think you've mentioned $50 million to $55 million of the revenue guidance would come from.
<unk> just wanted to confirm that the split between B to C and B to B is.
Is the same and then the second part of that is can you talk about the take rate on the <unk> business kind of where you know where that's gone in and given the additional content that you have with silverback and Ainsworth. If you can if we should expect to see that pick up in the back half of the year.
Thank you.
Sure.
So we have not seen the effects.
The BW take rate.
Increasing as of yet so youll notice that when we're comparing it to the first quarter last year. We had the effect of course on patent licensing revenue were still in this range of 4% to 5%, we believe that the take rate well.
Increase.
As we move towards the second half of the year as more content is coming out as we start to scale sports Super Rgs, but we're really not going to see the full effects of that until really next year, where we expect the take rate to be above 5%.
Okay, and then just in terms of the split between <unk> on the revenue guide.
There is no change to the split in the guidance.
Perfect. Thank you very much appreciate it.
Our next question comes from the line of David Katz with Jefferies.
Hi.
Afternoon, everyone. Thanks for taking my questions can we just delve a little farther with California, and what you may be able to know their same store. So there may be two competing.
Our efforts the one that's more travel one that's more commercially driven.
Can you just share your thoughts on both of those and sort of how you are positioned well.
You know within each of those or how you see your chances with in each of those or preference et cetera.
Okay.
Yes, David Thanks for the question.
There are two competing proposals out there for California. It towards the back end of this year and thankfully. It appears that the third proposal, which may have led to significant voter confusion has been has been bench to at least for now so there will be two proposals going onto the ballots.
I mean as a general statement I think if either when we will still have a.
A hand to play in the in the poker game of California's sports betting.
We're particularly positive on the tribal initiatives to try to initiatives. We've obviously been here active with simulated gaming in California for many many years since 2014, and we have a very strong track record of converting simulated gaming operator clients into real money gambling b to b clients. So we.
Lean in favor of the native American initiatives on the basis of those fully developed long term relationships that we have and enjoy right here in California.
Understood.
Yes.
I do have a couple of other details, but I'm going to jump back in the queue. Thanks very much.
Our next question is from Ryan <unk> with Craig Hallum.
Good afternoon.
Curious if you could elaborate on why games that two point, all will be more efficient and save $10 million annually versus one now and just maybe some additional details and quantitatively what improvements are coming back.
Yes, Brian I'm happy to take that I mean, you're really talking about one leadership group in software engineering globally.
Moving to one technology system, which is a competent to a hybrid is.
Dan existing tech and cool that existing tech.
One of the most interesting technical efficiencies is certain aspects of the cool that software, which allow instead of three software engineers to work on our project one sulfur engineer can work and complete that exact same projects and that's really at the core the critical engineering efficiency that we are moving towards four launch in very early 2023, hopefully that.
It's helpful.
So launches in early 2023, and then the $10 million would be incremental beyond that starting once this launches is that correct.
No the $10 million and it's starting to take effect this quarter, but we'll see that unfold over the course of the year as we have moved through curious of restructuring. So most of that will be identified through this year I would say about 70% of it this year with the remainder coming in next year.
And of that 70% Karen is that within guidance or is that incremental.
It is within guidance.
Great and then just one on the 2023 outlook, you've talked some about California, but.
Did I catch you right in the prepared remarks that you were previously assuming in California, and now you arent or I guess can you walk through the puts takes on 2023 of what assumptions have changed.
Well as Dermot was alluding to a lot of it is also just around the cadence of our international launches. So in the original guidance, we had assumed effectively Q&A territory per year for <unk> as an example, where between now and the end of next year. It really is primarily around Mexico.
That's going to be our focus and so we're really only expecting one launch, though it really again as we.
You can sort of compare it to the U S opportunity, there's a slight delay there, but the point that I would highlight around 2023 is while it may be.
For a small as we say for the 225, we are really focused on bottom line profit and so we don't think that there is going to have a delay in achieving long term margins that were pacing towards that 30% to 35% range that we previously guided to we will be on track to achieve that even with.
The revenue number for 225.
Being aspirational, because our focus really as profit.
Helpful. One more for me so $34 million of cash good balance there it seems like with the guidance this year and even the profitability and cost efficiencies for next you.
You would have enough cash to to influx of free cash flow positive on an organic basis I guess, one is that true and then too.
If you look at a $30 million notes that you just offered I guess, what's the rationale for that specifically given the core business comments.
We're still expecting to be free cash flow positive in the fourth quarter as we originally guided to you.
We are not quite there yet because of the level of investment we're still in hyper growth and so.
While we could get there organically, if we weren't investing as heavily in games back to point out.
For example, in and again, the Mexico launch.
That could depend on profitability, but we are expecting to be generative by the fourth quarter. The closing of the term loan was ultimately we're looking at the uncertainty in the macro environment. It's good corporate hygiene and we want to make sure that we are well capitalized and in the event that other opportunities are coming away. It just allows us to be that much more.
Flexible so a very prudent all around.
Great for my end on that last statement that's it for me. Thanks, Good luck guys.
Thanks.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad.
Okay.
We're not receiving any further questions at this time I'd like to turn the floor back to Dr permits Murphy for closing remarks.
Okay. Thank you everyone for joining us today and for your continued support we're off to a strong start to the year with numerous catalysts upcoming in the third and fourth quarters across Gan sports Super Rgs and a more active international sports calendar, we've now transitioned the business to generate positive EBITDA in the first quarter in 2022.
<unk> will be a full year of continued profitable growth as we execute each of our three main priorities I look forward to updating you all on our progress as we go throughout the year. Thank you again.
Thank you ladies and gentlemen, this concludes today's conference.
May disconnect your lines at this time.
[music].
Yes.
[music].
Yeah.
Yes.
[music].
Okay.
[music].
Okay.
[music].