Q2 2022 NeoGames SA Earnings Call

Good day ladies and gentlemen. Thank you for standing by. Welcome to the Neo Games second quarter 2022 earnings conference call. This time all participants are in listen-only mode.

Question and answer session follow the formal presentation. Please note that this conference is being recorded today, August 11, 2022. I would like to turn the call over to Mr. John Cornet with ICR. Please go ahead.

Thank you, operator. By now, everyone should have access to our second quarter 2022 earnings release, which is available on the NeoGames website at www.neogames.com in the investor relations section.

Before we begin the formal remarks, we need to remind everyone that the discussion today will include forward-looking statements.

These forward-looking statements, which are usually identified by use of words such as will, expect, anticipate, should, or other similar phrases, are 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. Therefore, you should exercise caution when interpreting and relying on them.

We refer all of you to our recent SEC filings for 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 June 30th, 2022, when it is filed with the SEC. Next Tuesday 2nd November 1022, 2022.

During today's call, we will discuss non-IFRS 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 IFRS.

A reconciliation of these measures to the most directly comparable IFRS measures is available in our earnings release on the Neogames.com website.

Posting the call today, we have Moti Malool, Neogames Chief Executive Officer, and Raviv Adler, Chief Financial Officer of the company. They will provide some opening remarks and then we will open the call to questions.

With that, I'll turn the call over to Moti.

Thank you, Jacques, and good morning, everyone. Last night, we released our second quarter 2022 results. This morning, I will highlight some key points about the second quarter and provide an update on our current business initiatives and the trends we are seeing in the market.

Raviv will then run through our financial results, which we recognize are a bit more complex this quarter than in the past.

due to the expired transaction.

Overall, we had a very exciting and productive quarter.

Of course the most significant development since we last spoke is that we completed the tender offer for the outstanding shares of Aspire Global on June 16.

In total, over 99% of shares in a SPY were tendered.

the less than 1% remaining outstanding are subject to a squeeze-out proceedings, which we expect will be completed shortly.

With the tender behind us, the real work begins as we have positioned ourselves in such a prominent position that enables us to become a global leader in providing technology and content across iLottery online support bidding and iGain to our lottery customers and to leading online gaming operators in regulated markets.

We are very excited about this transformational combination from a number of important perspectives.

First, our technology and product offerings for rotor is now unmatched.

Second, we have strategic and significant growth opportunities across ILO3, online sport marketing, and iGaming, which have a combined count of over $70 billion.

That, together with our combined track records of profitable growth, opens up even more opportunities ahead.

We continue to be focused on markets with attractive potential and significant barriers to entry.

And with the addition of our talented colleagues from Aspire, we have a broad, experienced, and innovative management team that we believe places us in a position to lead the industry.

We are hard at work integrating the teams and our operations.

and we are realizing more growth potential synergies.

as we progress in the process.

There are lots of things to be done. However, even as we are early in early phases of integration, we are happy to report that the combination is already bearing fruit.

When we announced the star transaction earlier this year, we announced the star transaction

One of the key reasons for putting our two companies together were some of the trends we were seeing with our lottery customers, where more and more lotteries globally are expanding into additional verticals within their online offering.

specifically online sport betting and eye-gaining operations.

From our perspective, the ability to provide a full range of products combined with our experience in operating across all verticals is becoming increasingly important.

To that end, we announced a multiyear turnkey project with the existing lottery operator in Brazil's second largest state of Minasirai, expanding our reach to an additional 21 million people.

With this agreement, we have added a new term kilo-3 customer and entered a very attractive new market.

We are excited about this opportunity for several reasons.

First, this will be our first launch of e-Instant Games and online sport betting in the regulated marketing Brazil. And in fact, it is the first one in the entire Brazilian market.

Second, this puts us in a great position for future opportunities as Brazil continues to regulate lotteries state by state.

and develop other forms of regulated gaming.

And third, we have found this to be an advanced market with access to innovative ePayment solutions and overall high e-commerce adaptations, which usually suggests a good foundation for iLO3 and iGAMING operations.

In the end, we won the business because we were able to offer a comprehensive digital solution.

a solution that provides our advanced Neoscore platform market-driven e-Instant content for our in-house iLothra game studio and a complete online sports betting solution with B2Bets.

Together, our offering was what our new partner needed to achieve its goal of building on the successful retail lottery and digital keynote program available in the state and expanding further with a wider online portfolio. This is precisely the type of business we envisioned we could win.

When we convey

the key strategic benefits of the S-PAR transaction earlier this year.

We have started the project already with our talented teams and we expect to go live in Brazil during the first half of next year.

In addition to Brazil, we are seeing benefits in other areas of the world.

In Canada, at the end of 2021, we added PeriPlay content aggregation solution for player burden.

And we have launched a suite of contents from its in-house studio Wizard Games, which have been quite popular with the players and growing with market share.

Recently, PeriPlay continued that success and expanded its presence in Canada, entering into an agreement with the Canadian Atlantic Lottery to offer its fusion content aggregation platform and games from Wizard Studio throughout the region.

Then, last week, we entered into an agreement through B2BES with Sajogu, the lottery provider in Mozambique.

So, Jogo is majority owned by Santa Casa Global, which is the global arm of our longstanding customer, the Portuguese Lottery, a relationship we were excited to expand. In this case, we are entering a new lottery market with our B2BET offerings and providing our proprietary support group solution for both online operations and the retail network. Looking forward, we feel really good about having all these various offerings at our disposal.

as we look to expand our global presence.

Looking at our results for this project,

The total revenues plus our MPI revenue interest increased to $31.3 million.

including approximately 8.3 million of revenues from this time.

Even when excluding Aspire, the Quotero's results were up 7.6% year-over-year and up 2.6% compared to the first quarter of 2022.

The revenues from a SPIRE nominated functional currency, Euro, grew 17% year over year.

as well as 5.5% sequentially from the first quarter.

These results highlight the strong trends we are seeing in both areas of the business.

Moving to a few updates on our various business areas.

We are happy to report that all of our turnkey accounts in the US, Canada, and Europe posted quarter-over-quarter revenue growth, despite typical seasonality during the second quarter.

Michigan continues to perform in line with our expectations, posting nice sequential growth compared to the prior quarter, and continuing the positive trend in the account.

results in Canada through the AJLC continue to perform well and show sequential growth as I touched upon earlier.

Virginia 2 continues to impressively outperform in the current environment as the account innovates in many areas, launching advanced marketing programs.

expand its product portfolios.

Turning to the Aspire side of the business, we are taking great strides in integrating the Aspire segments.

For the Spark Core business, which provides full iGaming solutions including our PAN technology and managed services to iGaming operators in regulated markets, we signed two new full product and managed services deals in European regulated markets with B2C operators.

On the sport betting side, we are experiencing increased momentum in the development of this business area.

In line with the long-term plan to enter the US market, we are pleased to announce that the BTOBET sport betting platform is now certified with GLI 33 as an advanced wagering system.

which practically means that our sports betting platform is certified to operate in the North American market.

As such, we now have our PAM certified and live in 50 markets and our support of the submarine platform is ready for B2B sport games.

In addition,

Absolutely today.

We expanded our presidency in Africa.

A market where it already has a dominant position with its sport betting technology, partnering with YouTube Bets, the Ethiopian retail and online brand, for which YouTube Bets will provide you to prepare for sport betting platform and risk management.

We expect to launch early next year which will expand our market's dominant presence in Africa to 27 countries.

Our content aggregation and iGaming arm, ParaPlay, continues to perform very well and continues its growth in all its business areas.

Teripli signed 12 new partnerships to provide content aggregation and games, including with industry leaders such as BetMGN, which went live with games from Wizard Studio in Michigan and New Jersey, as well as a deal with DraftKings in the US.

Through PeriPlay, we've also expanded our relationship with Caesars to provide our games and aggregation in the US and Ontario and Canada.

Turning to the maximum environmentNum.

While there seems to be a possibility of a recession, we would like to remind everyone that lottery is typically an industry that has been less impacted during similar macro-related environments.

With this in mind, we're currently not seeing any impact to any of our business lines as a result of the macro environment.

However, we will continue to monitor as the economy develops.

With that, I'll now turn the floor over to Ravif.

Thanks, Moti.

Before I get into the results, two comments.

First, our usual reminder that when we discuss our results, I would point out that all of our iLottery business in North America operates through our 50-50 joint venture Neopolar Interactive or NPI, except in Michigan, which is reflected in our top-line revenues.

Our contract in Virginia, New Hampshire, North Carolina, and the province of Alberta. Run through NPI.

Except for the NPI contracts, we 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-own operation and through our equity interest in NPI.

Now turning to the results. During the second quarter of 2022, our revenues as reported on the income statement, which excludes our share of NPR revenues, was 21.1 million, including an 8.3 million contribution from Inspire Global.

up 63.4% from last year.

In addition, our share of NPI revenue grew to 10.3 million during the second quarter of 2022, compared with 8.5 million last year, up 20.6%.

The sum total of these numbers was 31.3 million during the second quarter, representing an increase of about 46.4% year over year.

On the expense side, it's worth noting that second quarter earnings were impacted by some one-time items.

The primary item was 14.2 million of non-recurring transaction related expenses related to the <expletive> Moran, a part time fader and Me

For the quarter, our adjusted EBDOW was 10.3 million, which includes 1.3 million contribution from Spark Global from June 16 through the end of the quarter.

Excluding the partial quarter contribution, the new game's adjusted EBITDA margin was 39.2

As a reminder, when evaluating the combined adjusted EBITDA margins, it's important to consider that the results reflect that the SPIRE historically structured certain parts of the business in contracts such that revenue is recognized on a gross basis.

This results in higher revenue and lower margins when compared to the historical neo games business where revenues is recognized on a net basis.

Going forward, as part of the integration with SPAR, we are considering options to orient the business and its respective contracts to move closer to net.

If we are successful, over time this may result in expansion of margins for the combined financials.

Of course, we will keep investors updated of any decisions we make in these disclosures going forward.

In addition, when evaluating the revenues we are adding from Aspire Global Business, it is important to note that going forward our results may be affected by currency exchange rate fluctuations given the majority of added Aspire revenues. Our Euros on British pounds nominated.

For instance, if we look at expired global revenues for the six months year-to-date in dollars, revenues were up approximately 9.5%.

This change reflects an increase of 21.4 in revenues measured in Euros, partially offset by the currency changes in the Euro-dollar exchange rates.

We will work to mitigate these impacts and provide transparency on how these affect our results.

According to our balance sheet, we ended this quarter with about $129 million worth of cash and cash equivalents.

Our outstanding debt at the quarter end was approximately $266 million at the weighted average interest rate of 6.25%.

We have approximately 33.3 million shares outstanding.

In addition, current liability label deferred payment on business combination for 96.3 million represent cash consideration to be paid to shareholders as part of the tender offer.

Thus, when looking on our cash balance, it is appropriate to offset the amount due to shareholders for analytical purposes.

With respect to guidance, we are updating our expectations to reflect successful completion of this paraglobal tender on June 16.

As a result, we currently expect revenue and our share of NPI interest for the full year of 2022 to be in the range of $194 million to $208 million.

The range reflects our previously provided guidance range which remains unchanged, together with the contribution of revenues from SPAR Global, beginning from when the tender offer was closed on June 16 to December 31.

With that, I will turn the call back to Moti.

Thanks, Arviv. Overall, this was such an exciting quarter for us with true transformational change in our business that we were so pleased to show our investor base how fast we are leveraging into new business.

We truly believe we are in a great position to continue executing on our growth strategy for both IO3 and I gaming opportunities and are excited by the momentum we are generating.

Thank you all as always for your interest in our story.

With that, operator, please open the line for questions.

When I'll begin the question and answer session, to ask a question you may press star then one on your touch tone phone.

Using a speakerphone, please pick up your handset before pressing the keys.

To answer your question, please press star then 2.

This time we'll pause momentarily to assemble a roster.

The first question comes from Justin Till of SIFL. Please go ahead. Good.

Hey, good morning, Moti Raviv. Good to hear from you both and congrats on getting the Aspire deal across the finish line here.

I wanted to start.

I wanted to start there on the acquired business. So we're going on just about two months now, since you closed on the deal. Just curious if there's anything there that's sort of caught you by surprise thus far, or kind of any key incremental takeaways now that you've had eight weeks or so to look behind the curtain a bit.

No, nothing caught us by surprise. As we said, we are very much encouraged by what we keep finding in terms of potential growth synergies, even more so than we had before as we go deeper and deeper into different product areas, geographic strengths and existing customers that we could leverage between each other.

But we can't say that we've learned anything to surprise us.

Perfect. That's helpful. And then hanging on that theme of kind of top line synergies between the two businesses, you know, congrats on the recent deal down in Brazil, bit of a two parter here. First, just how should we think about timing for launch and for ramp? And then second, you know, how impactful did it end up proving having the BTO bed assets when you went to compete for that contract?

Well, I'll start from the end. It was very impactful because it allowed us to price in a sensitive way and be fully aligned with our interest, unlike whether we would have worked with a potential partner on the B2B side for such a deal. Plus, what's even more exciting is that now we have the in-house operational knowledge.

to make this a success and not only provide a product. And the synergies between the marketing team and the operations on the lottery side and the sports side are expected to bring very good growth potentials for that deal. When it comes to timeline, as we said, we were careful to say the first half of next year we will obviously do our best to try to do it.

on the earlier part of that and later, but the reason that we can't be accurate is because we are breaking new ground here. There is no

regulated sports betting brand in the Brazilian market and not even an online instant game. So we are happy to work very closely with the relevant regulators and with our customers to define what needs to be tested and checked and so on. But as you can understand, this may take a little bit longer because we are busy writing the book.

That's why we couldn't at this point in time be more specific, but when Q3 comes and we will report to the market, we will be smarter and maybe we'll provide a more accurate date for go live.

That's helpful. Thank you, Moti. And if I could just squeeze in a third and hang on the subject, you know, on Brazil, you know, obviously kind of a state by state rollout process there up to each one individually. Just are you hearing anything on any other state potentially opening up in the market, whether iLottery only, sports betting only, or, you know, broader package?

Definitely, there are quite a few processes that even gained public awareness. For example, a couple of states like Sao Paulo, which is the biggest one, had started a procurement process or an RFP to find a concession that will manage the lottery in that state and also support betting licenses. It was paused from legal reasons and may be expected to reinitiate like many things in Brazil post the election. This year there's election also in Brazil, not only in the US.

and many things are a bit paused up until then. And apart from that, which has been in the spotlight, there has been other processes. Rio de Janeiro had a process and two or three other states. And I remind you that there are quite a few states in Brazil which are decent size in terms of population. You know, 10 million people give or take, some of them even bigger. And obviously, our state, our customer state is 21 million people. So we definitely think that in the next year, 23.

It could be that two or three other states will already be at a point that they are going to seek for vendors or concessions.

Very helpful. Thank you very much. I'll pass it on.

Thank you, Jeff.

Thank you. Our next question will be for Jonas. Tourist securities, please go ahead.

Oh great, hey guys, look I know you haven't given any specific numbers, but maybe can you help us as we try to quantify the synergies with the combination. I mean really what's the best way to think about upside from here versus how we were modeling the standalone Aspire and Neo Games businesses.

Thank you Barry for the question. We didn't provide any synergies on the revenue side, although as Moti pointed out, there are quite few and one of them is the...

It's the most recent Brazil contract.

We also do have some pretty significant cost synergies associated with the fact that we're no longer using the content provided of Particle as costs on our books as well as the fact

other consolidation of facilities and some other factors that are associated with the OPEX structures of both businesses that can be now removed from RP&L. That being said, we didn't provide to the market any particular guidance or numbers.

because we're busy in the integration process and bringing those forward. Once we have concrete figures, we will provide that to the market as part of our guidance.

Okay that's definitely helpful but I mean I guess should we expect this to be more visible in 23 in terms of the cost side of the equation and everything you know we should think about this year as sort of as is.

Correct. We will have some few but it's relatively minor. Then we report Q3 numbers and we can be more specific on the cost synergies for 2023.

That's great. And then, you know, I think relating to Jeff's question about new jurisdictions, I'm just curious, any updates from a USI lottery perspective you didn't touch on, whether that's Ohio, Massachusetts, or any other states?

Yes, generally speaking as you guys can imagine the processes that have been active in some of the markets.

Some of those processes are kind of paused a bit until the elections. Such could be the case in Ohio that passed a significant milestone in last quarter, but probably waits for post-election time to continue that process. And so is the case in other states. I would say that in this last quarter, we did see, let's say, the most progress that has been achieved thus far in Massachusetts when it comes to moving Dilatory forward.

By the way, as always, pretty much in connection with moving, sport betting or other forms of gaming, while it didn't get passed as a bill, because it doesn't necessarily need to.

It has passed certain legislation milestones with different committees in the state, so I think that has been something that hasn't happened for years and shows that this is GCC writerous agenda.

Apart from that, the other processes that have not yet passed full approval are probably paused a bit until the elections and will relaunch after that.

Great, and if I could just sneak in one more. Within the Aspire business, can you maybe talk about what you're seeing across the key geographies, whether that's the UK or Germany or any other countries?

Yes, definitely. Aspire performed well this quarter as you could have seen from the reports, our expectation that this will continue to be the case. I think the things that we are mostly anticipating for in the second half of the year and are still not fully clear is the point of time where the reentry to two key markets in Europe which are moving into local regulation which are Germany and Holland.

what will be the exact point of time that that is happening because that's in the hands of the regulators. That is probably also one factor that influences the range of guidance that we gave but obviously it's just a matter of time and if those markets will open up a little bit later in the year or so they will be expected to impact our growth potentially into next year. Thank you.

Great, all right, thank you so much.

Thank you. Next question will be from Chad Bannon of Macquarie. Please go ahead. Hello.

Morning, thanks for taking my question and congrats on the closing of the deal.

I wanted to ask one more on the revenue guidance. You've hit on this a couple times, but I just wanted to make sure we're thinking about it correctly. I believe the implied guide for Aspire in the back half of the year is around $100 million just based on what you generated in the first half and your reiteration of the legacy business. I believe that kind of assumes double-digit, same store, constant currency growth.

and you just talked about that that's what Aspire was able to generate in the second quarter. Just wanted to confirm that. And then also related, I believe last year, Aspire was slightly stronger in the third quarter, but this fourth quarter will obviously have the World Cup. So as we're thinking about seasonality in the back half, should we assume that it's closer to kind of even in terms of the waiting? Thanks.

Yes, thank you. So, first question, if that's correct, if you're moving a SPARR contribution to the guidance, the range that you've quoted is the right one.

Obviously, the World Cup would impact the expected revenues.

from SPAR during Q4. This is the reason why we gave relatively high range from the lower side to the upper side of the guidance.

One important note when we're talking about the SPIRE revenues is something that also touched on our commentary to the quarter is the fact that the currency fluctuation, especially this year, and the fact that the SPIRE business by the vast majority is nominated in Euros or GBP. So thanks to all of our organizers and I have been there a couple of times today. We accepted this as a

British Pounds, that would impact also the revenues expectations and this is again another reason for the relatively high range of the upper to the lower end of the bar.

Okay, perfect. Appreciate that. And then with respect to the consumer, it sounds like it's pretty stable, particularly with the North American contracts. Did you start to see any growing weakness, you know, sequentially throughout the quarter as inflation picked up and prices at the pump increased? Or was it relatively stable throughout the three months in the quarter?

Chad, as I mentioned in the opening remarks, we haven't seen any impact at all, not only in the US but also in Europe . We can't say that this will be the case going forward. We just reminded everyone that the lottery industry has proved to be a bit less impactful than other industries in times of financial macroeconomic environment.

like in 2008 and in 2009. The other lines of business there's no such history to learn from, but for the moment we haven't seen any downtrend as a result of macroeconomics in the online business.

Great. Appreciate it. Thank you very much.

Thank you.

Thank you. The next question will be from Cassandra Lee of Jefferies. Please go ahead. You're welcome.

Hi, thank you for taking my question.

Could you help us think about kind of the opportunity in Brazil? How does the traditional lottery in Brazil compare to US in terms of spend per capita or players behavior?

Yes, first of all Cassandra, we know it's tricky, we understand it's tricky because we have very little to grab on when we model that country since as I've mentioned we are pretty much breaking ground. There are no

similar regulated online activities to learn from.

Even the numbers that exist from the single lottery in Brazil that has been selling some sort of jackpot product on a federal scale is really little to learn from because it hasn't been a high yield or per capita market for the decades that it exists from reasons that it would probably take long to explain but it's definitely a...

not our customer, I mean the federal lottery in Brazil, Kasia has not been high performing in the global industry to say the least, so literally to learn from. What we are encouraged from is definitely what we have been able to learn on the environmental aspect that makes us believe that this is something that.

that could be quite interesting. The access and the usage of e-commerce, electronic payments and everything online has boosted to an unbelievable level in the country during COVID. I have to say, probably even more advanced than in other countries in Western Europe or even some aspects of US. So we feel that there's very solid grounds for adaptation of online channels, but...

but we understand that it is difficult to model. I think that we have to go live and when we will be like three months or so live, we will start to get a feel of players spend in the first month of activity, and then be able to compare and build a model from there. But at this point of time it is difficult for us to grab into anything that would provide us with a reasonable benchmark.

That is really helpful. Thank you, Moody. And if I may ask another one, how should we think about your sports betting business margin compared to iLottery? I understand when you're the sole operators in the jurisdiction, you don't have the same kind of pressure in terms of promoting or free play, but still want to get your thoughts on that.

Yes.

Thank you, Cassandra. The support business is the margin profile given that it includes also certain...

trading services and other factors of course that we not necessarily see in the side of the iLottery. The margin profile would be a little bit lower than the traditional iLottery programs. So if we were...

If we are assuming or hoping to see NEO games as high-lock trip provider trades at around high 30s, low 40s, then the sportsbook should be expected somewhere between 25-30% gross margin in terms of operation.

Thank you very much and congrats on the deal and the new contract.

Thank you.

Thank you. This concludes the question and answer session. We will now return to all time elude for closing remarks. Please go ahead.

Thank you. Nothing to hold everyone on the line. Thank you for the continued interest in our story and company as always. We hope to continue to bring growth in the next quarters to come. We are very excited with the opportunity.

Thank you everyone. Have a great day.

One.

Conference is now concluded.

Thank you for attending today's presentation. You may now disconnect.