Q3 2022 Inspired Entertainment Inc Earnings Call
[music].
Good morning, everyone and welcome to the inspired entertainment third quarter 2022 conference call.
All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After 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 you to the company's Safe Harbor statement that appears in the third quarter 2022 earnings press release, which is also available in the investors section of the company's website at Www dot.
S E I N C dot com.
The 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.
A reconciliation is included in the earnings press release.
With that completed I would now like to turn the conference call over to Laura Weil, The company's executive Chairman Mr. Weil. Please go ahead.
Thank you very much operator.
Everyone.
And thank you for joining our call this morning.
With me as usual are Brooks Pierce Stewart Baker, and Dan Silvers.
Despite the inconvenience of the slide of the pound.
And so narrowly focused inflation and supply chain issues.
Our underlying momentum in the third quarter was very strong.
And we're executing well along each of our main strategic vectors.
Just to be able to put everything in context, it's worth reviewing our overarching strategic objectives.
One drive high digit.
High double digit growth in our high margin capital efficient digital businesses addressing the gaming lottery and sports betting verticals.
To manage our land based business is for mid single digit growth, while reorienting, our business model in a way that significantly reduces its capital intensity.
And three combine these two yields and overall business that is growing faster as higher margins and far lower capital requirements.
These three in turn allow us to more than adequately fund our overall growth objectives, while at the same time attending to our balance sheet.
Our net leverage right now is below two and a half.
And as mentioned in the press release, we have repurchased more.
More than 1 million shares so far.
Notwithstanding the currency inflation and supply chain issues mentioned earlier, our EBITDA in the quarter was about equal at consensus suggesting that the underlying business is close to hitting on all cylinders.
Our overall EBITDA margins, though a healthy 37% was.
It was down from about 39% in 2021.
More than all of this decline was a result of inflation and supply chain issues.
Unique in our holiday parks segment.
Enrollment Brooks may elaborate on that a little.
But as we move through the fourth quarter and into the first quarter of next year.
We expect that this situation will have been remediated.
As we've mentioned before and as we've been targeting.
Our digital businesses grew to account for a little over 50% of our EBITDA in the quarter up from 36% a year ago.
And what happens otherwise to be the seasonally strongest quarter of the holiday parks segment at least from a revenue point of view.
The star of the quarter. Once again was our virtual sports business with established records for revenue EBITDA and margin, specifically revenue and EBITDA grew respectively.
$14 6 million.
<unk> 6 million in 2022.
From $10 5 million and $8 five $8 6 million a year ago.
About a 50% increase in EBITDA and a rather remarkable result.
While the majority of the recent growth has come from outside the United States.
We're getting excellent traction with the Pennsylvania lottery with DC lottery.
And Ontario gaming and.
And we are cautiously optimistic that there are many more important developmental opportunities in the north American market.
There is no seasonality to this business the virtual sports business.
We can see.
And there were no one time revenues or other events in the quarter.
Yes.
So effectively the virtual business.
At the moment is generating EBITDA at the run rate of $50 million a year.
Which just so happens to be more than twice what the entire.
EBITDA was of inspired entertainment five years ago.
Okay.
Growth in our digital interactive or I gaming business was more moderate in the quarter as we wait for contracted new customers.
Product enhancements as it Brooks will talk about in a moment to come on stream.
Revenue in the month of October for the interactive business accelerated to 14% year after year.
And we feel that we are pivoting back upwards to a higher rate of growth.
Of particular note here is that we will shortly be launching our second lottery game.
With the Quebec lottery following the extraordinarily successful launch of our first game earlier this year.
The bedspread contract you mentioned in the press release represents a very critical element in our overall strategy with about 1400 retail locations.
And 5600 terminals.
That Fred is our largest customer in the UK server based gaming market.
Historically this market has evolved.
We're making the capital investment to create the installed base of terminals.
And earning a return over the life of the contract.
And the best read model, we will be selling the terminals and then supplying in an ongoing multi year basis content and technical services.
Here again.
We're cautiously optimistic that in the relatively near term.
The majority of our customers will move to this model.
So that our retail business will become effectively an extension of our digital business.
We supply content and technical support on a recurring multiyear contract basis, but we do not supply capital.
I should also mention that Betfred has a very important customer for our virtual sports and gaming products.
Illustrating even greater synergy between the two sides of our business.
With this I will hand, it to Brooks to elaborate in more detail.
Okay. Thanks Loren.
Excellent summary of how we view the business and I'll try to give some more detail on insight on each of the operating segments.
So let's start with the digital businesses, which as Martin mentioned now contribute more than 50% of our EBITDA and are the areas of higher growth and higher margins with less capital intensity, which we expect will continue to scale nicely.
Actual sports business had another outstanding quarter growing on a functional currency basis at the revenue line by 63% and EBITDA at 75% compared to Q3 of 2021, and by 12% and 13% or 12% of revenue and 13% of EBITDA over our previous quarter again on a functional.
Currency basis.
This segment continues to perform at an extremely high level with a number of key drivers still to look forward to notably the plants. We're building on for the North American market now.
Now live with two lotteries in the U S and several gaming operators in both New Jersey, and Ontario were very encouraged by the responses. We received at both <unk> and the World Lottery Summit in Vancouver, with an increased pipeline of opportunities developing based on the success, we're seeing for virtual sports on a worldwide basis.
Segment continues to show strong organic growth in both online and retail.
A number of geographies and we expect to add additional territories to build on this space.
A good example, the popularity of the product is in Greece, where we expanded our menu of available products and increase the frequency of the events and saw 17% growth last month in what's a very mature market.
We're excited to launch our homeroom homerun shoot out product this quarter with icons like Babe Ruth and Mickey mantle and other legends of the game and expect it will be very popular in many key markets.
<unk>, we expect to see a bump from the World Cup. This month is there likely be increased footfall and many of our betting operator shops and retail and increased interest in our most popular sport soccer or football, depending on who you're talking to.
And our online channel Needless to say, we're very bullish on this business segment.
Moving over to the interactive right gaming segment, which showed 10% growth in functional currency in the quarter as well, although somewhat moderated from our growth rates experienced during COVID-19, we're starting to see the benefit of our launches in Pennsylvania with Q3, only having rush street for the full quarter and draft Kings for just a few days in the quarter.
That MGM will be going live this month Caesars will be going live next month, and we're still hopeful to add <unk> in Pennsylvania, and our other key markets of New Jersey, Michigan in Connecticut.
Interestingly, where we are live with tangible in Ontario, they already represent close to 10% of our business. There. So we have high expectations when their resource challenges free up and we can get them live and all of our jurors jurisdictions.
We're also introducing some key product enhancements like our first progressive games in North America planned to go live in Q4 this year.
All of the above plus continued growth in key markets like Greece in the Netherlands.
The launch of a number of new titles throughout the fourth quarter and the holiday season bode well for this business going forward and going into 2023.
We also have gone live with our second I lottery game in a lot of Quebec and are looking to expand this footprint in other jurisdictions worldwide as we build out our library of lottery content.
So clearly we believe there is great momentum in the segment and as we've seen from our October results.
Number of positives that we see for all of our digital businesses.
Moving over to the retail side, we were gratified to sign a new five year contract with our largest customer in the UK by machine totals and shop locations that Fred the vantage cabinet will be rolled out to the Betfred has state in 2023. After its successful trial. This year that produced a meaningful uplift in the cash box and the locations.
Where it was on trial.
We expect strong demand for this product from all of our LBO customers in the U K. We will also be introducing this product in the pub segment of our of our leisure business.
In Greece, we continued to see impressive results with Q3 win per unit higher than any other Q3 since our first launch in 2017 and this is with significantly higher number of machines deployed.
We're at the early stages of discussions with our customer in Greece on replacement cabinets for those that have been there since inception and with over 9000 terminals deployed there. We believe there's a great opportunity to drive incremental value in a mature market with new evidence in the industry leading content.
Lastly, we are very encouraged by the opportunities discussed at <unk> with additional operators in the distributed games markets, where we've already proven our success in both Illinois and Western Canada.
As Lauren mentioned in his remarks in the leisure segment and specifically the holiday parks is where we faced headwinds on a cost basis from inflation and cost of goods sold unique to that business.
Revenue across the leisure segment held up very well across pubs holiday parks and motorway services, but margins were impacted by the aforementioned cost issues. We continue to believe strongly in the opportunity in pubs and motorway segments, but clearly we need to rectify some of the cost issues in the holiday parks part of the business as we move forward.
I'll hand, it over to Stuart for his comments.
Yeah.
Thanks, Brooks and good morning.
For the first time since the pandemic began nearly three years ago. We're now in a position where we have a clean quarter. Both the currently from the prior year.
Of course, each quarter has its nuances and will go into one activities, but overall it is like for like in terms of trading restrictions.
Thereof.
One area, where it is not like for like though is in exchange rates, which were $1 18 in the current year and $1 38 in the prior year when looking at the average for the quarter and 112 with the balance sheet date. This is 135 a year ago.
This is why as with the last quarter, we're trying to make clear the underlying trading of the business, but talking about functional currency results.
Now this isn't perfect as cost incurred in U S. Dollar, we will still see it was more expensive than great British pounds with the stronger dollar, but it is certainly more useful and I view and looking at just reported numbers.
And there's no better example of this than overall quarterly revenue, which declined 3% we're looking at reported numbers.
With 13% in functional currency with.
All business units growing revenue year on year.
Virtual sports as mentioned was yet again, the standout segment with growth of 63%, but interactive also grew 10% leisure 6% gaming 3%.
And these last two segments would have been slightly higher had it not been for the closure of certain venues as part of the morning for the death of the cleaning and the U K and it's also worth noting that gaming high quarter product sales in the prior year, which as we've mentioned before do fluctuate quarter on quarter.
Now in addition sequentially versus the second quarter of this year all segments were up in functional currency.
Turning attention to adjusted EBITDA.
So our growth overall of 7% compared to the same quarter in the prior year.
Driven by virtual support growing 75% on functional currency basis.
Sequentially quarter to quarter, EBITDA increased 13% driven by seasonality in the leisure segment, but also a virtual sports growth of 13% and interactive growth of 4%.
Now many of the businesses, we are facing some cost challenges from factors outside of our control such as inflation in terms of salary costs fuel costs and utility costs and any purchase by the underlying cost is in dollars.
As you would expect the impact of these is seen within the parts of the business with higher costs to some extent gaming in pubs within Alicia, but mainly in the holiday caulk business, where our cost of sale includes noncash prices the cost of which is written significantly year on year.
We have a track record of dealing with costs that need to be taken out of the business. For example, after the reduction in stakes in the UK gaming market.
Part of the synergies after the Novo Matic Technology Group acquisition majority Covid, Lockdowns and where we are.
We'll do so again to mitigate these challenges.
Okay.
Looking further down the income statement net income for the period was $10 2 million.
This compares to $7 5 million in the second quarter of this year.
Last year's equivalent number was $25 million and this included an accounting gain on the fair value of warrants a $17 3 million.
No items that we would consider as accounting anomalies in the current quarter or in fact year to date.
This left basic earnings per share.
Nine in the current quarter and a 72% year to date.
The diluted equivalent EPS numbers 35 <unk>.
66 <unk>.
Turning attention to cash flow, we started the quarter with $31 8 million and ended it with $37 4 million an increase of $5 6 million.
This would have been higher without the FX impact.
Great British pound rates, reducing for $1 21 to $1 12 between the two balance sheet dates.
In addition included in the net movement was a repurchase of shares in the quarter of $5 million taken.
Taking the year to date total to $10 million.
Capex in the quarter was $9 3 million, taking the year to date total to $31 million.
And we would expect the fourth quarter to be lower than other periods, but even so the full year number will be above the long term average of $30 million, we talked about alone.
In part this is due to one off purchases that we needed to make this year, but also because we brought forward some investment.
We were asked on the prior earnings call if buying back stock would mean a reduction in the ability to make the most of opportunities in front of us to accelerate growth and as you can see it is not the case, we have the ability to do both.
And finally note that net leverage which is now down to two four times from three seven times, a year ago due to increasing EBITDA higher cash and reduced U S dollar equivalent that talent given the movement in exchange rates.
So with that I'll hand back to loan funding remarks before opening up to Q&A.
Thank you Stuart that was very good.
I have no further.
At this time operator so.
If you could open up the.
Program to Q&A. Please.
We will now begin the question and answer session to ask a question you May press star one on your Touchtone phone.
You are using a speakerphone please pick up your handset before pressing the keys to withdraw your question again press Star one at this time, we will pause momentarily to assemble our roster.
Your first question comes from the line of Barry Jonas with true Securities. Your line is open.
Hey, guys good morning.
Correct me, if I'm wrong, but the virtual business and pipeline look to be heavily lottery operator focus.
Is that somewhat a function of the lower volatility of the product relative to traditional sports betting.
To state that this could be even more attractive for commercial operators given how the world series just played out.
Yes.
Well, if we if we steered in that direction that wasn't intentional I mean, obviously lottery is a very big channel for us in large part because from a retail perspective, there is a huge number of locations where the game can be played but we feel we feel very strongly.
About the sports betting operators and having this as a core product for them in various we've talked about a number of times.
The RTP as favorable from an operator perspective theres not the risk of loss like you saw in the World series. So we think it's only a matter of time before it is going to be a core offering for both the sports betting operators as well as the lottery segment.
Yes.
Great great.
Barry just yet just elaborate sort of slightly on that is.
It's not a direct answer but it's interesting is is that.
So many of our major customers.
Outside of the United States customers like Lauder Medica.
Seasonal.
OPEC and Greece.
In fact are the major lottery operators in those countries. So this this.
Kind of signals to us.
That in the fullness of time, if the mainly.
Main lottery operators in North America, which happen to be the states and provinces, rather than private operators like lot of Medicare or old path.
Eventually jump on the product and of course, if we got the same kind of response there as we've had in Europe .
All bets are off.
Yes, yes that makes sense.
And then just for a follow up question.
At a high level curious, how you're thinking about M&A here is there a sort of a check list for you for identifying appropriate deals and then executing.
Well.
Yes.
Sure.
We're.
I think right now we're more focused on M&A that gives us.
Technology or product or platform expertise to.
To fill out.
Our menu rather than rather than acquiring.
Revenue or EBITDA per se, we don't feel like we need to go out and buy earnings but we.
Not that we wouldn't if we had the opportunity.
But.
For example, in our interactive businesses, we've talked about.
Our our game development expertise is phenomenal and and we can see that in our lottery business and in our.
And our I gaming business, but there are some.
Let's say ancillary features of the platform features that.
That we havent developed essentially because we haven't had time because they're so focused on the game. So we think we could make it a very immediate.
Quantum step up in and the scale of our interactive business, if we could more quickly.
Fill out the features of our platform. So one of the things. We're looking for is possibly an acquisition M&A opportunity that would do that for us.
Great Alright. Thank you guys appreciate it.
Sure.
Your next question is from the line of Brian singer.
With Craig Hallum Capital Group Your line is open.
Good morning, guys. Congrats on the strong results and clean results.
To start with Fred and I see the extension there improved terms as well from a capital efficiency standpoint can you discuss the impacts to revenue margins and EBITDA in 2023 with the equipment sales and then what that looks like in 2024 and going forward from a service standpoint.
Yeah, I think the.
So the equipment sale is really it costs. So there's not this is not a onetime sale.
Gain event.
And.
I won't get into the terms, but certainly no less favorable than where we are I think what we will hopefully see and what we've seen in the trial.
Vantage cabinet is a pretty significant uplift in the cashbox. So thats one of the things by rolling out new terminals with new features we're hopeful that we'll get some some uplift from from that side.
All of them.
David It's safe to say higher revenue next year zero margin and then you get to high margin flow through after that.
Yes, I mean, I was just going to.
Sure.
Add into that Ryan because there will be a <unk>.
Significant.
Sale too.
That Fred.
We currently at.
At no margin because the idea is.
It is by doing this then effectively that Fred is making the capital investment that we would otherwise have made.
I would expect that our equipment sale overall equipment sale margins next year, obviously, we will be down because it will be a significant sale.
<unk>.
Deliberately.
At no margin too.
Too bad for it and when the time comes next year and we report that sale, obviously, we'll point that out that we were anticipating that to happen. So if you see.
Next year, a fall in the gaming margin. It has nothing to do with the health of the business that simply.
The business model, where we're slowly but surely.
Grinding our way through eliminating the capital investment Okay, Yes, Ryan I think we would expect to do.
Clarity on what the normalized margin would have been at the time.
So that it's clear what portion was zero margin and what you should think about it on a stabilized basis.
Sure.
Yes, no. It certainly seems like an improved contract just want to make sure expectations are in terms of going into your lap.
In terms of going forward.
There's no doubt that it will.
Will produce significant.
An increase in bulk.
EBITDA and margins on an ongoing basis, because as Brook said.
The cabinet itself in trials in the U K has produced significant uplift.
Sure.
In revenue.
In the cash box and our revenues are what percent of the cashbox.
Costs are essentially fixed and have nothing to do with the revenue so.
As we drive more revenue.
With a higher performing cabinet and have fixed costs, obviously, the margins will get better going forward.
Yes.
Understood. Thanks.
On the interactive.
So just wanted to move over so how much visibility do you have to I gaming launches that you mentioned I appreciate the detail kind of by operator jurisdiction, but are those firm dates where you know thats, what theyre going to launch or I guess are those best guesses.
Yes.
Well so for the ones that I mentioned that MGM is firm as I'm sure. You know there is there is a number of steps that have to that have to happen both from a technology standpoint, and a regulatory standpoint. So the bet MGM one as is locked in because we have visibility to that Caesars.
We feel very confident about.
<unk> is the one that I mentioned that obviously.
<unk> if you look at the numbers is roughly 15% to 20% of every one of those markets.
Other than Ontario were not participating with them.
Even though the Ontario numbers are great. So, it's a pretty big gap.
Not to have handle on our and our.
Customer profile. So obviously as soon as we can get that done and go live with and that we will in all the markets.
Great. One last housekeeping did you actually repay any debt in the quarter or was the sequential decline entirely FX.
No, it's just FX movements right.
Thank you so much good luck guys.
Thanks, Brian .
Your next question comes from the line of Chad Beynon with Macquarie. Your line is open.
Hi, good morning, Thanks for taking my question.
Brooks you mentioned positive reception from Q3 this year with respect to the Lps in Illinois, and in Canada can you remind us Justin.
Yes.
US where things are in western Canada in terms of placements any new opportunities and then any other performance metrics in Illinois that would kind of help lead to higher market share.
Sure sure well, so western Canada will deliver the big order 800 machines in the fourth quarter. They are just now starting to hit land in Canada as we speak.
Western Canada does.
Nearly RFP cycle. So obviously, we went from 100 machines and now we will have over 800 machines there.
Hopefully again, assuming the games perform as the first one is have we would hope to be able to get when their next RFP be able to get significant share.
And the other markets that are probably.
Closest to the horizon in terms of distributed gaming.
Our Oregon in Alberta.
And we obviously I think we've mentioned we've had discussions with them at <unk>.
In terms of Illinois.
I would say, it's a mixed bag in certain parts of the state our games are performing very well.
In the Chicago land market, not as well as we would hope, but we've we've actually just rolled out.
A couple of new games.
That we hope will show some positive impact this quarter, but as Chad as I'm sure you know.
Illinois is now really fully a replacement market because they've added the sixth machine they've increased the stake limit. So it now really is just kind of a fight for market share with.
The Igt's light and wonders and aristocrats of the world.
Great. Thanks, Brock and then the obligatory question about the UK White paper following a new Prime Minister.
Updates just in terms of how you're thinking about.
When we could potentially hear something in kind of what your partners are doing in the market.
Anything to be aware of for the next three to.
12 months.
Steve.
Yes.
I'm not sure I can talk about with great certainty of anything going on in the UK political landscape right now.
Yes, I think the a couple of things to say on that one is the expectations of the white paper.
Yes, they do an unknown, but probably starting next year.
Not hearing any rumblings of significant changes, but the ministers that are in place now we think we see sensible ministers for the gaming industry.
So yes, we don't expect.
Any significant changes, but at the timing I can say with any certainty.
Okay. Thank you very much nice quarter.
Again, if you would like to ask a question press star followed by the number one and your telephone keypad.
Your next question comes from the line of Eddie.
<unk> NGO with Roth capital Your line is open.
Hey, Thanks for taking my question.
Brazil.
Just wanted to kind of check in on the state of the UK consumer I mean third quarter results kind of speak for themselves. It looks like things are still steady as she goes but just kind of wanted to confirm that even in October and November that things are still relatively steady.
Yes.
We're not seeing any changes.
Even through even through October so.
Everything that you read about the UK economy doesn't seem to have impacted.
Gaming play for us at least based on the results and obviously, where we see these real time.
Perfect and then within interactive.
<unk> added six games during the third quarter versus <unk> in the first half.
Was that part of the reason that the slower sequential revenue growth and then now that you kind of have more bandwidth after the Pennsylvania launch.
Should we expect kind of game releases to get back to that 10 to 12, a quarter, which kind of implies.
Maybe a bit more of a acceleration in revenue because of that.
Yes.
That's actually a good catch on your part and yes, we've got a pretty good lineup of half.
Holiday games, we had a bunch of games that went out for actually Halloween introduced some very nice results. We've got a bunch of Christmas games that will go out. So we had a fourth quarter, we'll certainly have.
Significantly higher number of game launches in the third quarter.
As Lauren mentioned in his remarks the October numbers.
We're very strong.
Yeah.
Great. Thank you.
Youre welcome.
Your next question is from the line of David Bain with B Riley Your line is open.
Great. Thank you I guess first Lauren in the PR you cite an exciting pipeline of new products that could open up significant new avenues of growth that youre going to speak to in the coming months.
Im hoping you can maybe give us as much as you can on these I mean, if it's virtual sports lottery, new concepts new contracts all of the above kind of what we're in for kind of left me wanting.
That comment.
Sorry, Dave I Couldnt help.
Well I think the thing.
They can take out of what you said, Dave that I would agree with is the all of the above part.
We're going to be.
Introducing a number of platform enhancements in our.
Our I gaming businesses Brooks talked about.
We have a couple of.
Terrific things coming in virtual sports.
I think they're probably the most exciting things going on.
But.
We won't be seeing any more about those until they're.
At a point, where we feel we can make a public statement, but.
Let's just say that we're very very excited about a couple of things that are coming along in virtual sports.
That would only further accelerate the growth that we're already seeing.
Okay fair enough.
The second one I guess my second one.
And I don't know if this makes sense, so maybe stuart or Dan is there a way to lock in current currency exchange when it comes to the debt or use the.
The most recent leverage as an opportunity to continue to refine to the structure of the balance sheet somehow.
Okay.
Well I mean technically yes, there is a way to do it.
Sure.
I think.
For a number of reasons, we've always taken the position that we formulate our capital structure in order to.
Match, our general.
Currency exposures of our business, but we are unlikely to.
Put financial hedges in place against our capital structure.
We tried to explain very clearly exactly how we're set up to investors if investors want to do their own hedged in.
That's probably a more appropriate way to do it then our trying to make a directional bet on currency movements.
<unk>.
So yes.
Okay understood alright, thanks, guys. Thank you.
This concludes.
A question and answer session I would now like to turn the conference back over to Mr. Lorne Weil for any closing remarks.
Thank you operator.
I think.
The things we've talked about so far pretty much speak for themselves I think.
Again other than the.
Yes, it's fortunate decline in the in the pound that at least now seems tools.
The beta has run its course.
We're very happy with the quarter.
We're accomplishing exactly the things that we set out to accomplish.
And.
We're obviously very excited about.
Where things are going to be heading in the next few quarters. So thanks for joining this morning.
We will see you in a few months.
Yes.
Great.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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