Q3 2022 Gan Ltd Earnings Call
Adjusted EBITDA was $2 $1 million delivering on our commitment for a positive number every quarter this year.
We ended the quarter with approximately $42 million in cash, which was $7 million lower for the prior quarter and heavily impacted by both the effect of foreign currencies as well as timing of capital expenditures, including required investments in gaming licenses for our soon to be launched regulated territories of Nevada and Mexico.
However, we are making important progress towards achieving sustained positive free cash flow with operating cash flow being positive for the first time since the second quarter of 2021. Additionally, Q4 is seasonally the strongest quarter and combined with our cost reduction initiatives that are yielding positive results, we anticipate positive operating cash.
Flow in the fourth quarter as well lastly.
Lastly, we anticipate Q4 will be the lowest quarter of the year for capital expenditures with our investments in content gaming licenses and PP&E largely complete for the year.
Turning to fourth quarter, and full year performance FX headwinds and the uncertain impact of the upcoming World Cup on a b to C business are creating a wide range of potential outcomes. Despite a positive start in October when we experienced an all time monthly record in sports betting handle on a constant currency basis.
As a result, we will not be providing revenue or adjusted EBITDA guidance for the fourth quarter are not at all pleased with not delivering what we had previously provided to the street. This year not at all I take ownership of this as CEO and will be further adjusting our cost structure and making operational improvements to deliver on expectations and ensure a healthy balance sheet.
Looking now at our two segments I'll begin with me to see.
Revenue in the segment was 19 $4 million versus $21 1 million in the prior year the underlying health of the business remains robust with active customers, increasing 31% and turnover, where the amount wagered, increasing 16% from the prior year period, the mix shift of customers is skewing towards <unk>.
In America, where average wagers tend to be lower than in European countries, but rapid returns on marketing investments in user acquisition remain consistent.
The results relative to the prior year were impacted by a couple of main items, Firstly, the international business of cool better comps or a negative foreign currency impact to revenue of $3 $3 million because of the strengthening U S. Dollar to note on a constant currency basis year over year revenue growth of 8% versus.
The actual decline of 8%.
Secondly continued marketing challenges emerge in certain European markets and increased competition in certain Latin American markets.
On the <unk> side, we generated $12 $7 million in revenue, which was a 14% increase from $11 $2 million in the prior year the.
The revenue increase was driven by a 29% increase in gross operating revenue our take rate on that gross operating revenue. However was down 60 basis points to four 6% due to the mix shift of our revenue during the quarter.
Overtime, we expect our take rate or the digital gaming value chain to increase driven by our expanded b to b offerings, but this metric can tend to be volatile from quarter to quarter, depending on revenue mix.
Slipped monopolies onto the next slide slide number three.
On the positive side, we continue to make strides on key strategic initiatives in the quarter and there was strong underlying growth trends in both of our business segments.
Notably, we ushered into operation the new B to B product line for the company Gan sports completing our existing <unk> product and service offerings of a leading platform or Pam.
I gaming content aggregation or Super Rgs.
Stimulated gaming for deployment prior to I gave me regulation and of course, our retail and online sports gambling solutions we.
We are a proven one stop shop for all your needs here in the U S. Whether you need just the path or the complete enterprise solution ranging from Pam to I gaming to retail and online sports driven by our managed to trading services team. We now believe we have all pieces of the jigsaw puzzle here in the U S.
Looking ahead, there is a lot of excitement for the World Cup, which kicks off this Sunday with Qatar versus Ecuador, while the tournament will be a huge event for the industry similar to commentary. This earnings season from our international BDC peers pinpointing the revenue impact is nearly impossible given the multitude of factors, including what team.
Advanced to late around for some context looking back to the second quarter of 2020. One that featured the Cooper and European Championships are new depositing customers more than doubled over the events versus the prior months, which causes us to be optimistic for a similar or greater outcome in the current quarter.
While I'm generally pleased with the underlying strong trends in the business and the progression of Gan sports the timing of our revenue acceleration on the B to B side has been delayed by the timing of state regulatory approvals and state by state legislation, particularly on I gave you.
We now possess gaming licenses in 19 U S states as well as intolerant Canada.
As noted previously these regulatory relationships and privileged licenses represent very real assets, both today and in the future as well as create a significant barrier to entry for competition.
While we can't control these dynamics in the interim we can improve our cash generation as we await new states coming online.
And as an organization, we absolutely must do a better job of continuing to be more profitable and cash generative, while staying nimble to deliver for our clients.
This will be achieved by laser focus on all of our operating expense line items heading into next year.
There's also an opportunity to reallocate our marketing spend will be to see to only the highest return regions along with other measures to drive profitability.
To assist in this task before moving on.
I'll take the opportunity to welcome Mr. Eric Green to our board of directors.
I know some on this call May in fact, no Eric Eric expertise in the capital markets in the U S gaming space will be invaluable as we execute our strategy of becoming the premier B to B technology provider here in the U S and he adds important independent leadership to our board.
Our board of directors will continue to evaluate its composition and structure to ensure we have the right leadership and expertise to support our growth plans and drive shareholder value.
Moving now on to the next slide slide number four.
And so we delivered new content, we launched new clients and recently debuted our new cool that sports, both app and the entire market.
Silverback Studios, which we acquired last December now has five lives slot titles online with an additional five more slot title is expected by the end of the first quarter.
The initial performance metrics are highly encouraging and each game has outperformed its subsequent releases.
In December we will launch Tiki Bonanza, which features a unique taken looked wheels that a lot of players not only to look any of these five reals after any spend but also to change that takes before they spin again without losing their logs. The silverback team is very excited to debut this title with an expectation that this will be the strongest titles.
Or at least to date.
We entered two new markets in the quarter with the launch of our platform in Oklahoma Casino in Arkansas and the debut of course of our retail <unk> sports in Mississippi with the island view Casino and resort.
While switching on 'twenty sports betting kiosks on the Gulf Coast of Mississippi with the immaterial near term revenue driver in my view this actually matters more than any b to b product and service launch in <unk> history, we created a leading sports betting product that we expect to garner considerable success here in the U S.
While there are simply too many gangsters organic employees to name across the globe I'd like to personally thank everyone directly involved for their efforts of getting Gam sports alive and into the market.
Gan sports received great feedback and global gaming Expo last month in Las Vegas, the product is truly differentiated given the ease of use the end use of personalization.
Operator customization ranging from the user interface to hybrid trading models, and we expect to announce new plan partners when contracts are formalized.
Moving north of the border the cool that team just launched native iOS App in the Ontario market. It's too early to tell the impact given the limited data, but it does open new marketing channels to that line of business.
That being said cool, that's 20 year history, and all the setting and risk management in the country's national sport ice hockey bodes well for the potential success in that market.
Wrapping up now on slide five and looking near term it will be an exciting fourth quarter with the FIFA World Cup, we will be watching day by day to see new customer sign ups wagering volumes and other key metrics for a b to C business.
As we head into 2023, we'll be entering two new markets with Red rock resorts, providing their sports platform and the Las Vegas local market and in addition, the cool that would be to see brand will go live in Mexico.
What's critical is delivering revenue growth and positive adjusted EBITDA and free cash flow to drive a healthy business, we will be maniacally focused on prudent spending and cost cutting where appropriate to drive bottom line performance as we await the acceleration in our revenues.
Let me just take a small step back for a moment and speak to the state of the Union.
Currently I gaming operates in just six U S states with really the three key larger states of New Jersey, Pennsylvania, Michigan driving the majority of the $5 1 billion in estimated revenue in 2022 from I gave you.
Retail sports books are permitted in 32 states with online sports books currently lives in 22 states.
Which combined are expected to generate $7 $1 billion in 2022.
We really are still in the earliest days of this process and the massive overall opportunity for commercial and tribal gaming operators. This is what really excites me day in and out for Wolfgang can accomplish for its clients.
I truly believe <unk> is uniquely positioned to provide a range of clients with a full suite of enterprise solutions that gets them up running and winning.
From this perspective, there was really no true competitive again that can deliver this type of comprehensive offering here in the U S.
And so while the timing of the opportunity is challenging to pinpoint it remains as real intangible as ever.
I remain confident that again will be a major beneficiary of this opportunity.
And with that I'll hand over to our CFO , Karen Florida carrier.
Thank you Jeremy and good afternoon, everyone.
Starting with our consolidated financial results on slide seven.
Q3 revenue of $36 1 million was flat compared to the prior year.
<unk> revenue of $12 7 million increased 14% and me to see revenue of $19 4 million declined 8%.
Adjusting for the effect of foreign currency exchange revenue increased 11% in constant currency normalizing of $3 6 million year over year impact primarily realized in our B to C segment.
Excluding this impact revenue increased 16% and 8% for BBB and <unk>, respectively.
Adjusted EBITDA was $2 1 million versus a loss of 900000 in the prior year period.
Yeah, that's a headwind on revenue with a tailwind or benefit to our operating expenses. This quarter is nearly 90% of our approximate 700 employed global workforce are now based internationally and we observed larger quarter over quarter declines in both the euro and pound I'll dive a bit deeper into our opex improvements on the net.
But first Derek mentioned, given the uncertainty in the range of world kind of outcomes and the impact of FX on our business, we will not be providing guidance for the fourth quarter of 2022 that said holding betas esports margin within our normalized range. We do expect the fourth quarter to be the seasonally strongest of the year and to continue to.
To deliver on our commitment to generate positive adjusted EBITDA each quarter this year.
Let's dig into this on the next slide.
Our continued cost discipline, coupled with FX tailwind have demonstrably impacted our profit margins and we are proud that the trajectory has shifted from an adjusted EBITDA loss to a profit year over year.
The chart on the left measures our cost structure as a percent of revenue year over year, you will see marketing spend increased 410 basis points to 14, 2% of revenue.
This is mainly attributable to supporting the organic growth of our B to C business, where the marketing spend ratio. This quarter of 23% is still well below the peer group and to a lesser extent. That's often includes timing of industry trade shows and related spend such as G suite.
This is a dial that we have full control over and we are actively evaluating capital allocation to ensure spend is focused on the highest ROI regions channels and opportunities for 2023.
Excluding marketing spend every other operating expense category being our cost of sales personnel or other opex declined over 400 basis points each versus the prior year period, primarily on cost controls and FX benefits.
In total our non cost of sales expense structure declined five percentage points from 69% to 64% of revenue and we see this is great progress towards the commitments, we've made to gain scale and achieve profitability.
Turning to the chart on the right hand side. This illustrates the growth we have been delivering an adjusted EBITDA since the third quarter of last year.
Quarter to date, we improved adjusted EBITDA by reversing a lot year to date with double the adjusted EBITDA profit versus prior year and full year, we expect to maintain this trajectory again reversing the loss we incurred in 2021 the path. We're on ultimately will translate into sustained positive free cash flow.
Moving on to the next slide slide number nine.
I'll take a moment to highlight some key metrics this quarter and our path to sustained positive free cash that first we are a cash generative capex like growing b to C business as a proof point the team driving our entry into the Mexico market is under 10 employees and as we've discussed before the marketing playbook for our DTC operation.
One is to enter the market through a focused social media and digital campaign, which allows us to scale the business over time, rather than invest in a big splash launch and importantly, the pure play leader player in the early stage U S. Digital gaming market, we do not spend marketing dollars, but rather it's strictly take a recurring part of the value chain.
Second there has been a strides made with continued room for refinement of our corporate cost base, which is essentially fixed in nature.
Items, such as corporate insurance, and bringing professional cost in house, our tangible opportunities for near term savings without impacting our growth objectives. In fact, we've already capitalized on some of these opportunities and we'll see some benefit of cost reductions starting in this quarter.
Third I'll touch on our capital expenditures and cash.
In Q3, we view our cash burn is burdened by both the timing of unfavorable FX and capex with required investment in PP&E and gaming licenses for new upcoming markets.
Looking forward, our fourth quarter Capex should be the lowest of the year with a de minimus cost for gaming licenses, essentially lower PP&E and investments in explicit gaming content largely complete for the year.
To reinforce with Durbin said earlier Q4 is seasonally the strongest quarter and combined with our cost reduction initiatives that are yielding positive results. We anticipate positive operating cash flow in Q4.
We are committed to ensuring a healthy balance sheet and runaway sustained positive free cash flow and we will continue to adjust the cost structure to ensure these goals are achieved.
To wrap up my remarks on the next slide and as Dermot noted while there are while there were a lot of positives. This quarter, we haven't delivered on all our prior commitments to our shareholders and we must and will do better by taking action to further focus our business, making as much progress as possible as quickly as possible in the areas of our.
Business that we are able to control.
We did deliver growth in our AWP segment, our <unk> segment on a constant currency basis, and 2 million of adjusted EBITDA profit.
There is a lot to look forward to in the quarters ahead with our entry into the 600 million Mexico online gaming market.
Once again sports in the Las Vegas locals market with Red Rock and the World Cup kicking off this weekend. These revenue opportunities should translate into a higher conversion of profit and ultimately free cash flow as we continue to refine our cost structure and scale.
With that I'll now turn the line back over to the operator to open it up for questions.
Back to you.
Yes.
Thank you.
We will now be conducting a question and answer session. We ask that you limit yourself to one question and a follow up before rejoining the queue. So that other people have an opportunity to ask questions.
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Yeah.
Our first question comes from David Katz with Jefferies. Please proceed with your question.
Hi, This is Cassandra Lee on behalf of David. Thank you for taking my question.
How about a year ago, you laid out a longer term target of five to 6 million revenue by 2026, and I understand a lot can change like on one year, especially in the space.
I just wanted to get your updated thoughts on the kind of mid to longer term.
Aspirations for this company.
Yeah, I think he Cassandra.
First of all it's important to say that on our first quarter earnings call. We did note that the 2023 target it was aspirational and contingent on a number of things happening, which.
And included timing around the launch again for it and also additional states are regulating but with that said, we're currently evaluating that and are likely to provide 2023 guidance during our fourth quarter conference call.
Great how are we thinking about kind of more longer term like 2026 sonoco.
California.
The recently rejected the propositions on sports betting how are we thinking about next cycle and what kind of opportunities there may be things like California and Florida.
Yeah. Thanks for center, I mean, California was disappointing for many but we looked at it as two propositions that effectively split the boat. So it's of course possible that we'll see perhaps any one proposition come in 2023.
I think we'd be a relief to many stakeholders and listeners on this call, but in the meantime, there's a plenty of opportunity for Gan sports in both retail and online we've made great progress year to date.
And we're firm believers in our 2026 revenue targets based on the ramp up in organic growth coming out of B to C and various different international markets, particularly Latin America.
But crucially for our core value proposition, which is b to b here in the U S.
We're seeing very very high levels of demand for the Gan sports capability, and we look forward to making additional viewpoint announcement as and when contracts are finalized.
Great. Thank you for taking my question.
Thank you.
Yeah.
Our next question comes from Chad Beynon with Macquarie. Please proceed with your question.
Hi, good afternoon, Thanks for taking my question.
Wanted to ask about the BDC growth rates I believe you said, 8%.
Same store.
FX adjusted growth rate in the third quarter I believe we had thought about this being certainly a double digit grower I know the gross margin was a little bit light, but I guess I'm kind of focusing on the handle as we look at the markets, where you operate kind of.
Yeah.
Nor with Finland, Sweden, and then kind of what Youre doing in Latin America can you talk about you know what.
What the growth rates are looking at broadly are you seeing.
The growth rates in Latin America that you originally thought out.
To achieve and what's going on in some of the core markets is that what's kind of bringing down the BTC.
On the overall financials. Thanks.
Yeah, Chad Thanks for that Q3 of 2021 in fact in Latin America, and certain of our key markets.
We had a greater than anticipated tailwind from Covid and Covid lockdowns predictive of gaming Starwood retail gaming establishment.
So that said that that was one factor that impacted year over year effectively Q3, 'twenty. One we had most of that quarter, we had a tailwind.
Was unexpectedly strong.
But the.
Generally I think you should think.
Teen percentage growth year over year would be a natural way of thinking about just the business and the growth prospects going forward just any additional color. Yeah. I mean, we haven't had another major customer acquisition opportunity really since the Copa America and the euros to Q2 of last year. So again, we're looking forward to.
The World Cup, we think it's going to be a pretty major opportunity at least from a customer acquisition.
Underlying kpis perspective, and then throughout 2023 will have opportunities to reactivate are all of those customers that we've acquired during the tournament. So we're excited for what is to come in the fourth quarter.
Okay. Thank you both.
Then on the capital allocation good to hear that you're reiterating the Q4 positive cash flow from operations.
On the share repurchase front I know that there was a press release earlier in the quarter.
How much did you acquired during the quarter.
On blackout during any of.
That period end.
How should we expect you to.
Two two.
To end up spending the remainder of what's out there on the share repo.
Sure. We did have purchases that occurred in Q2, we did not have any purchases in the third quarter and we are just laser focused right now on achieving cash flow.
Staying cash flow positive a runway. So at this point, we're not actively discussing additional purchases but of course, we'll be opportunistic as we look at 2023 and capital needs.
Okay. So you weren't on blacked out for any of the third quarter that was internal decision.
Correct.
Okay. Thank you very much I appreciate it.
I Wonder if you would like to ask a question. Please press star one on your telephone keypad.
Our next question comes from Ryan <unk> with Craig Hallum Capital Group. Please proceed with your question.
Good afternoon guys.
What sort of a guidance or I guess withdrawn guidance I get it with the <unk>.
The volatility, but curious what changed relative to your expectations for World Cup today versus three months ago. When you were comfortable giving that guidance and then I guess, just as I think about internal assumptions and standpoint is there anything in the previous range. It wouldn't be good guide post for us to think about as we think about Q4 again I assume.
And knowing that greater volatility.
Yeah. The first thing I would say Ryan is that it's not just the range of outcomes for the World Cup of course, we've also seen FX movements and that has continued to degrade with the strengthening of the dollar we saw that throughout the third quarter. So those are the things that were also weighing and really we're looking at it more just in terms of.
The confidence balance, though because of the range of outcomes, both from an FX and World Cup standpoint, as we've been talking about constant currency results et cetera.
It really is.
Can you just do the math to get to the low end of the previous guidance of $37 9 million for fourth quarter revenue. So were just looking at again the potential impact of FX. The outcome of the World Cup and that is that the main reason that we are withdrawing the guidance.
I think Brian there's another aspect, which is interesting which is.
You have a very very capable tenured and experienced leadership group and the PUC Division and it's a as a private company transitioned to being a public company.
Develop the awareness of the level of certainty required in order to make guidance calls on major sports events.
And I think this leadership team in the BDC Division it has to be commended.
For being grown up so that the World Cup and saying you know what there isn't the World Cup that I've never been good for bookies. That's just the reality of history, but you just don't know with certainty of the level required.
Two to maintain the revenue guidance for the fourth quarter, So again, I'll commend him for being grown ups.
Being very considered in the way that they've enabled us to make these statements today.
Then just my second follow up here can you provide an update on the relationship with the fan doable for the platform and Pam given you are the exclusive provider of their gaming Casino gaming operations and then in January 2023, but acknowledging and getting that contract does extend through 2025.
With various elements. So curious kind of how the negotiation is going out with that exclusivity ending here in January .
Ryan you won't be surprised I will simply say, we will update the market as when we have something to update the market with I mean for now we don't see any operational change in the relationship as you go through the January date that you pulled out so we're very comfortable with the status quo and we're very happy with the nature of the expanded relationship into Emporio north.
The border and of course, the very significant U S online casino.
Which we are operating for them and with them in great partnership.
Thanks very much.
Thank you.
Okay.
Yeah.
We have reached the end of our question and answer session I would now like to turn the floor back over to Durbin.
Carmen.
Alright, Thank you everyone for joining us today and of course your interest in our company.
There are a lot of upcoming things to be excited about in our business in the mid to longer term massive opportunity for <unk> to monetize our enterprise technology solutions for regulated I gaming and sports gambling here in the U S and opportunity which remains in its infancy in the interim we will continue to work to operate our business as efficiently as possible identify opportunities to <unk>.
<unk> shareholder value and ultimately navigate our enterprise through this challenging macro environment on this basis and very much look forward to updating you all early in the new year. Thank you again.
This concludes today's conference. Thank you for your participation you may now disconnect your lines.
Okay.
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Well.
Oh.
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