GAN Limited Q1 2023 Earnings Call
Speaker 1: With me today are Dremors Market President and CEO and Brian Chang, Interim CFO .
Speaker 1: I'd like to remind our audience today that we made the 4-digit statements on the call, which are protected under a safe harbor or 40-bother federal courties laws, and in each case our call thought that the 4-digit misplamers contained in our release.
Speaker 1: Please record our files at the SEC to understand how we calculate any of these metrics discussed in today's call.
Speaker 1: With that, I'll turn the call over to our CEO , Dr. Muswarfett. Dr. McQuiet, please.
Speaker 2: Thank you, Bobby, and good afternoon, everyone.
Speaker 2: I am happy to update the market today that our eye gaming exclusivity in the US for FANDIL group has now been extended on a rolling basis following the expiration of the initial exclusivity period in the first quarter.
Speaker 2: We believe this has been an overhang of uncertainty and I'd like to thank the executives at FanDuel Group continuing to trust GAN with providing FanDuel with our mission critical B2B solution.
Speaker 2: I'll also take the brief opportunity to highlight our B2C Division's significant value proposition with revenues of nearly $19 million last year and an all-time revenue record in our largest B2C market achieved last month, speaking to the underlying growth opportunity ahead of us.
Speaker 2: The B2C division has also contributed their award-winning modern international sports technology to our B2B division, which during the first quarter was deployed at scale in both retail and online channels in Massachusetts for Wynn Resorts Encore Boston Harbor property.
Speaker 2: WIN just reported a 20% increase in sign-ups to the WIN Rewards loyalty program year-to-date, attributed to their new sportsbook. And I believe that B2B partnership has an exciting future as we roll out together across the nation.
Speaker 2: In the first quarter, therefore, we made solid progress in executing our strategy in such a way that we are confident we will ultimately drive revenue gains and reduce our cost structure.
Speaker 2: Post quarter end, we disclosed a restructuring of our debt with Sega Sammy Holdings Inc. that puts us on a significantly stronger financial footing.
Speaker 2: Firstly, we materially reduced our annual cash interest cost, and secondly, we eliminated potential covenant issues.
Speaker 2: Furthermore, we reduce the cost of exclusively licensing aimsworths by gaming content by $15 million in exchange for a small equity stake in our company.
Speaker 2: We also elected to exit our B2C division from the highly competitive Ontario, Canada market in order to deploy our marketing capital in faster rate of return markets available to us in Latin America.
Speaker 2: And as a reminder, our B2B division continues in Ontario, Canada as both the exclusive PAM and I-Gaming platform provided to FANDL, which is a strong partnership executing well together since launch just one year ago.
Speaker 2: These three steps already taken in the strategic review process evidence our clear commitment towards realizing shareholder value.
Speaker 2: Step 1, Restructure our debt.
Speaker 2: Step 2, reduce exclusive aims where thy gaming content costs, and step 3, exit B2C from moment for you.
Speaker 2: Speaking to the first step taken, I could not be happier with the outcome of this strategic debt capital refinancing, which I'm confident will be beneficial to our shareholders, our employees, and of course our B2B clients. And I'll speak a bit more on the broader strategic review process in my closing remarks.
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Speaker 2: So getting into the first quarter results.
Speaker 2: We generated revenue of $35.1 million, which was a decrease of 6% from the prior year quarter. The decline was primarily related to a decrease in our contractual revenue rates with the client in the B2B division, which correspondingly decreased our overall take rate for the B2B division.
Speaker 2: With respect to our take rate, we do expect this trend.
Speaker 2: to trend upwards in the coming quarters as we roll out GaN Sports across the United States. Our sports betting technology capability, and particularly our retail sports betting technology, carries a favourable economic model.
Speaker 2: Positively, our contract with the largest B2B customer remains in place until January of 2025, and some of the rate decreases partially offset by their market share gains in domestic iGaming.
Speaker 2: B2C revenues in the first quarter were consistent year over year even when factoring in adverse foreign exchange with modest underlying growth on a local currency basis.
Speaker 2: In the wake of the World Cup, nearly 40% of new customers acquired during that soccer tournament were retained on CoolBet.com, which recently benefited from major soccer sponsorships in key Latin American markets, which appear to be performing well, with an all-time record in revenues and active players last month pointing towards a solid return to growth for our B2C division.
Speaker 2: The underlying key performance indicators or KPIs excluding the take rate were very strong across both of our operating segments.
Speaker 2: On the B2B side, we processed $423 million of gross operator revenue through our platform, which was an increase of over 40% from the prior year period.
Speaker 2: B2C KPIs remain healthy post the soccer world cup with double digit or 12% growth in new customers and importantly our marketing spend ratio remains well below US peers at just 21%.
Speaker 2: Notably, this ratio is even lower for Latin American markets, which is a key focus of ours to drive profitable growth in geographies where we see better return profiles on customer acquisition marketing.
Speaker 2: Adjusted EBITDA was modestly positive as cost saving measures offset the decrease in our revenue.
Speaker 2: The team remains focused on profitability and, as we've mentioned in prior quarters, all our new real-money iGaming or sports gambling B2B clients will be launching on the new GameStack 2.0 version of our technology platform.
Speaker 2: While our first quarter revenue results are a bit lighter than our expectations, we're making great strides to reallocate resources to our higher return opportunities, to diversify our revenue base, and transition to our new technology platform that will meaningfully accelerate our scalability and improve our cost structure.
Speaker 2: As we noted last quarter, our focus, simply put, is on B2B GAN Sports and Latan B2C. On GAN Sports, we've laid the groundwork for what we believe is the number one sports betting solution in the US market, with a marquee client roster to prove it.
Speaker 2: In Massachusetts, our major partnership with Wynn Resorts yielded impressive 60 plus percent share of handle in the retail channel, attracting major VIP sports gamblers with individual retail sports wagers placed in excess of $100,000 on popular local and national sporting events, including the Super Bowl and March Madness.
Speaker 2: The historic regular season run by the Bruins resulted in a high level of any interest, but certainly proved to impact the overall performance margins of the retail book while the mobile operations delivered very promising results in the first week of operations and are continuing well into the second quarter.
Speaker 2: We look forward to developing this major partnership with Wynn and rolling that nationally, including in Nevada, where we will be both their PAM and their sports tech provider across retail and online channels. GAN is now licensed in 18 U.S. states and we ultimately expect GAN sports to be operational in every licensed U.S. jurisdiction. In Nevada, we continue to work through the licensing process.
Speaker 2: Moving to Cool Bets growth in Latin America, it's clear that our strong performance during the World Cup has allowed us to grow our presence in these markets. We saw strong KPIs this quarter with new customer growth of over 10% continued low customer acquisition costs and encouraging but still very early initial metrics.
Speaker 2: out of a recent entry into the Mexican market.
Speaker 2: Finally, our largest lap-down market had a record April in net gaming revenue, partly driven by a new soccer team sponsorship, which appears to be delivering ahead of expectations in a tough competitive climate.
Speaker 2: We will continue flying tuning Mark and Capillac spend to the highest return regions to Scotland in promoting unattractive travel.
Speaker 2: continue fine-tuning market capital spend to the highest return regions throughout Latin America. To illustrate this point,
Speaker 2: We clearly exited the B2C market from Ontario, Canada in order to shift marketing capital deployed at a 12-month rate of return to a 6-month or faster rate of return in Latin American markets.
Speaker 2: Finally, our new platformer of games stacked 2.0, which combines the best elements of our existing platform and Cool
Speaker 2: All of our new real money B2B gambling clients will be launched on GamesTank 2.0, which will result in greater functionality for the operators and conservatively result in $10 million in annual cash savings.
Speaker 2: I'll now turn the call over to our Interim Chief Financial Officer Brian Chang to provide more color on financial and accounting items, and then I'll conclude with additional color on strategy and the strategic review process. Brian , over to you.
Speaker 3: Thank you, Dermott. Good afternoon, everyone. Before we discuss our quarterly results, I wanted to provide some more details on our amended credit facility, as well as the amendment to our aims with agreement, each of which were executed as part of the first phases of our strategic review.
Speaker 3: We believe these changes were truly a great outcome for GAN and its stakeholders.
Speaker 3: As a result of the amendment to our credit facility, we were able to secure waivers for all potential events of default and amended certain financial covenants and we are very pleased to report that we are now fully in compliance with all of our financial covenants.
Speaker 3: Our new interest rate is fixed at 8% compared to our prior rate that was variable based on SOFR, which was effectively 15.5% in the prior year quarter.
Speaker 3: In addition to lower fixed interest rate, our interest rate is paid in kind, otherwise known as pick interest, which allows us to defer any cash interest until the maturity of the loan.
Speaker 3: While we will still recognize interest expense throughout T&L, there will be no cash outflows until maturity. We estimate this will result in $4 million annual savings in cash interest.
Speaker 3: Related to our agreement with Ainsworth, as Dermot noted, we reduced our future cash commitments by $15 million or $5 million on an annual basis in exchange for an equity stake in the company of 1.25 million shares.
Speaker 3: This will modestly increase our share count from $42.6 million to approximately $43.8 million. As a result of this amendment, we recognize a $9.2 million gain in the quarter that is recorded in other income that significantly contributed to the reported net income this quarter of $1.5 million.
Speaker 3: From a cash perspective, the amendments to our credit facility and AIMS Worth Agreements will lead to reduced cash outflows of approximately $9 million per year.
Speaker 3: Moving on to the quarter, B2B revenues were $8.6 million versus $10.7 million in the prior year period. This is primarily attributable to a decrease in our take rate as described earlier.
Speaker 3: For expenses, our capitalized development run rates have been adjusted, which added approximately $1.5 million of expenses to our P&L but did not impact free cash flow.
Speaker 3: We also note that FX in the quarter did not materially impact us as the majority of our foreign revenues and expenses are aligned and constant currency exposure was a wash on earnings.
Speaker 3: Lastly, we ended the quarter with $40.8 million in cash, down from $45.9 million as of year end, driven primarily from changes in working capital.
Speaker 3: Our cash balance at the end of April approximated our year-end balance.
Speaker 2: With that, I'll turn the call back over to Dermot. Thank you, Brian . As we mentioned last quarter, we initiated a formal strategic review process that continues to progress at a good pace. Importantly, we've already executed three distinct initial steps year to date.
Speaker 2: and I'll provide more color on the two most important of those steps.
Speaker 2: The amended Ainsworth Exclusive iGaming Content Distribution Partnership reduces our future cash commitments by $15 million.
Speaker 2: And our successful refinancing transaction provides for much greater financial flexibility and approximately $4 million in reduced annual cash outflows over the next few years.
Speaker 2: While each of these steps are immensely positive in isolation, the strategic review continues forward and we will update the market when appropriate.
Speaker 2: As we go through the process, our collective belief remains unshaken that there is significant, unrealized value in our proprietary technology offerings that encompasses omni-channel sports, PAM, and leading iGaming aggregation, our patented IP, and a growing profitable B2C business.
Speaker 2: We are unable to provide forward guidance at this time, given the nature of our strategic review process, and as a result, the variability of potential outcomes prevents us from providing an outlook within a reasonable range, although we expect to be in a position to provide guidance for the year upon the resolution of these discussions, hopefully in the near future.
Speaker 2: To wrap up, I'm confident in our go-forward strategy to drive revenue growth with B2B Sports and B2C growth in Lausanne. We are taking a more simplified and focused approach to how we allocate our capital and resources.
Speaker 2: We are in fact in the very early innings of the rollout of GAN Sports, and at this time next year, of course subject to regulatory approvals, we expect that GAN Sports will be operational with marquee clients across the biggest US gaming markets.
Speaker 2: This past quarter we've made strong strides to shore up our balance sheet providing financial flexibility to profitably grow our business.
Speaker 2: Finally, we are moving at a good pace on our strategic review process designed to deliver incremental value for shareholders and we will update the market when appropriate.
Speaker 2: And with that, we'd be happy to take your questions.
Speaker 2: Thank you. At this time, we will conduct the question and answer session. If you would like to ask a question, please press Star 1 on your telephone keypad now and you will be placed in the queue. Once again, to ask a question, press Star 1 on your phone now.
Speaker 2: Your first question comes from Ryan Sigdahl of Craig Hallam Capital Group. Ryan, your line is open.
Speaker 4: 3 to 4 million, Delta and Q1 and not knowing those changes in the contract terms going forward with by fire most important. What a third of that be to be business. So any help, I guess, maybe I'll ask one other. A different way. Do you expect more or less revenue from that customer this year? Again, indeed.
Speaker 2: hand retail, which is a key inflection point for customers making commitments to our business. So again, hard to be specific in questions and accepting to understand the frustration.
Speaker 4: That's all for me.
Speaker 5: Your next question comes from Chad Baden of Macquarie. Chad, your line is open. Chad Baden afternoon. Thanks for taking my question. First on Cool Bad Dermot, I believe you said that revenues were up.
on a constant currency basis. Can you talk about...
kind of where the business is in Mexico, the opportunity, if you're still as excited as you were previously in terms of what this could mean for the business. And then secondly, can you kind of dive in a little bit further into markets where you're seeing growth, understanding that you...
I'm excited on Terrio just trying to get a better sense of what's going on kind of deep in the cool bat markets. Thank you.
No problem at all, Chad. Thanks for the question. Yet the B2C division, as I said, on the call, we entered the second quarter with great run rate, great growth, all-time record, NGR and activity. Very, very happy with the byproduct results of a major soccer club sponsorship activity.
and we anticipated at the very beginning of this year, but the early indications are positive. As with all new market entries, you have to be very, very patient and optimize the conversion funnel to new depositing players before you start allocating significant amounts of marketing capital. So we're going to continue to optimize.
The product, but the product itself, CoolBev.com, has been extremely well received in all the Latin American markets that it's rolled out into, and we expect and anticipate the same team will continue to achieve market penetration and market growth rates in the Mexican regulated market which will align with our previous experiences.
Our definitive material agreement with one of our clients on literally the last day of the quarter. So it's it's very hard to predict these things and there's obviously, a rush, which our clients sometimes know all about as you approach the end of the quarter. So yes.
in that particular region. So, very excited about the B2C division and the return to growth prospects after relatively pedestrian growth performance in 2022, which is behind our expectations. But the indicators in the current quarter and looking forward through the year are very positive.
Great, thank you. And then on GAN Sports, can you help us just kind of think about how long it takes to get a customer up and running, really just kind of adoption rates? The reason why I'm asking it is, when would we need to hear about new contract launches to be live ahead of?
NFL season, which is obviously the biggest contributor for most B2C operators. Is there anything, you know, any big contracts that are coming up opportunities there? And when would we need to hear something to have contribution for 2020?
successful conclusion of the licensing and certification process in Nevada, which is seriously complex as an undertaking. The summer launch for Station Casinos, I think that's going to be a massive and highly impactful industry-wide...
shift in the tectonic plates of vendor infrastructure provision in major gaming markets. So we're super excited to get that out. The first early indicator of that was really the very positive reception by our client, Wynn Resorts, and a lot of other people in the industry paying attention to the rollout by GAN, of GAN Sports, for Wynn Resorts in Massachusetts.
Not just the very fast rollout of retail, but the day one successful launch of online sports for when in Massachusetts on March the 10th in the first quarter. So super positive rollout. It was weeks, not months to get the retail operation stood up, which is super exciting retail scales and deploys very, very effectively and very well in states where we are licensed.
Other states, any new states where licensing cycles are required or technical certification requirements are slightly different, which they tend to be from state to state, can be a multi-month cycle, but we do anticipate significant new B2B clients of GANsports as we progress through the balance of 23.
Thanks, and then one last housekeeping one. Brian , you mentioned that after the Ainsworth conversion, you're at 43.8 for shares. The diluted number was larger than that in the press release. Can you give us the end of the quarter or current fully diluted number with all the warrants options?
I believe that we should be around $47 million.
We have obviously the effective options, the aimsworth and our RSUs that have invested that would make up that delta.
Okay, thank you very much. Good luck.
Okay, thank you very much. Good luck. Thank you.
At this time, there are no further questions. I would now like to turn the call over to Dermot Smurfit for any closing remarks.
Thank you operator and thank you of course to everyone for joining this afternoon's call. From here we will lean hard into GAN sports in the US and selected international markets for B2C where we are best positioned and see clearly attainable path to profitability. I remain excited about the opportunity ahead of us.
and in confident we have the right team and planned execute from here. Thank you all.