Bragg Gaming Group Inc (BRAG) 2022 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Bragg Gaming Group Fourth Quarter and Fiscal Year 2022 Earnings Conference Call. (Operator Instructions)

It is now my pleasure to turn today's call over to Mr. Yaniv Spielberg, Chief Strategy Officer. Sir, please go ahead.

Thank you, operator. Good morning, everyone, and thank you for joining our fourth quarter and full year 2022 earnings conference call. I'm Yaniv Spielberg, Chief Strategy Officer for Bragg Gaming Group. I'll be hosting today's call alongside my colleagues, Chief Executive Officer, Yaniv Sherman, who will comment on our fourth quarter and full year performance; and Ronen Kannor, our CFO, who will review and discuss our fourth quarter and full year results. If you've not already done so, you can follow our earnings call presentation from our website at investors.bragg.group, in the section called Latest Presentation. On this call, we'll review Bragg's financial and operating results for the fourth quarter and full year of 2022. Following our prepared remarks, we'll open the conference call to a question-and-answer period.

I'll start the call with some brief cautionary remarks regarding certain statements that may be made on this call. Certain statements made on this conference call, and our responses to various questions, may constitute forward-looking information or future-oriented financial information within the meaning of applicable securities laws. Statements about expected growth, prospective results, strategic outlooks and financial and operational expectations, opportunities, projections rely on a number of assumptions concerning future events, including market and economic conditions, business prospects or opportunities, future plans and strategies, technological developments and anticipated events, trends and regulatory changes that may affect the corporation and its subsidiaries and their respective customers and industries.

While we believe these assumptions to be reasonable, they are subject to a number of risks, uncertainties and other factors, many of which are outside of the company's control, and which could cause the actual results, performance or achievement of the company to be materially different. There can be no assurances that these assumptions or estimates are accurate or that any of these expectations will prove accurate. For a complete discussion of these factors, please refer to our recently filed press release and other publicly available disclosure.

With that behind us, I'd like to turn the call now to our CEO, Yaniv Sherman. Yaniv?

Thanks. Hi, everyone. I'm Yaniv Sherman, Bragg's CEO. Thanks for attending our 2022 fourth quarter and full year results presentation. We're excited to take you through our strategic, operational and financial highlights as well as sharing some more of our plans for 2023 and beyond.

Moving to Slide 4. 2022 marked a transformational year for Bragg. Beyond our financial results, our record revenues and adjusted EBITDA, we've continued to transition from a regional central European leading online platform to a global content-led iGaming solution provider with extensive distribution across U.S., Europe and Latin America. We've integrated our teams and sites under a unified brand, Bragg, working towards a joint mission and vision. The Braggers are persistently executing against the strategy and the course that we've charted. And I'm very happy to share the progress we've made.

On Slide #5, after concluding our U.S. acquisition, we are perfectly positioned to fast-forward Bragging to its future. We marked the launch of two new Bragg game studios, Atomic Slot Lab and Indigo Magic, and we were able to develop the first batch of proprietary and exclusive market tailored games for the U.S. and Europe. Our U.S. rollout is progressing well, leveraging Bragg's cutting-edge tech stack and development core, coupled with unique game production know-how. Having launched in new regulated markets in Europe, our recent success in the Dutch market was complemented by customer and game rollout in the U.K, Switzerland, Belgium and the Czech Republic, just to name a few.

On the product front, we are religiously developing our products, tools and features to introduce our partners and their players with the best possible customer experience in online gaming. While 2022 and 2023 are by no means the end of the journey, I'm happy to say we are definitely on our way.

I'd like to turn this to Ronen for a review of our financial results and then take you through some more operational highlights in more depth. Ronen?

Thank you, Yaniv, and good morning, everyone. I'll begin my comments on Slide 7. As Yaniv indicated earlier, 2022 was a transformational year for the group, and we can see that in our financials and operational results. The group continued to execute very well during the fourth quarter.

The fourth quarter total revenue was up by 50.3% year-over-year to EUR 23.7 million, and up by 13.3% from the previous quarter, representing an all-time record revenue for the group. In addition, the group's year-over-year revenue growth was 45.3% and reached record of EUR 84.7 million. The growth was mainly derived organically through its existing customer base, new onboarded customers in various jurisdictions, in particular, the Netherlands, with a solid revenue performance from the Wild Streak Game Studio and Spin Games existing U.S. customer base.

From a professional and KPI perspective, total wagering generated by games and content offered by the group during the quarter was up by 65.4% (sic) [65.8%] from the same period in the previous year to EUR 5.1 billion, and up by 24% to EUR 17.7 billion year-over-year. As you can see from the wagering chart on the right-hand side, Bragg has seen a positive momentum since the effect of the inception of the German regulatory restrictions on gameplay in Q3 2021, which demonstrated its ability to transform and diversify its operations. Gross profit for the quarter increased by 61.6% to EUR 13 million, with gross profit margin increasing by 390 basis points to 54.9%.

On a full year basis, the gross profit increased 59.2% reaching EUR 45.1 million, moving margins by 460 basis points to 53.2%. The margin increase is a direct effect of a change in our composition of revenue derived from the increase of iGaming platform, managed services and proprietary game studios, which have no cost of sales compared to third-party games and content, which have associated third-party costs.

Adjusted EBITDA for the quarter was up by 128% to EUR 3.6 million, with adjusted EBITDA margins reaching 15.4%, an improvement of 530 basis points from the same period in the previous year. On a full year basis, adjusted EBITDA was up by 64% to EUR 12.1 million, a record result for the group. The change in margin was mainly the result of scale, a change in the product mix of iGaming, alongside with high investment in salaries costs as part of the group's strategy to expand its software development and product portfolio, all with the focus of margin control.

Operating profit for the quarter amounted to EUR 0.2 million, an improvement of EUR 2 million from the previous year. And on a yearly basis, it saw an improvement of EUR 5.5 million to an overall EUR 0.8 million operating loss as a result of improved underlying performance.

Finally, we are pleased that in the first few weeks of the year, we have seen a strong current trading, matching our expectations.

Now turning to Slide 8. As I mentioned earlier, our entry into new markets, particularly the Netherlands, has been exceptionally strong. This, coupled with new client wins and the ramping up with operators launched early in the year, has given consistent quarterly growth since third quarter of 2021, with the fourth quarter 2022 seeing a 13.4% increase quarter-over-quarter and 50% from the previous year.

The key drivers for the fourth quarter outperformance is new launches of iGaming and turnkey Solution customers, mainly on the Dutch market, which is ComeOn and Betnation and Merkur in the Czech market. Performance of customers launched in financial year 2021 and in financial year 2022 was better than expected, mainly on the content segment. And North America content revenue tracking in line with our expectations with the rollout of new content in Michigan and New Jersey.

Overall, new business pipeline, new market entry and more focused sales underpin the financial year 2023 revenue targets.

As you can see on Slide 9, gross profit margins are in the growing trajectory since third quarter of 2021 due to the shift of Bragg's product mix. We are scaling up our business in line with both our revenue growth and the continued movement in product mix, as indicated on the right-hand side of the slide. Product mix has changed noticeably since last year's third quarter. It is trending towards PAM, turnkey solution and proprietary content, leading to improving gross profit margins and profitability. The gross profits increased by 61.6% to EUR 13 million in the fourth quarter, with a full year growth of 59.2%, reaching EUR 45.1 million, with margin improving for the quarter by 390 basis points to 54.9% and for the full year by 460 basis points to 53.2%.

The fourth quarter revenue performance driven mainly from the content, aggregate and third-party exclusive content and proprietary content, while platform and turnkey solutions were slightly lower proportionally. In the fourth quarter, total Games and Content revenue segment amounted to EUR 18 million, and represented 76% of the total revenue compared to EUR 11.4 million and 72% of last year. Proprietary content deployment is positively progressing, both in the U.S. and EU market by increasing both distribution and games performance. As we indicated in the previous quarters, the group is targeting gross profit margin improvement to reach 60% by financial year 2024, mainly by increasing its revenue portion of its proprietary content, PAM and turnkey solutions.

Moving to Slide 10. Adjusted EBITDA amounted to EUR 3.6 million against an operating profit of EUR 0.2 million, and on a full year basis to EUR 12.1 million against an operating loss of EUR 0.8 million. The gap was driven by the following noncash and exceptional items. Depreciation and amortization, the increase in intangibles amortization is part of the Wild Streak and Spin acquisition in June 2021 and June 2022, respectively, and the increase of capitalized software development costs. Share-based payments, the charge for awards granted to senior management during the period composed of deferred share units, restricted share units and share options. Transaction and acquisition costs, costs mainly associated with acquisition of Spin acquisition in June 2022, M&A activities during the year and costs associated to the convertible debt financing completed in September 2022. Exceptional costs, the costs mainly associated with the strategic review process took place early in the year with onetime both compensation and recruitment fees.

As you see on Slide 11, we ended the quarter with a cash balance of EUR 11.3 million compared to EUR 16 million of December 31, 2021, with outstanding liability of EUR 10 million convertible debt. As of this date, the total outstanding liability after share conversion is USD 9 million.

Our net working capital is approximately EUR 8 million, excluding current convertible liability compared to EUR 11.6 million at the beginning of the year. The cash difference between the start of the year and the end of the year is explained by EUR 9.1 million consideration paid upon the Spin acquisition, a continued investment in CapEx and tech in the total of EUR 7.3 million, and this offset by EUR 8.1 million net proceeds from the convertible debt and improvement in the group performance.

Looking forward, we are projecting a positive free cash flow from operation, while there is no CapEx or technology debt required in the business.

Management is confident that there is no immediate refinancing or further debt requirement needs for the business.

Turning now to our outlook for 2023. We started off the year so far with continued momentum and expect that we will continue to successfully execute on our growth drivers throughout the year. This morning, we provided revenue guidance in the range of EUR 93 million to EUR 97 million and adjusted EBITDA guidance in the range of EUR 14.5 million to EUR 16.5 million. The midpoint of these ranges represent year-over-year growth of 12% for revenue and 28% for adjusted EBITDA.

With our record fourth quarter performance and strong current trading, today's guidance compares positively to the initial outlook we provided last November when we reported our third quarter's results. With that, I will turn the call back to Yaniv.

Thanks, Ronen. Our games and product development machine has been reinforced with top content partners and complemented with Tier 1 customers. Partnerships with leading companies like Bluberi and Galaxy Gaming, produced online-first games and deployed with blue chip operators in the U.S. and Europe, including our newly launched turnkey partners, the Netherlands and the Czech Republic. Our ability to successfully operate on both sides of the Atlantic, and our focus on iGaming, has proven to be a key differentiator for Bragg, in what is a crowded and competitive marketplace.

Slide 15 showcases our recent content production and development headed by our Las Vegas Content Hub, developed and integrated by our amazing teams across Slovenia and India. Within a year, we've established two new studios and managed to develop and deploy 20 new titles across our network. We aim to more than double this production capability within 2023. On top of this proprietary portfolio, we've developed and integrated 23 titles from our exclusive partners under our Powered by Bragg program. This combination offers another point of differentiation, and by working closely with our operating partners, we're already optimizing game performance and applying the growing data set to the 2023 games development road map. This is a key driver in our quest to become a must-have content partner in all markets we operate in.

Slide 16 demonstrates the initial impact already apparent of our content-led strategy. By expanding our proprietary and exclusive portfolio, we are able to offer a unique selling point and simultaneously expand margin towards our long-term goal. This is just the beginning. Game development, when done right, takes time and persistence. However, the team's ability to set up, produce and roll out this new game portfolio in a short time frame is an amazing achievement. We're now focused on ramping up our game production and distribution through 2023 as we want to leverage this early success, create momentum and brand recognition as proven performers.

The bottom graph also demonstrates our strategy's execution effect on revenue and market diversification, another key differentiator in our ability to offer content coupled with regulated and compliant tech stack. It's not just about the games, it enables us to create new revenue sources that serve as a foundation to future growth. We're going toe-to-toe with much larger competitors and aim to disrupt our field and gain additional market share. Online gaming has always been a super dynamic sector, and Bragg's agility and creativity has allowed us to succeed even under extremely challenging conditions. Product excellence and market diversity are key to our future success, and will eventually win the day.

Moving on to Slide 17, specifically in the U.S., which is the fastest-growing iGaming market in the world, our existing distribution and existing relationships are helping us roll out new content across major gaming states at a growing pace. Online Casino is now recognized as a key component in the U.S. growth and profitability story for the operators, and we see an increasing demand for well-performing games. Atomic Slot Lab game development philosophy, which leverages proven land-based titles and game mechanics has resulted in a new content portfolio we are very excited about, and has already been well received by American players and complements the already established Spin games roster. We are now focused on cranking up our production capabilities, aiming to introduce more proprietary and exclusive games from our partners and working closely with the operators in order to deploy and promote these games. Our clear goals for 2023 and beyond is to position Bragg as a content must-have partner across the key iGaming space.

And on Slide 18, 2022 was no different than previous years in terms of online market regulation, which has only accelerated. For Bragg, it has been a year of new market entries alongside existing markets expansion. Establishing Bragg as the market leader in the Netherlands was complemented by new content deployed in the U.K., Sweden, Canada and Switzerland. Our hub aggregation platform was deployed into the Belgium market, and our PAM went live in the Czech Republic. This, of course, follows our new content deployment in the U.S. Deals to introduce our content in the Italian market, the second biggest in Europe, and in Mexico have been signed, and we are now looking to launch and expand our presence in these important markets. Looking ahead, new opportunities lie in markets going through different stages of regulation. Brazil is one key Latin American market we have our sights set on. We also continue to monitor the developing German online sports and casino regime, we launched earlier this year. Our tech and games have long been proven performance in this market. In North America, our license and certified proposition will help us capitalize on the future U.S. states and Canadian provinces regulating online gaming in the mid- and longer term.

To summarize, we're now lapping another record year for Bragg financially and operationally. We are consistently executing against our product and market strategy, entering new markets with our multiproduct approach and increasing our proprietary content footprint. We're continuing to reinvest into our products and teams as we grow Bragg into a B2B key player organically. This also enables us to take on additional inorganic opportunities in the future. With our strong current trading, and 2023 guidance of between EUR 93 million and EUR 97 million in revenues, and EUR 14.5 million to EUR 16.5 million of adjusted EBITDA, we're excited about the opportunities we have in front of us, and we can't wait to execute against them.

I wanted to take this opportunity and thank our Braggers for their dedication and an amazing year. These are truly their achievements. Thanks again for listening. We'll be happy to take any questions you may have.

(Operator Instructions) Your first question comes from Edward Engel with ROTH MKM.

Congrats on the quarter. Last quarter, you had the slide up that showed a timeline of your state-by-state U.S. rollout of proprietary content, which was largely being completed by the end of 2023. Can you just talk about how you're tracking in terms of rolling out in new U.S. states and then, I guess, major operators within those states?

Sure. Yes, we're -- the plan, as we presented is progressing well. We are live in the three major new gaming states with top operators there being New Jersey, Michigan and Connecticut. We have Pennsylvania as planned, as we communicated last time around on plan, on target and final stages of testing, and we hope, pending regulatory approvals, that we can go live there imminently. So in terms of our rollout plan, both with operators and with -- in the different U.S. states, we're on track. And now it's about, as we mentioned, getting more share out of the operators and also moving down the list to sort of increasing our market share in each one of those states and our share of wallet in each one of the operators, but it's progressing per the plan that we've communicated.

Perfect. And then on Slide #16, it shows there a pretty decent uptick in your gross profit from Bragg Studios. Was that just a factor of a lot of game releases there? I guess what was kind of driving that strength in December?

Well, it represents the fact that we're already seeing the effect of over indexing in terms of monetary value. This is still a low base we're working off, but the proportion of Bragg Studios inside our overall game proposition, most exclusive and proprietary is growing at a nice pace. Again, reaffirming the business rationale behind expanding our production capabilities around it. So that is trending well. And the initial batch of gains is -- had been performing per expectations, in some cases, exceeding them, and these are good initial signs.

Perfect. And then just one last one, if I could just squeeze it in. The gross margin in the 4Q had a nice uptick. Just wondering, would it be fair to assume that gross margins should be higher in the second half of the year as you kind of rolled out with your provider content across more states?

Yes. Well, that was the original plan, again, focus on deploying -- deployment in the first half of the year and started getting that effect in the second half of the year. We are mostly demonstrating our ability to consistently grow that margin. Having said that, if we have opportunities to invest or to develop the product or the proposition further, we may choose to apply more capital towards that. At this point, that seems to be the direction we're heading in. But again, if we wanted to ramp up our game development and product development capability, we're able to do this, but the trend is to expand gross margin through the second half of the year and into '24.

Our next question is from the line of Matthew Lee with Canaccord Genuity.

So I'd love to start by breaking down the updated guidance in terms of what's changed, both in terms of revenue and more important, profitability. So the midpoint of your guidance suggests high teens EBITDA margin, which is a pretty substantial jump in current level. So I just want to get your thoughts there.

Yes. What changed -- well, we maintained consistency in terms of our previous guidance just with monetary value. We've communicated low teens on revenue and at least 20% growth on adjusted EBITDA. Developers -- the fourth quarter was stronger than we anticipated on the back of a good, mostly activity around World Cup. That momentum continued into this year so that's mostly -- we revisited the growth trajectory, and we wanted to make sure that we are bullish enough on our estimate at this point. But that was mostly when we spoke last in November, it was pre-World cup, and we were cautious about our participation frankly, no one has ever seen this type of event at this time of the year. But again, we were pleasantly surprised by increased gaming activity around it, which led us to revising the guidance.

Right. That's fair. And then maybe on the content side, proprietary currently makes about 10% of total revenue. Maybe can you help us understand where you said that to be for 2023? And then maybe longer term, given your expectation of acceleration of that business? And then have you changed the number of proprietary games that you're expecting this year, then maybe next year?

Sure. So I'll take the second one first. We're changing the number of proprietary games. We're putting more development resources behind them. So we've established it again, as we outlined, in record time. We were able to regroup or reestablish two new studios around the resources that were in the company that are acquired through the U.S. acquisition, and we're building around them. So more developers, more game production, more certifications and more territories also separating between the EU and the U.S. production lines. And that's the reason why we're looking to increase both production and deployment because deploying in regulated territories is not a trivial task, and we're streamlining that process so we can do more with the existing resources.

On the proprietary content, well, basically, what we are expecting is that production and capability -- and the deployment capability ramp-up will result in accelerating their proportion of the total revenues. Because right now, it's ticking up to 10%. And then, naturally, every percent we expand there should have a bigger impact on the bottom line, and that's basically the plan. We don't have a separate target for proprietary content for '23 and '24, but we do realize that is embedded inside the guidance in our budget. So if you look at the budget or the guidance, and the number of proprietary games that we're planning to deploy, you pretty much get the full picture of the effect that it will have. The bottom line is growing faster than the top line.

Your next question comes from the line of Adhir Kadve with Eight Capital.

Congrats on the quarter. So a lot of new content in New Jersey and Michigan. I'm just wondering, can you give us kind of like early feedback on how this content is kind of being received by the players and by the market?

Yes. So we've had a good initial experience, just a small group of these games go live in these markets, still a subset of about five or six games since November through today, and we're looking to redeploy a few more batches inside Q1 and then Q2. The initial results are encouraging in the sense that every game that we've put out there has made an impact and specifically with the leading gaming operators that we deployed them with. We are talking mostly on GGR and activity levels. And it's now about two other factors that we need to make sure that we consistently improve. One is positioning. These games typically are well accepted, but then you need to make sure that they are promoted and positioned in a way that will keep activity high. And that's something that we're working with the operator towards. And the second is cadence, making sure that we release those on steady and well communicated plan. That goes to -- that saying is also very relevant to Europe with the larger operators. So creating that visibility and road map into the second half of the year is very important. And I think that would create a long-lasting effect.

But the initial signs show that the games are, say, are working and they're getting traction and also getting the appropriate attention from the operators, and that's what we're looking to build as we scale up.

Okay. And then just on the back of that, like are the games that you have, for example, New Jersey and Michigan, are they easily transferable into markets like Connecticut? So if you see very good results in New Jersey, do you require a lot of kind of investment in the games to kind of launch them into a new state or potentially a new country?

New state, no. It's -- the games are consistently across the U.S. The only thing is -- the main thing is certification, which needs -- each state requires a slightly different certification process and with the operator. So that's -- once the game is live in one state and certified in another is pretty streamlined, or I wouldn't say easy, but it's more transferable. Other markets, games from the U.S. into Europe and vice versa, it's not as trivial as people initially thought. That's the reason why we've structured this both market-specific or, call it, continent specific. Some U.S. games are accepted well. We've seen some Atomic Slot Lab games received well in the U.K. and other territories. But generally speaking, we're trying to cater for each market. And if we get the benefit of transferability, that's great. But we assume that the players in each market sort of have their own taste, especially when you talk about Central Europe versus the U.S.

Okay. Excellent. And maybe one last one from me and then I'll pass the line. GGR generated on the platform was fairly high this year -- this quarter at EUR 5.1 billion. I assume a lot of that is on the back of transactional activity from the World Cup. But can you kind of give us what like a second order benefit of that when you see these people coming on the platform, transacting, playing games, how do you kind of leverage that into the future? And how does that kind of help you guys as a group?

Well, a lot of it is with the operator. We provide them with the tools, but at the end, it's always a game. The World Cup generally is a big acquisition event, but what we -- as I said, we were pleasantly surprised that the gaming activity, and most of this is still gaming activity, not necessarily sport, but we do provide sport in some key markets like the Dutch market, but this is predominantly gaming activity. And if you see an increase in that, it means the players are playing. The one thing that you want to make sure that in terms of engagement, that players keep on playing, the levels of activity or the number of actives keeps increasing to increase that wager activity. Once the bets are increasing, then you are able to acquire and retain the players. Again, this has a lot to do with the operators' CRM and acquisition, mostly retention and engagement efforts. We do offer them an increasing number of tools with greater depth so they can retain those players and increase activity like Fuze, and that has seen some great initial success in making the games and the events more sticky. But so far, that increased -- as I said, the momentum persisted into the first quarter would suggest that the players stay with both the content and the platform, which seems to be sticky in that regard. But wagering is a good parameter of activity generally speaking.

Your next question is from the line of Mike Hickey with The Benchmark Company.

Congratulations on your fourth quarter, year and your strong guidance here. I guess the first question, I realized fourth quarter was strong. Your current trading activity seems to have, I guess, carried a lot of that momentum. I'm wondering sort of how you factor in the macro environment into your thinking for '23. Obviously, a lot of pressure on the consumer, the player. Curious how that's impacting your business in key markets?

Thanks, Mike. I think the major factor behind the diversification, you're absolutely right that in our sort of recession prone, or I don't want to call it recession-mania riddled environment and consumers are generally more conscious of expenditures and free cash flow. But generally speaking, when we diversify our revenue flow and our revenue sources, than especially across different markets, but also through different product verticals, we create sort of a safety net around that. I have to say that some of the growth that we were seeing sort of on a broader level so more entertainment and consumer-driven spending. Some of the content also well received, let's call it, on the entertaining or entertainment side. But generally speaking, the way we think about this, the macro environment is definitely something that we need to keep an eye, but it's mostly on side of the operators and markets themselves.

So our customers, our partners are directly impacted. And in that regard, we're very focused on creating long-term partnerships that have 2-way incentives so both parties can demonstrate margin and control, especially in regulated environment. But this is the long game, and that's the way we're building it. But diversity and the right types of deals is the right -- we are moving in the right strategy to sort of go through this challenging period, which we will eventually end.

I guess the next question on your U.S. expansion. It seems obviously some puts and takes there, I think, coming into a new market, especially when that's expanding so fast. Just curious, I guess, any incremental early learnings after being in the market now in the U.S. and how you think about your current resources? I think you mentioned maybe in your prepared remarks that maybe you'd continue sort of M&A and increasing your internal development. So I guess just broadly speaking, curious what you're seeing in the market, what you're learning and how that's maybe reshaped some of your thoughts on the U.S.?

And then also just curious, if you think there's any further regulatory relief, it seems like online casino is obviously behind sports betting in the U.S. in terms of opening new states. I think there's more of an effort here recently to sort of open new states, but curious your thinking there and the opportunity you see?

Sure. So on the first part, it's a lot to unpack, but I'll try to sort of summarize it. I think what we've learned since we ventured into the market is -- and I've been involved in the U.S. market for a decade now is that two things or a few things prevail here. One is the investments, the resource investments, you need to be prepared to put in and really lean into it. It's not just another market, the prize is big, but so is the investment. And in some cases, it's just a different type of DNA. I think the two acquisitions made with Spin Games and Wild Streak Gaming has proven themselves as game changers. And going into the market directly would have probably been either prohibitive or extremely challenging at our current structure, and those acquisitions really provided us with the shortcuts that we were looking for because it's mostly around both distribution and your ability to work with the American deployment and regulatory compliance mechanisms, which are very different from Europe or the rest of the world, very business prone, but they're very detail oriented. So this one thing is -- that's exactly what we're currently focused on and making sure that we streamline our global European, India and U.S. delivery machine tuned towards the U.S. market and the U.S. operators were different organs. These are different companies than the ones operating elsewhere. So it is a unique market in that regard. That's one takeaway that is almost setting up a whole new operation, leveraging some of our global capabilities.

And the second part is, on the regulation development in the U.S., naturally, a casino is a different -- very different than sport. We have 30 sports states, but only 6 gaming states. On one side, it is more politically charged and requires a lot of [concession] and bipartisan support. On the other side, we just see a small group of states making such a material impact in creating such an enormous TAM. I think that we don't need to get to 30 states, we only need to get a couple more across the line to do two things. One is significantly increase the TAM, which is already big. Working off a low base, we don't need additional states, but any other states added will be a net to our addressable market and help us increase that gearing effect. Deploy the content, as I mentioned, into additional states is marginal. It's not dramatic. And the second point is once a state adds casino to its existing sport product, I think that will serve as an important precedent because the [two states --] and the six states that have regulated gaming alongside sports betting have done it pretty much at the same time. Once the game -- or once, sorry, a state demonstrate the ability to pass casino on top of sports, I think that will write sort of the blueprint for other states to do that. And I think that will accelerate this, I believe, '24 play onwards. But once we do that and putting aside the larger states, the top three states, anything in New York, Illinois, or any other larger state naturally will move the needle for everyone and for us as well. So that tide should lift all ships.

Your next question is from the line of David McFadgen with Cormark Securities.

I was wondering if you could give us an update on the German market. Have you seen much of an improvement in that market? And are you banking on much of an improvement in your '23 guidance from Germany?

In short, we were encouraged to see that the German local federal government has relaunched its regulatory regime. So they now have a new body issuing licenses, which was a bottleneck in the past, really slowed down the development of the market. Having said that, the one thing that still remains challenging is the actual tax framework there, which is very high. It's actually on betting wagering basis, which is prohibitively expensive. Without a significant change in that, I think that, that market will be challenged to really go back to what it used to be. Having said that, we are hearing increased conversations about addressing that in several contexts. So we mentioned it, we're encouraged. We haven't included that in our '23 guidance. We're assuming that, that development will take more time, but we've mentioned it because, to us, it will be a pure upside of the platform and mostly the content that we have developed and integrated into it with some of our local partners in our proprietary portfolio. We know how to operate in that market from a consumer perspective and adjusting it towards any regulation should be relatively straightforward.

But again, now that they're issuing licenses, the tax framework is probably the next order of business, and I hope they will -- they will go forward and make it a more, call it, business-oriented market as opposed to a restrictive one, but that's our baseline assumption.

Okay. And then just on the Netherlands, can you give us an update on your performance in that market? I know in the past, your market share was about 30%. I was just wondering if you could give us an update on that statistic, and just how things are going in the Netherlands?

Well, yes. I mean we don't have any formal data yet or recent formal data around it, but we're assuming we're about the same -- about the same market share, give or take. The point, we've had great success with our partners there. We've launched two more operators. Those launches, as Ronen has indicated in his presentation, were better than we expected. They were quickly ramping up even during the World Cup, which is typically a sports-led -- sports-led event. So they were able to acquire and grow inside that market. So the market is growing albeit a more moderate pace naturally since its inception, as you expect. And in there, right now, we're very focused on working with our partners to make sure that we keep adjusting and improving the platform. Also from a competitive, and more importantly, from a compliance perspective, the local regulators has a high bar, and we aim to keep on meeting it. Some of the changes that they're making, we're keeping abreast with, and that's one of our major focus areas. Having the experience in other regulated markets, and we know that this isn't -- there's never a steady state so it's a very much a moving target -- and we're very focused on that. But so far, we're very happy with the performance in that market. We're looking to fortify our market position there with increasing our existing partners and potentially adding new ones.

Okay. And then just lastly, you talked about the content rollout in the U.S. being accelerated in the latter half of the year. So I'm just wondering does that have the potential to potentially raise guidance as you bring out more and more titles is back half weighted?

Well, we've taken into consideration our plan. Actually, if we are able to roll out -- the one thing that accelerating rollout would naturally have a positive effect. But more importantly, we're trying to work off some working assumptions around the game's performance. What could change -- potentially change guidances if some of the games produce or will perform better than what we expected. There is no real way of knowing it before you launch a game like most consumer-facing products. But I would say that alongside our production and deployment capabilities, the games' stickiness and performance have the potential of moving guidance in that regard. So that's something that we will naturally monitor and keep you guys and investors updated as we make progress through the second and third quarter.

Your next question is from the line of Jack Vander Aarde with Maxim Group.

Great. Congrats on the strong 2022 finish and strong 2023 outlook. Yan, I wanted to just point out maybe in the fourth quarter, the number of unique players using Bragg's games and content, excluding Wild Streak and Spin, that increased by 51% to EUR 2.8 million, it looks like, in the fourth quarter. Clearly robust growth in players, especially considering the macro. Can you just remind me of what this actually includes, and what's driving this kind of robust player growth? Because it seems like the fourth quarter particularly stood out relative to the rest of the year?

Well, the unique players is also a function of marketing activity around the brand that we power. And as we mentioned, some of the market activities were around the World Cup. So that created a surge, not just in sports activity, but also in gaming activity, depending on the country that you were in. And naturally, when we have live presence in places like the Netherlands and some of the U.K. and Western Europe, some of them have teams in the tournament so a lot of the marketing was done around it, and I have to say very cleverly sort of adjacent to the sports event before and after them. And a lot of this also stems from a higher penetration on mobile. This was naturally the highest mobile penetration in the World Cup history. So people were actually able to, in some cases, play through a game using their mobile devices. So overall, what you're seeing is mostly an effect of a seasonally typical fourth quarter, supercharged with increased marketing activity that resulted in increased unique players over the platform, both new players and existing players.

Excellent. Got you. And then maybe just one more follow-up for me. Just looking at the overall head count, it looks like that's also scaled significantly since last year with over 400 employees, contractors, subcontractors. Just how are you thinking about headcount in 2023? And is that baked into your adjusted EBITDA guidance?

Yes, sure. Of course, it's baked in into our guidance. We made a push. As I mentioned, we have an opportunity, and we wanted to put more resources behind our either -- both product development, but also content development. That's the main result behind it. As you can see, this is also a function of the overall activity. A company that runs or drives more than EUR 5 billion in bets and over almost EUR 18 billion in processed funds and so forth, that also projects and requires more manpower around it, both from a development and competitiveness perspective and especially in the regulated environment. Again, the Netherlands, just to give context, the company was heavily relied on the dot-com market back in 2021. It's a completely different business now, both from a global, but also from a practice perspective. So that -- in that regard, it affects both the investments and margin. But going forward, as I mentioned, into second part of the year and into next year, we are looking to start harvesting the results of that investment. The fact that we're able to do that while maintaining growth and profitability so top and bottom line is a remarkable achievement, I have to say.

Most companies at this point, they would have to sacrifice one or the other. We're able to do both. We just want to use this momentum in the back of the growth trajectory to make sure that we put that to good use and then good return. But right now, our main capital is human capital. And I expect that, beyond this year, there will be more of a steady state or incremental growth as we go into new markets rather than this development push that we're trying to cater. We're basically shortening time frame instead of sort of stretching them out further into the future, we'd like to do that sooner rather than later.

(Operator Instructions) Your next question comes from Gianluca Tucci with Haywood Securities.

Congrats on strong quarter. You mentioned that current trading is off to a strong start. I'm just wondering, do you expect normal seasonality this year? Or given your state launch plans for 2023, this year might look a bit different?

Well, by now, I don't really know how to define normality over the last two or three years. But I mean, this year, hopefully, we're getting back to a more seasonal or, let's call it, foreseeable calendar with no major sport events in Europe or globally, and also the post COVID effect is sort of subsiding back into calendar. So yes, I mean, I expect this now to be more driven by the business agenda rather than external events. And yes, I mean, it's -- the only x factor here has been travel seasonality has been quite high over the past two years, people have been traveling a lot so we have seen some of that effect. And the flip side was the higher mobile penetration on gaming product, which traditionally was lower than sport. So that compensated for some of that. But I mean, this calendar, I think we're looking at something that resembles more of what we used to see up till 2019 than '22 and '21.

Okay. Perfect. And on proprietary content -- on the proprietary content side, it's hanging around 10% of revenue. Like when do you see that in the low- to mid-teens? Is that also a back half of the year story?

Yes. I mean, we're looking to ramp up the deployment and that should follow suit as soon as we get that or soon after content. Listen content, at the end of the day -- and again, I'm stressing the fact that we're transforming or transitioning the company into that position. Other companies take years to build the portfolio and the gaming brand and distribution presence, we're trying to leverage our existing capabilities. So we are leveraging our existing capabilities and distribution to short-circuit that. But content is always a persistence game. Once we get more and more content out there with more of more operators, that will take an effect and expand those -- there's -- that's a mathematical sort of blueprint. We're not inventing anything new here. The only thing that we're doing is leveraging it as opposed to establishing this separately, which required a much different and bigger effort on existing both capital and resources. So that base would expand if -- I mean if we need to further invest into it and then have it ramp up quicker into next year, that may be the best decision.

But generally speaking, that is the direction of travel we're very, very focused on.

Okay. And just lastly from my end here. I think you mentioned that you expect to be free cash flow positive, so that's great. How can we think about CapEx investments for this year?

Ronen, you want to take that?

Yes. So from a free cash perspective, from a CapEx perspective, let me just give you some kind of how it actually was involved. In 2021, we invested EUR 2.9 million. This year, it was EUR 6.7 million. When I'm mentioning CapEx, I'm talking about the software development cost is actually taking our team and allocating the cost, which is the creating of new content. And we're projecting from 2023 around EUR 10 million to EUR 11 million of software development costs in our balance sheet, which is quite prudent. We're keeping the same ratios. We know what we're investing. We know we have a limited of maintenance, all about launching new customers, building games, which is the most highly investment part of this particular year in the last 2022 and definitely into 2023.

So that's roughly, as Yaniv mentioned before, we're ramping our human resources. And majority of the CapEx, I'd say, 90%, 95% of the CapEx is predominantly our software development cost. All the rest is IP and trademarks protection and investment in those particular items. But that's in certification of course of games, when you're launching on those particular markets, if in the U.S. market specifically, and European slightly different, you are certifying games that's also part of CapEx. But the lion's share, as I mentioned, the majority of it is our development team, which is all built in-house, and by consultants that are fully, fully dedicated and exclusive to us.

There are no further questions at this time. I will now turn the call back to Mr. Yaniv Spielberg.

Thank you, everyone, for joining our call this morning, and thanks to all the Braggers for their hard work and a very successful year. We're extremely happy with the year of the past and even more excited about the year ahead. We look forward to hosting all of you guys on our next call and for the time being. Have a great day.

Ladies and gentlemen, thank you for participating. This concludes today's conference call. You may now disconnect.