Inspired Entertainment Inc (INSE) 2017 Q3 法說會逐字稿

Good day, and welcome to the Inspired Entertainment Third Quarter Conference Call.

(Operator Instructions) Please note, this event is being recorded.

I'll begin today's conference call by referring you to the company's safe harbor statement that appears in the third quarter earnings press release, which is available in the investor section of the company's website at www.inseinc.com.

This safe harbor statement also applies to today's conference call as the company's management will be making certain statements that will be considered forward-looking under securities laws and rules of the SEC.

These statements are based on management's current expectations or beliefs and are subject to risks, uncertainties and changes in circumstances.

In addition, please note that the company will discuss both GAAP and non-GAAP financial measures.

A reconciliation is included in the earnings press release.

With that completed, I would now like to turn the conference call over to Mr. Lorne Weil, the company's Chairman.

Mr. Weil, please go ahead.

Thank you, operator.

Good morning, everyone, and thank you for joining our fiscal third quarter conference call.

I'll make my comments very brief before turning things over to CEO, Luke Alvarez, who will discuss the quarter in some detail, and then we should have plenty of time for Q&A.

As we have been discussing for some time, we are continuing to see momentum building in the business, with year-to-year constant currency revenue growth comfortably above 20%.

As Luke will discuss in a moment, the ramp-up of our business increase was particularly noteworthy in the quarter.

But more generally, we're seeing nicely balanced organic growth across geographies and product lines.

Once again, the decline in the value of the pound serve to somewhat mask the underlying momentum in the business, but I think we have just about lapped that problem.

More specifically, at June 30, 2016, the pound was at $1.33, only slightly higher than where it was at June 2017 at $1.30.

But the pound started the 2016 quarter at about $1.45 and it was the decline through the quarter that eventually produced the year-to-year comparison that we have seen in the most recent quarter.

Assuming, of course, that the pound stays in the $1.30 range going forward, we can expect now to see the full impact of our momentum on our results.

Lastly, I should mention that in addition to driving significant organic growth in our core businesses in several key international markets, we continue to very aggressively lay the groundwork for the development of our North American business and to look carefully at a range of interesting and accretive acquisition opportunities.

And with that, I'll turn the program over to Luke to discuss the quarter in more detail.

Thank you, Lorne.

So I will now talk through the performance of the business in the quarter with comparisons to earlier in the year and also to last year.

Broadly, we are very pleased with our performance in the quarter, with the business delivering very significant growth from our new launch into Greece but also significant growth from many other engines of growth accelerating in parallels across the business, as Lorne said, across a range of territories and different channels; retail, online and mobile.

And so we think that growth will continue and accelerate going forward.

Revenue increased just under $7 million or, in fact, 23% on a constant functional currency basis, driven by growth in our Server Based Gaming hardware sales and also in Virtual Sports recurring revenue.

Reported revenue, as Lorne mentioned, increased only 10% or 9.9% from $29.4 million to $32.3 million, reflecting the adverse sterling currency impact.

But as Lorne explained, we believe we've now lapped that such that the double-digit growth rate should be reflected in the results going forward.

I'll talk specifically and spend a bit of time about Greece, which was probably the highlight of the quarter.

But as I said previously, I want to emphasize that there were multiple different engines of growth in parallel to the Greece rollout.

So in Greece in the quarter, we rolled out both Server Based Gaming products, VLTs and also our Virtual Sports.

SBG rollout is going extremely well in Greece.

We had 1,050 terminals in stores at the end of the quarter on June 30 and over 1,600 as of today's date.

The full deployment of the first phase is contracted to be 3,960 terminals and should complete in the first half of calendar '18, if not sooner.

And the performance of our terminals has been very, very strong during this ramp-up period, where obviously new venues are being opened every week and new terminals installed.

Our terminals have outperformed all competitors in the market.

There are 3 other Server Based Gaming VLT competitors in the market, including 2 of the world's largest gaming suppliers, in fact, the world's 2 largest gaming suppliers and we have the single, top-performing game and the top-performing terminals today.

We are very, very pleased with that performance and optimistic, therefore, that this will result in additional volume gains in the subsequent phases of the rollout, therefore, beyond the 3,960 that are already contracted.

In terms of Virtual Sports, we also launched that in the quarter or just before the beginning of the quarter.

And we're now live in 4,600 retail venues.

So those are OPAP lottery and betting shops distributed across Greece.

And we launched our Rush 2 virtual soccer product.

And we'll be launching additional sports in 2018.

The rollout went from 100 venues on kind of day 1 to 4,600 over about 8 weeks.

And I think I can confidently say it's probably the best retail launch by our virtual sports product we've seen worldwide.

OPAP ran a very strong national cross-media advertising campaign, including a very funny set of TV ads.

The product has proven extremely popular, so we're very happy with the results.

And players in the market in Greece are calling our soccer game the PlayStation game, thereby proving its appeal both to millennials as well as, of course, to the traditional football and sports bettors.

So Greece, overall, a real success.

We have the strongest performing Server Based Gaming products and the only and very strongly performing Virtual Sports products now live in just under 5,000 venues.

Overall, in our server-based terminals estate, our average operating base during the quarter increased by 1,181 terminals or just under 5%, driven absolutely by Greece but also by additional smaller volume games in Italy and in Latin America.

In Italy, in the server-based business, we continued to deploy SBG terminals with our sixth Italian government concessionaire, Gamenet.

But we also in the quarter had almost a full quarter, so a 9-week effect of the new tire tax rate on VLTs that the government implemented in April.

Overall, across the SBG estate worldwide, customer gross per win unit grew very slightly, driven by increases in all of the U.K, Italian and Colombian estates.

Net win per unit, net to us, declined very slightly as a result of the increased Italian taxes, but we expect momentum to be good going forward as Greece rolls out and we get more effect from that.

In the U.K, in our server-based business, we demonstrated solid trading performance in the quarter, showing year-on-year customer gross win growth.

We also sold and deployed over 500 self-service betting terminals, which themselves provide a small but profitable recurring service revenue to us as well as hardware margin in the quarter.

Critically, in the U.K., and this is a relatively new thing for us, although we've had Virtual Sports deployed on the mainstreams of the bookmakers in the U.K. for many years on a -- largely on a fixed fee basis, we started in this quarter to launch our second and/or third Virtual Sports channels with the major bookmakers, one during the quarter, one since the quarter, and those launches are going extremely well.

And really, we're applying the learnings of Italy and other international markets back to the U.K. there.

And whilst those launches will not be material in this fiscal year '17, we expect the U.K. retail Virtuals from second and third channels in most or all of the major bookmakers to be a material growth driver in fiscal '18 similar to the Greece Virtuals rollout.

So overall, in our Virtual Sports business, customer operators increased from 74 customer operators a year ago to 83 today or 12 or so percent.

So 83 customer operators today, and average revenue per customer also increased.

So we're adding volume and not deteriorating the quality of income.

In fact, Greece will probably drive an uplift in average revenue per customer.

As well as launch in Greece in Virtual Sports in the year and some of the of the U.K. retailers I mentioned, we went live with Fortuna in Poland.

Fortuna is Central Europe's largest betting operator, and we went live in 500 of their venues in Poland and also online with them.

And additionally, after a long and competitive public procurement process, we were selected as the lead virtual sports supplier to Veikkaus.

And Veikkaus is owned by the Finnish government.

It's the Finnish National Betting Agency and lottery, much like OPAP in Greece, and has an exclusive legal betting license on lotteries and sports betting in Finland.

And we'll be providing again Virtual Sports, both to their retail betting locations and on their online site.

In our mobile subdivision within the Virtual Sports division, we launched 3 new mobile remote gaming system implementations during the quarter, all actually via NYX with Leo Vegas, My Bet and Sky Bingo.

And revenue for that product line increased about 80% year-on-year, quarter-on-quarter versus the same quarter last year.

And after the quarter end, we also signed and launched with Mr. Green.

It's one of the world's fastest-growing regulated online casinos.

And Mr. Green as the other 3 and are live with several of our HTML 5 mobile games.

And so that business, while it's relatively small in the scheme of things, is an important and very fast-growing contributor going forward, very high-margin, like it.

We also celebrated the success of our very first Virtual Grand National.

So what we did here was we went in and filmed the Grand National race track and we produced a photorealistic, extremely convincing virtual version of the race with the same runners and riders as were figuring in the actual race.

We ran the Virtual Grand National on national TV.

It was broadcast the night before the actual Grand National.

And in fact, the predicted virtual winner, Cause of Causes, actually finished in second place in the actual live race on the following day.

So it was an interesting and exciting event.

And we launched a complimentary Grand National race of Champions slot game, land-based and online, to coincide with the event.

So that was a real success based on a real live race.

And I think you'll see more of that with both horse races and other types of sports as we continue and progress our Virtual Sports worldwide, including in the U.S.

Lorne mentioned the importance of the launch of our Virtual Sports into North America.

We previously announced the launch earlier in the year into Nevada with William Hill in various casino sports books.

And the deal with the Michigan Lottery for online and mobile virtual Sports, which is in development and progress, they're not yet launched.

And we have a strong pipeline of additional Virtual Sports opportunities in the U.S. and North America more widely in both lotteries and gaming segments, and we look forward to further announcements in the calendar year on that segment.

We also in the quarter, although it did not yet make a material contribution, launched our first Rush Go Virtual Sports games.

These are on-demand Virtual Sports games that you play in apps on your mobile device, smartphone or tablet, running off our remote -- Virgo Remote Gaming Server.

We are strongly optimistic about these new types of games.

They are hybrid sports games.

And we've now got them live across a number of the big U.K. and European regulated online operators, and we're seeing very encouraging signs of player adoption and very encouraging staking patterns.

We believe these are kind of hybrid games that represent a new category of excitement for players because they fuse kind of casino-style [math] and staking patterns with the fun and the passion and also the millennium enthusiasm of our sports and virtual sports graphics.

We have many new channels in mind for these types of games and many new versions of the Rush Go games featuring different sports and formats coming out over the course of the next few months and into 2018.

And we are optimistic that that will be a significant mobile growth driver going forward.

So broadly, it's been a very busy quarter with a lot going on.

We grew revenue very strongly and achieved many accomplishments.

We're looking forward to realizing the benefits of all those launches going forward and see that strong double-digit growth rate continue.

And as I said, whilst Greece has been a highlight, both on the Server Based Gaming VLT side and on the Virtual Sports side and will be a very material contributor going forward, there were many other launches in the year, land-based and mobile, U.K., European and other international as well as momentum in the U.S. So we are very optimistic about the progress of the business going forward.

So on that point, I'll hand back to the operator, who will kick off the question-and-answer session.

(Operator Instructions) The first question comes from Chad Beynon with Macquarie.

I just wanted to start with Greece.

Given the strong performance of the placements in the whimper down on the Server Based Gaming side of things, does this help validate anything with respect to your product?

I mean, I know it's early, but given your comments about how well some of these games have performed and how exciting this is, does this put you in a better place for Phase 2 in Greece?

And then also, is this something that you can talk to other operators around the world just in terms of how your product has performed and put you kind of in a different arena there?

Thanks, Chad.

I mean, that's a great question, and I think it does clearly help us very much in Phase 2. In fact, the Greece contracts are structured such that the best-performing suppliers gain additional volume in the subsequent phases of the rollout.

So we're optimistic of additional volume over time in Greece.

But I think you're right.

I mean, Greece is a very helpful case study for us.

If you look at the European distributed gaming slots and the VLT footprint, you've got the U.K, which is dominated equally by us and Scientific Games with equal market share.

You've got Italy, which is ourselves -- pretty much solely ourselves, NOVOMATIC and IGT.

And you've got Greece, which is ourselves, Scientific Games, IGT and a smaller, very good quality Czech supplier.

So -- in -- we are the only player represented in the 3 major European markets, and we're a very strong performer in all of those markets, if not, the top performer in some of them.

And we clearly intend to bring that reputation to other international markets.

And when the time is right, to North America as Server Based Gaming begins to be deployed in the distributed gaming environment there.

Great.

And then maybe taking that to kind of back to North America.

Given that we're about 2 months away from the big gaming show here, could you just remind us kind of where you are from a regulatory standpoint on VLTs in North America?

Maybe give us a taste of what some of the products are going to be like and just any messaging that you'll have here in North America for your SBG product?

Okay.

Well, I think, look, our immediate priority in North America is Virtual Sports.

I mean, as I mentioned, we're live in Nevada.

Land-based, we expect to go live, although it has been slower than we'd hoped, soon in New Jersey online with most of the New Jersey online operators.

And of course, we expect to go live next year, online lottery, with Michigan and to be announcing other lottery and gaming deals, both land-based and online.

So our 2018 focus is -- for North America is principally Virtual Sports, where there's a big low-hanging fruit.

I mean, if you think of -- Greece is going to be a very material contributor to us from Virtual Sports alone.

And Greece is 12 million people, relatively low GDP per capita economy, compared to any average U.S. state is larger and richer.

So we think the opportunity for Virtual Sports in North America is extraordinary.

Nevertheless, at the Vegas show, we will, of course, be bringing our server-based products, including our latest curve terminal, which we'll be deploying in the U.K. later this year.

And we are already G2S-compliant for the deployment that we've done in North America.

So we are certainly keeping a weather eye on the wide area, server-based and G2S-based opportunities in North America as they emerge.

And clearly, there are opportunities that we expect to emerge in late 2018 and 2019.

And we have products, which is not far from being fit for purpose for those markets.

Great.

On the U.K. triennial review, there is some -- there continue to be some headlines out there.

I'm not sure if anything is confirmed.

Could you just update us in terms of the latest in the market there?

Yes, I mean, I think the headlines are largely noise, whether they're positive or negative.

I mean, and they move around.

Obviously, the U.K. has been a little politically noisy recently with the general election.

But we are expecting an outcome in the fourth calendar quarter, probably an indication in October.

We remain optimistic that the regulator will make an evidence-based decision and most certainly collected a lot of evidence and are kind of thoughtful and informed.

I think it's important to understand that whatever the outcome in terms of any possible change to maximum stake, there are certain changes that would have little or no impact on the business.

Others would have potentially larger impacts, but none of those impacts will begin to flow through until fiscal 2019 because the earliest there will be confirmation would be probably December of this year and then there will be an implementation period.

So we don't see it as a short-term positive or negative.

But clearly, we'd like clarification and we expect that in the fourth quarter of this year.

But we remain optimistic that there will be a sensible, evidence-based approach.

(Operator Instructions) The next question comes from Todd Eilers with Eilers & Krejcik Gaming.

I want to ask a follow-up on Greece.

Obviously, it sounds like it was a strong ramp-up for you guys in the quarter.

Can you give us a sense now that you've got over 1,000 games in the market, can you give us a sense for what the gross win per game is kind of trending at this point?

And also, I was wondering if you could comment on, there was some news out that I'm not sure how credible it is that the government was looking at reducing OPAPs allotment of games a little bit.

I was wondering if you can maybe comment on that.

Do you see that as a risk?

Or is it largely noise out there?

Yes.

I mean, on the first point, Todd, and I anticipated you might want to know this.

But I think we're not in a position to cite actual GGR numbers at this point.

I think we are waiting until OPAP feel the time is right for them to do that as a Greek public company.

But we're very encouraged by the income levels, they're in line with our expectations.

Clearly, you see the early cohorts of in-stores are now performing better as they take -- there's an adoption curve of a few weeks.

Interestingly, in the last 6 to 8 weeks, we've been deploying into the betting shops and existing lottery venues, not just the dedicated gaming halls.

And we were optimistic that those venues would perform well, and they have.

So I think we are very comfortable with the income trends there, and they're in line with what we were expecting.

I think the -- what you're referring to in the Greek draft regulation is something that was published as a draft reg to Parliament last week, I think Thursday or Friday, and will be voted on in September.

It may or may not go through.

If it does go through, whilst overall it will reduce the total number of eventual machines from 35,000 to 25,000, remember, in the first phase, at the moment, we're only rolling out across all 4 suppliers 16,000.

So that still implies an additional 9,000 to be deployed on top of the total that's been deployed today.

And I think broadly, the feeling is it's very positive for the market because it will mean gaming GGR concentrated in both gaming halls with 50 machines per venue and now in these new regs, betting shops with up to 15 machines per venue, typically probably 4 or so, but in some of the large ones, up to 15.

And that will effectively mean that the legal GGR in the country is concentrated across a smaller number of machines overall than the originally envisaged total but a much larger number than are deployed today.

So broadly, I think everybody thinks it's very good news for the industry if that gets implemented.

But we'll wait to see.

It's still to be voted on, and that's likely to happen in September.

Okay, great.

Just one additional question.

You guys mentioned some self-service betting terminal sales in the quarter, I think 500 plus.

It seems to be a trend in the U.K. market.

Is this something we should expect to see more of from you guys?

Or was that kind of a one-off in the quarter?

No, I mean, look, you'll see a little bit more from us.

It's not particularly material as a line of our business.

I mean, one, we sell the hardware using some of our VLT form factors -- sometimes used assets, sometimes new assets.

And then we make a small recurring revenue from the machines.

It's a big growth trend in the U.K. market.

All of the big bookmakers now have in most of their shops 1, 2, as many as kind of 4 or 5 or sometimes more SSBTs to allow a much wider range of bets and to allow in-play bets and so on.

It's a small, profitable line of business for us selling and servicing those machines, but don't read too much into it one way or another.

(Operator Instructions) The next question comes from [Greg Greenberg] who is a private investor.

My question really revolves around the way in which you expect to fund the deficit cash flow until you get yourselves to a break-even position.

And I'd like some ideas to when you may expect that to be happening.

Dan, do you want to pick that one up?

Yes.

Look, I think we expect to run break-even or north of break-even cash flow in the relatively near future.

I think the reality is that any cash flow deficit is really the result of discretionary CapEx, and so there is an ability to modulate those -- that capital spend to the extent necessary.

But we're comfortable with the company's liquidity position for the time being.

So Luke and Stewart.

I don't know if you have anything more to add to that, but I think it's pretty straightforward.

Yes, no, I think that's -- I mean, look, we have our underlying businesses in VLTs and in Virtual Sports, very cash-generative.

We have lots of avenues of growth and ideas of where to grow the business, and we have been investing in those and continue to invest in those.

Obviously, our maiden quarter and this quarter, there was a certain level -- certainly, in the maiden quarter -- of fees going through the cash accounts and somewhat in these transaction fees as a result of the (inaudible) listing.

Those are now largely cleared down.

But as Dan says, the business underlying is very cash-generative.

And we have lots of ideas to grow, which is discretionary CapEx.

Okay.

Am I still on the call with you?

You are.

Okay.

So I guess, to follow up then.

I should understand that you have adequate cash available through your financing options and situations so that you can get yourself to a point without possibly accessing the markets, et cetera, and that's it.

Correct.

(Operator Instructions) This concludes our question-and-answer session.

I would like to turn the conference back over to Mr. Lorne Weil for any closing remarks.

Thank you, operator.

I really don't have anything to add to what we've already said both in the prepared remarks and the Q&A other than to say we're as positive as we ever have been about the things we're doing and about the outlook for certainly the next few years.

And we look forward to speaking to you again next quarter.

Thank you.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.