Inspired Entertainment Inc (INSE) 2017 Q4 法說會逐字稿

Good morning, and welcome to the Inspired Entertainment Fiscal 2017 Full Year 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 full year earnings press release, which is available in the Investors 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 the 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 over to Lorne Weil, the company's Chairman. Mr. Weil, please go ahead.

Thank you, operator. Good morning, everybody, and thank you for joining our fiscal 2017 full year conference call.

As usual, I'll make my comments brief before turning things over to CEO, Luke Alvarez, who will discuss our first year as a U.S.-listed public company in some detail and then we should have plenty of time for Q&A.

As you know, we closed on the acquisition of Inspired through our [Hydras] back in December of last year and I'm pleased to note that the attributes we identified in our analysis of the company have only strengthened over this year. We continue to believe that we offer a superior omni-channel gaming solution to our customers and that our Virtual Sports product, in particular, will continue to gain traction in jurisdictions around the world.

We continue to see the momentum building in the business as we expected with adjusted EBITDA growth, net of public company costs and after adjusting for foreign currency impact, increasing by 22% this year and we think this is really the clearest indicator of the momentum that we have in our business. And as the business continues to grow, we expect to see margins expand as scale overtakes these public company costs. As Luke will discuss in a moment, our launch in Greece has been extremely successful, bringing us an important new geography as we balance our growth across regions and product lines.

As you know, the decline in the value of the pound that surfaced somewhat masked the underlying momentum of the business, but I think we're in a position to expect a more favorable foreign currency environment. To give you a sense for the magnitude of the shifts, which, as you know, is largely attributable to the so-called Brexit vote in the U.K., at the end of September 2015, the pound was $1.51. At the end of September 2016, a year later, it was $1.30. And at the end of September of this year, it was $1.34. And I think you know that, along the way, it dipped quite a distance below $1.30 as well. 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 since it will not be offset, hopefully, by foreign currency shifts.

In addition to driving significant organic growth in our core business in several key international markets, we continue to aggressively lay the groundwork for the development of our North American business and then Luke will talk about a number of very important and, in many ways, we think tipping point developments that have occurred in North America over the course of the last year and to look carefully at a range of interesting and accretive acquisition opportunities.

And with that, I will turn the program over to Luke.

Thank you, Lorne.

So I'm pleased to be talking to the company's main full year results as a public company in NASDAQ. We are pleased with the company's performance in our first year as a U.S.-listed public company. We have multiple engines of growth now firing in parallel across a range of different territories and products and channels.

Revenue increased $19.5 million, about 16% on a constant functional currency basis, driven principally by growth in Server Based Gaming, hardware sales and in Virtual Sports recurring revenue. Reported revenue increased 2.3% from $119.8 million to $122.5 million, reflecting the adverse sterling currency impact that Lorne referred to, but as we said, we now believe that we have lapped that and we'll see the full effect of our growth momentum going forward.

Greece was probably the main highlight of the year in a year in which many different things happened in many different markets, and I'll come on to some of the others, but Greece relaunched VLT server-based terminals into the Greek market early in the calendar year. And as of the end of September 30, we have delivered 3,960 of those terminals into Greece, of which 2,700 are live as of today's date, the rest in the course of going live as our customer (inaudible) continues to rollout.

In addition, since the year-end, OPAP recently awarded -- or at the year-end, OPAP recently awarded Inspired with an additional 1,400 terminals, which will be installed during the first calendar half of 2018. And that's on the strength of our performance of those terminals in the market. Performance of our SBG terminals has been very, very strong and has outperformed our competitors. And a number of those competitors include 2 of the world's largest and also the U.S.'s largest gaming suppliers. We also have the single top-performing game on the server-based VLT in the market. So we're very enthusiastic about our VLT and server-based performance in Greece.

Rush 2 Football, soccer that is, European football Virtual Sports product, also launched earlier in the year and it's now live over-the-counter in over 4,000 OPAP lottery stores. Very recently, in the last couple of weeks, it's launched onto additional Self Service Betting Terminals in 500 OPAP venues, which should rise to about 800 venues by the end of this calendar year. And that's been an extremely successful launch. I think, in many ways, we think it's one of the best launches that we've done of that product worldwide to-date and our customer did an amazing job of launching and marketing the product. And during 2018, we expect to launch additional sports beyond soccer as well as additional soccer variants and, therefore, are optimistic of continued growth.

We also announced very recently a very important strategic partnership for -- in Greece with Novomatic. And Novomatic may be slightly less well-known to some of our U.S. listeners, but it's one of really the big 3 gaming suppliers worldwide alongside IGT and Scientific Games, albeit privately owned, in Europe. It's the main supplier of slots and casino equipments into the European market and we've recently announced that we are collaborating with Novomatic to exclusively deliver Novomatic's leading games on our server-based platform into the Greece VLT market to the Greek lottery operator, OPAP. And there are 5 Novomatic games live on our terminals in Greece, including truly iconic titles like Book of Ra and Lucky Lady’s Charms, and there are more to follow alongside new Inspired games in 2018. Novomatic and Inspired are also working to extend this partnership to additional markets in calendar 2018. So we're very excited about that and we believe that's helping our customer and ourselves grow our incomes further in the Greek market.

At the same time, one of the rationales for coming together onto -- into the Hydra [spec] and working together with Lorne and listing on NASDAQ was to bring our products and games and technologies into the North American market. And we've made significant progress, we believe, in Virtual Sports in particular, in the U.S. during fiscal and calendar 2017.

During the fiscal year, we announced that we've entered into an agreement with the Michigan Bureau of State Lottery to supply our Virtual Events lottery products as an online product, an online lottery product in the state. And we are optimistic that, that will go live during the first half also of calendar 2018.

And in the last week of November of this year, we also received formal approval from the New Jersey Division of Gaming Enforcement to go live with our Virtual Sports online. So 5 of our Virtual Sports and are now available for online and mobile distribution as regulated gaming products in the state of New Jersey. Contracted operator partners in New Jersey include Caesars, Resorts, Golden Nugget, Rush Street, Bwin Borgata, Betfair and Pala Interactive, many of them will be names very well-known to you. Two of those operators are already live with our Virtual Sports and there are more to come over the course of the next few weeks.

We also, as I'll mention later, announced and pre-launched our new 1st Down Virtual Football game. And when I say football, I mean football, not European soccer. And we're very excited about the prospects for that going forward.

We also saw good momentum nevertheless in our U.K. business. So one of the key announcements that we recently made is an extension of our Server Based Gaming terminal contract with Betfred, the U.K.'s largest independent bookmaker, for which we extended our contract there for an additional 5 years. And as part of that, Betfred also awarded us over 1,000 additional Server Based Gaming terminals which had been previously operated by another supplier, our main competitor in the U.K. market, so that was both a contract extension and a very material gaming share driven by our strong performance.

A follow-on from this, we've also extended and expanded our Virtual Sports agreement with Betfred. So if you go in to a Betfred venue, you will now see 4 of our Server Based Gaming terminals, but you'll also see multiple Virtual Sports on the screens in those shops as well as online. And that extension, in particular, applied the lessons we've learned in other European markets such as Italy to expand the number of channels available in those shops. So we now supply an additional 2 channels in addition to the one that was already there of our Virtual Sports content onto screens in Betfred's betting shop estate. And following this extension, players in Betfred shops will now be able to wager in about 1,700 venues on a race from Inspired every minute of the trading day.

At the same time, we also extended and expanded our Virtual Sports retail presence in other big U.K. retail operators, including William Hill, Paddy Power, 49's, collective of Baker's content and also into Republic of Ireland with Boylesports. So that's our first Virtual Sports market. We launched our first products into the U.K. in 2003 in Virtual Sports, but we're still seeing growth and expansion there.

At the same time, we grew very, very strongly in mobile with a full portfolio of games. RGS, that's our Remote Gaming Server called Virgo, grew extremely strongly in the year, triple-digit growth, adding multiple new games and new customers that we took live. So the customers now live with our premium mobile sports slots and also our on-demand Rush Go! Virtual Sports, which are unique to us, include many of the U.K. and Europe's largest regulated online operators, companies like William Hill, Ladbrokes, Gala Coral, Betfred, Mr. Green, Bet 365, Leovegas, SkyBingo and MyBet, and we also recently gone live with operators, including GVC brands such as Bwin and PartyCasino. And there's quite a long list of additional independent operators and regulated micro-gaming customers that we expect to go live over the course of the next 2 to 3 months. So lots of good momentum there on the mobile side as well as the land-based virtuals and land-based Server Based Gaming side I described previously.

In Europe outside the U.K. and also in Asia, we also pushed our retail virtuals very hard into a number of new jurisdictions and existing jurisdictions. Some of the key launches in these markets included in Italy where we launched with Virtual Sports originally in 2014 and saw a couple of years of strong growth and then the market kind of flattened somewhat.

We've seen -- during the year, we launched our new Football Matchday product, which is a multi-current -- concurrent multi-game game which allows a player to bet relatively small amounts in exchange for potentially very large prizes. It's an important category of market in the Italian market and we launched it in Snai, in Sisal, at Eurobet and in other venues. And we also used it to -- as a key product to secure new business wins. So we launched into Betaland venues. And in the last 2 weeks, we've launched a few games and we'll be shortly launching Matchday into Goldbet, who are the largest new entrant, new betting concession into the Italian market, to operate 1,000 venues. So a very, very important milestone for our expansion and continuing leadership in the Italian market.

We were also, during the year, in a competitive tender, selected as Virtual Sports supplier to the Finnish national lottery, Veikkaus, and we also took our Virtual Sports games live in Poland with Fortuna who are Central Europe's largest betting operator. We also launched in retail venues and extended our agreements through to 2020 with the Romanian operator, Superbet. And Romania, although a relatively small country, is a large sports betting market and an important land-based and digital channel for us.

We also, midway through the year, announced an exclusive deal with LT Game Macau, a company that many will be familiar with as they are the leading supplier of electronic gaming -- electronic table games or Baccarat terminals, specifically ETG terminals, into Macau and other Asian jurisdictions. And we announced a deal to launch a Virtual Sports ETG terminal with initially our horse racing game and, during the course of 2018, various other sports presented on the ETG format. We expect the first of those terminals to go live coming out of the Macau and GLL test process in the first calendar quarter, we believe, of next year with one of the key Macau casinos and we are optimistic that will be the first of a number of major Macau casino deployments of that product and a strong partnership that we're excited about.

Now, our company, as well as building a increasingly international and global customer and operator footprint, land-based and online and mobile, in gaming and in lottery, is, at its heart, a game and technology innovation company producing what we call entertainment with an edge. And during the year, we launched a number of new products and a number of new games. And as we build our footprint of digital network products, you will see more and more, we believe, the scale effect of that games and that software and game development and technology development pushing out further more and more endpoints.

So some of the key launches during the year on the Virtual Sports side, land-based and online and mobile included a new virtual Greyhound racing game, Rush Dogs 2. We also launched a new very fast short horse racing game called Rush Sprint. Both of those into both the U.K. and European retail environments and there's online customers. New versions of Matchday, which I referred to earlier, in Italy, as I mentioned, but also in the U.K. as well as online customers. The Mike Tyson game that we announced at G2E a couple of years ago went live in the U.K. and then U.K. and Gibraltar and Europe online and also went live in a slots game form land-based and mobile. We launched a grand national horserace, the virtual version of which was also broadcast on U.K. national TV and did extremely well.

And we launched cricket recently with our key U.K. customer, Paddy Power, and also online in U.K. and Europe. And cricket, although again perhaps not of much interest to American colleagues listening in on the call, obviously is the key sport for -- of interest to 1.5 billion Indians in the country and in the Indian diaspora. So we expect to do well and potentially also have exciting social gaming opportunities in various international markets.

We also launched country-specific games like darts, very U.K.-centric; golf, slightly more global. And we also launched a product called Virtuals Connect, which is a very straightforward turnkey online virtuals graphics service which allows small to medium regulated online operators to get access to our products quickly and easily, and a number of medium-sized operators went live with that product.

Finally, we also launched an awful lot of mobile-optimized HTML 5 slot games across the U.K. and Gibraltar and European operators. And on many of these operators, including some of the world's largest online regulated operators, we are now one of the very top suppliers of mobile slots with a large number of games in their top 20 games. So we are pleased with that. And we also launched over 10 of our Rush Go! and Rush Live hybrid games, which are, we think, a brand new category of fast snackable sports games -- Virtual Sports games that appeal particularly strongly to the next generation of millennial players. They're app-based, they're fast, they're on-demand and we're very optimistic about their future.

Since the year-end, we launched the first trials in the U.K. of our new flex, which is a new curved screen Server Based Gaming terminal. And although many of you will have seen server-based traditional casinos -- sorry, curved screen traditional casino slots in G2E and on the Vegas floor, we believe this is the kind of best-in-class next-generation product because of its likability and it's server-based nature, a kind of iPhone X wide area server-based retail gaming.

So, in general, we believe this focus on digital product and technology innovation into clear entertainment with an edge is all about appealing to the next generation of omni-channel players. And we've been accelerating our growth. Our industry is going digital, both in mobile and in land-based, and digital is our sole focus.

From a regulatory point of view, we believe the direction of travel in respect of U.K. regulation, clearly it's a remaining and important component of our business, has become a lot clearer in the last 3 months. The U.K. industry is expecting a decision from the U.K. Department of Culture, Media & Sport in the first calendar quarter of 2018. In Greece, there had been recent amendments to the gaming regulations, including the VLT regulations, which we regard generally as very positive. And meanwhile, we're also very clear we're pleased about the number of U.S. jurisdictions which have already approved or in the process of approving Virtual Sports. So the ones that have been announced now include Nevada, New Jersey, Michigan and Pennsylvania and we expect that list to expand in the coming year.

We are a small but fast-growing innovator in the gaming and lottery industry. And as such, even as a small company, we are now a top 3 supplier across all the main European VLT markets and we are winning against the very largest players from the U.S. and the global industry and we're meanwhile also a top tier supplier in mobile games, in Virtual Sports and in Virtual Sports lottery, all fast-growing categories within our industry. So as we move into calendar 2018 and almost a quarter into the fiscal '18, our focus is to further extend that omni-channel lead across the U.K. and European lottery and sports betting markets whilst also pushing aggressively into North America.

And in many ways, the most exciting recent innovation, which I just touched on very briefly at the beginning, was the presentation at Portland's NASPL U.S. lottery conference and the Las Vegas G2E gaming supplier conference of our new product, 1st Down, which is our new fast and furious football game. And when I say football, as I said, I mean football, not soccer. We are expecting to launch this live into both retail and online markets in the U.S.A. in calendar 2018 as both a gaming product and a lottery product depending on that regulatory context.

U.S.A. is a key focus for us this year, but having said that, the U.K. and Europe and especially Greece continue to grow. So, in general, we're very optimistic about the multiple growth engines driving our business.

As you can see, overall, we're excited about our prospects with a lot happening in the business all around the world and in many different products and channel verticals. We think the future is bright for what we focus on, digital omni-channel games focused on the next generation of players, both in Virtual Sports and the other products that we produce. And on that basis, we are affirming our guidance range of $54 million to $58 million in adjusted EBITDA, reflecting the aforementioned momentum and growth initiatives in the business.

So I will now hand over to the operator to manage the Q&A.

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

I wanted to start with, Luke, kind of what you ended on there, the 2018 guidance, which is strong and it assumes a pretty high percentage growth there. First, are you assuming anything in that with new launches or new regions on the SBG platform? And then also, how should we think of any additional operating expenses that could creep into that? Just as you continue to innovate and rollout your product, how important is it to stay on track and maybe just some variables within that number? And then, I have a number of follow-ups.

Okay. I'll let Stewart answer the second of those questions and speak a little bit to the first, but I'll speak initially to the first on server-based launches. I mean, we're not assuming any major new server-based launches in the year. We have our U.K. business. We talked to the volume growth with Betfred earlier. We've got our Italian business where obviously there were some tax increases last year and we're assuming very little growth. The main driver for the server-based business in the year is Greece where obviously we're adding a lot of terminals and optimistic for further momentum beyond what we've already announced, but there are some small contributory markets in Latin America and some international ETG sales that's part of the mix.

Stewart, do you want to talk to operating overhead and other costs?

Sure. So, I mean, obviously in the guidance given, we talked about margin expansion, which, as you can deduce from that, what we expect costs to be. And as we said before, we think we are a business which will benefit a lot from scale as we grow the business. So we don't see a lot of incremental costs coming through. Obviously, for the first quarter, we will have the incremental public company costs, which Lorne talked about before and they were lapped by the time we get to the end of the calendar year. As we rollout into the likes of Greece where the volume comes on, we don't need a lot of extra heads there, so that builds into the fact that it saves us a lot of scale. And then, we talked before about the operating scale that we get from virtuals and the beauty is that gets rolled out without a number of incremental costs.

Great. Moving on, sticking with the high level, just you made a small comment about acquisitions, if they come along, more from a tuck-in standpoint than transformational standpoint. How should we think about this as a focus for 2018 and 2019, given the number of opportunities that you have that you walked through, Luke?

Luke, you want me to take that?

Yes.

Yes, Chad. This is Dan. I think we continue to be focused on opportunities not only to grow the business organically, but to look at interesting potential combinations. And I would say that, that continues to be an area of large focus and we want to make sure that we're doing a deal that is the right deal. And so we will be disciplined in that regard, but it's certainly is an area of heavy focus.

Okay. Great. Moving on to the fundamentals. Clearly, the fact that you're participating in Phase II in OPAP is a positive for what you're doing in the Greek market. Could you talk a little bit more about where you're finding success against some of the biggest multinational competitors, as you mentioned, in the space? Is it new games, different type of math, just maybe some color there? And if that could portend well into new or expanding markets internationally?

Yes. I mean, I think, in some ways, it's a statement of the obvious, but it don't necessarily mean it's the easiest thing to do. These countries are different. We went into Italy back in 2010 with server-based product having been one of the leaders in the U.K. We subsequently went into one of the Latin American jurisdictions. And what we found in each of those markets is that player preferences in terms of obviously minimum staking levels, game volatility, graphical themes and so on are all different. And clearly, you have to understand the market so we're now very rigorous about researching each market as we go into and adjusting our games accordingly. In Greece, we did that extensively, looking at both what people are playing in the casinos and also what they were still playing in the gray market that we still operate in at that time just to understand what player preferences were and we did a lot of panels and a lot of focused groups and research. And I think that has borne fruit and our games are extremely well suited to the market. It was one of the reasons we also partnered with Novomatic because clones of Novomatic games copies were very successful in the unregulated market in Greece. It's now in the process of being shut down. So I think that research focus has served us well. We're innovative, but we aim to be data-driven as a company.

Okay. And then, the last one for me, just ending with Virtual Sports here in North America. Can you talk to any, I guess, incrementality that you found? Being live in Nevada and as you launched the 1st Down Football product, is it your expectation that this will be incremental to the current sport or the current online offerings? Just kind of how your vendors and the government should think about what you're offering to the market? And that's all for me.

I mean, I think, Chad, it's too early to tell in terms of the actual data. We've got a tiny deployment into Nevada at this point. New Jersey literally started to go live in the last 10 days. We would be enormously surprised if it wasn't incremental because our Virtual Sports are now live in over -- approximately over 40 countries and upwards of 35,000 venues and some hundreds of online sites and apps. And in pretty much every case, it is incremental.

I mean, Greece is a great example where we launched in April of this year over the course of a month into 4,000 lottery venues that already had keno and sports betting and general lottery games and we produced over -- well over EUR 100 million of incremental GGR for the lottery in the year, numbers they've cited and released in their results, kind of annualized, and most of that new money for the shops and for the lottery and for the good causes that it funds, so that's pretty typical. We saw the same story in Italy when we launched back in 2014. We're seeing the same thing in many, many markets. So typically it increases the sports betting take in established sports betting markets by 10% to 20%. And in gaming or lottery markets where there isn't regulated sports betting and it goes in as a gaming or lottery product, it can be considerably more.

(Operator Instructions) The next question comes from Mark Heiman with Saguaro Capital Advisors.

Just really quickly on the U.K. gaming regulation situation and what was released, I recall in the last call you had made some comments and I just wanted to kind of just get your thoughts on if what was released was generally what you'd expected and then if there's any way at all to just think about the effect on the company under various betting limits for U.K. gaming establishments?

Yes. I mean, what has happened since we last had a call was the government had now published, I think, in September their consultation document and that narrows the range of options in terms -- and also makes it clear how they want to kind of think about the problem. There's now 4 state scenarios which are 2-pound, 20-pound, 30-pound and 50 pounds. And there is quite a lot of discussion in their kind of consultation about a combination of measures, including enhanced player protection, disciplines, session limits, the kinds of things we see, for example, in the Greek market. There's also some quite encouraging, from our point of view as a Server Based Gaming system supplier, comments about extending that kind of governance controllability to other sectors of the U.K. industry, which obviously would open the opportunity for us bringing our technologies into adjacent sectors.

I think we have clearly developed views on different combinations of factors and how they might impact trading on the different circumstances. I mean, a key point to note is that there will be no implementation of this until 2019. So from our point of view, there is no impact on fiscal '18 and we'd like to see what the impact will be in terms of the eventual decision that we expect to come out in the first quarter of next year. But in the meantime, our U.K. business is performing well and we are, of course, continuing to grow the business very strongly internationally.

Sure. Sure. I mean, it's just -- in terms of what was actually released, it seemed to me that to be rather the consensus. Is that your thought as well, just you not being based there?

Sorry. What are the contentious?

No, no, no. Was what was released what you had -- generally what you had expected versus what was kind of talked about prior? It seems to me to be pretty -- had either leaked or been discussed, but when you read the document for the first time, what was your reaction? Any surprise or was it pretty much as expected?

I think it was largely in line with what's expected. I think it moved thinking forward a little bit and narrowed the range of options somewhat and there was some very thoughtful consideration about additional measures around player protection and about the industry as a whole that didn't relate specifically to state. So I think it was in line with what we were expecting. We wait to see and obviously contributing to the consultation as part of the industry in terms of where it eventually bottoms out.

To some extent, we've been through multiple changes in the regulatory environment in Italy and Greece, obviously and more recently in the U.S. with the legalization of Virtual Sports in markets like Pennsylvania and others. I mean, we're a regulated operator in a regular -- regulated industry. It's always evolving.

This concludes our question-and-answer session.

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

Thank you, operator, and thank you, everyone, for having joined this morning.

I think, in summary, the range of developmental activities that took place during 2017 actually were phenomenal. I think that was clear from the overview and summary that Luke gave. And I think when we consider the totality of all of the products and marketing and technology initiatives that were put in place during 2017 that it clearly has a new and strong support to the view that we have now in 2018, as Luke expressed it, in terms of both the acceleration of revenue growth and, in parallel, the improvement in margins. And I think, all of this taken together, suggests to me anyway that 2017 was a tremendous year in terms of laying the groundwork for the growth of this business going forward. We were quite enthusiastic about Inspired at the time we announced our business combination almost exactly a year ago and I think we have never been more optimistic and enthusiastic than we are now.

And we hope that you'll stay in contact with us through 2018 and we look forward to talking to you about a quarter from now. Thank you.

Operator, you can wrap it up now. Thanks.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.