Inspired Entertainment Inc (INSE) 2018 Q1 法說會逐字稿

Good morning, and welcome to the Inspired Entertainment Fiscal 2018 First 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 first quarter 2018 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 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, everyone, and thanks for joining our fiscal 2018 first quarter conference call.

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

I think our results continue to show the kind of momentum and traction we've discussed in previous calls, with our revenue adjusted for currency and more calendar days than last year's quarter up by 14.3% quarter-over-quarter and our adjusted EBITDA up by 13% on the same basis.

We continue to see double-digit growth in both our Server Based Gaming and Virtual Sports businesses as customer adoption increases along with our geographic.

In that latter vein, we're pleased to be the only licensed provider of virtual sports to the New Jersey gaming markets, now serving 5 online gaming operators.

We think this deployment in addition to our Las Vegas Virtuals business and upcoming deployment in the Michigan Lottery shows that our North American strategy is paying off, and we expect that growth to accelerate as we introduce terrific new products like our American football game -- excuse me, 1st Down Virtual Football during this year.

In terms of strategy, we are continuing to focus on our organic growth opportunities, which, as I said a moment ago, are significant in both of our main businesses as well as looking carefully at a range of interesting and in every case accretive acquisition opportunities.

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

Thank you, Lorne.

This is Luke Alvarez, President and CEO of Inspired.

Welcome, everybody.

We are very pleased with our first quarter results, as we believe we've showed positive developments in both our operating segments and meaningful growth across multiple regions and multiple product lines.

As more completely summarized in the release, revenue was up just over 16%, year-on-year just over 14% adjusted for the number of days and for FX.

Server Based Gaming revenue grew 14%, 12.2% after those adjustments; and Virtual's revenue grew a strong 21.9%, that's 20.3% after those adjustments.

And net loss also narrowed significantly from over $22 million a year ago to $4.2 million in the most recent quarter.

Our adjusted EBITDA for the quarter increased 13% year-on-year versus Q1 '17.

That's 13%, but increased 32% year-over-year versus Q1 '17 excluding incremental public company costs, and we have now lapped over all periods with no public company costs in the prior period.

So that's a good indication of the underlying EBITDA growth rate.

The company also made approximately $8 million of long-term debt repayments during the quarter, and we continued our international expansion strategy, including our rollout into Greece, which I will talk more about, our Virtual Sports going live in a number of new jurisdictions and in particular going live during and since the quarter in New Jersey online as well as new contracts in Latin America, Scandinavia and other jurisdictions.

So to drill in a little bit, in Server Based Gaming, the segment of our business, Greece is a very important growth driver, and we're very, very pleased with our group performance as our relationship with OPAP has deepened alongside other strong main performance.

We've added 2 additional orders of server-based terminals since the original contract, bringing us to a total of 6,360 terminals ordered.

And in fact now, as of today, I can announce on this call an additional 1,035 orders, which we will be formalizing in a release on Monday and which brings us to a total of 7,395 server-based terminals for the Greek market now ordered, and just over 3,500 of those are deployed to date with the remainder to be installed during the course of this calendar year.

We are a top performer in this new Greek market, again going up against clearly very large U.S. competitors in that market, and we are very pleased with the performance.

We also, in the quarter, announced a partnership in that market with Novomatic, who have deployed a number of games onto our terminals.

In the U.K. Server Based Gaming market, we announced late last year the gain, the extension of our contract for many years now with Betfred and the gain of over 1,000 additional server-based terminals in the U.K. from our competitor in the U.K, which include new shops that Betfred acquired from Ladbrokes Coral.

So we are in the process of rolling those new terminals out right now.

In that context, I will also comment on the U.K. triennial review of gaming stakes and prizes.

The company is aware of and has been monitoring and for some time has been planning in anticipation of the U.K.'s ongoing triennial review, which has been in progress since 2016.

We do not, of course, know when that review will conclude nor what its outcome will be, and we do not know when that outcome will eventually become effective in the form of new rules for the behavior of games on the machines and other such.

We do know that if a cut in B2 game stakes specifically is mandated, such a cut will probably affect our U.K. LBO gaming machine revenue.

For this reason as well as for various other reasons, including the strength of our technology and games, we maintain and have been sharpening our focus on growing our non-LBO U.K. revenue, which includes Virtual Sports in U.K. LBOs, B3 Server Based Gaming machines in other venue types, including AGCs and mobile services and, of course, includes virtual sports and mobile slots games on the regulated U.K. sites.

And we've also been sharpening our focus as we'll talk more about and I just touched on in the context of Greece on growing our non-U.

K. revenue, both from Server Based Gaming and from Virtual Sports and from mobile games.

We think that this growth strategy is working and is reflected in many of the successes that I've talked on to date in Greece, and I'm going to continue talking about now in the context of our Virtual Sports business.

In our Virtual Sports business, we launched new virtual sports in the quarter and in new markets.

We expanded into a number of new U.K. customers.

We also expanded into a number of new Italian customers, including quite large rollouts with Eurobet and with Goldbet.

We also continued the rollout into Greece, which started earlier in the year with OPAP in 4,000 venues.

We added 800 SSBT venues in the quarter, and we launched into Poland and Romania and announced during and since the quarter new contracts in the U.K., most recently in Finland just this week with the Finnish lottery, Veikkaus, and in Latin America including Panama with Sportium.

We also, most importantly, of all of that now live with Virtual Sports in New Jersey with 5 partners and 2 more that we'll be launching shortly.

Just in the last couple of weeks, we've launched with Caesars and Golden Nugget.

And as I said, there will be 2 more to launch soon, leaving us with about 7 operating live in online New Jersey.

We are on track to launch with the Michigan Lottery later in 2018.

We're also on track and excited about our new 1st Down Virtual Football game.

That's American football, not European soccer, which we expect to go live in the U.S. in a number of deployments, including lotteries and also online gaming deployments in the U.S. later in 2018.

And on our mobile business, we launched 5 new RGS customers in the quarter in a business subset that is growing very, very quickly.

So we are pleased in general with how come -- far we've come in the year.

This is our fifth quarter as a U.S. public company.

We made a lot of progress in this quarter specifically, especially in North America in a short period, which validates the strategy of the original business combination and listing in the U.S. We look forward to reporting more success in the U.K., in mainland Europe with a number of different jurisdictions and, of course, in North America in future calls.

So with that, operator, we're now happy to take the questions.

(Operator Instructions) Today's first question comes from Chad Beynon of Macquarie.

First, just wanted to start with Greece.

You mentioned a number of positive announcements here in new deployments.

Could you just talk about your current performance with the existing footprint and kind of how you think about the new units, if you can produce a similar type of result there?

Any additional color there would be helpful.

So Chad, happy to speak to that.

Obviously, we're somewhat constrained because the customer is also a public company.

So we can't give too much detail.

But we're very pleased with our performance in Greece.

I think we've seen the case of volume rollout accelerating in the most recent quarter.

So the speed of rollout is picking up, which is encouraging.

The income per unit is good and solid and stronger than we had originally anticipated.

So we are pleased with that.

And we are also, I think, seeing a good pipeline of new games coming on stream and new games have had assisted the incomes.

I think encouragingly, we're also seeing that the earlier cohorts of venues that were deployed are continuing to grow fairly solidly.

So there is definitely an adoption curve that you'd see our players get used to the products and to the existence of these regulated venues, and that suggests the incomes will continue to grow.

So we're pleased with Greece.

I think our customers is pleased with our performance and that the market as a whole, and we've seen that in some of their announcements about the market, and I think there's a lot more to go on.

And Lorne, you mentioned at the outset you're still thinking about potential M&A.

Can you help us think about what verticals make the most sense right now from synergistic standpoint also just the strategic vision standpoint?

And how you think about your current balance sheet ahead of the triennial review announcement?

And if you would be able to perform an M&A ahead of that?

I think generally, we're thinking our acquisition ideas or M&A ideas are in 2 categories: One, which we'll call tuck-in or purchasing acquisitions that are relatively small in size and would be directly and deliberately strengthen 1 of our 2 existing businesses and would be of a size and scale that we would have no difficulty executing financially whether or not the outcome of the triennial review had been determined.

And those verticals are fairly obvious.

They are the verticals of the businesses that we're already in so that we get immediate synergy, we get immediate accretion and competitively and strategically we strengthen our position.

So we're quite focused in that arena.

And hopefully, we'll have something to talk about in the not terribly distant future.

At the same time, we continue to look at considerably larger potential transactions that, again, in terms of the general vertical would all fall within the digital gaming technology umbrella.

So we're -- we don't have any plans or any intentions of doing anything of significant size that anybody would view as a significant diversification for us because we see huge growth opportunities in the markets and the general technologies that we already are practitioners of it.

So there's no need to do that.

They would again either from a technology point of view or the markets they serve point of view would be oriented to the markets and the geographies where we're intending to optimize our growth.

So that would be the lottery world, the betting shop world, the casino world.

The geographies are sort of fairly obvious.

And how our ability to execute a transaction of a larger size independent of the outcome of the triennial review would really depend on who the particular target is, what the financing alternatives are and what would make most sense for the company.

So I don't know necessarily that the outcome of the triennial review is necessary for us to do something of a larger than a tuck-in or a purchasing acquisition.

But until we really settle on a specific objective and begin to move forward, obviously, I can't say anything without any certainty.

Great.

And then my last question is regarding the virtuals vertical.

Can you talk about customer acceptance in the U.S. thus far?

And also if politically, you're starting to see states and the federal government finally understanding of kind of what you're bringing to the market in expansion of revenue and kind of how you view that arena if it could open up more in the next couple of years?

I'll talk to that a little bit, and Lorne may wish to chip in.

I mean, in terms of player acceptance, I think it's early days.

We've been live in New Jersey for 4 weeks or so at this point and only the last couple of weeks with larger operators.

In Nevada, we're live in a small number of venues with single streams in just horseracing at this point.

So we've seen some interesting data and some encouraging data, but it's very, very early.

I think the reason you heard us talk a lot about 1st Down, our football game, is clearly that's what we believe is the breakthrough product for virtuals in North America.

Soccer has a place.

Car racing has a place.

Horse and greyhound racing have a place.

But in each geography that we operate, there is a single sport that dominates, which, for example, in Italy is soccer and in the U.K. has been more horseracing, and we'd expect that sport in North America to be football.

And that's why we're excited about the launch of 1st Down, and we hope to have more to talk to you about in the not-too-distant future on that.

I think we have seen emphatically a evolution and acceleration of the regulatory acceptance of Virtual Sports.

Obviously, the Nevada Gaming Commission got there at the beginning of last year or late 2016, and we started to go live there a year or so ago.

New Jersey accepted the principle in about the same time line, and we finished the test process in November, December and started to go live through the labs and a few operators in New Jersey.

So I think now and probably the 2 most important regulatory bellwethers from a gaming point of view, both land-based and online, we have New Jersey and Nevada accepting the principle and putting in place -- having put in place regulations for virtuals.

More recently, clearly, we've seen lottery start to do the same thing.

So Michigan, as you're aware, contracted with us for virtuals as an online product.

We announced that in 2017.

We expect to go live midway through 2018 calendar.

And more recently, in the final calendar quarter of '17, Pennsylvania Lottery announced that virtuals will be deployed -- permitted and deployed as a land-based product in lottery-available venues, such as convenience stores and bars and taverns in the state of Pennsylvania, and they expect to see that go live at some point this year.

And clearly, we hope to be a supplier for that, but I'm not currently contracted.

So we are excited about the momentum in both gaming and lottery land-based and online in the U.S. And we think those 2 lottery states and 2 gaming states that have approved the products, the first of many to come.

And clearly, we've seen in Europe, only the U.K. and then only Italy do it and then multiple countries come on stream very quickly.

And we hope the same will happen in the U.S. with states as more and more states can point to precedent in other states that have already regulated it.

So we're optimistic.

(Operator Instructions) Today's next question comes from Alex Silverman of AWM Investments.

So you -- your first quarter calling a $40 million EBITDA run rate.

Your guidance is $54 million to $58 million for the year.

What's the greatest lever to accelerate that EBITDA number over the course of the next 3 quarters?

Stewart, do you want to pick that up?

Sure.

So obviously, the -- well, based on from what Luke said, the biggest driver will be the rollout of SBG terminals in Greece.

So we're currently at around 3,500.

And as Luke said, we're contracted up to finally the order received out of the press into the mid-7,000s.

And we hope for they should be rolled out by the -- certainly by the end of the calendar year and hopefully around the end of the fiscal year, and that will give the biggest increase there.

We'll continue to roll out into new territories in Virtual Sports, for example, with the rollout with Veikkaus announced this week.

And then we've got a couple of exciting new casino products, which we think will deliver some successful in the hardware sales that we're showing at the ISHOW next week.

This combination of all those is the new customers continue to build out that we get to that incremental amount that gets us to the full year guidance number.

So is it fair to say...

And Alex, I think some...

Yes, please go ahead.

Alex, I was just going to say I think some of the clue in the numbers is the underlying EBITDA growth rate of 32% excluding public company costs.

And obviously, as we pointed out, we've now lapped the first quarter where we didn't have those.

So going forward, that underlying growth rate starts to come through.

Is it fair to say that the growth in EBITDA over the course of this coming year is driven mostly by business that you've already won but has not yet launched?

Yes, I think that is the case.

Yes.

Understanding obviously that launches can push out and those may be out of your control and all, but this is not business that you still need to go out and win.

By and large this is business that is already contracted, which we have to deploy.

Clearly, there is some element of that, that is yet to be contracted.

And as you pointed out, there is uncertainty as always as to the timing of launches and the income that is then generated when launches do come through.

But for example, in Greece, I think, both the announcements of the new orders and the heads up on the additional 1,035 that I just mentioned, all of those clearly go to reduce uncertainty, which isn't to say there is still a lot to do in the year and there is clearly some uncertainty as to timing and quantum of launches that may happen, but broadly a great deal of it is contracted indeed.

Great.

That's helpful.

Second question, can you book and for us what a B2 outcome might look like for your business, if it were to happen this year given -- assuming your $54 million to $58 million of EBITDA, and I think understand that it's not going to impact this year's numbers.

But should it happen this year, what that might look like for EBITDA on an adjusted basis?

I think as a general rule, we can't comment on that.

There's so much uncertainty as to the nature of any regulatory change, the timing of it, notwithstanding recent speculation, it is uncertain.

We haven't given guidance beyond this year.

So that's why we said it's difficult to give guidance in that context.

Our focus is building the business in new segments in the U.K. and internationally and a greater, greater proportion of the business comes from those other channels and sources and footprints, and that's clearly a great balance in our focus.

And as we said, we are confident about the growth rate in our business and confident on our ability to continue growing the business.

I guess, I understand that.

What I'm looking for is sort of a worst-case basis, which my numbers indicate just my back-of-the-envelope numbers indicate would not be as bad as what the market seems to perceive.

I will repeat, we haven't given guidance beyond this.

I think we'd steer you to analysts and to your own models on that point.

And our next question comes from [Gavin Ritchie] of (inaudible) Capital.

Could you talk about whether or not any organizational changes will be required?

And if so, how long it would take?

And if not, how -- what the timing would be of any refinancing of your debt?

What do you mean by organizational changes?

One of your peers recently changed the way their subsidiaries restructured to allow for an easier financing.

I was wondering if anything like that would be required for you guys?

No.

I mean, we wouldn't need to do anything like that.

I think we -- looking at our balance sheet continues to be a top-of-mind exercise.

And I think that's -- probably would be inappropriate to say on this call.

This concludes our question-and-answer session.

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

Thank you, operator.

Thanks again, everyone, for joining the call.

I think from Luke's comments and from the elaboration on those comments from Stewart that we're still feeling positive regarding our earlier guidance for this year.

All of the existing business that's ramping up is pointing strongly that we'll come to that point by the end of the year.

Strategically, all of the initiatives that we've undertaken in the last year or so seem to be really beginning to get traction.

And so we're very optimistic about the near- and medium-term outlook for the business.

And obviously, we look forward to talking to you again in the quarter and reporting how we're doing.

So thanks again for joining, and we'll speak soon.

Thank you, sir.

Today's conference has now concluded.

We thank you all for attending today's presentation.

You may now disconnect your lines, and have a wonderful day.