Inspired Entertainment Inc (INSE) 2021 Q1 法說會逐字稿

Good morning, everyone, and welcome to the Inspired Entertainment's First Quarter 2021 Conference Call. (Operator Instructions) Please note that today's 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 2021 earnings press release, which is also 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 call over to Lorne Weil, the company's Executive Chairman. Mr. Weil, please go ahead.

Thank you, operator. Good morning, everyone. And thank you for joining our first quarter conference call. As you might have read earlier this morning, we're launching a capital markets transaction today, actually this morning. And as such, we will depart from our normal practice of doing Q&A at the end of these conference calls and not be doing Q&A today.

That being the case, we'll try to provide as much information in our prepared remarks as we can, again, recognizing the sensitivities. Let me also apologize for starting our call so close to the Scientific Games call. But again, because we're launching the transaction this morning and given the time change between here and the U.K., we need to get going on that literally the second we're done with this call.

Given the constant refrain of COVID, COVID, COVID that has for months been a feeling depressingly reminiscent of the film, which I'm sure you've all seen, Groundhog Day, but lately, given where we pretty confidently believe we are in the COVID cycle, it's beginning to feel more like the moment Dorothy steps out of the monochromatic nightmare of Kansas, and finally, into the Technicolor world of ours. In this connection. I might also mention that the landscape has further brightened this morning by the U.K. pound, which is trading at a little over $1.41. So a lot of very good news.

As we have outlined more times than we care to, we haven't had a normal quarter, which we'll define as one that was unaffected by COVID, since the fourth quarter of 2019 when, consolidating Novomatic results for the first time, we earned a little under $20 million in EBITDA. By the middle of the first quarter of 2020, we were already sliding into lockdown, and we were in full lockdown throughout the second quarter of 2020. We began to ramp-up in the third quarter of 2020 earning about $16 million in EBITDA for that quarter. But importantly, ending the quarter considerably ahead of where we had started it.

This ramp-up continued into October 2020 by which point we were performing at a level equal to or ahead of where we were in the fourth quarter of 2019, notwithstanding the continued existence at that time of certain meaningful restrictions. And we were projecting to go considerably higher as we moved into 2021. But then as we all know, we went back into lockdown in November and December, and remained in lockdown through the first quarter of 2021.

The U.K. finally began to reopen in April, and as Brooks will discuss in more detail in a moment, expects to fully open beginning May 17. And by the end of June, as we move into the third quarter, we believe that all of our markets will be open. While our retail or bricks-and-mortar business was enmeshed in this 15-month version of Groundhog Day, some very important dynamics were otherwise taking place in the company.

First and foremost was the evolution of our online business. At no time during the COVID lockdown did we cut back our spending in support of this business. In response, monthly revenues in the combination of our legacy Virtual Sports and Interactive or iGaming businesses about tripled over the course of 2020 and have continued to grow strongly year-over-year so far in 2021.

At the same time, reflecting the tremendous scalability of this business, our margins have expanded very significantly during the same period. Develop months, sell often is our mantra in this business and as growth in revenue and profitability has been driven by a lethal combination of new products sold into new geographies and new customers. We continue to believe that our greatest opportunity is in North America. And indeed, just this past Friday, we launched iGaming in Michigan, a new market that is showing phenomenal growth.

At the same time, we have continued to implement the synergies inherent in the Novomatic acquisition, which we now expect to approach $20 million a year, a substantial majority of which has already been actioned. In addition to cost synergies in the areas of content development, manufacturing, back-office functions and field operations, we have begun to see positive revenue synergies as we market the game libraries of each company to the others' vertical customer base in both retail and online sales.

So where does all this bring us right now? Historically, we have chosen not to provide quarterly guidance, instead preferring to give overall color on the state of the business. However, we have just gone through an unprecedented 15-month period at the end of which we recognized that investors would benefit from having some incremental visibility as to near-term outlook. It's very difficult to project the exact slope of the ramp-up that we will experience as our markets reopen in the second quarter, but assuming our markets are fully open as we enter the third quarter, then we have a pretty clear confident picture of what the third quarter will look like.

Essentially, we can take the roughly $80 million base stabilized annual EBITDA level that we believe we have established at 2 or 3 different points in time over the last 15 months and add to that the benefits of both the growth in our online business and the realized synergies on the Novomatic acquisition. And on this basis, we would arrive at the third quarter EBITDA guidance of $28 million to $30 million, about 50% ahead of where we left off at the end of 2019.

As we mentioned in our press release, it is not our intention to initiate regular quarterly guidance because this is something we continue to philosophically believe does not make sense for this business. But given the craziness of the past 5 or 6 quarters, we felt it was important to make an exception at this particular time. And with that, I'll turn it over to Brooks to give us a little more color on the activities of the individual businesses.

Okay. Thank you, Lorne. I'll give some detail on the schedule and ramp-up of our business globally and give some further detail by business segment on our Q1 results and some of the key initiatives we're working on for the remainder of 2021. So the retail betting shop business in the U.K., as Lorne mentioned, reopened on April 12, albeit with the following restrictions. Only 2 of the 4 machines were allowed to be played. A player could only play for a 15-minute session, and players were limited to 2 visits per day.

Even with these restrictions, we've been encouraged with the early results that validate our thesis of pent-up demand, with GGR being about 8% above the results when the shops were under the same restrictions in December. The U.K. government has stated that these restrictions will be lifted as of May 17, and the only remaining restriction, which is to do with social distancing, will be lifted in June. Our Leisure business consists of machines and pubs, motorway services and holiday parks, will also fully reopen on May 17.

The early results from the pubs thus far, being open for a few weeks, but only with outdoor services, far exceeded expectations. And the holiday park bookings are some of the highest that we have ever seen. The combination of all these factors as well as a number of economists forecasting a major spike in demand for hospitality services in the U.K. bodes well for our reopenings in May.

Moving geographically. So in Greece, the shops have been reopened for several weeks for Virtual Sports only, and our revenue has come back to approaching 100% of its pre-COVID levels, and we expect that our VLT business will reopen in Greece in mid-May as well. Italy is looking more likely to be a June opening. And therefore, it's our view that we'll be in full operation across all of our segments by the time we get to the third quarter. And as Lorne remarked earlier, we fully expect Q3 to be the highest revenue and adjusted EBITDA quarter in our history, excluding the impact of any VAT-related income.

So let me just go down into a little bit more detail on a segment basis. So in the Gaming business, as we mentioned, the Gaming business in the U.K. has returned strongly, and we expect to be back to pre-COVID levels or greater by the time we get to the third quarter. We've also successfully launched our second customer in North America with the sale of 100 terminals to Western Canada Lottery Corporation, and the early performance numbers have been outstanding. And we believe this validates both our cabinet and content strategy beyond just the initial Illinois market.

The Canadian market is certainly one of the major target markets for Inspired going forward. Just to comment a little bit more in Illinois, we sold 40 games in Illinois in the first quarter and are starting to see accelerating demand in that market with our Q2 machines sold already eclipsing those in Q1 with only half of the quarter complete.

Moving on to Virtual Sports. So our online Virtual Sports continued to grow in Q1, with revenues increasing by 18% compared to Q4 of 2020 and by 51% compared to Q1 of 2020. We continue to see organic growth from a number of key customers and successfully launched our VPP product online with our partner, Sisal Sans, in Turkey in the fourth quarter of 2010, with 11 channels of scheduled Virtual Sports via our proprietary RGS platform into their existing website.

Following the initial success, we've since deployed 2 channels of Soccer Matchday, providing players with the ability to bet on 8 concurrent matches every 2 minutes across both English and Turkish soccer leagues. More products will launch in -- by the end of the second quarter and in time for the Euro 2021 Soccer Tournament. This VPP product that I just outlined is what we'll be using in our key North American markets, and our first launch will be with BetMGM scheduled to go live yet this quarter.

In Virtual Sports, our retail business was limited in the U.K. with virtuals allowed, but without screens being allowed to be turned on, which obviously impacted the business substantially. We expect to have the screens turned on with the full reopening of the betting shops on May 17. And importantly, the Republic of Ireland, which is another key market for us, will also return on May 17. As mentioned previously, Greece has returned almost completely, and we have several new products that will be released in both Greece and Italy before the start of quarter 3, which we expect will accelerate our growth in those markets.

Moving on to the Interactive or iGaming business. The Interactive business continued to grow, as Lorne mentioned, in Q1, with revenue growth of 22% compared to Q4 of 2020 and 143% growth compared to Q1 of 2020. We originally forecasted some softening of the Interactive business with the retail business being reopened in mid-April, but the numbers have continued to grow, which gives us encouragement for the stickiness and sustainability of this segment of our business.

North America has quickly grown to be our second largest market with companies such as BetMGM, Golden Nugget, Loto-Quebec, Caesars, DraftKings and others, all showing consistent growth, validating our content, resonating with players on a global basis. We look forward to launching and growing our footprint in Michigan, which, as Lorne mentioned, just went live last week. We expect West Virginia next quarter. And then obviously, Pennsylvania, once we have successful licensure in Pennsylvania.

Moving lastly to our Leisure business. We're anxiously awaiting our opening of all of the segments of the Leisure business starting in mid-May and look forward to a full summer season for the first time since our acquisition of the Novomatic U.K. business in October of 2019. Along with our increased revenue from this segment, we have delivered beyond the original expectations in terms of synergy and look forward to having increased scale and margins from this segment of the business going forward.

Finally, I share Lorne's bullish sentiment about the earnings power of the business going forward, coming out of the lockdowns, and we would expect to see the third quarter and the second half of the year to clearly illustrate the momentum we see internally.

And with that, I'll hand it back to Lorne for closing remarks.

Okay. Thanks, Brooks. That was a terrific review. And thank you, again, everyone, for joining this morning. Again, I'm sorry that we are not going to be able to take Q&A today. But I hope you can appreciate the sensitivity of the issue. And again, I also apologize for scheduling hopefully not too close to the completion of the Scientific Games call.

But as Brooks said and as I indicated earlier, I think we are really on the cusp of something fantastic in this company. I really don't think we've ever been more bullish or felt more buoyant about what was happening, basically, because really everything we've been working on for the last 2 or 3 years is coming to fruition.

It's obviously, as I've said a few times before, tried our patience because of the stop and start nature of a lot of this stuff becoming obvious. But I think we really are at the point now where it is all becoming very clear. And over the next couple of quarters, I think the results will validate that. So thank you all again for joining this morning, and we look forward to speaking with you in another quarter. Thanks. Operator, you can now end the call.

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