NeoGames Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
November 10, 2021

There are 7 speakers on the call.

Operator

Thank you, operator, and good morning. By now, everyone should have access to our Q3 2021 earnings release, which is available on the Neo Games website at www.neogames.com in the Investor Relations section. Before we begin our formal remarks, we need to remind everyone that the discussion today includes forward looking statements. These forward looking statements, which are usually identified by words such as will, expect, anticipate, should or other similar phrases, are not guarantees of future performance. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect, and therefore, you should exercise caution when interpreting and relying on them.

Operator

We refer all of you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results in financial condition. We encourage investors to review our regulatory filings, including the Form 6 ks for the quarter ended September 30, 2021, when it is filed with the SEC. During today's call, we will discuss non IFRS to financial measures, which we believe can be useful in evaluating the company's financial performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with IFRS. A reconciliation of these measures to the most directly comparable IFRS measures is available in our earnings release and on the neogames.com website.

Operator

Hosting the call today, we have Moti Malul, Neogame's Chief Executive Officer and Raveed Adler, Chief Financial Officer of the company. They will provide some opening remarks, and then we will open the call to questions. And with that, I'm turning the call over to Moti.

Speaker 1

Thank you, Jack, and good morning, everyone. Welcome to our Q3 earnings call. This morning. I will highlight some key points about the 3rd quarter performance and provide an update on the trends we're seeing in the market. Afterwards, I will turn the call over to Raveev to run through our financials and business performance.

Speaker 1

This quarter, we continued to progress our goals across key aspects of our business. For example, despite expected seasonality, we have seen growth in several of our accounts, such as Virginia and New Hampshire, which continue to outperform expectations as the ILO-three programs flourish and receive a strong reception in these markets. In Canada, We continued our investment in additional expansion of gaming verticals to power the very successful Play Alberta brand by launching online sport betting further to previous quarter investments in draw games and live dealer verticals. We continue to create and roll out unique content and enhance the player experiences. During the quarter, we began the rollout over our multi game progressive jackpot feature across selected e instant games from our NeoGame studio with 3 of our customers significantly diversifying their games offering.

Speaker 1

The attraction and engagement of players with this feature enabled part of the growth we have seen in the quarter. Overall, we continue to significantly grow our business year over year. For the 3rd quarter, Revenues were $12,000,000 while our share of NPI revenues for the quarter was $8,300,000 Looking at the 2 components added together, they equate $20,200,000 for the Q3 of 2021, representing growth of approximately 30% year over year. In terms of EBITDA, for the Q3 of 2021, we generated adjusted EBITDA of $7,500,000 As a reminder, our EBITDA margins fluctuate and reflect investments in technology and operations as we continue to roll out across the new markets we are entering. For example, this quarter, much of this investment has been due to recent launches in Alberta of draw games late in Q2 and sport betting in the Q3, which introduced both new tech investments as well as some operational learnings.

Speaker 1

Most of these product investments have been onetime in nature, and we do not expect further extraordinary spending for the remainder of this year. Moving on to some other business updates. In Michigan, much is anticipated, results were impacted sequentially due to the various factors we have mentioned in previous reports, a combination of seasonality, post COVID patterns as well as heavy marketing spend by the iGaming competition in the state, especially towards quarter end. We continue to work closely to support the measures and disciplined approach demonstrated by the state lottery with its iLottery program, building on foundations that we are confident will lead to sustainable long term growth of the program in the as we have seen in other markets with similar landscapes. On the games front, We continue to view our constant rollout of games with more customers around the world as an investment into future growth.

Speaker 1

In this regard, subsequent to quarter end, we launched our first to premium instant games with Lottomatica in Italy, further expanding our footprint in the Italian lottery market, where we now serve both Italian lotteries with our games content. One other good point of progress is our strong partnership with Caesars Entertainment, which continues to evolve and expand. In this quarter, we went live in Arizona, where our technology is integrated into their unique Liberty platform for online sports betting and iGaming, which is now live in 10 markets and growing into the future. The regulatory environment and state authorization in the U. S.

Speaker 1

For iLottery, continues to develop. This quarter, we have seen 2 states in different stages of the procurement process. The Connecticut Lottery commenced a public procurement process for an iLottery solution and services, and the West Virginia Lottery conducted an RFI process to gather information and insights on successful iLottery deployments as a precursor to a potential full procurement process, which may be expected in 2022. With that, I'll now turn the call over to Ravi.

Speaker 2

Thanks, Moti. Before I get into the results, as a reminder, when we discuss our results, I would point out that all of our ILO3 business in North America Operates through our fifty-fifty joint venture, Neopolitan Interactive or NPI, except in Michigan, which is reflected in our top line revenues. Our contracts in Virginia, New Hampshire, North Carolina and Province of Alberta run through NPI. Except for the NPI contracts, we conduct all of our business through NeoGAMES. As a result, from an accounting standpoint, as many of you know, we generate revenue and earnings through our wholly owned operation and through our equity interest in NPI.

Speaker 2

Our revenues reported on the income statement, which Our share of NPI revenues was $11,900,000 during the Q3 of 2021, down 8.8% over the same period last year. Our share of NPI revenue was $8,300,000 during the Q3 of 2021 compared with $2,500,000 last year. The sum total of these two numbers was $20,200,000 during the Q3, representing an increase of about 30% year over year. Moving to EBITDA update. For the quarter, our adjusted EBITDA was $7,500,000 which is down 3.8% compared with the $7,800,000 last year.

Speaker 2

Sequentially, it's important to note that the fluctuation in our EBITDA margins is generally driven by 2 main factors. The first is that the new accounts and products ramp up. We often see increased costs earlier in the life cycle of but stabilized over time. Secondly, differences in the product and services mix in gaming verticals offering drive varying margins. For example, on one hand, accounts that have limited offerings such as draw based games only or on the other hand, accounts with very wide offering, including gaming verticals, where we incur cost of third party content drive lower margin than our average.

Speaker 2

As Marty mentioned, this quarter, we have seen impacts on our EBITDA mainly associated with investment in both technology as well as in operational learnings, primarily in our operations in Alberta. These investments by most have been onetime in nature, and therefore, we do not anticipate similar impacts in the remainder of the year. Overall, we are comfortable with where margins are and where they will be as the business matures. Diversifying and growing not only the customers the customer base but also product types is an important element of our growth strategy as we wish to provide turnkey solution to our customers. Turning to our balance sheet.

Speaker 2

We ended this quarter with about $68,200,000 worth of cash. Our outstanding debt to the quarter was approximately $33,000,000 at a weighted average interest rate of 1%, leaving us in a net cash position of $35,200,000 We have 25,200,000 shares outstanding at the quarter end. During the quarter, we successfully completed an underwriting public secondary offering by one of our shareholders of almost 4,000,000 shares of common stock, significantly increasing our public float. Regarding guidance, we're encouraged by the trends towards the end of the quarter and into early for with some of our key accounts, enough to allow us to increase our overall annual revenue guidance to be between $82,500,000 $84,500,000 at the midpoint, these revisions represent an increase of 5.2% compared to our prior range and represents year over year growth approximately 42%. As we've indicated in the past, the revenue guidance does not include launching any new turnkey accounts.

Speaker 2

With that, I will turn the call back to Moti.

Speaker 1

Thank you, Raveed. To summarize, We believe we are in a great position to continue executing on our growth strategy for both internal and external growth opportunities and are excited by the momentum we are generating. This month, actually in about a week from today, we will see the 1st anniversary since our IPO last year. We firmly believe that our results continue to demonstrate the strength of our model in generating significant value for our customers and thus for NeoGain and all our shareholders. NeoGain remains well positioned Thank

Speaker 3

you.

Speaker 4

Our first question comes from Jeff Stanchal with Stifel. Your line is open.

Speaker 5

Hey, great. Good morning, Moshe and Raviv. Great to hear from you both and thanks for taking our questions. I wanted to start on the revised revenue guidance. Good morning.

Speaker 5

I wanted to start on the revised revenue guidance if possible. At the midpoint, it implies about $20,000,000 for Q4, which stable quarter on quarter.

Speaker 3

I was hoping you could

Speaker 5

just walk through some of the puts and takes that you contemplated there. On the one hand, you do have seasonality and some ramp momentum in Virginia, Alberta, etcetera, going in your favor heading into Q4. On the other hand, visibility to some of these reopening headwinds you highlighted and some of the marketing spend in Michigan is still somewhat limited. So just curious how you guys think about the various puts and takes when you think about sequential growth Q3 into Q4?

Speaker 2

Yes, Geoff. Thank you. It's basically a combination of 2 factors. The first one being, as you rightfully mentioned, is the trend that we see currently in Michigan as opposed to continuing continuation of growth in other accounts in Virginia and Alberta and how those are going to be played out altogether into our Q4 guidance. So Q4 expected revenues.

Speaker 2

So the 3 Those are the 3 main accounts that generate revenues for our business. And the way they are going to play out during Q4, together with the seasonality effect That we see normally in Q4 is the main assumptions built into our guidance.

Speaker 5

Okay, perfect. Really helpful. And then for my follow-up, we've heard one of your peers this earnings and a little bit in the prior talk vocally about rolling out a cloud based solution across their iLottery contracts. Are you considering updating any of your U. S.

Speaker 5

Contracts with something more comparable to your in Alberta? And if so, how should we think about the financial impact? Thanks.

Speaker 1

Yes. First of all, yes, we are already there when it is allowed. For example, we deployed Alberta in Canada purely over a cloud environment, and it's working phenomenally well. In the U. S, there has been certain combination of regulatory constraints as well as guidance specific guidance from lotteries that have prevented the move in a more massive way into the cloud so far.

Speaker 1

That other vendor, our good partners, IGT that you have mentioned, I've actually done that specifically with a game server, and it's definitely our intent to start with that front as well And into the future, maybe be able to convince more and more states to the ability to deploy bigger parts of the solution than just the game servers into cloud environment. It's a bit too early to suggest what type of cost saving this would have on the business because There's fundamentally a few hybrid models that may impact that model.

Speaker 5

Okay, great. Helpful encouraging as always. Thank you both very much.

Speaker 1

Thank you, Jeff.

Speaker 4

Our next question comes from Barry Lewis with Truist Securities. Your

Speaker 3

I think I'm going to go 4 for 4 Karen asked if there are any updates in Ohio and the RFP you originally submitted there?

Speaker 1

Not specifically to the RFP itself, but generally speaking, yes. I've updated in last quarter and it's even more intensified. There are Significant discussions among the bigger topic of gaming expansion on the different fronts in the States. There is also a significant discussion taking place on how to approach ILottery. We're obviously embedded within these discussions, and we can't say if Final decisions will be taken this side of the year or into next year, but we're definitely seeing good tractions with the different stakeholders in the States, whether it's the legislation cycles or other stakeholders, but nothing that we can report as being final at this point of time.

Speaker 3

Got it. And then how should we be thinking about the market for Neo Games to expand its scope into iGaming further? And maybe just with that, can you remind us, are there any competitive limits tied to your Caesars

Speaker 1

relationship? Yes, we definitely see it may be a topic that requires more than just a minute or 2 sentences of a response. We definitely see growing trends of convergence into gaming even with our core lottery customer base, not in the U. S, but outside of the U. S.

Speaker 1

A demonstration of that is what we're doing in South Africa very successfully and what we're doing in Alberta very, very successfully. And we're seeing that elsewhere. When it comes to U. S. Specifically, so to answer your question, there's no limitation on us to explore other gaming opportunities from a legal binding perspective with what we do with Caesars.

Speaker 1

I remind you that our relationship with them is very strong and dedicated, and we're very happy with how that is trending.

Speaker 3

Great, great. Okay, thank you so much guys.

Speaker 6

Thank you.

Speaker 4

Thank you. Our next question comes from Chad Beynon with Macquarie. Your line is open.

Speaker 6

Hi, good morning.

Speaker 5

Congrats on

Speaker 6

the results and thanks for taking my question. Wanted to ask about the consultation process. You talked about a few states where you're currently exploring that and helping the government. Given your strong spend per adult in Virginia and given how quickly that has ramped, Now you have multiple property or multiple states where you've been very successful. Does this further help your positioning just in terms of future market share?

Speaker 6

Or is it still based on other factors, just kind of technical scores that aren't related. Just trying to figure out if the better that you do, the better position you are for new U.

Speaker 1

S. Expansion? Thank you. Thanks, and good morning, Chad. First of all, we think that our position as a market leader in the U.

Speaker 1

S. Is It's very strong and hopefully it would put us in a position to win more and more of the deals that come into the market. Obviously, we're not expecting to win all of those deals, but we're definitely well positioned. And yes, the more we provide Consistent success in each and every state that we open up, not only Virginia but also all of the others, It definitely puts us in a good position for future wins as well. I would also say though that it gives us the ability to do something more than that.

Speaker 1

It gives us the ability to Take the vast amounts of data that we collect from not one state, but from quite a few in order to educate to legislators in the different states side by side with the potential lottery customers on What that can do for them? And I think that's our focus today. Our focus is, 1st and foremost, to help lotteries within their states to get state authorization and that is done through educating legislators to the impact the good impact that ILO3 can have into the state, the different good causes in the states. And there's a significant interest in the last couple of months as to the comparison of what revenues from military programs can give to the state when compared to tax revenues from online sports betting. I think that we knew that at some point, this will be a discussion topic and we're definitely seeing that it is becoming one.

Speaker 1

We have nothing against sports betting whatsoever. We think it's great and we can see that there's parallel growth for the programs in Virginia, in New Hampshire and anywhere that we have with sports betting in the state. But I think the data we have from 4 states in the US help us a lot to demonstrate the impact that it can get into good causes. So that's another point of assistance that we provide To the Lottery industry.

Speaker 6

Great. Thank you. And then with regards to M and A, I know you've talked about this on the last couple of calls. Obviously, following the IPO, you wanted to take your time. But now you have a pretty good cash position and you're generating free cash flow quarter after quarter.

Speaker 6

How are you thinking about M and A and maybe some of the areas within the tech stack that you could look

Speaker 1

to benefit from? Thank you. Yes, of course. Yes, indeed, Chad. As you recall, in the last earnings release, we've updated that we have conducted a strategic session together with our Board and management gave recommendations as to quite a few different domains in which we think we will get into a better position.

Speaker 1

And these domains are different based on what we want to Geographically, U. S. Has different requirements for non organic growth than, for example, Europe or Latin America or others. And so we have mapped those into the different ones. And yes, we are actively in the search process.

Speaker 1

There's nothing to report as of this point, but it's something that now we are way more active than we have been in the past after this strategic decision that we took.

Speaker 6

Thank you, Moti. Appreciate it.

Speaker 4

Thank you. And I'm currently showing no questions at this time. I'd like

Speaker 1

Yes. Thank you, operator. Well, Again, as I said at the closing of my earlier remarks today, we're looking at the clock and we can't believe that a week from now, It will be a year since we went public. It's quite an exciting journey for us, and we are hopeful that we will continue to be able to drive good value to our shareholders and continue to have good interactions with the broader stakeholders in the industry. So thanks, everyone, for joining us this morning.

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NeoGames Q3 2021
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