NeoGames S.A. (NASDAQ:NGMS) Q3 2022 Earnings Call Transcript November 10, 2022 8:30 AM ET
Company Participants
Jacques Cornet – ICR
Moti Malul – Chief Executive Officer
Raviv Adler – Chief Financial Officer
Conference Call Participants
Cassandra Lee – Jefferies
Ramin Sobhany – Truist Securities
Jeff Stantial – Stifel
Chad Beynon – Macquarie
Operator
Good day ladies and gentlemen. Thank you for standing by. Welcome to the NeoGames Third Quarter 2022 Earnings Conference Call. All participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that this conference is being recorded today, November 10, 2022.
I would now like to turn the call over to Jacques Cornet with ICR.
Jacques Cornet
Thank you, operator, and hello everyone. By now, you should have access to our third quarter 2022 earnings release, which is available on the NeoGames 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 will include forward-looking statements. These forward-looking statements which are usually identified by use of 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 use caution when interpreting and relying on them.
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 and financial condition. We encourage investors to review our regulatory filings including the Form 6-K for the quarter ended September 30, 2022 when it is filed with the SEC.
During today’s call, we will discuss non-IFRS 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. The reconciliation of these measures to the most directly comparable IFRS measures is available in our earnings release on the neogames.com website.
Hosting the call today, we have Moti Malul, NeoGames Chief Executive Officer; and Raviv Adler, Chief Financial Officer of the company. They will provide some opening remarks and then we will open the call to questions.
With that, I’ll turn the call over to Moti.
Moti Malul
Thank you, Jacques and good morning everyone. Last night, we released our third quarter results which is our first full quarter combined with Aspire Global since the acquisition. I will begin by highlighting some key points about the quarter and then provide an update on our current initiatives and the trends we are seeing in the market. Raviv will then run through our financial results.
During the third quarter, we reached a number of significant milestones across our business lines, further increasing our conviction in the benefits of our integrated end-to-end iLottery, iGaming and Sportsbetting solutions has to offer to the global gaming market. We saw new markets move towards implementing an iLottery solution signed iGaming and Sportsbetting deals, both in the US and internationally and continued the integration of the Aspire Global business. We are also proud to report record revenue results for the quarter, both on the consolidated basis, as well as for our core iLottery business.
While we are far from done, working to fully accomplish our goals, we see this quarter as a strong step in the right direction. First, a few financial highlights which Raviv will expand upon later. On a consolidated basis, the total of revenues plus share of NPI revenues grew to $73.3 million, which includes a full quarter of Aspire Global.
Looking at the pieces, our iLottery business posted the highest top line quarterly result ever in our history. iLottery revenues and share of NPI revenues together were $24.7 million, up 22% compared to last year and up 8% compared to the June quarter. iGaming revenues were also up nearly 8% on a constant currency basis, with particular strength coming from the Games and Sports segments of the business.
Taking a closer look at the iLottery segment of our business, we saw strong performance across our current accounts and positive development on multiple legislative fronts. Driven by the July Jackpot run, all of our major U.S. customers experienced both year-over-year and quarter-over-quarter growth. While this is very encouraging in its own right, it becomes even more impressive when drilling down to the account level.
Michigan volumes continued their sequential growth which began in Q4 of last year, demonstrating the parallel growth potential of iLottery alongside iGaming, as we anticipated would happen based on what we have seen in other markets in the US and globally. We believe that these results and those from the past few quarters support our thesis that iLottery and iGaming can and do grow in the same market.
The Virginia lottery continues to outperform impressively with another strong quarter. It made us so proud to see them win the Global EGR Operator Award for 2022 as the Lottery Operator of the Year a well-deserved win that we are honored to have such a strong partnership with doing our part by powering them with the best technology available and our market-leading suite of games for NeoGames Studio.
New Hampshire and North Carolina also showed nice sequential growth leveraging the July Jackpot into the rest of the quarter. Considering the current state of the US economy, we consider this a very positive sign as the macro outlook grows less and less clear.
Turning to the state authorization front. We saw West Virginia come to market with a much anticipated RFP during the quarter following the RFI process. We view this as an interesting opportunity and look forward to demonstrating our competitive advantage to the state lottery as they choose an iLottery solution that needs to grow and flourish in an already existing iGaming and online Sportsbetting environment.
Naturally with the mid-term elections having just taken place, Q3 did not see much progress on the legislative front in the US. However, we do believe that iLottery authorization will regain momentum in various states in 2023 following the elections and in light of preparation of a macroeconomic environment that may suggest pressure on state budgets.
On the gaming front, we made significant progress both in the US and internationally with particular strength coming from our Pariplay content aggregation business. In the US, Pariplay was licensed in both Pennsylvania and Connecticut. The platform and games are now certified in five out of six regulated US states allowing us to bring content from both our Wizard Games studio and third parties to players across the country.
We further bolstered Pariplay’s position in the US by signing additional content providers to the aggregator platform with a few interesting ones signing exclusive deals with Pariplay to enter the US market demonstrating the strength of our offering.
Finally, we expanded our relationship with BetMGM through the launch of content from Wizard Games on the BetMGM casino platform in Michigan. This launch gives us three states including New Jersey and West Virginia in which our content is live with a market-leading BetMGM platform.
Internationally, we signed a content distribution deal between Pariplay and ATG in Sweden to further enhance our content aggregation platform’s market-leading position in Europe. Under the terms of the agreement Sweden’s largest operator will gain access to Wizard Games and select third-party content through Pariplay, while giving us access to ATG’s customer base of over 1.3 million users as of the end of 2021.
Additionally, we established a partnership between Aspire Global and ITSP in Germany to provide a complete turnkey technology and gaming solution to one of Germany’s largest gaming operators, and expanding on the existing sports agreement between the parties that will be ready to go live once licenses are granted to our partner.
While regulators in the country have been slower than expected in reviewing and issuing licenses for local operators, this contract puts us in a great position to benefit from the shift when it does eventually take place.
At the same time, it is worth pointing out the top line trends in Aspire Core which is focused on providing turnkey iGaming solutions including PAM, managed services in all approved gaming verticals in regulated markets. In addition to the currency impact which Raviv will touch upon further in his part, we are experiencing a more conservative pace of market openings and granting of licenses to applicant operators in certain regulated markets in Europe such as Germany and Holland, which had a modest impact on our Q3 results.
In BtoBet, our Sportsbetting business we saw strong growth across our accounts leading to quarter-over-quarter growth of over 25% and year-over-year growth of over 100% for the business line. We maintained this momentum by extending an agreement with our largest customer for an additional five years demonstrating the strong partnership and successful cooperation between us. This customer is live in over 20 markets in Africa and this extended partnership continues our dominant position in the region.
Along with these developments in iLottery, iGaming and Sportsbetting we also continue the integration of the NeoGames and Aspire platforms. Pariplay has been integrated with the NeoGames platform in Alberta launching strong titles from Wizard Games studio that have captured significant share of wallet in that account and we have also started to roll out content from third parties with plans to roll out many more in the future.
In that regard we have also integrated NeoGames Studio and iLottery content into Pariplay with plans to roll out that content into certain customers of Pariplay in the quarters to come, while also introducing its Fusion aggregation platform to our lottery customers.
In anticipation of our launch in Brazil in the first half of 2023, the BtoBet Sportsbetting platform has been integrated with the NeoGames iLottery solution. This collaboration of business units was key in our ability to win the Brazil opportunity and we expect it to be equally important in similar opportunities going forward.
Finally, before turning the call over to Raviv to walk through our financials in detail, I want to provide an update on the impact of the overall economy on our business, which is a natural area of interest to our investor base in these times.
Historically, as we’ve highlighted on previous calls, the lottery industry has been fairly resilient to macroeconomic changes. We are seeing this trend currently continue, as we have yet to see any degradation in player value or play behaviors across both iLottery and iGaming despite the uncertain economic landscape. However, this is a trend we will continue to monitor going forward, as the economic uncertainty continues.
With that, I’ll now turn the call over to Raviv.
Raviv Adler
Thanks, Moti. Before I get into the results, as a reminder, when we discuss our results, I would point out that all of our iLottery business in North America operates through a 50-50 joint venture with NeoPollard Interactive, or NPI, except in Michigan which is reflected in our main company revenues.
Our contracts in Virginia and New Hampshire, North Carolina, in the 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 only owned operation and through our equity interest in NPI.
Now turning to the results. Our platform continues to perform well on multiple fronts, as we have grown the business both organically and inorganically over recent months in both our core iLottery business, as well as the businesses we added through our acquisition of Aspire Global. We are proud to report record revenue results for the quarter, both on a consolidated basis, as well as for the core iLottery business.
In terms of the Aspire integration, as we have always said, we believe that the real value of the combination was from a revenue perspective. As we have progressed with the integration process, we have identified cost synergies in the range of $3 million to $5 million. We expect to achieve these cost synergies on a run rate basis by the end of the first anniversary of our acquisition of Aspire Global.
During the third quarter of 2022, our revenue, as reported, on the income statement, which excludes our share of NPI revenues, was $62.2 million of which $48.5 million is attributable to revenues from the Aspire Global business.
Excluding Aspire Global contribution, our results of $13.7 million represents year-over-year growth of 14.1%. Our share of NPI revenue reached $11.1 million during the third quarter of 2022, up 34.4% compared to the same period last year. The sum total of these numbers was $73.3 million.
For the quarter, our adjusted EBITDA was $17.6 million, compared with $7.5 million in the same period last year, representing 135% increase. When considering the NeoGames iLottery business, we saw adjusted EBITDA increase to $9.9 million and margin expand to over 40%.
Before reviewing the balance sheet, I want to highlight a couple of notes relevant to the results. As a reminder, Aspire Global has historically recognized its revenues on a gross basis, while NeoGames iLottery business recognized revenues on a net basis. This results in higher revenue, but lower margin for the Aspire Global business.
As discussed on our last quarter call, we have been working with Aspire Global partners to adjust contracts to more closely align with our iLottery business. We’re encouraged by the preliminary results. Additionally, we wanted to flag again the impact of exchange rate fluctuation on the performance of the Aspire business.
With much of the business revenues dominated in euros or British pounds, recent FX moves have muted the revenue growth when converted to US dollars. To provide better transparency on the strength of the business, independent of currency moves, we’ve included a presentation of the business revenue growth rates on a constant currency basis in our earnings release.
It stated Aspire Global revenue of $48.5 million for the third quarter reflects 8% growth when measured on a constant currency basis. This growth, however, is offset by 15.5% decrease caused by the impact of the foreign currency exchange rates.
Turning to our balance sheet. We ended this quarter with $60.3 million of cash and cash equivalents. At quarter end, our outstanding debt was approximately $192.8 million or exchanged on a euro basis of $200.8 million, at a weighted average interest rate of 6.25% with 33.5 million shares outstanding.
Additionally, we have an outstanding balance of $24.1 million for the short-term liability label deferred payment on business combination. As noted last quarter, this represents cash consideration to be paid to former Aspire shareholders as part of the transaction and for analytical purposes this balance should be netted against cash.
With respect to guidance, we are encouraged by the trends in the business and this allows us to provide a revised and tightened range that includes — increases the midpoint. As a result, we expect revenues and our share of NPI revenues for the full year of 2022 to be in the range of $197 million and $208 million, moving from the previous range of $194 million to $208 million.
As a reminder, these values include contribution from Aspire Global starting on the date of the tender offer closed, June 16th 2022, through the remainder of the year.
With that, I will turn the call back to Moti.
Moti Malul
Thanks Raviv. We are very pleased with the developments and financial results of this past quarter. As our first full quarter following the acquisition of Aspire Global, we viewed it as crucial in proving the thesis behind the transaction and believe that we made significant progress in accomplishing this goal.
We saw progress across all business lines and expect this momentum to continue, as we fully integrate our businesses. We thank you for joining us to hear about this progress. And look forward to providing updates in the future.
With that, operator, please open the line for questions.
Question-and-Answer Session
Operator
We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Cassandra Lee with Jefferies. Please go ahead.
Cassandra Lee
Hi. Good morning, Moti and Raviv or good afternoon. Maybe a little bit too early to think about 2023 guidance, but if we were just to start thinking about next year and without new jurisdictions or new contracts, how should we think about the growth rate across different revenue channels?
Moti Malul
Hi Cassandra. Good morning. Yeah. You’re right, that we are not at the point that we’re providing guidance for 2023. I would generally make three comments relative to that.
Number one, we are expecting to start to see revenues even if at the beginning they will be modest from Brazil.
Number two, there’s a few of our accounts that we feel haven’t yet reached maturity and we are still expecting them to grow nicely.
And number three, the new segments we’ve added to our business and some of them did present impressive growth in the last quarter are expected to continue to grow into next year.
So even on — you are right to say that on the iLottery segment, beyond Brazil we haven’t baked in revenues from deals in 2023. Of course, we are hopeful to achieve these but not necessarily significant revenues from new deals. But that is not the case on the other segments of our business. Is that — does that answer your question?
Cassandra Lee
Yes. That is helpful. And if I may, have one follow-up. Thank you for laying out some cost synergies from the Aspire transaction. But if you were thinking about more high level and I know it’s a bit hard to quantify kind of revenue opportunities or synergies.
I think we generally understand how having iGaming capabilities help you win iLottery contract. But we’re kind of wondering how this your iLottery capabilities today help you win on the iGaming front?
Moti Malul
Yes. Thank you. Excellent question, I think there’s a couple of obvious areas where our iLottery business and deployment helps us win business on the iGaming side. The most obvious example is the U.S. where our significant deployment of systems allows us to be I would say number one or top three in the market for sure among the B2B operators with systems live operating regulated and certified in markets.
We are in the combination of our lottery business and our support of Caesars we are live today in 17 markets in the U.S. I believe Ohio is the 18th one, if I counted properly, which is in our opinion far greater than any other B2B platform provider in the market.
And if you layer on top of that the Pariplay business which represents our iGaming games side of the market or content side, that is certified live and running in five states, then I believe that that is an immediate boost to the Aspire Global market entry of gaming into the U.S. market, because regulatory landscape would have required them to take a year or two before they can get to the point that we brought them. And that’s just one typical example.
The other part is that in other places around the world, again, in areas for example take Brazil where we are now deploying the first-ever brand or customer that will go live in the regulated markets according to local regulation. The iGaming part of regulation, are expected to follow. The time line is a little bit unclear but they are in progress. Sports betting in particular maybe iGaming a little bit later. The fact that we will be deployed live and running with a Sports betting solution in H1 next year will be serving and of course with our PAM which is the same time that serves our iGaming business would put us in a great position to win additional deal on the iGaming side when Sports betting regulation comes in effect in that market.
So if I zoom out in every geography, one of our segments runs faster than the other because of how regulation progresses and opens the door for others to follow by being the first to invest in infrastructure and technology and regulation and certification and allowing the others to be way more cost efficient in time to market when they come into those regions.
Cassandra Lee
Great. Thank you for taking my question.
Operator
The next question comes from Barry Jonas with Truist Securities. Please go ahead.
Ramin Sobhany
Hi guys. This is Ramin Sobhany on behalf of Barry. Thanks for taking our question. Congrats on signing the Georgia Lottery contract. Can you provide any additional color on the ramp that you see for the contract there? And any expectations on the size of the opportunity, do you have any visibility on similar opportunities there as well where you are the platform provider?
Moti Malul
Yes. Thank you for the question. It’s definitely a good one. As you said that up until recently, we kept our really market leading games from NeoGames Studio serving in the US only on our full turnkey accounts. We have always seen demand for those games, which are known to be great performers across iLottery customers in the US, which do not have the turnkey solution from us. And the first one that we have signed such a deal in the US — by the way we’ve done so in Canada already last year and we’ve announced a deal that we’ve done with Atlantic Lottery that is also not a turnkey customer for us.
We expect to go live with Georgia again Q1, Q2, next year really depending yet on customer projects, which are not necessarily completely into our control. Along time the lottery there is growing to be bigger and bigger in its iLottery business. And I think that with our good games, we have the chance to capture interesting parts of their wallet share.
If you look at the other opportunities currently in the US market where similar opportunities exist then the bigger one of those is, for example, Pennsylvania of course Kentucky and there are smaller opportunities as well with the lotteries of DC for example that is also live and running with the iLottery program.
So generally speaking I would say yes. It is our intent into next year to continue looking to get into contracts hopefully with those customers in the market, which are operating iLottery programs but do not yet have content from us.
Ramin Sobhany
Got it, great. Thanks for that color. And I guess just as a quick follow-up on a different — on your jackpot comments. Given the really nice run we’re just seeing that just ended, how should we think about quantifying the upside there? Maybe you can relate it to how the previous run in Q3 went. Any additional color there would be helpful?
Moti Malul
I would be careful providing guidance into Q4, but two things. First of all, yes, you could definitely expect as always that when there’s a jackpot run, especially when it happens at the beginning of the quarter, it pushes numbers in that specific month but also allows follow through to the following months.
I would say again I’ll try to remain general here that while this jackpot has been fantastic in its size, the market as a whole and not only our customers have seen a trend where the pickup rates of players into the jackpot were later in time into the jackpot than what happened in July.
There’s a number of potential explanations to this. One of them is simply that the media coverage of the US elections did not allow for the jackpot until it reached very significant numbers to plow through the cluster of media and others. Numbers were impressive and significant for sure, but the only color I could give at this point of time is that it took a little bit longer to pick up public momentum. But jackpots are never bad for our business. That’s something that is a known fact. I hope it’s helpful.
Ramin Sobhany
Thank you. Yes, it’s very, very helpful. I appreciate you talking our questions. Thank you.
Moti Malul
Thank you.
Operator
The next question comes from Jeff Stantial with Stifel. Please go ahead.
Jeff Stantial
Great, thanks. Good morning. Moti, Raviv, thanks for taking our questions. Starting off on guidance, maybe a follow-up to the prior question. I was just hoping maybe you could walk through some of the puts and takes on raising the low end of guidance? On the one hand you do have the Powerball jackpot in Q4, which should help, but it sounds like a later tailwind from that than you normally expect. On the other hand the strong USD continues to impact the Aspire business. Is there anything else relative to prior guide, we should be contemplating for thinking through the raise to the low end? Thanks.
Raviv Adler
Yes, Jeff. Good morning and thanks. You’ve basically touched on the vast majority of the points. The Powerball jackpot this month would certainly be a positive trend to our revenues in the quarter. That would to some extent be set off against FX headwinds and other factors that were reported on the Aspire Core segment in our quarterly results and both two factors are the main reasons for us increasing our lower end of the guidance.
Jeff Stantial
Okay. Understood. That’s helpful. Thank you. And then for my follow-up, you talked to some really impressive results in the acquired BtoBet assets, Pariplay continuing to execute on new market opportunities. The third piece of that business the core platform business, it looks like revenues were down about 6% year-on-year in constant currency. Can you just talk a bit more about what’s driving that contraction and kind of how you see run rate growth moving forward? Thanks.
Raviv Adler
Yes. I think the nature of the core business of Aspire, it’s mainly — we call it a timing issue where on the comparable periods, on the revenue side, on the core, you’ve seen markets such as Netherlands for example, who’s been transitioning into regulated market region and licenses has not yet been granted to operators that are having signed contracts to the Aspire, so didn’t yet go live. Same goes for the regulation in Germany and some slowdown in the pace of issuing licenses. Those both two factors are something, which is to some extent delaying the launch of the new regulated markets on the core. And this is the reason why you see on the comparable period to some extent the drop of the 6% that you’re touching.
Jeff Stantial
Great. That’s helpful. Thank you, Raviv.
Operator
The next question comes from Chad Beynon with Macquarie. Please go ahead.
Chad Beynon
Hi. Good morning. Thanks for taking my question. Thanks, Moti, Raviv. Wanted to start with margins, I guess specifically focusing in on the distribution expenses. Obviously this is the first full quarter with Aspire, so we’re kind of learning how the margins flow through currently with how you guys are reporting. But anything to highlight just in terms of, maybe inflationary pressure or tech costs regarding the distribution expenses? And until you recognize the synergies in the back half of 2023, any change in terms of how we should think about margins in the near term? Thanks.
Raviv Adler
Chad, good morning. So the reason of the trends that you see on the distribution line item on the P&L is basically by the vast majorities, the way revenues are being presented in the P&L. And as we’ve touched both on our commentary on the quarter and last quarter we’re running a process with the partners of Aspire to try and move the presentation method for next year into net. That would cause — that has the potential of expanding the margins, especially on the Aspire business. We haven’t been — we haven’t completed that process yet and — but the results, so far are encouraging. We haven’t seen any other trends relative to the macroeconomic environment that impacted distribution expenses. And the reason they have been impacting the margin, is again, due to the gross presentation of revenues.
Chad Beynon
Perfect. Thanks. Okay. So you’re not seeing any inflationary pressure on that employee side? This is kind of as expected really just kind of flowing in?
Raviv Adler
Exactly.
Chad Beynon
Okay. Thanks. And then on the balance sheet, I know it’s very early right now and there’s a lot of things that you’re kind of focused on. But how are you thinking about where you want to run this company from a net leverage standpoint? And if there are opportunities for more tuck-in acquisitions when and how big could this fold into your offerings? Thank you.
Raviv Adler
So from a net leverage perspective, we have quite strict and clear guidance by our Board, which suggests that the net leverage or the net leverage of the business would run around three and hopefully down during 2023. And I’ll let Moti touch the tuck-in acquisition.
Moti Malul
Yes. Obviously, as we shared we do have in mind a couple of areas that we would benefit strategically from certain tuck-in acquisitions, but it is tied to net leverage as well that we do not necessarily wish to go significantly, beyond where we are now. Plus in an environment where interest rates could and maybe are expected to still grow especially in Europe, where they haven’t reached areas where the US, is and our debt is tied to that we would need to be mindful of making sure that we are going into such tuck-in acquisitions connected with where the business is from the ability to reduce its net leverage profile.
Chad Beynon
Great. Thank you. Best of luck. Appreciate it.
Moti Malul
Thank you, Chad, as always.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Moti Malul for any closing remarks.
Moti Malul
Thank you. Thank you guys for joining us, again. I would say that the only additional perspective I want to give beyond the good questions we were asked this morning and hopefully, the material that we provided in the opening comments is that our business now is not made of one segment, but actually four and we believe it’s very impressive that three out of those four, showed significant revenue increase and performance.
And it’s natural, when you have four verticals or four segments to your business that in timing perspective, not all of them would grow at the same timing and in the same pace. And that’s why for example Aspire Core that we were asked about, is experiencing something they have experienced many times in the past where they’re in line of business when they have transitioned from into a fully regulated market. And that happened when they transitioned into the UK, it happened when they transitioned into Denmark and certain other markets. Then this transition period always comes with a level of uncertainty, of how long it would take which is controlled by regulators.
But when I zoom out from a management perspective, I think that we are very encouraged by the fact that we have four growth pillars to our business that allows us to grow on most of them, if not always on all of them. So that’s the only additional perspective, I want to provide to everyone on our call. And as always, we are extremely appreciative for the interest that you are taking in our company and we’ll continue to do our best to meet your expectations. Thank you, everyone and good morning.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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