Earnings Transcript for NGMS - Q1 Fiscal Year 2022

Operator: Good day, ladies and gentlemen. Thank you for standing by. Welcome to the NeoGames First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer will follow the formal presentation. Please note that this conference call is being recorded today, May 12, 2022. I will now turn the call over to Mr. Jacques Cornet with ICR.

Jacques Cornet : Thank you, operator, and good morning, everyone. By now, everyone should have access to our first 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 exercise 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 period ended March 31, 2022. During today's call, we will discuss non-IFRS 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 measure 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 first quarter 2022 results. This morning, I will highlight some key points about the first quarter performance and provide an update on the trends we are seeing in the market. Raviv will then run through our financials and business performance. Overall, there haven't been significant changes since we last spoke only 2 months ago, as the business continues to perform well and in line with our expectations. We're also obviously diligently working towards the close of the Aspire acquisition as we recently launched a tender offer and we are on track for closing before the end of the quarter. During the quarter, the total of revenues plus our NPI Revenue Interest climbed modestly, growing 3.8% year-over-year as well as over 5% sequentially from Q4, bringing the total sum to an all-time high of [2020], $22.4 million. We consider this to be an impressive result given the comparison of the first quarter of 2021, which benefited significantly from a double jackpot run from both Mega Millions and Power Ball. These results highlight the strong trends we are seeing in some of our key markets. Virginia, for example, continues to outperform, with strong growth both quarter-over-quarter and year-over-year. The account continues to innovate in many areas. OneTouch is the recently launched online raffle games subsequent to quarter end. Alberta, too, has demonstrated continued growth. Given the full portfolio of gaming verticals across lottery, casino and sports, which we have geared to play Alberta with, such that the market has become our second largest turnkey account. We view Alberta as a terrific example of the type of account where our lottery customer will benefit from our strategic acquisition of Aspire, for example, content from Pariplay, Wizard Games studio continue to gain traction and wallet share with an impressive introduction that began in Q4 last year. In Michigan, with the first quarter of this year, we have fully lapped the introduction of iGaming in the market in January of 2021. This gives us enough perspective to see evidence for what we believe is sustainable growth in the account, which has continued the growth that started in the second half of Q4 last year into Q1. Recall, when we last spoke, we mentioned results had stabilized sequentially. And in fact, we were seeing beginnings of what we were hoping would be a momentum shift during the latter part of the fourth quarter. As we have mentioned in the past, our long-term belief is that after an aggressive period of promotion from iGaming during 2021, the lottery will get to a point where the business stabilizes, and then again, begins to regain growth. We are seeing new players join the system, and in our view, these new players today are more dedicated lottery players because they are all aware of the iGaming offering and have decided to join the iLottery program. While we may still see fluctuations in revenues due to expected impacts from factors such as seasonality or large jackpots, overall, we are expecting the pattern will be trending towards growth moving forward. Our Caesars partnership continues to perform well as we launched New York and Illinois with them during the first quarter. In April, we also went live in the first Canadian market with Ontario, broadening our partnership with Caesars to include international markets. In Europe, Sazka, another of our multi-gaming product customers, continues to perform well, and we have seen continued growth of revenues with an impressive online performance. The regulatory environment and state authorization in the U.S. for iLottery continues to evolve in some key markets, which we have mentioned on prior calls. However, since we last spoke 2 months ago, there hasn't been much new to report. Internationally, we see movements in a few regions. One with interesting dynamics in Brazil, in which we see continued progress in various states to form, create and regulate lottery authorities as a first step towards gearing up with lottery tech and operations as well as sports betting in the coming years. This is a long-term process, but an interesting market with attractive potential opportunities given its size, particularly when you consider the products that will be offered within this emerging lottery market. Obviously, our biggest news during the quarter was the announced acquisition of Aspire Global in January. To summarize the deal, we view it as a natural development for the progression of NeoGames as the combination with Aspire will enhance our scale and competitive position across all business lines, adding Aspire's proprietary sports betting offering, its iGaming content and aggregation platform, as well as its turnkey B2B gaming solutions to the NeoGames offering. We believe this strategic combination will generate significant long-term shareholder value by synergistically capitalizing on the key strengths of our 2 companies and positioning NeoGames for expansion in new and existing markets. Based on their impressive first quarter results, we remain excited at the prospects of completing the transaction. The deal continues to progress on schedule for closing as we recently put out a prospectus on the commenced offering, a couple of weeks ago. The acceptance period runs from April 27 through May 25, with an expected settlement date of June 14, 2022. Currently, given market reception, we are confident we will meet the shareholder approval threshold and we look forward to updating you on our next earnings call. Lastly, I would like to provide an update on the conflict in Ukraine as it relates to our operations, friends and colleagues who remain there during these difficult times. Once again, their safety and well-being are our chief concern, and with this in mind, I'm happy to report that all are currently safe and we continue to support them in the best way we can while the situation remains fluid. Secondly, we have been so far very successful with our efforts and we are able to completely mitigate all the impacts to our business through various measures such as relocation to safer areas and parallel recruitment outside of Ukraine in a few markets. We are fortunate to have such a dedicated, motivated and engaged team in Ukraine who are all demonstrating admirable responsibility and loyalty to the company and to our customers. Like everyone, we hope to see a swift end to this conflict, but until then, we expect our operations to continue with minimal impact. 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, NeoPollard Interactive or NPI, except in Michigan, which is reflected in our top line revenues. Our contracts in Virginia and New Hampshire, North Carolina and the province of Alberta run through NPI. Except for the NPI contract, we conduct all of our business through NeoGames. As a result, from an accounting standpoint, as many of you know, we generate revenues and earnings through our wholly-owned operation and through our equity interest in NPI. Now turning to the results. Our revenue is reported on the income statement, which excludes our share of NPI revenues, was $13.2 million during the first quarter of 2022, down 0.7% over the same period last year. However, our share of NPI revenues grew to $9.2 million during the first quarter of 2022 compared with $8.2 million last year. The sum total of these 2 numbers was $22.4 million during the first quarter, representing an increase of about 3.8% year-over-year. Generally speaking, first quarter earnings were partially impacted by one-time items, which was transaction costs incurred for the upcoming Aspire Global acquisition of $2.2 million. For the quarter, our adjusted EBITDA was $8.5 million, which is down 12% compared with $9.7 million last year. The results represent an EBITDA margins of 38%, up 90 basis points quarter-over-quarter. Turning to our balance sheet. We ended up this quarter with about $40.9 million of cash and cash equivalents. Our outstanding debt at the quarter end was approximately $13.2 million at a weighted average interest rate of 1%, leaving us in a net cash position of $27.7 million. Corresponding with Aspire capital note terms, we have settled in full, both outstanding principal and accrued interest of a total of $21.1 million. We have 25.5 million shares outstanding at quarter end. With respect to guidance, we're updating the range to account for our reported results, which were in line with our expectations. We continue to expect solid growth from our existing customer base in 2022, and we still expect 11% year-over-year growth during 2022 based on the midpoint of our guidance range of $91 million to $96 million. Keep in mind, however, that this guidance does not include the launch of any new turnkey contracts nor presumes the closing of the merger with Aspire Global. It also assumes the full range of possible outcomes from the Ukraine crisis. With that, I will turn the call back to Moti.

Moti Malul : Thanks, Raviv. We believe we are in a great position to continue executing on our growth strategy from both internal and external growth opportunities, and are excited by the momentum we are generating. We look forward to welcoming the team from Aspire Global into the NeoGames family and take advantage of the amazing opportunity to capitalize in global markets of iLottery, iGaming and online sports betting. With that, operator, please open the line for questions.

Operator: [Operator Instructions] Your first question is from Jeff Stantial with Stifel.

Jackson Gibb: This is Jackson Gibb on for Jeff Stantial. So I wanted to dig into the guidance changes a little bit, if I may. Could you maybe give around -- a little bit more detail around this -- in part of the [indiscernible] while leaving this point flat. Is that another quarter in the book giving you more visibility? Or did stabilization in Michigan or your ability to mitigate the Ukraine disruption figure into that as well? Just trying to get a little bit more color around [content] to tighten the range there, that would be great.

Moti Malul : Yes. Jeff. First of all, yes, we haven't moved our midpoint because we're getting more confident around the guidance overall. We felt that the range of the guidance we provided in our last earnings call, which was because of certain uncertainties on the lower end because we didn't know what impact would be, if at all, from the Ukraine situation, which we're happy to report that we have fully mitigated so far. And on the other hand, there has been a couple of deals on the content side of the business that we launched at the later part of last year that we didn't know how fast it will take for them to pick up on an aggregate value. It's not a specific deal. It's an aggregate value of where do we forecast towards the end of the year. So we took this opportunity as we are now in May to kind of tighten a bit, the range to give more clarity to investors on where we see. But we have not done any significant changes beyond that.

Jackson Gibb: Okay. Great. That's really helpful. And then if I could just ask more. Margins were 38%, up almost 100 basis points sequentially, reversing kind of the declining trend. How much of this do you think is really the result of the cost plus development work for Caesars? And how much do you think the Alberta contract becoming -- ramping and becoming your second largest contract, how do you think the various puts and takes affect margins? And how does it figure into where investors can look for margins to go through the rest of the year and long term?

Raviv Adler : Yes. Thank you, Jeff. So relative to margins, as a general statement, we still expect that on a go-forward basis that the business would perform around the high 30s and low 40s, and we feel comfortable where the margins are currently trending. We're not giving guidance relative to EBITDA contribution on specific contracts. In general, I can say that quarter-over-quarter, we're seeing a better performance in volumes and revenues coming through contracts, which are driving higher margins profile. And also the work that we have done with a contract in Alberta relative to the structure of our costs contributing -- contributed a bit to the margin improvement, and we expect that to -- also on a go-forward basis.

Operator: Your next question comes from Barry Jonas with Truist.

Barry Jonas : My first question is if we think about the potential for new iLottery jurisdictions, how would you frame the scale and size of opportunities for the company in North America with the JV as opposed to international where it's 100% NeoGames?

Moti Malul : First of all, we always said that the U.S. has so much to still open up where we have roughly 10 states, maybe depending on how you count. Maybe 1 or 2 states that are doing just subscriptions where there are more than 35 states to still go with iLottery. So absolutely, the potential in the U.S. market is huge going forward. And also the nature of the deals in the market where we are providing full turnkey account, including the fullest extent of services, provides for those deals to account for the most meaningful portion of our revenues, and we still expect the U.S. market going forward to be the more dominant market. That's not to say that there aren't markets where we feel there are good opportunities to explore especially markets which we believe that can have economical scale. Which is why, for example, I referenced to Brazil, which is 26 states. However, like the U.S., it has a lot of internal scaling if you aggregate wins of a couple of states in them, and so we're trying to look for the markets which have a more attractive profile. And unfortunately, we see that some of these are opening up around the world. But again, we still expect that as -- with enough time, let's say, giving it enough time for the markets to open up in its fullest extent, the U.S. market will definitely continue to be the largest portion.

Barry Jonas : Okay. Got it. And then just as a follow-up question, how should we be thinking about potential M&A once the Aspire deal closes? I believe Aspire management has talked about an interest in the live dealer.

Moti Malul : Yes. First of all, I hope that you will let us have a few days of rest. We've been working very diligently on this one for 5 or 6 months and even before that. Our appetite to find interesting opportunities in the market hasn't stopped before because of the Aspire transaction. To remind you, even before the Aspire transaction was announced, we said that we are looking at opportunities in a landscape of 3 or 4 universes or buckets or verticals, and one of them was gaming. But we had others, and we will definitely continue to pursue opportunities in those areas. We will now add to these -- also areas which we don't have full visibility into, with the exception of publicly-made statements. On the Aspire side of the business, obviously, the transaction has not been completed, so we have not yet had the chance to strategically see how to blend the prioritization of potential transactions. But we are definitely looking to continue to seek for opportunities that will enhance the full offering of what will become the group.

Operator: Your next question comes from Cassandra Lee with Jefferies.

Cassandra Lee : Can you talk about the timing of North Carolina eInstant launch? And what kind of growth can we expect from that?

Moti Malul : Yes. Cassandra. We can say that we have a specific date and time that that was already approved by the commission. The lottery is waiting for an approval by its governing commission to let them upgrade the activity to include the eInstant. They have been working very diligently on educating the Board and working to gain that approval for a good couple of months, but there hasn't been a final decision on that matter. Obviously, when it does upgrade itself to become a full lottery account with eInstant, we expect that this will create quite a significant impact on our potential revenues in the extent that we have seen when we opened up, for example, eInstant in Virginia in the middle of 2020 -- 2020. I forgot the time line, I think it was July 2020. So yes, so it gives quite a significant boost to the activity because obviously, for as long as that we have only draw games, we are able to grow the business very nicely. And North Carolina is a successful account when it comes to draw games, but very much impacted from jackpot runs, an eInstant will provide. So depending on the timing of when that opens up and how much runway do we still have in the year to transfer that into revenues, the revenue potential will change. So I don't know if it answers your question, but when we are now in May, and we haven't yet received the approval. So obviously, the impact on this year, if it opens up, it will probably be modest.

Cassandra Lee : Got it. And if I may ask another one, we saw the use of IP rights jumped quite a bit sequentially and year-over-year. I assume has something to do with Caesars's launch in New York. I wonder how much of that is kind of one-time versus kind of a good run rate going forward?

Raviv Adler : Yes. So Cassandra. As you probably know and -- the use of IP is very much linked to Caesars's aspiration of expansion in the U.S. -- in the U.S. market, which we're supporting. And as you rightfully stated, it was associated with the launch of New York and later also early Q2 in Ontario. And we're very much linked and committed to support our expansions and the pace of them opening new states. So I cannot say that it was one-timer, but given that what we are familiar with their business plans going forward, it should be recurring also into Q3 and Q4 later on this year.

Operator: And with that, ladies and gentlemen, we conclude our Q&A. I'll turn the call back to Moti Malul for his final remarks.

Moti Malul : Thank you. And thank you, everyone, for joining this morning as usual and showing interest in our company. The main thing, obviously, while we are still reporting on our existing business, is for us to be focused on completing the transaction and next quarter results, if we close on time, will allow us to provide a bit more color on the joint activities of the company. Because if we close the transaction, obviously, still in Q2 as we expect, by second half of August, we will be able to provide a bit more color that I know that many investors are waiting for. But we're definitely excited for the opportunity. So thanking everyone for joining this morning and showing interest in us, and have a great day.

Operator: And with that, ladies and gentlemen, we conclude today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.