GAN Limited (GAN) on Q1 2021 Results - Earnings Call Transcript
Bobby Shore: Thanks, Doug, good afternoon, everyone. GAN’s first quarter 2021 earnings release was issued today after market close and it’s posted on the company’s website at gan.com. With me today are Dermot Smurfit, President and Chief Executive Officer; and Karen Flores, our CFO. Please note, we’ve provided a set of PowerPoint slides that will accompany our prepared remarks. You may access these slides in the Investor Relations section of our website. We’ll start on Page 2 with our Safe Harbor disclosure. We would like to remind you that, except for the actual statements made today, information contained in the conference call, including any financial and related guidance to be provided, consist of forward-looking statements that involve risks, uncertainties and assumptions that are difficult to predict. Words and expressions reflecting optimism, satisfaction with current prospects, as well as statements in the future tense, identify forward-looking statements, but their absence does not mean that a statement is not forward looking.
Dermot Smurfit: Thank you, Bobby, and good afternoon, everyone. Please join me on the fourth slide of the presentation released earlier today. This was an impressive first quarter of delivering strong top line growth, exceeding our stated guidance and executing new client wins and launches, together with the closing of the Coolbet acquisition. Today, we’re announcing a major content distribution deal with Ainsworth, providing exclusive access to their proven land-based content. I could not be any more pleased with what the team accomplished so far this year, enabling us to drive further growth going forward. Turning back to the first quarter. Our top line increased 260% year-over-year with our new B2C segment contributing over $14 million out of nearly $28 million in total revenue. Underpinning our strong growth was Michigan’s launch, which represented an historic achievement for GAN with three simultaneous client launches delivered on January 22. Michigan certainly hasn’t disappointed since with strong growth in Q1 continuing into Q2, centered very much on iGaming as the major U.S. sports events came largely to an end. Nearly $28 million combined revenues exceeded our guidance for a variety of positive and sustainable reasons. Not just Michigan, but all jurisdictions worldwide where GAN operates continued to experience secular growth as the sports betting calendar peaked or the underlying digitization of iGaming continue to drive the real profit center of the U.S. industry, which is iGaming.
Karen Flores: Thank you, Dermot and hello to everyone on the call today. Our client’s success has created tremendous demand for our services right now, and we’re off to a very strong start in 2021 with a number of revenue records set during the quarter. I’m extremely pleased with our results the momentum we have in the business and our progress on strategic initiatives, including our newly expanded super RGS content offering with Ainsworth, as well as closing of the Coolbet acquisition on the 1st of January, which is now included in our financial results. The steady cadence of new state and client launches, as well as the contribution of Coolbet drove solid performance in this quarter, while we also continued to invest in our technology and team to scale the business and capture this unique market opportunity. We operate in a highly competitive environment, whether it’s the number one B2B enterprise platform in the U.S., or as one of the fastest growing B2C iGaming companies in the world. And we believe the investments we are making now and our full stack offering in global organizations will lead to increased market share and value creation for all of our stakeholders. Before I jump into Q1 results, let me briefly summarize key changes in the presentation of our financial statements. You will notice our public filings now include two new segments, B2B includes our Real Money, internet gaming and simulated gaming offerings, and B2C includes Coolbet’s assets and international operations. Additionally, our consolidated financial results now will create the impact of the final purchase price associated with the Coolbet acquisition, which was a total fair value of the assets acquired and liabilities assumed of 218 million. And now turning to a discussion of our first quarter results on Slide 11. I’m excited to report we have very strong performance in both segments, which collectively drove a 263% year-over-year increase in revenue to 27.8 million, which includes the acquisition of Coolbet in the current year period. As disclosed in our 10-Q, revenue growth on a consolidated pro forma basis was 88% for the combined group, with revenue increasing from 14.8 million in the prior year period. Our B2B revenue increased 52% sequentially and 76% comparatively to record high 13.5 million, which exceeds our previous record of 10.7 million by 27%. Revenue from Real Money iGaming was up 76% sequentially and 68% comparatively to 10.5 million attributed to both our new partner launches and continued expansion, as well as 3 million of patent licensing revenue recognized in the quarter. Simulated gaming was up 4% sequentially and 114% comparatively with year-over-year growth driven by the addition of Penn National and other key partnership launched in 2020. We also observed record revenue in Italy, which increased 39% sequentially and 76% comparatively. Underlying this positive momentum in our top line growth were significant gains in our key performance indicators. Record total B2B gross operator revenue of 214 million, which was up 63% sequentially and 51% comparatively resulted in record high online casino SaaS revenue increasing 49% quarter-on-quarter and 96% year-on-year. Our take rate of B2B gross operator revenue this quarter was 6.3% down versus 6.7% in the prior quarter and up versus 5.4% in the prior year. It’s worth reiterating that we recently observed volatility in our take rate of gross operator revenues due to the dynamics of taxation and player bonusing within new markets. Unrelated to pricing of our enterprise platform offering for which we earn a revenue share of net gaming revenue. As a result, we are currently working towards providing new, more insightful and transparent KPIs tied to NGR, which we anticipate to rolling out on the next earnings call. On the subject of take rate, I’d like to take a moment to further discuss the exclusive Ainsworth content licensing deal. As we first cited our content strategy as a method of expanding our take rate approximately a year ago, upon the anticipated launch in early Q3 GAN will assume Ainsworth recurring content licensing fees they are deriving from online operations of their RGS. Their roster of clients includes nearly all major B2C operators online who are not platform clients of GAN. In this manner, not only do we start sharing a non-clients online casino revenues immediately, but we also extend our distribution reach across the entire industry. This deal is critical to our super RGS strategy, provides us further competitive differentiation with a proven U.S. catalog and accelerates our capture of content licensing economics, while in parallel we also pursue our own O&O content development. We’ve entered into this deal at a highly attractive estimated return on investment of nearly 30% with a base case scenario of 50 million in incremental revenue and 12 million of incremental net income over the term with positive free cash flow beginning in 2022. We look forward to unlocking the value of this key strategic partnership over the five-year term. And now returning to our Q1 revenue results, B2C segment revenue outperformed our expectations generating 14.3 million in quarterly revenue derived from the contribution of Coolbet’s online international sports betting and casino gaming operations. On a pro forma basis Coolbet grow its first quarter revenues 83% year-over-year as a direct result of increasing its active customer base by 81% and growing turnover by over 100%. Key performance indicators remain at exceptional levels across the board and we are excited about the low acquisition costs, highly scalable business, they will continue to grow now under the umbrella of GAN. Turning to adjusted EBITDA, we generated 1.7 million versus 2.5 million in the prior year. Our operating expense impacting adjusted EBITDA increased from 5.1 million to 26.1 million driven primarily by the addition of Coolbet, our expanded B2B organization, and public company and regulatory related costs. As Dermot mentioned, we will continue to invest in our technical capability and delivery as well as invest to meet the demands of new and existing customers for the immediate future. Contributing to our net loss of 4.5 million versus net income of 700,000 in the prior year is higher amortization related to acquire new intangibles of 2.9 million and an increase of 1.2 million in share-based compensation and related expense. Our balance sheet remains strong, with the cash balance at 52.2 million at quarter end and we continue to remain debt-free, granting us a clear path to focus on high growth initiatives, securing additional market share and delivering the best platform technology to the market. And now turning to Slide 12, we believe growth opportunities abound and will continue for the foreseeable future. Our view is that these are the early innings for online sports and iGaming, and based on current industry reports, we believe we will continue to see the rapid adoption of our gaming legislation. Near-term our focus will be on capturing the potential opportunity of New York regulation, but in the years to come, we believe we will continue to have access to a large pool of potential clients across leading commercial and tribal operators. And we are uniquely positioned as the only pure play B2B operator focused on this enormous opportunity. Internationally, the B2C business is present in some of the most exciting regions in the world. And we look forward to leveraging Coolbet’s know-how and sports technology to implement our full-service B2B offering in the U.S. The GAN Sports and super RGS offerings are a way to further enhance our scale and profitability and we are yet to see the impact these exciting investments will bring in the years to come. Our revenue has already been highly recurring, and we believe these additional products will serve to further reduce our customer concentration, increased geographic diversity and enable a higher take rate of operator revenues. We are confidently executing against our long-term strategy and with this, we are increasing our revenue guidance from the original range of $100 million to $105 million to now $103 million to $108 million. And I’ll highlight that the midpoint of this range is three times our 2020 revenues for GAN B2B standalone. While we aren’t providing adjusted EBITDA guidance, we do expect to generate positive adjusted EBITDA as we grow and scale our top line and take rate, while improving operating leverage through controlled growth with a focus on efficient spend. We hope to expand on these concepts further at our Investor Day event in early October, during the first day of the Global Gaming Expo in Las Vegas, also known as G2E. We look forward to providing a deeper dive into Coolbet’s unique capabilities and the long-term scalability of our B2B business, as well as introduce other senior leaders here again, more information on that will be forthcoming. I’ll now turn it back over to Dermot to conclude our remarks. Dermot?
Dermot Smurfit: Thanks, Karen, turning to Slide 13. Simply put, GAN is in better shape today than at any point in its recent history. There is clear opportunity for continued strong growth, profitability and just winning with our expanded client base. We delivered strong results this past quarter driven by our talented team and our incredible and scarce technology offering. These strong results should continue as we efficiently stand up new B2B clients and expand our B2B content offering to include GAN Sports and Ainsworth’s exclusive slot portfolio. B2C, we will continue the first quarter’s momentum internationally as major sports tournament’s kick off in June, helping counteract the seasonally slower sport betting calendar in the U.S. and reflecting GAN’s now global reach. We anticipate that our current execution strategy will ultimately yield a highly scalable and recurring business model, which will maximize value for all of our stakeholders. That concludes our remarks. And we will now open the line for questions.
Operator: Our first question comes from the line of Chad Beynon with Macquarie Group. Please proceed with your question.
Chad Beynon: Hi, good afternoon, Dermot and Karen, thanks for taking my question. Nice results. Wanted to start on the guidance. So based on what you’re seeing or – I guess based on what we’re seeing in April out of the public data in markets like Michigan and New Jersey, your iGaming numbers as you noted continued to be very strong. And you mentioned that there’s no slowdown at this point. So can you help us think about the $3 million positive revision to your annual guidance and how that – and then how that works into the $3 million beat in the first quarter? Anything else that we should be thinking out throughout the year, positives or negatives, that were different to how you thought about this at the end of March when you gave the last annual guidance? Thank you.
Karen Flores: Yes. Thank you, David. So we mentioned during Dermot’s remarks that sports through now Coolbet being part of the company is 25% of our total revenues. And we have seen that, of course, the sport side of B2C can be quite volatile. And so we have included a base case in our guidance. So we’re taking into consideration that, as well as the fact that we’re not completely out of the woods yet with respect to COVID. So we are cautiously watching those things through the second quarter. Our guidance that we just reiterated is a base case scenario. So we do think depending on execution of the content deal, as well as GAN B2B sports, that those are areas where there could be upside. And of course, as we’ve mentioned before, we do not include patent licensing in our guidance. And so if anything were to happen between now and the end of the year from a patent licensing perspective, that would be an increase as well.
Chad Beynon: Thanks. Great. And then can you provide any more color just in terms of comments around investing in the business? You talked about technology and talent that will obviously sacrifice some of the near-term EBITDA opportunities. But at what point do you think you’ll have kind of the full team in place? And how are you thinking about what’s out there and if you’re able to acquire the talent that will help you position the company for the future? Thanks.
Dermot Smurfit: Yes. So Chad, you’ve kind of self-answered to a degree. So investing in growth and future market share, getting the right talent on board, leveling up in certain scenarios, growth overall. This is all about capturing these long-term multiyear relationships to be somebody’s platform at a point in time in the industry where we’ve been surprised at not only the organic B2B client opportunities in the U.S., which are basically a jump ball for everybody engaged in the marketplace, but more interestingly, existing single-state clients suddenly asking to go multistates, which is a big list internally. And then secondarily, you’ve had a pretty interesting surge in competitive replacement opportunities, which I think, again, simply reflects the relatively as far as understanding of just how complicated all of this stuff is to do, whether it’s in an individual real money gambling state or multistate. And I think our multistate capability has really sat at the heart of that as people have kind of reevaluated their team choice and thought actually maybe we need an alternative provider. So GAN has become rather a default go-to solution that’s proven and not a risk of getting live quickly in any individual or multiple state marketplace. And I think that’s been the incremental surge in B2B platform demand that we are having to address. And it’s absolutely the right decision for us to go, you know what, we’re going to need an additional launch team, perhaps even two over the course of the next quarter or two. It takes time, typically six months to engage, upskill, and operationally switch on a new client launch, squad of some sorts. So it’s absolutely about resourcing not just today’s opportunity from our existing clients, but also responding and being able to capture these new B2B platform client opportunities that really come up for grabs in such a fleeting way momentarily before they disappear from view again unless you are ready and capable of bringing them online within four to six months. Just as we did in Michigan, where you can see us signing a contract a win in September of last year and getting them live in January. And that was just one of three major client deployments. So really, it’s about ensuring that we don’t miss these extraordinary opportunities. And we are open for business very much so, and we expect to have new B2B clients imminently.
Chad Beynon: Thanks, Dermot. Great to hear. Congrats on the quarter.
Dermot Smurfit: Thank you.
Karen Flores: Thanks, Chad.
Operator: Our next question comes from the line of Ryan Sigdahl with Craig-Hallum. Please proceed with your question.
Ryan Sigdahl: Good afternoon, guys. Thanks for taking my questions. Curious on the Ainsworth agreement, is it an exclusive distribution agreement? Or are you acquiring the online IP? And then secondly, you mentioned, Karen, you mentioned $50 million in incremental revenue over five years. What does that agreement start? And then how much of that contribution is included in the fiscal 2021 guidance?
Karen Flores: Yes. Thanks, Ryan. So I’ll let Dermot comment on some of the strategic points for the deal as well. But as far as the starting point, as we mentioned, we are assuming that it launches early part of the third quarter. So there is, let’s say, a low single million number that’s included in the current guidance. Again, as we really get into that deal and get our sea legs, if you will, again, there’s potential upside as we have a base case included in the guidance. So we’ll be really evaluating that early on in the quarter and should be able to talk about it more on the next earnings call.
Dermot Smurfit: Thanks. Ryan, on the strategic stuff. Yes, it’s exclusive distribution. We’re not acquiring any of the Ainsworth intellectual property. This is an exercise in mutual back-scratching in the sense that they get to focus all of their tech team on just scaling that online slots portfolio, right? This is a game about getting scaled quickly with online slot portfolios. They’re at 80 individual titles, many of them iconic, recognizable, major titles like the Roaming Reels and Mustang Moneys of the world. And Ainsworth content is incredibly popular and well positioned and kind of distributed across retail gaming floors in the U.S. And I think they’ve got another 15 titles that are close to the boat that should be rolled out for the end of the year. And they’re going to continue to build that out up to 200, potentially even more than that over the course of the deal terms. So very much an exclusive distribution, specifically here in the U.S. And we think it’s going to confer a lot of competitive advantage to our B2B platform clients and future clients of our super RGS.
Ryan Sigdahl: Maybe a follow-up, on top of Chad’s previous question on guidance, but you raised guidance by $3 million on each end of the range. You just beat Q1, your range by $3 million. You mentioned upside at the end of the quarter in the last week, kind of relative to when you gave that, as well as you just said a couple of million here for Ainsworth incremental, as well as Michigan basically significantly exceeding expectations. So I guess what isn’t going as well? Or what are the offsets there that I’m missing?
Karen Flores: Yes. So again, when we look at guidance, we’re also looking at the potential risk relative to the sportsbook. And we just closed on the Coolbet acquisition on January 1. So it’s something we’re continuing to monitor. When we’re in the midst of it and we’re looking at it sort of on a week-over-week basis, we understand that there can be a good bit of volatility there. And of course, for the first quarter, it ended in our favor. But we’re going into the equivalent March Madness event with Copa in the June timeframe. And so we’re going to be looking at that, the trends associated with that, and how that is managed to really gain more comfort around the volatility that could exist in the sportsbook. So that’s just, again, a little bit of a hedge there, and we look at it right now from a base case scenario. With respect to Ainsworth and some of the other items that you mentioned, Ainsworth is the deal that we’ve been working on for a long time. So it was included again in our original projection. I won’t go into all the ins and outs of what’s in our projection. But of course, we assume new business when we originally put out the guidance of $100 million to $105 million on the first quarter. So again, we’re continuing to monitor it, and we’ll update the market on the next call.
Ryan Sigdahl: And then just switching over. Curious how you think about Wynn interactive, the opportunity there, given its recent spin-out merger with the SPAC, they’re going to have significantly more capital to accelerate marketing and market share gains, et cetera. They also mentioned proprietary in-house tech a lot. They have BetBull. They also use Scientific Games in a few other states. Just kind of the puts and takes there, how you view that relationship and opportunity to expand in other states?
Dermot Smurfit: Yes, incredibly positive, Ryan. Thanks for the shout-out on that. We’re actually in the process of integrating the front end. I think when they talk about proprietary technology, they talk about the front-end mobile app that BetBull’s very well-known and respected for. And that’s been integrated to sit on top of the GAN platform just as it has been in other states that Wynn has already launched. And actually, I do point out a number of factors of Wynn. The first and most important one is that they licensed our patents as part of the contract deal in September of last year. That’s to integrate the rewards program. They’ve been talking up the 13 million reward members in a database. We’ve seen this brand certainly in the online casino outperform any of the other online casinos we’ve launched for any other B2C operator clients in any other state. I mean this brand is a special brand. When it comes to the financial capital that they’ve raised to go after the opportunity and have a run to the podium, the numbers are in the public domain. It’s a very significant war chest they have, but any other comment beyond that would be for Wynn’s executives to provide to the market, and it wouldn’t be appropriate for me to comment at this place.
Ryan Sigdahl: Yes, that’s helpful. Yeah, they’re certainly going to get more aggressive. Curious, can you remind me what is included in the patent license with Wynn, how long it was, what states that includes, how it was quantified? And then if there’s upside if they get more users, then what was kind of part of that initial agreement?
Dermot Smurfit: Yeah. It’s a 10-year deal commencing from launch. So we launched in January of this year. The patent license extends only to Michigan and the contract terms only encompass operations in Michigan. I would hope they would speak kindly of us. And certainly, we’ve enabled them not just to be there on day one, but to take a reasonably interesting share of the market pretty quickly out of the gate. So very, very strong relationship of collaboration at this point, and we’re excited to see what happens next.
Ryan Sigdahl: Great. Thanks, and good luck. I’ll hop back in queue.
Dermot Smurfit: Thanks Ryan.
Operator: Our next question comes from the line of David Bain with B. Riley FBR. Please proceed with your question. David Bain, your line is live.
David Bain: I’m sorry for that. Sorry, I was on mute. Congratulations on the quarter and, of course, Ainsworth. Understanding Ainsworth as one of the larger players, can we anticipate continued unique content, either tuck-ins or exclusives going forward as either an opportunistic or even a core strategy? And understanding you’re not disclosing exact acquired right purchase amount, can you give us some color on structure, like upfront cash component with some ongoing split? Is that sort of what we should look at either with this deal or something going forward?
Karen Flores: Yes. Thank you, David, and I won’t call you Chad.
David Bain: I want to be Chad on weekends.
Karen Flores: Of course, we stated a year ago that we’re going be focused on content strategy and progressing that as far as we want to take it. We do see that the M&A valuations in the market are, we think, overheated a little bit. And so really, we’re taking an alternative approach that wouldn’t necessarily include, at least for now, M&A. So it is definitely focused on smaller tuck-ins, potential acqui-hires solutions where we can start building out the O&O content, and then we’re going to continue to be opportunistic relative to licensing deals that we think are attractive. And a big piece of what we’re looking at with content, I’ll just reiterate this, is that we want the content to be proven in the U.S. market. So there is a lot of content that is available internationally, but we don’t think it necessarily resonates. And so we do have a very-focused strategy on U.S.-proven content. So with respect to the Ainsworth deal specifically, yes, there are cash commitments associated with it. It’s over the course of the deal. We’re not going to reveal those terms specifically. But again, I would just say we are expecting a very high return on the investment there.
David Bain: Right. Okay, great. And then my follow-up would be just bigger picture on hybrid, generally, you spoke to this with Wynn on that discussion a little bit. But is there a balance – or what is the balance between levering that patent for incorporation of core technologies for value-add for the client in GAN versus straight patent licensing? And are you gauging now more acknowledgment of the patent in your discussion with operators that they continue to see what’s – see wagers coming from online and invest more?
Dermot Smurfit: Yeah. Well, there’s been plenty of data points even year-to-date, enhancing, if anything, the understanding of the value that the patented iBridge framework delivers to B2C operators already active in multiple states who have relatively recently implemented that capability. We think the rewards program of retail casinos has always and will continue to always sit at their ability or at the heart of their ability to compete aggressively against online-only players. So it’s an incredibly important and strategic intellectual property asset of ours. I think it is very well-known within the industry. And patent licensing is always a balancing act, that there is a need to enforce intellectual property here in the U.S. in an appropriately balanced and measured way. And we intend to continue to press the merits of licensing the intellectual property on people who may or may not be infringing on it even today. So we’re very conservative. We’re very careful. We know the enhanced actual value. We priced it and licensed it at a market rate, and we’ll continue to respond to the opportunities with a real degree of flexibility. But for sure, this is probably the most important piece of patented technical capability that exists in the crossover world between retail and online gambling today.
David Bain: Awesome, okay. Thank you.
Operator: Thank you. Our next question comes from the line of Greg Gibas with Northland Securities. Please proceed with your question.
Greg Gibas: Hey, good afternoon Dermot and Karen. Thanks for taking the questions, and congrats on the strong results. I guess, you mentioned the B2C offering of Coolbet outperforming your internal expectations. Just wondering, I guess, if you could discuss a little bit more about what drove that outperformance, maybe to what degree, and then whether you expect that better-than-expected strength to be sustainable going forward.
Karen Flores: Yeah. So the secular growth that they’re seeing, particularly in Latin America, it continues to outpace where we had originally thought that it would be. So they’re doing great. They have an incredibly social product, low acquisition cost model, and they really do an excellent job of effectively scaling that business. So we’re just seeing a lot of plurality, a lot of traction in the markets that they’re competing in. And again, in terms of the way that they manage the sports margin specifically, it worked out in our favor at the end of the quarter. And so that’s really what kind of put us over the top with that. But again, we’ll – as we get further into it, we’ll test the waters there and make sure that we’re comfortable that they’re managing the risk appropriately. And we’ll guide according to our base case associated with it.
Greg Gibas: Okay, great. And if I could follow up on guidance, I know you don’t want to be too specific here, but you mentioned positive adjusted EBITDA this year. I was just wondering if you could maybe discuss how you expect operating expenses to trend going forward and maybe what are the notable drivers or changes that you would see this year.
Karen Flores: So we expect operating expenses to as we’re talking about further investment and a lot of that is really around staffing additional launch teams to front run the demands that we’re seeing. So it takes us, generally speaking, about six months to fully staff the launch team. And because of what we’re seeing, where there is a slight shift in the sales pipeline where, I would say, even a few months ago a lot of the opportunities that we were talking about are maybe single-state, now we’re seeing more of a shift toward multistate deals, which are way more technical, way more complicated. And it just takes more resources. And so we want to be able to meet those demands. Again, these are not just new opportunities that we had originally envisioned or set out for the last few months. These are opportunities that are coming our way that are also replacement platform opportunities. So we feel like it’s really important to continue to tap that. We are going to see the operating expenses tick up a little bit. But as I said, we’re also focused on efficient growth, controlled growth relative to that headcount. So we are managing those costs appropriately as we look to potentially staffing in new labor markets that we’re not in today. So it’s something that’s under evaluation to make sure it is an efficient use of spend. And we do expect it to level off toward the end of the year.
Greg Gibas: Okay, sounds good. I appreciate the additional color. Thanks.
Operator: There are no further questions in the queue. I’d like to hand the call back to Mr. Smurfit for closing remarks.
Dermot Smurfit: No problem. Thank you all for joining us today for our first-quarter earnings. We’d like to thank our investors who backed our U.S. market leadership position. We now have a deeper stable of long-term clients who are winning B2B market share and have reduced our B2B client concentration. We’ve got firm visibility of our domestic and international growth and solid control over our business going forward, which is now good for both a strong balance sheet and the burstable bandwidth and engineering resources required to continue delivering for all of our clients. Accordingly, we look forward to continuing with the strong execution in the first quarter as we progress through yet another exciting year in America’s young online gambling industry. Looking forward to speaking with you all again in August. Thanks for your time. Be well.
