NeoGames S.A. (NGMS) Q3 2021 Earnings Call Transcript

NeoGames S.A. (NGMS 0.07%)
Q3 2021 Earnings Call
Nov 11, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the NeoGames third quarter 2021 earnings conference call. [Operator instructions] Please note that this conference call is being recorded today November 11, 2021.

I'll now turn the call over to Jacques Cornet with ICR.

Jacques Cornet -- Investor Relations

Thank you, operator. And good morning. By now, everyone should have access to our third quarter 2021 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 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. 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, 2021, when it is filed with the SEC.

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 measures is available in our earnings release and 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'll provide some opening remarks, and then we will open the call to questions. And with that, I'm turning the call over to Moti.

Moti Malul -- Chief Executive Officer

Thank you, Jacques, and good morning, everyone. Welcome to our third quarter earnings call. This morning, I'll highlight some key points about the third quarter performance and provide an update on the trends we are seeing in the market, afterwards, I'll turn the call over to Raviv to run through our financials and business performance. 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 continued to outperform expectations as the iLottery 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 PlayAlberta brand by launching on SportsBay further to previous quarter investments in Draw Games and Live Dealer verticals. We continue to create and roll out unique content and enhanced the player experiences. During the quarter, we began the roll out of our multi-game progressive jackpot feature across selected e-instant games from our NeoGames studio with three of our customers significantly diversifying their games offering.

The attraction and engagement of players with these features enabled part of the growth we have seen in the quarter. Overall, we continue to significantly grow our business year over year. For the third quarter, revenues were $12 million, while our share of NPI revenues for the quarter was $8.3 million. Looking at the two components as together, they equate $20.2 million for the third quarter of 2021 representing growth of approximately 30% year over year.

In terms of EBITDA, for the third quarter 2021, we generated adjusted EBITDA of $7.5 million. As a reminder, our EBITDA margins fluctuate and reflects investments in technology and operations as we continue to roll out across the new markets we're entering. For example, this quarter, much of these investments has been due to recent launches in Alberta of Draw Games late in the second quarter and sport betting in the third quarter, which introduced both new tech investments, as well as some operational learnings. Most of these product investments have been one-time 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 as 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 this state, especially toward quarter end. We continue to work closely to support the measured and disciplined approach demonstrated by the state lottery with its iLottery program building on foundation that we are confident will lead to sustainable, long-term growth of the program in the state as we have seen in other markets with similar landscapes. On the games front, we continue to view our constant roll out of games with more customers around the world as an investment into future growth. In this regard, subsequent to quarter end, we launched our first suite of premium eInstant games with Lottomatica in Italy further expanding our footprint in the Italian lottery markets where we now serve both Italian lotteries with our games content.

One other good point of progress is our strong partnership with Ceasars 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 ten markets and growing into the future. The regulatory environment and state authorization in the U.S. for iLottery continues to develop.

This quarter, we have seen two 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 Raviv.

Raviv Adler -- Chief Financial Officer

Thanks, Moti. Before I get into the results, as a reminder, when we discuss our results, I'd point out that all of iLottery business in North America operates through our 50-50 joint venture NeoPollard 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. Our revenues reported on the income statement, which excludes our share of NPI revenues was $11.5 million during the third quarter of 2021, down 8.8% over the same period last year. Our share of NPI revenue was $8.3 million during the third quarter of 2021, compared with $2.5 million last year. The sum of total of these two numbers was $20.2 million during the third quarter, representing an increase of about 30% year over year.

Moving to EBITDA update for the quarter, our adjusted EBITDA was $7.5 million, which is down 3.8% compared with $7.8 million last year. Sequentially, it's important to note that the fluctuation in our EBITDA margin is generally driven by two main factors. The first is that the new accounts and products ramp up, we often see increased costs earlier in the life cycle that stabilized over time. Secondly, differences in the product and services, mix in gaming verticals of recurring margins.

For example, when 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. As Moti 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 one-time in nature and therefore we anticipate similar impacts in the remainder of the year. Overall, we're comfortable with where margins are and where they will be as the business matures, diversifying and growing, not only the customer base, but also product type is an important element of our growth strategy as we wish to provide turnkey solution to our customers.

Turning to our balance sheet, we ended up this quarter with about $68.2 million worth of cash. Our outstanding debt at the quarter end was approximately $33 million at a weighted average interest rate of 1%, leaving us in a net cash position of $35.2 million. We have 25.2 million 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 million shares of common stock, significantly increasing our public float.

Regarding guidance, we're encouraged by the trends toward the end of the quarter and into early fall, with some of our key accounts, enough to allow us to increase our overall annual revenue guidance to be between $82.5 million and $84.5 million. At the midpoint, these revisions represents an increase of 5.2% compared to our prior range, and represents year-over-year growth of approximately 42%. As we've indicated in the past, the revenue guidance does not include launching any new turnkey accounts. With that, I'll turn the call back to Moti.

Moti Malul -- Chief Executive Officer

Thank you, Raviv. 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're generating. This month actually, in about a week from today, we will see the first 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 NeoGames and all our shareholders.

NeoGames remains well-positioned to continue to capitalize on the current landscape as a leader in the rapidly expanding global iLottery market. With that, we thank you for joining us this morning and we're happy to answer any questions. Operator, please open the line for questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question comes from Jeff Stantial with Stifel. Your line is open.

Jeff Stantial -- Stifel Financial Corp. -- Analyst

Hey, great. Morning, Moti, Raviv. Great to hear from you both and thanks for taking our question. I wanted to start on the revised --

Moti Malul -- Chief Executive Officer

Hey, good morning, Jeff.

Jeff Stantial -- Stifel Financial Corp. -- Analyst

Good morning. I want to start on the revised revenue guidance if possible. At the midpoint it implies about $20 million for Q4, which is stable quarter on quarter. I was hoping you could just walk through some of the puts and takes that you contemplated there.

On the one hand, you do have seasonality and some rent momentum in Virginia, Alberta, etc. going in your favor heading into Q4, on the other hand visibility into some of the reopening headwinds you highlighted and some of the marketing spend in Michigan it's still somewhat limited. But just curious how you guys think about the various puts and takes when you think about the sequential growth Q3 into Q4?

Moti Malul -- Chief Executive Officer

Yes, Jeff, thank you. it's basically a combination of two factors. The first one being is you actually mentioned is the trend that we see currently in Michigan as opposed to continuation of growth in other accounts in Virginia and Alberta and how those are gonna be played out altogether into Q4, guidance, so Q4 expected revenues. So you know the three – those are three main accounts that generate revenues for our business and the way they are gonna be played out during Q4, together with the seasonality effect that we see normally in Q4 is the main assumptions built into our guidance.

Jeff Stantial -- Stifel Financial Corp. -- Analyst

OK, perfect. Really helpful. And then, for my follow-up, we've heard one of your peers this earnings in a little bit, than the prior talk vocally about rolling out a cloud-based solution across their iLottery contracts. Are you considering updating any of their contracts or something more comparable to your solution in Alberta, and if so, how should we think about the financial impact? Thanks.

Moti Malul -- Chief Executive Officer

Yeah. First of all, yes, we're 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 combinations 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.

That other vendor, good partners IGT that you mentioned have actually done this 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 solutions and 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 is fundamentally a few hybrid models that may impact that model.

Jeff Stantial -- Stifel Financial Corp. -- Analyst

OK, great. That's encouraging as always. Thank you, both, very much.

Moti Malul -- Chief Executive Officer

Thank you, Jeff.

Operator

Our next question comes from Barry Jonas with Truist Securities. Your line is open.

Barry Jonas -- Truist Securities -- Analyst

Hey, guys, how are you?

Moti Malul -- Chief Executive Officer

Hey, good morning, Barry.

Barry Jonas -- Truist Securities -- Analyst

I think, I'm gonna go for proportion and ask if are there any updates in Ohio in the RFP you originally submitted there?

Moti Malul -- Chief Executive Officer

Not specifically to the RFP sales, but generally speaking, yes, I have updated in the 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 and discussions 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.

Barry Jonas -- Truist Securities -- Analyst

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

Moti Malul -- Chief Executive Officer

Yes, we definitely see, hey, it maybe a topic that requires more than just a minute or two sentence of 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. A demonstration of that is what we are doing in Sazka very successfully and what we're doing in Alberta very, very successfully, and we are seeing that elsewhere.

When it comes to U.S. specifically, so to answer your question, there is no limitation on us to explore other gaming opportunities from a legal binding perspective with what we do with Ceasars. I remind you that our relationship with them is very strong and dedicated. And we're very happy with how that is trending.

Barry Jonas -- Truist Securities -- Analyst

Great, great. OK. Thank you so much guys.

Moti Malul -- Chief Executive Officer

Thank you.

Operator

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

Chad Beynon -- Macquarie -- Analyst

Hi, good morning. Congrats on the results, and thanks for taking my question. Wanted to ask about the consultation process you talked about a few states where you are currently exploring that and helping the governments. 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? Or is it still based on other factors, just kind of technical scores that are related? Just trying to figure out if the better that you do, the better position you are for new U.S. expansion. Thank you.

Moti Malul -- Chief Executive Officer

Hey, thanks, and good morning, Chad. First of all, we think that our position as the market leader in the U.S. is very strong and hopefully, it'll 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 states 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'd also say though that it gives us the ability to do something more than that, it gives us the ability to take the vast amount of data that we collect from not one state, but from quite a few in order to educate legislators in the different states, side-by-side with the potential lottery customers on what that could do for them. And I think, that's our focus today. Our focus is first and foremost, to help lotteries within their states to get state authorization and that is done through educating legislators to the impact -- the good that iLottery can have into the state, the different good causes in the states. And there is a significant interest in the last couple of months as to the comparison of what revenues from iLottery 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 it is becoming one. We have nothing against sports betting whatsoever we think is great and we can see that there is parallel growth for the programs in Virginia, in New Hampshire and anywhere that we have with sports betting in the states. But I think, the data we have from four states in the U.S. help us a lot to demonstrate the impact that it can have into god causes.

So that's another point of assistance that we provide to our – to the lottery industry.

Chad Beynon -- Macquarie -- Analyst

Great. Thank you. And then, with regards to M&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 are generating free cash flow quarter after quarter. How are you thinking about M&A and maybe some of the areas within the tax deck that you could look to benefit from? Thank you.

Moti Malul -- Chief Executive Officer

Yeah, of course. Yes, indeed, Chad. As you recall, in the last earnings release, we have updated that we have conducted a strategic session to get it with our board and management gave recommendations and as to quite a few different domains in which we think we will get into a better position. And these domains are different based on what we want to achieve geographically.

U.S. has different requirements for organic growth, then, 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. There is nothing to report as of this point, but it's something that now we're way more active than we have been in the past after this preceding decision that we took.

Chad Beynon -- Macquarie -- Analyst

Thank you, Moti. I appreciate it.

Operator

Thank you. And I'm currently showing no further questions at this time. I'd like to turn the call back over to Moti Malul for closing remarks.

Moti Malul -- Chief Executive Officer

Yes. Thank you, operator. Well, again, as I said, at the closing of my early 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're 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.

Operator

[Operator signoff]

Duration: 25 minutes

Call participants:

Jacques Cornet -- Investor Relations

Moti Malul -- Chief Executive Officer

Raviv Adler -- Chief Financial Officer

Jeff Stantial -- Stifel Financial Corp. -- Analyst

Barry Jonas -- Truist Securities -- Analyst

Chad Beynon -- Macquarie -- Analyst

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