NeoGames S.A. (NGMS) Q1 2022 Earnings Call Transcript

NeoGames S.A. (NGMS 0.07%)
Q1 2022 Earnings Call
May 12, 2022, 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 first quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode.

A question-and-answer session will follow the formal presentation. Please note that this conference call is being recorded today, May 12th, 2022. I will now turn the call over to Jacques Cornet with ICR.

Jacques Cornet -- Investor Relations

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 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 31st, 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 -- Chief Executive Officer

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 two months ago. As the business continues to perform well and in line with our expectations. We're also obviously, diligently working toward 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 $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 Megamillions and Powerball. 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.

One such 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 accounts where our lottery customer will benefit from our strategic acquisition of Aspire.

For example, content from terribly wizard game 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 a growth that started in the second half of Q4 last year into Q1. I recall, when we last spoke, we mentioned results have 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 lottery 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 toward 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 US for our lottery continues to be involved in some key markets, which we have mentioned on prior calls. However, since we last spoke two 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 toward gearing up with lottery technical 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 a combination with Aspire, we'll enhance our scale and competitive position across all business lines, adding Aspire as proprietary sports betting offering, it's 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 strength of our two companies, and positioning NeoGames for expansion in new and existing markets. Based on their impressive first quarter results, remain excited at the prospects of completing the transaction.

The deal continues to progress on schedule for closing, as we recently put out the prospectus on the commenced offering a couple of weeks ago. The acceptance period runs from April 27th through May 25th, with an expected settlement date of June 14th, 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 our country 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 were 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 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 -- Chief Financial Officer

Thank, Moti. Before we get into the results, as a reminder, when we discuss our results, I would point out that all four out of three business in North America operates through a 50-50 joint venture, Newport Interactive, or NPI, except in Michigan, which is reflected in our top-line revenues. Our contracts in Virginia, New Hampshire, North Carolina, and the province of Alberta run through NPI. Except for the NPI contract, we conduct all of our business to NeoGames, As a result from an accounting standpoint, as many of you know, we generate revenues and earnings throughout all owned operation and through equity interest in NPI.

Now turning to the results, our revenue as 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 two 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 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 in 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 the Aspire Capital [inaudible], 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 are 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 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 -- Chief Executive Officer

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.

Questions & Answers:

Operator

Thank you. [Operator instruction] Your first question is from Jeff Stantial with Stifel. Please go ahead.

Unknown Speaker

Hi, this is Jack from [inaudible] Thank you for taking my question. So I wanted to dig into the guidance changes a little bit on May. Could you maybe give a little bit more detail around that page while leaving that 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 period figure into that as well? Just a little bit more color around the decision to tighten the range. That would be great.

Moti Malul -- Chief Executive Officer

Yeah. Thanks for the question, and good morning, Jeff. First of all, yeah, we haven't moved our meeting point 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 uncertainties on the lower end, because we didn't know what the 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. And it's not a specific deal. It's an aggregate value of where we forecast toward 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.

Unknown Speaker

OK. Great. That's really helpful. And then if I get more margin for 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 cosmos development work procedures? And how much you think the Alberta contract is coming, ramping, and becoming your second largest contract? How do you think that various puts and takes affect margins, and how to figure into where investors can look for margins to go through their first year and long-term.

Raviv Adler -- Chief Financial Officer

Yeah. Thank you, Jeff. So relative to the margins as a general statement, and we still expect that on a go-forward basis that the business would perform around the high thirties and low forties. And we feel comfortable where the margins are currently trending.

We're not giving guidance relative to maybe the contribution on a specific contracts in general. I can say that quarter-over-quarter, we 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've done with a contract in Alberta relative to the structure of our costs contributed a bit to the margin improvement and we expect that to also on a go-forward basis.

Unknown Speaker

Understood. Thanks a lot.

Operator

Thank you. Your next question comes from Barry Jonas with Truist. Your line is open.

Barry Jonas -- Truist Securities -- Analyst

Thank you. 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% video games?

Moti Malul -- Chief Executive Officer

First of all, we always said that the US has so much to still open up where we have roughly ten states, maybe depending on how you count, maybe one or two states that are doing just subscriptions where there are more than 35 states to still go with iLottery. So absolutely, the potential in the US market is huge going forward. Then 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 due to account for the most meaningful portion of our revenues. And we still expect the US 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 do Brazil, which is 26 states. However, like the US 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, given enough time for the markets to open up in its fullest extent, the US markets will definitely continue to be the largest portion.

Barry Jonas -- Truist Securities -- Analyst

OK. 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 live dealer. Thanks.

Moti Malul -- Chief Executive Officer

Hey. Yeah. 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 five or six 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 three or four 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 to 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.

Barry Jonas -- Truist Securities -- Analyst

That's great. Thank you, Moti.

Operator

Your next question comes from Cassandra Lee with Jefferies. Please go ahead.

Cassandra Lee -- Jefferies -- Analyst

Hi. Good morning. Thank you for taking my questions. Can you talk about the timing of North Carolina instance launch, and what kind of growth we expect from that?

Moti Malul -- Chief Executive Officer

Yes. Good morning, Cassandra. Thank you for joining us. We can say that we have a specific date in time 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 instance. 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 fully lottery account with instance, we expect that this will create a quite a significant impact on our potential revenues in the extent that we have seen when we opened up, for example, instance in Virginia in the middle of of 2020, I forget the timeline, I think it was July 2020.

So yes, so it gives quite a significant boost to the activity because obviously, for as long 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 the draw games, but very much impacted from jackpots runs in an instance 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, will probably be modest.

Cassandra Lee -- Jefferies -- Analyst

Got it. Thank you. And if I may ask another one. We saw the use of [inaudible] quite a bit sequentially and year-over-year, I assume, has something to do with Caesars launch in New York.

I wonder how much of that is comes one time. Is this kind of a good run rate going forward?

Raviv Adler -- Chief Financial Officer

Yeah. So, Cassandra, thanks for the question. As you probably know, the use of IP is very much linked to the Caesars, and aspiration of expansion in the US market which were 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 the 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.

Cassandra Lee -- Jefferies -- Analyst

Got it. Thank you very much for taking my questions.

Operator

Thank you. 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 -- Chief Executive Officer

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 have been 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 closed 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 thank you everyone for joining this morning and showing interest in us and have a great day.

Operator

[Operator signoff]

Duration: 26 minutes

Call participants:

Jacques Cornet -- Investor Relations

Moti Malul -- Chief Executive Officer

Raviv Adler -- Chief Financial Officer

Unknown Speaker

Barry Jonas -- Truist Securities -- Analyst

Cassandra Lee -- Jefferies -- Analyst

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