This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: By now, everyone should have access to our second quarter 2021 earnings release, which is available on the NEO Games 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 quarter ended June 30th, 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 measure is available in our earnings release on the neogames.com website. Hosting the call today, we have Moti Maul, Neogames Chief Executive Officer. and Raviv Adler, Chief Financial Officer of the company. They will provide opening remarks, and then we will open the call to questions. With that, I'll turn the call over to Moti.
spk03: Thank you, Jacques, and good morning, everyone. Welcome to our second quarter earnings call. We are pleased to post another strong quarter of results as we continue to develop the full iLottery potential of our customers in both new and existing markets. As always, we constantly work to roll out new game content and platform development in order to provide our customers with the best technology platforms, the most entertaining game experiences, and a complete range of expertise services and market-leading solutions, enabling them to lead iLottery markets across the globe. We are proud and honored that our commitment to our customers' excellence, growth, and partnership success is recognized by the industry, as we have been recently selected as the best lottery supplier by the 2021 EGR B2B Awards. We were honored to receive this prestigious award and look forward to continue driving innovation, leading tech solutions, and games in the lottery industry. This morning, I will highlight some key points about the second quarter performance and provide an update on the trends we are seeing in the market Afterwards, I will turn the call over to Raviv to run through our financials and business performance. The results of the quarter can be characterized by strength in our underlying platform, as we were able to achieve similar results to the first quarter without the benefit of a double jackpot run and despite expected seasonality and increased competition from other iGaming verticals in some of our markets. As a reminder, recall the jackpot trends impacted the two prior earnings reports and primarily that of Q1. In terms of seasonality, while it's tricky to quantify, particularly given how much of an outlier 2020 was in terms of typical customer trends compared to prior years, we could see that, as we have anticipated, Results were impacted by typical spring seasonality with some modest effects from the loosening COVID restrictions in many of our markets. Bolstered by continued growth of more recently launched markets, such as Alberta, the fact that we were able to post similar revenues to last quarter record results in spite of these various headwinds speaks to the durability and resiliency of our company. Overall, we continue to significantly grow our business year over year. For the second quarter, revenues were $12.9 million, roughly in line with the second quarter last year. However, in addition, our share of NPI revenues for the quarter was $8.5 million, compared to $1.6 million in the second quarter of 2020. Looking at the two components added together, they equate to $21.4 million for the second quarter of 2021, representing growth of approximately 47% year-over-year. In terms of EBITDA, for the second quarter of 2021, we generated adjusted EBITDA of $8.3 million, up about 6.6% compared to the same period last year. Moving on to market-specific highlights, in Alberta, we continue to develop and expand the brand and offering of playalberta.ca and to benefit from the growth of the market. In this quarter, we benefited from the introduction of drawbase games and through our launch of LiveDealer late last quarter. In Michigan, as anticipated, results have declined sequentially due to typical seasonality that we've experienced in a few markets as more people have been able to get outside and travel combined with increased competition from iGaming and sports wagering, where commercial marketing spending has been fairly aggressive, as usually is the case in early market launches. While Michigan remains, and we believe will continue to be, one of our strongest markets, we are pleased to see progress towards our goal of diversifying our revenues, as we have expanded and grown our offering to a wider customer base. Last year, for example, Michigan contributed more than 70 percent of turnkey contract revenues during H-1, but that has been reduced to approximately 40 percent this quarter, as we now have four markets that each generate more than 10 percent of total revenues. Regarding the regulatory environment, as many, but not all, state legislators finish the bulk of their work in the first half of the year, we have seen continued developments in iLottery discussions adjacent to broader gaming expansions. In Connecticut, for example, the governor recently signed legislation that, among other things, authorized sport betting and iLottery, and while it is still early, we believe this will progress into an RFP to provide the lottery with an iLottery solution and services in the near future. While the regulatory process continues to progress in the United States, Internationally, we have moved forward with two new game content agreements in Europe. We saw Ukraine come out with new gaming legislation that included iLottery, and we were able to enter that market rapidly with our first deal, which we signed with UNL, Ukrainian National Lottery, to provide our revenue-driving suite of instant games content. We also expanded further in Italy through an agreement with Lottomatica, As such, we are pleased to soon be servicing both lottery operators in Italy when we go live. Given the momentum we are seeing in both the US and Europe, we remain confident that the global iLottery market is poised to keep growing. One of the main reasons for our success is the superiority of our technology and content and our unique understanding of what it takes to succeed in this emerging lottery segment. We have spent a lot of time and resources positioning ourselves for the long-term evolution of the iLottery market, tirelessly working on games, content features, and platform enhancements with customer success strategies to remain at the cutting edge of innovation in the space. One such enhancement we have launched subsequent to Quaterend is our linked multi-game progressive jackpot functionality that went live in New Hampshire and is planned to be introduced across a few other markets. In keeping with the positioning theme, as we consider the future of the industry, we have been exploring our options from an M&A perspective, defining a handful of potential target domains that we feel would enable us to broaden our offering even further, enhance and accelerate our market-leading position, and complement our geographic expansion opportunities. While we have nothing imminent to announce, we are considering using all of the tools at our disposal, including M&A, to appropriately but aggressively grow our business and its opportunities. Finally, in order to help us towards all of these goals, we recently welcomed Chris Chabon to the NeoGames team as Executive Vice President of Sales, Marketing, and Customer Development. Chris brings a profound understanding and vast experience in the global lottery industry and its unique dynamics. Understanding that the global lottery industry is undergoing a significant transformation into the digital space. There is no one better to help introduce and expand the Neogen's offering to new and existing markets, and we are very happy to have him on our team. With that, I'll now turn the call over to Raviv.
spk02: Thanks, Monty. 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 our 50-50 joint venture, Neapolitan 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 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. Revenue as reported on the income statement, which excludes our share of NPI revenues, was $12.9 million during the second quarter of 2021, down 0.6% over the same period last year. Our share of NPI revenue was 8.5 million during the second quarter of 2021 compared with 1.6 million last year. The sum total of these two numbers was 21.4 million during the second quarter representing an increase of over 47% year over year. For the quarter, our adjusted EBITDA was 8.3 million up 6.6% compared to 7.8 million last year. Sequentially, it's important to note that the fluctuation in our EBITDA margins is generally driven by two main factors. The first is that as new accounts and new product ramp up, we often see increased costs earlier in the life cycle that stabilize over time. Second, differences in the product and services mix in gaming verticals offering drive varying margins. For example, on one hand, accounts that have limited offering, such as Raw Games Only, Or on the other hand, accounts with very wide offering including gaming verticals where we incur costs of third party content when providing full turnkey solution drive a lower margins than our average. 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 the product type is an important element of our growth strategy as we wish to provide turnkey solution to our customers. As we add more accounts, new accounts may have different margins contribution due to the differentiation of our product mix. For example, as noted, markets that are draw-based only tend to operate on low margins. It is, however, important to view these markets as significant investments to our long-term growth of the business, as over time some accounts will choose to convert to be full service iLottery clients and we would be in a strong position to serve them in a greater capacity. Turning to our balance sheet, we ended up this quarter with about 65.4 million worth of cash and cash equivalents. Our outstanding debt at quarter end was approximately 33 mil at a weighted average interest rate of 1%, leaving us with a net cash position of 32.4 mil. Regarding guidance, since we feel we were overall able to anticipate the trends and seasonality impacts of the second quarter, we feel confident in our plans to the second half of the year, and thus we are raising our 2021 revenue guidance to be between $75 and $79 million. At the midpoint, the guidance represents year-over-year growth of over 30%. As we have indicated in the past, the revenue guidance does not include launching any new turnkey contracts. As Moti mentioned, results remaining strong, notwithstanding the expected impact of seasonality and absence of checkpoint runs on our revenues during the last quarter, we remain in a strong position to continue executing during the back half of 2021. With that, I will turn the call back to Moti.
spk03: Thanks, Riz. To summarize, Our results continue to demonstrate the strength of our model in generating significant value for our customers and thus for Nailgames and our shareholders. 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 are generating. Nailgames 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 this morning, and we are happy to answer the questions. Operator, please open the line for questions.
spk00: If you'd like to ask a question at this time, please press the star, then the number one key on your touchtone telephone. To withdraw your question, press the pound key. Again, that is star, then one to ask a question at this time. Our first question comes from Barry Jonas with Truist.
spk05: Hey, guys, how are you?
spk00: Morning, Barry.
spk05: Good morning. Can you maybe help frame the international or I guess the non-North American opportunity for us a little? Where would you like to see the profit mix go longer term between North America and international?
spk03: Depending on the timeline that you're looking at, When we look at international, the established markets that we have in Europe, in our opinion, would see primarily opportunities driven out of content, and we are investing a lot, and as you can see, there's good result of that to plant seeds of our content within as many possible lotteries in Europe because we think that content over time will play a significant role in the inevitable growth of iLottery in those markets as well. Some markets, by the way, will turn into faster rates of revenues, and others will take a little bit longer, but we see it as a good investment into the future. When we look at the other regions beyond Europe, whether it's Latin America or Asia Pacific and so on, they are a bit longer term to create revenues, but we believe in the opportunities over there. I would say that COVID sometimes delays a bit the ability to do businesses and opening new markets in areas that we have not yet reached to, but we're putting efforts in that direction. In the U.S. and in North America overall, as the opportunities come along, we are in a position to implement them faster, and we have a solution that allows us to reach faster time to revenues and not only faster time to markets because it leverages on the success that we have seen in the different markets. So I hope that provides a good enough understanding of where we see the future going.
spk05: Yeah, that's great. And then as a follow-up question, can you give us any update on the process in Ohio as you understand it?
spk03: Sure. Ohio, no different than the trends that we are seeing in many, many other markets, really looks at how to approve expansion of iLottery as a part of the broader discussion of what to approve when it comes to other parts of gaming expansion potential in the state, whether it's sports betting or others. So what we have seen is that the path to take with iLottery has been discussed among various legislation cycles, I would call it, that predominantly looked at the broader picture. There's been very fruitful and good discussions. We've been invited to testify and to be in front of such legislation committees before they adjourn for the summer. and we anticipate that we will be back into those advanced discussions in September when the legislators are back in town. On a broader view, I would say that this is a trend that we see in many other states where even if the lottery does not require to be included in specific gaming expansion legislation, the discussion about this does happen looking at the broader picture. And we have seen that with a bill that recently passed in Connecticut. You know, we see that there's an iLottery bill on the floor now in Massachusetts at the same time of discussing sports betting. So it's maybe foreseeable that those discussions will be in tandem at some point and so on and so forth. So Ohio, we expect to get back to the advanced phases of discussions that our customer is having with the legislator committees in September.
spk05: Great. And if I could just ask one clarification, I think the multi-game progressive jackpot is really exciting. Is there the potential now or over time for that to cross over state lines?
spk03: First of all, progressive instant jackpot game is nothing new to the retail industry in the U.S. We've basically taken, when I say the retail, I mean, of course, the land-based lottery industry. in the U.S. that has fast play games introduced in a number of markets, and we have created and improved a new version for that for the online. I think now with more, I would say, final position, if finally the right word to choose of the DOJ case, it does open the door for such discussions of crossing across a couple of states, and we're definitely looking at that potential and discussing this with our customers.
spk05: That's great. Thank you so much, guys.
spk00: Our next question comes from Jeff Stanchel with Stifel.
spk04: Great. Thanks. Good morning, Moti. Thanks for taking our questions and congrats on another successful quarter. I wanted to start on the changes to guidance. At the midpoint, it looks like it implies a bit of a step down from the first half of the year. You've been running $21 million and change or so per quarter. I was wondering if you could just provide a little bit more color there. Is that largely conservatism around seasonality, reopening headwinds, maybe some more one-time elevated development work in the first half? Is there anything you can provide to help frame that? how you guys are thinking about that first half to second half cadence would be helpful.
spk03: Sure. Happy to try to. It's a tricky year for all of us, right? We believe we were able to anticipate pretty well where the numbers will get to in the few markets where we have actually declined due to the factors we mentioned earlier in the call. we do know from our experience, and that's why we have baked it into the future, that September is usually the point where we wish to start to see an upturn in results. And July and August behave very differently than September within Q3 regularly. So we just want to wait to see that what we anticipate that will happen at the beginning of the fall, which will then continue into the later parts of the fall and towards the new year, will actually happen so that we can, you know, develop even further confidence in what we provided. And that's why the guidance that we have provided has suggested the range that it did. Perfect.
spk04: That's really helpful. Switching gears here, last quarter you talked to a bit of a tailwind customer acquisition from the double jackpot run in Q1. As folks that were introduced to the app via the jackpots stuck around to keep playing Instance thereafter. Do you have any metrics that you could share around that during the second quarter? Did you find that a meaningful percentage of folks that were introduced to the app did indeed stick around and start playing Instance? Just any thoughts around that general trend and how to think about upside the next time we experience this phenomenon would be helpful.
spk03: I don't have any metrics out of the top of my head, but I think that one of the reasons that I think we performed, in our opinion, well and were suggesting revenues that are the same as the peak revenues of Q1 was because of those customer retention rates. Obviously, it's... Because of the multiple reasons, including seasonality and the post-COVID and so on, it's difficult to quantify, but we're definitely happy with the retention rates that we have seen and the stabilization of where we are during summer.
spk04: Perfect. Very helpful and encouraging. Appreciate all the color. I'll pass it on.
spk03: Thanks. Thank you. Thanks for joining.
spk00: As a reminder, that is star then one to ask a question. Our next question comes from Chad Bannon with Macquarie.
spk06: Hi, good morning. Thanks for taking my question. With respect to your in-house game content versus other third-party content that you might be offering to customers, can you talk about where you are in this journey and what type of pipeline you have going forward for new games that could help shift that mix more towards your business.
spk03: Thanks. Yeah, of course. First of all, I would remind that the main contract in which we use third-party content is in Alberta where we need to provide a complete iGaming offering that is not within our space. So that's why... We see tremendous growth and part of that, of course, is the good part of the lottery mix that we provide the complete instance for that account and also the connectivity into suggesting draw gains. However, when it comes to casino gains or live dealers, we don't have any intention to develop in-house for those verticals and we are using third parties. When it comes to the lottery market, both in North America and the others, I would say that even in the vast majority of the cases, truly the vast majority of the cases, even in cases where our customers decide to add other content providers, which we welcome, by the way, they come above and beyond the revenue share that they have within our deals, and they see that as supplement of content. So while we keep introducing great games to the market in a pace of at least two each month, across many of our customers, when our customers choose to tap into content from others in the lottery industry, they do not come, in the vast majority of the cases, in the turnkey accounts on the expense of what they have in the rev share with us. I hope that answers the question.
spk06: Yeah, that's perfect, Monty. And then with respect to the development services that you do with, with William Hill and others, uh, on the Pam side, the cost plus work. Um, I know that, uh, William Hill Caesars is, is launching in a lot of new States, uh, in the next couple of months here for sports betting and, and I gaming. Can you talk about if, uh, if you're able to disclose, if you'll be helping them, um, uh, roll out those products. Thanks.
spk03: Uh, happy to, uh, again, they're, uh, they're a fantastic, uh, and, as you know, also shareholder, and we are indeed helping them with ambitious expansion opportunities. We're live with them in eight markets. We have seen significant migrations of Caesars brands into the William Hill Liberty solution that we play a significant role within, and our teams, which are, by the way, expanding to support William Hill and now Caesars, are busy with fast expansion opportunities. So I definitely see that we are taking a prime role in helping this great customer and shareholder of us in their ambition to take a bigger share of the market.
spk06: Great. Thanks, Modi. Appreciate it, and congrats on the quarter. Thank you, Chad.
spk00: That concludes today's question and answer session. I'd like to turn the call back to management for closing remarks.
spk03: Thank you, Operator. And thanks, really, everyone. I mean, this is our third quarter, but we still consider ourselves to be newcomers to the market, and we continue to have a lot of respect to that, and we don't take it for granted for any interest that is shown in our company and our good work and employees. So thank you, everyone, for the time and attention.
Disclaimer