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spk09: Good day, ladies and gentlemen. Thank you for standing by. Welcome to the NeoGames first quarter 2023 earnings conference call. At this time, all participants are in listen-only mode. The question and answer session will follow the formal presentation. Please note that this conference call is being recorded today, May 11, 2023. I will now turn the call over to Jacques Cornette with ICR. Please go ahead.
spk05: Thank you, operator, and good morning, everyone. By now, everyone should have access to our first quarter 2023 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 uncertainty that could cause actual results to differ materially from what we'd 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 6K for the quarter ended March 31st, 2023, 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 on the neogames.com website hosting the call today we have modi 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.
spk11: Thank you, Jack, and good morning, everyone. Last night, we released our first quarter 2023 results. This morning, I will highlight some key points from our first quarter performance and some trends we are seeing in the market before turning the call over to Raleigh to run through our financials in further detail. Overall, we began 2023 with a very strong force as we continue to capitalize on our investments in technology and game content. We continue to believe that our integrated offering across various segments of digital gaming will prove to differentiate us from our peers and enable us to engage with an increasing number of partners seeking to make the transition into the online domain or grow their existing operations. As we share that our inaugural capital markets day in March, each of our business units are led by talented individuals with significant experience in their unique market segments. And all of them are united by the goal of working together to take advantage of the convergence we are experiencing in digital gaming. But we will discuss the first quarter financial results in more detail later in the call. But I wanted to highlight some important figures before moving into business updates. On a consolidated basis, the total of revenue plus our share of NPI revenues was $64 million for the first quarter. Overall, we have seen strong growth both year-over-year and sequentially across our business when looking on a like-for-like basis. Moreover, our adjusted EBITDA but the group also continues to show strong growth as we posted $20 million for the quarter. In our iLottery business, we continue to exhibit strong growth with first quarter revenues of $29 million, an all-time high. The impressive results are primarily due to a combination of reasons. In addition to the expected strength of first quarter results due to typical seasonality, we saw growth and strong performance across all our key global accounts. Our solid first quarter performance in the U.S. was driven by both jackpot runs in each of January and February and the continued outperformance of our own initiative and game content. As we mentioned on previous calls, jackpot runs provide both an immediate boost due to increased engagement as it drives new signups as well as returning players, then followed by a longer-term growth opportunity in terms of player conversion into instant games and other non-jackpot games. This quarter's performance is a prime example of both effects. We are very pleased that this Trump performance was accentuated by our own selection of engaging games, which allowed us to grow WalletShare. In particular, we would like to highlight the continued performance of the new studio game, Desert Fantasy, which, as you may remember, was launched in Virginia in the fourth quarter of 2022 with the title The Lamp, quickly became the most successful game launched for the state's online lottery. In addition to other strong-performing games from our studio that rolled out with impressive performance, Desert Fantasy was recently awarded Gold Category winner for Best New Game by EGR North America. We are so proud that New Games has also won the overall category of Best Lottery Supplier of the Year by EGR North America. These are great achievements, particularly considering the competition we face for these categories. Before turning to our international accounts, we wanted to highlight an area of innovation in our iLottery offering, of which we are very proud. The Virginia Lottery recently became the first U.S. lottery to operate a completely cloud-based lottery program, including our draw game system, Neodrome, our player account management, Neosphere, and our game library. The cloud-based solution will allow the Virginia Lottery to improve efficiencies and more easily scale, particularly with the increased volumes associated with jet programs. Turning to international markets, we wanted to provide an update on the launch of Lotto Minas iLottery and online sports betting in Minas Gerais, Brazil. While we are currently still in pilot phase with this account, preliminary results continue to be encouraging as early adopters begin to engage with the offering. While we are pleased so far with several KPIs in this business, the rollout remains in the early stages as we function the service for the local market. Together with our local partners, we intend to continue to be deliberate and measured to ensure we are building a solid and proper foundation for long-term success, as marketing activities are planned to be enhanced post-FISA. We remain very excited to see our integrated offerings build and prove successful in this market going forward. as the market continues to evolve in offering new states, as well as potentially on the federal level, with only sport betting. In terms of new markets for iLottery, we have seen continued momentum in the U.S. and internationally. As this year's legislative sessions around the U.S. get closer to decisions on budget, we have seen progress in several states across the country. One such example is Massachusetts, where after authorizing supporting legislation, regulators have begun to give more specific attention and consideration to iGaming. In fact, a couple of weeks ago, state officials publicly supported the idea of allowing the state lottery to expand online. Turning to iGaming, we have been very pleased with the development on all fronts and the progress we continue to make in this space. In aggregation and content, TerriPlay has continued to establish itself as a prominent player in the burgeoning U.S. market. We launched content from our proprietary wizard game studio with market-leading draft teams in New Jersey and others. We view the progress TerriPlay has made over the last two quarters as a foundation for future growth with several key U.S. operators. All of this has resulted in impressive growth where our aggregation and content segment grew revenues impressively in over 15% year-over-year, as well as sequential. In our support betting segment, B2Bets had a very impressive quarter with strong performance of its major accounts, where March has been an all-time high in number of bets processed, leading also to both strong year-over-year and sequential growth. Through its five core, we continue to expand and grow as well. Subsequent to Quotaren, we launched three new brands. Among them, we are happy to share that we went live this week with our first partner in the regulated German sports betting market. In the context of our idea and existence review, I wanted to touch upon the recently released UK White Paper, which had been long anticipated by the markets. We view the draft is pretty much in line with our expectations. The UK remains a significant market for SPARCOR, so we have been paying close attention to this process for some time. We do not expect the effects of the white paper to have impact on our 2023 numbers. To prepare for the recommendation outlined in the white paper, we had already began to take steps to mitigate the potential future impact for both near-term and for future years. Longer term, we believe that White Paper provides a framework that will allow us to cater for ongoing sustainable long-term growth in the UK market. Overall, as you can see, we are very pleased with the progress we have made across our business in the short time since we last spoke. Specifically, the increasing number of developments that display the benefits of our integrated offering give us further conviction in the synergies that we still have yet to achieve as a result of our aspiring position. With that, I'll now turn the call over to Ravi.
spk10: Thanks, Moti. Before I get into the results, as a reminder when we discuss our results, I would point out that all of our iLottery business in North America operates through our 50-50 joint venture Neapolitan Interactive, or NPI, except in Michigan, which is reflected in our main company 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. Now turning to the results. During the first quarter of 2023, our revenues as reported on the income statement, which excludes our share of NPI revenues, was $49.5 million, of which $35.1 million is attributable to revenues from iGaming businesses, which includes Aspire Core, PowerPlay, and BetoBet. Excluding the iGaming contribution, our results of $29.2 million represents year-over-year growth of 30%. Our share of NPI revenues reached $14.8 million during the first quarter of 2023, up 61% compared to the same period last year. The total of revenues in the company shares of NPI revenues was $64.3 million for the first quarter of 2023. For the quarter, our adjusted EBITDA was $20.2 million with margins exceeding 31% compared to $8.5 million for the same period last year. representing a 136% increase. During the first quarter, our adjusted EPS was $0.20 per share compared to negative $0.03 per share for the first quarter of 2022. As a reminder, our adjusted EPS disclosure is intended to offer investors a view of what our earnings would look like, excluding the impact of amortization of intangible assets related to our acquisition of Aspire Global net of tax impact. As has been the case in previous calls, exchange rate fluctuation had an impact on the performance of the Aspire business. With much of the business revenues denominated in Euro or British pounds, recent FX moves have improved the revenues trend when converted to USD. As we have done in the past to provide better transparency on the performance of the business independent of currency moves, we have included a table in the earnings release showing the business revenues growth rates on a constant currency basis. For the first quarter, iGaming revenues of $35.1 million reflects the new legal terms, which became effective January 1, 2023, to account for a large majority of SPARCO revenues on net basis. As a result, the comparison to prior year numbers skewed the year-over-year comparison to appear negative as they were recorded on gross basis. If Q1 2023 iGaming revenues had been accounted for on a gross basis for the SPARCOR segment, total revenues would have been $59.9 million for iGaming, which would have represented 15.3% year-over-year growth when measured in reporting currency. Turning to our balance sheet, we ended the quarter with $44.4 million cash and cash equivalents. At the quarter end, our outstanding debt was approximately $213.7 million, or unchanged based on the Blackstone loan on a Euro basis of 200.8 million euros. Our weighted average interest rate was 8.35%, and we have 33.5 million shares outstanding. This quarter, we've made some improvements to our disclosure based on feedback from shareholders. We've added statement of cash flows to the quarterly earning materials, and we're proud to know that strong results have put us in a positive cash flow position. Turning to our 2023 guidance, as we only just spoke several weeks ago on our fourth quarter call, we're maintaining the guidance we initiated then. However, we wanted to quickly review and remind the matters that are important to understanding the figures. At the time of the acquisition, Aspire Core contracts had legal terms that dictated revenues to be recognized on a gross basis. This is different from Neo Games business, where contracts dictate revenues is recognized on a net basis. This has historically resulted in higher revenues, but lower margins for the Aspire Core business. The percentage of revenues in Aspire Core business that has been generated from contracts converted to recognized revenues on a net basis has reached a level of above 90%. As a reminder, as of January 1st, 2023, that number was 87%, but this remains moving figure as we progress through the year and continue to add to this number through further contract amendments and new customer launches. Reflecting this change net from gross, the company expects revenues and its share of NPI revenues interest to be between $235 million to $255 million, Assuming a like-for-like basis to prior year's guidance specifications, our 2023 guidance would reflect 10.4% increase year-over-year at the midpoint when compared to our results for the year ended December 31, 2022. With that, operator, please open the line for questions.
spk09: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2.
spk08: At this time, we will pause momentarily to assemble our roster. Our first question comes from Jeff Stantial with Steeple. Please go ahead.
spk07: Great. Thanks. Good morning, guys. Thanks for taking our questions. Maybe starting off on the reiterated guidance, looks like really strong start to the year, in particular on the iLottery side of things. Just curious if anything's changed since you initially issued guidance on March 6th compositionally, or if anything's kind of caught you guys by surprise, either positive or negative. Thanks.
spk10: Hey, Jeff. Good morning. No, actually nothing hit us by surprise on Q1 results. Traditionally, Q1 and Q4 were the strongest in terms of performing quarters from a revenue standpoint. Q2 and Q3 were in the strongest quarters. We've baked those assumptions within our guidance. And so far, we are within our plans. So the short answer to your question is no.
spk07: Great. That's helpful. Thanks. And then shifting gears over to the iGaming business, most appreciate your commentary on the UK white paper. Sounds like no impact to 2023. Correct me if I'm wrong. I think that's mostly a function of just sort of timing for some of these changes to come into play. You know, have you thought about, you know, longer term, what all these policies do implement? And I do appreciate that there's still some potential variability there. But when these do these policies do implement, Have you thought about what the impact may look like, whether it's 2024, back out to its employer, whatever the timeframe might be? And then within kind of that aggregate impact, have you thought about sort of which pieces of the white paper are potentially the more impactful ones, whether that's the VAT limits, the affordability checks, what have you? Thanks.
spk02: Of course, Jeff. As you can imagine, we've looked at this very, very closely, this being such a significant part of the SPARC core business. I would say it depends on the landscape of how long you look at. We truly, truly believe that in the longer term, the white paper, which we find to be very measured and in line with our expectation, allows for sustainable growth with our partners and our B2B partners in the country. However, whenever, and we have that experience in other markets as well, whenever the market moves into a change in regulation, that impact the way that players behave with the system. We see it, for example, in some markets when it comes to change of payouts of games, and it could be also other measurements like bonuses and so on. There's always a shorter term impact, which if you work hard to mitigate in advance, should not hit your business significantly. And then the players adjust to the new regulation. Of course, the players that will decide to continue to play within the regulated markets, which we believe is the vast majority of the player base, and you allow yourself sustainable growth. So the measures we have taken up until now and the ones that we will take as more information comes out with regards to the white paper should allow us to be impacted, in our opinion, in a modest manner, and then after a certain period of adaptation by players and by us to the new regime, Suggests a sustainable growth. It's a pattern that we have seen in quite a few other markets that we experienced the same transition periods Great that's very helpful.
spk07: Thank you both and nice quarter.
spk09: Thank you, Jeff My next question comes from Barry Jonas with true securities, please go ahead Great good morning.
spk06: Modi rabies. It's Patrick Kiawan for Barry my first question is After the Mega Millions run in January, U.S. lottery sales have been a bit weaker. What would you attribute a drop-off in play to? Do you believe it's jackpot fatigue or maybe more macro-related things?
spk02: We think it's primarily what is sometimes defined as a fatigue. However, we have to say that the retention... has been significant. The time that lapsed from November, which was the all-time high $2 billion jackpot, to the one in January, which was literally six weeks apart, obviously suggested that there would be certain fatigue. And you are right to say that in retail, that has been what the majority of the lotteries in the US have felt. However, the fact that the jackpot happened in January and still we had, knock on wood, a pretty strong quarter overall, could suggest to you that we were able to leverage the traffic coming in from that jackpot into the remainder of the quarter, and strong results have not stopped in January. Oh, that's great.
spk06: And for my follow-up, could you remind us again the link between large jackpots drawing iLottery signups and how to think about conversion levels to eInstance?
spk02: Yes, obviously there are so many factors, as you said yourself, the factor of potential fatigues, the factors of potential other things happening in that specific market and overall. But we definitely saw a trend across all of previous ones of it's not only new signups and the conversion of those signups into instant gains. We also see what we call reactivation. which is a much higher engagement level by players that have been almost effectively lapsed or that has been dormant for a while because they come to play during and around times of jackpot, but they then also spend, because of awareness, on other products. So the combination is not only from converting those new signups, which, as you can imagine, in certain mature markets that we have been operating for more than, eight years now, the new sign-up levels, even if they still exist nicely around jackpots, are not necessarily the big money driver of the jackpot. The jackpot awares people that have been registered in the past and come to be engaged again with the system. So it's hard necessarily to distill the additional revenues coming in from non-jackpot games between those two groups, but we can definitely see that that pushes through for not only a week post the jackpot, but as I told you, if the jackpot was in January and we experienced a full strong quarter, then it lasts for a good time post the jackpot itself. Okay.
spk06: Really appreciate the callers. Thank you, guys.
spk08: Our next question comes from Chad with Macquarie.
spk09: Please go ahead.
spk01: Good morning. Thanks for taking my question. Wanted to ask about your cloud-based solution that you noted has been rolled out in Virginia. Can you just talk about other states, their interest in something like this, and if you believe that other states, after understanding kind of where the tech is in this business, may look a little bit closer at this as a source for revenue for their state? Thanks.
spk02: Yeah. Hi, Chet. First of all, good morning, as always. I would start by saying we have quite a significant experience with deploying cloud solutions. It's not the first time that we have deployed. Alberta and Canada is deployed fully on cloud since we launched it in 2020. Brazil is deployed fully on cloud in Brazil since we launched it, and we obviously have a significant cloud deployment that serves our European customers. So we have a lot of experience, and we were able to take that experience and show the benefits of it to Virginia in order to encourage them to take that decision. I would say that over time into the future, it's not only technology advantages and operational advantages that lotteries need to weigh in. Obviously, each of them has its own color and view on what their specific regulatory, I would say, boundaries are. and what they think by themselves, you know, in many cases being the regulators on lotteries in their market and in some cases being attached to other that supports that. So I'm saying it's not only technology. It is, in our opinion, relatively easy to demonstrate the advantages of moving to cloud-based with the ability to be very agile with adding capacity and measuring capacity with accordance to jackpots, with the increased efficiency that you have with other parts of the operations. But it is not the only argument or the only thing that lotteries need to take into account when considering this. We are glad, though, that we have brought to the U.S. market a first actual implementation that has been, by the way, and this is important to understand, it has been approved and endorsed by Muscle, to deploy a cloud-based draw game system where, up until now, Muscle were looking at physical implementations from other reasons that they have to support that, and that shows that Muscle has moved to approve this, and it's a significant milestone that we have achieved with this rollout.
spk01: Okay? That's great news. Yeah, thank you. And then my follow-up just on... On game content, just given what we've seen globally with some companies going through harder times than companies like yours that are in a good financial situation, have you seen any change in the competition for wizard games, for basically the menu and content that you're able to put out? versus what you've seen in prior years. Just trying to understand if the competition has changed and maybe you're in a better position now versus what you've been in the past. Thank you.
spk02: Yeah. First of all, I think that you're primarily talking about competition of studios in the gaming space. On the iLottery space, we are at the dominant position that we hope and plan to work hard to continue to maintain. On the iGaming front, and Wizard being a studio that is dedicated for iGaming, I think we are seeing a continuous process of consolidations in the market. We are seeing that newcomers have excelled in some markets and have not excelled in others. To remind you, Wizard itself is a studio in infancy stages. It has been formed as a focus area within PariPlay less than two years ago. And so there's still a lot of growth opportunity from that, from the position that they started. And during that time that they grow, they will need to take into account those things which are happening in the market. So definitely we see that opportunity grows for them much wider as we go along.
spk01: Thank you very much, Moti. Nice quarter.
spk02: Thank you. Thanks, Chad.
spk09: Our next question comes from David Katz with Jefferies. Please go ahead.
spk03: Hi, good morning. Thanks for taking my questions. Nice results. You mentioned, Moti, in your prepared remarks about Massachusetts taking a look. I think I may have seen and or heard in my travels about other states, maybe even Louisiana. If you could talk about Massachusetts, what the sort of steps, timing, hurdles, barriers, et cetera, might be ahead of us. And, you know, even order of magnitude in terms of the size of the opportunity relative to others we have seen. And any other states, you know, plus or minus Louisiana would be very helpful.
spk02: Okay. Good morning, David, first of all. I think what's happening in Massachusetts is no different than what we have seen happening in other markets. It's just that it caught the public attention more than some other processes, and therefore it is more advanced. It's advanced in the nature that public officials have started to be vocal about it, the support that it's giving to it. And again, as it happens in other markets, it all started to gain momentum after passing sport betting legislation. where legislators have moved their attention to look into iLottery side by side with the opening of sports betting in the states, which is something that we have been promoting for legislators to look at due to the baked-in financial opportunities that the states tend to gain from iLottery in parallel to online sports betting. I don't know what the timeline is. It's always very difficult to say. But I would say that in those cases, as you know well, it's all about momentum, and momentum is definitely on the uprise in Massachusetts where quite a few legislators are asking to be educated about the matter, asking questions relative to the potential that this would have to the state and what would that mean versus impact on retailers, as we always hear, and we have good answers about that. What would that mean to the other forms of gaming? So I think it's advanced, but those things tend to have dynamics that is hard to predict in terms of the timeline that it takes. And I remind you that Massachusetts is one of the states that do not adjourn. They have an open legislation cycle throughout the year. So this is kind of a running mode that could happen at any point during the year and doesn't need to happen until a certain point in time. I did reference, apart from math, that there are processes in other states, and without talking about naming Louisiana specifically over there, although I think that they're definitely looking at it and they understand the benefits, I think there's about two or three other states where we could measure the growing interests of legislators to listen and to hear and to be educated, which suggests the early stages of building up and momentum. Regarding math, by the way, one last thing, the size opportunity, I mean, you could imagine the combination of the size of population with the fact that this is a top five lottery in the U.S. suggested this could be a significant potential. Perfect.
spk03: And if you don't mind my following up, in your response, you said that states obviously want to be educated in about the perspective interactions with retail lottery and that you have a good answer for it. Can we hear some of that? It's a topic that comes up in all of our digital coverage.
spk02: Absolutely. We've submitted white papers and we have data. The good thing is that now when iLottery has been introduced, for a bit over a decade and more than 10 states, there's simply enough data. And it's hard to argue with data that shows consistently that states that have launched iLottery have not been impacting retail sales. In fact, there are quite a few evidence to show that in certain states that launched iLottery, some of them are our customers, retail sales have actually grown faster than retail sales of states that have launched on Die Lottery. And you could argue that it's the share of voice and the fact that Lottery is all of a sudden advertising more in the digital domain gets into additional brand awareness to new opportunities and new crowds. So, yes, David, there is consistent data about this matter that we keep sharing with regulators to show them exactly the numbers that have taken place and the dynamics in the different states around the country. But long story short, there's no impact on retail.
spk08: Perfect. Thank you. Again, if you'd like to ask a question, please press star then 1 at this time.
spk09: Our next question comes from Steve Stella with Deutsche Bank. Please go ahead.
spk04: Thank you, and good morning, everyone. Just one for me on the trajectory of expenses. The approximately $24 million in distribution expenses and the $4.5 million in development expenses, is that a good run rate moving forward, or is there anything else we should think about as we look to model the OpEx?
spk10: Good morning, Steven, and thanks for the question. On the distribution line item, obviously that has been significantly impacted by the move from gross to net on the Aspire core business. And there has been some set of expenses relative to previous quarters. And the number that you see on Q1 is a good reflection of our of our run rate. Relative to R&D, there has been some few one-timers on the R&D line item this quarter associated with some incentive programs that we've introduced to some of our employees. And this is more of one-timers rather than run rate. And so I would suggest to use the number that has been provided to the market in Q4 as a measure to predict the run rate of the business.
spk04: Okay, very helpful. Thank you.
spk09: This concludes our question and answer section. I would like to turn the conference back over to Monty Mull for any closing remarks.
spk02: Thank you. Thank you. And thanks, everyone, again, for showing interest in our story and our business. We believe that, as I said earlier in my remarks, we started the year on a very strong note, and we're starting to see more and more fruits in the synergies that we have with the different parts of the Aspire Group that we have acquired and confident in our ability to bring more of that into the investors in the next couple of months. Thank you all for joining us, and have a great day.
spk08: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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