GAN Limited
Q4 2020 Earnings Call Transcript

Published: 25 Mar 2021

[Operator:]

Greetings, and welcome to GAN Limited Fourth Quarter 2020 Financial Results. . It is now my pleasure to introduce your host, Todd McTavish, Chief Legal Officer. Thank you. You may begin.

[Todd McTavish:]

Thank you, Doug, and good morning, everyone. GAN's fourth quarter and full year 2020 earnings release was issued today after market and is posted on the company's website at gan.com. With me representing the company today are Dermot Smurfit, President and Chief Executive Officer; and Karen Flores, Executive Vice President and Chief Financial Officer.

[Dermot Smurfit:]

Thank you, Todd, and good afternoon, everyone. Please join me, if you will, on the third slide of our presentation released earlier today. All in our U.S. NASDAQ listing completed just 10 months ago, we have now made the investments required to deliver on the promised 2021 opportunity to exceed $100 million in revenues with strong full year EBITDA margins and a swift return to solid cash generation in the coming quarters. Our investment decisions in 2020, particularly in the second half, to properly resource for the U.S. opportunity and create burstable bandwidth in our software engineering capability have already proven strongly beneficial in early 2021. As we're 84 days into the new year and firmly in the grip of record online activity, we believe that it is necessary to comment on expectations for the first full quarter of 2021, where we've already delivered $194 million in gross operating revenue to our B2B clients, not including Coolbet's newly consolidated and incremental revenues. And so with just a few days left to the current quarter, our Q1 2021 visibility, and therefore, Q1 revenue guidance is firm at between $24 million to $25 million. And I'll leave our CFO, Karen Flores, to comment further on full year guidance in detail later in this presentation.

[Karen Flores:]

Thank you, Dermot, and hello to everyone on the call today. Our first earnings call in 2020 marked a significant milestone for the company in which we had just completed the IPO and NASDAQ listing. Our fourth earnings call of this year marks another significant milestone. Our acquisition of Coolbet just closed on New Year's day. And while today's discussion will be focused on GAN's stand-alone 2020 results, we couldn't be more excited to end our prepared remarks with our 2021 full year and first quarter guidance inclusive of Coolbet. Before I jump into the financials, let me take a moment to briefly summarize the key highlights that will frame our 2020 full year results. First, we moved at an unrelenting pace to execute against our core growth strategy to build long-term partnerships with best-in-class operators, servicing them through best-in-class technology. Hands down, GAN continues to be the #1 B2B iGaming platform provider in the U.S. GAN's technology powered 21% of the total U.S. iGaming market in 2020, and we also command in excess of a 60% share of the B2B iGaming supplier market. We anticipate that our expanded customer roster, which now includes brand name clients like Wynn and Churchill, will continue to grow this year with the recent launches of Michigan and Tennessee. In support of our growth strategy, the IPO and follow-on offerings allowed us to deploy capital to expand resources, strengthen the corporate enterprise to achieve scale and execute a transformative accretive acquisition of Coolbet's online sportsbook technology and capabilities and international B2C operations. As Dermot outlined, 2020 was a truly foundational year for GAN. And while the investments required to position us for continued expansion reduced our profitability, we believe the majority of these expenses are now largely in our rearview mirror. Second, on our path to achieving scale and diversification, there are aspects to our revenues and EBITDA that will make comparative challenging due to timing or extraordinary circumstances. As relevant to our discussion today, it's important to note, our 2019 results include $8.5 million of revenue and $8 million of EBITDA that did not recur in 2020, more specifically, $4.5 million of revenue and $4 million of EBITDA from our U.K. B2C operations with WinStar World Casino that ceased in 2020, and separately, $4 million of revenue and EBITDA from recognition of a patent licensing fees. Today, I will be speaking to our 2020 performance both including and excluding these 2019 items, which will help set the stage for the organic growth we are seeing in the first quarter of 2021. Additionally, on our last earnings call, we discussed our intellectual property monetization strategy and reiterated our full year guidance subject to timing of this revenue. Last month, we reached an agreement to license GAN's patented iBridge technology for a total licensing fee of $3 million. As a result of this agreement, we will recognize the licensing fee during the first quarter of 2021 instead of the fourth quarter of 2020, as was previously anticipated. Had the patent licensing revenue been pulled forward into Q4, our revenue results would have been on target with consensus estimates. Lastly, I'd like to emphasize that B2B iGaming and simulated gaming represent our core B2B business, and we are now in a growth phase relative to our B2B online sports betting segment. In the third quarter of 2020, we migrated the FanDuel online sports betting wallet off our system. For the fourth quarter of 2020 specifically, the OSB migration had a significant effect on comparative and sequential trending. And again, I will be referring to the business performance both including and excluding the online sports betting revenue and EBITDA. That said, the good news is that our strong market share gains in our iGaming business more than offset the OSB loss. In the fourth quarter, total gross operator revenue of $132 million is up 9% comparatively, including OSB. However, excluding OSB, the organic growth is 156% with no new market or clients. And the better news is that we see a tremendous opportunity to keep winning market share over time. In particular, through our new operator partnerships and the GAN B2B Force Tech offering, which we anticipate launching this summer. And now to dig into the numbers on Slide 9. Looking first at our full year revenue drivers and KPIs. Total gross operator revenue increased 73% year-on-year from $316 million to $545 million. This increase was primarily driven by outperformance of our U.S. iGaming-related business, which increased 273% year-over-year, outpacing the total addressable market growth of 230% as we also enjoyed increased market share, which expanded from 18% in 2019 to 21% in 2020. We are extremely proud of surpassing $0.5 billion of operator revenues processed through our platform as we continue to manage the performance and execution of our partnership clients' businesses. We also saw a very healthy 89% year-over-year increase in simulated gaming gross operator revenue as well as a resilient 15% year-on-year increase in Italy. Online sports betting declined 21% year-on-year as related to the impact of both the pandemic on professional live sporting events as well as the FanDuel OSB migration in the third quarter. Now turning to full year top line performance, as outlined on Slide 10. Total revenue of $35.2 million increased 17% versus 2019. Looking at organic growth, excluding the 2019 impact of U.K. B2C and patent licensing, revenue increased 62% year-over-year. Our core B2B business, which drives recurring platform and content fees performed extremely well, increasing $6.2 million or 31% versus prior year, including the 2019 impact of U.K. B2C and $10.4 million or 67% excluding this. The strength of our recurring platform and content fee revenue was driven by a 173% year-on-year increase in iGaming, 77% increase in simulated gaming, 17% increase in Italy and a 5% year-over-year decline in OSB, as mentioned previously. To note, OSB declined as a percentage of our overall revenue as well from 10.1% in 2019 to 8.2% in 2020. And on the strength of our launches with Penn National, Agua Caliente, Route 66 and Snoqualmie, simulated gaming increased as an overall percentage from 19% in 2019 to 27% in 2020. Development services and other, which includes $4 million of patent licensing revenue in 2019, declined year-on-year from $10 million to $9 million in 2020. As I mentioned in my opening remarks, we recently reached an agreement to license GAN's patented iBridge technology for $3 million, and we'll recognize this licensing fee during the first quarter of 2021 instead of the fourth quarter of 2020, as previously anticipated. Sequentially and comparatively, our fourth quarter revenue declined 16% and 17%, respectively, as both prior periods include FanDuel OSB revenue prior to the third quarter 2020 migration. And the fourth quarter of 2019 also includes $4.5 million of revenue from our U.K. B2C operations. Excluding these items, our core business, recurring platform and content fee revenue increased 16% sequentially and 76% comparatively. Moving on to adjusted EBITDA on Slide 11. Adjusted EBITDA declined year-over-year from a profit of $7.9 million in 2019 to a loss of $2.3 million in 2020, including the 2019 impact of U.K. B2C and patent licensing. Excluding these items, the adjusted EBITDA loss increased by $2.1 million in our core business, as the investment in our year-long journey of graduating to the NASDAQ, investing in our people and infrastructure to achieve scale and acquiring Coolbet was substantially offset by strong organic growth. Year-over-year gross profit in our core business, excluding the 2019 impact of U.K. B2C and patent licensing, increased by $11.3 million or 107%. The related adjusted gross margin also increased from 49% to 62% with a revenue mix shift towards the highest-margin recurring platform and content fees. This healthy increase helped to mitigate both temporary and permanent increases in our cost structure. In 2020, we incurred an elevated level of professional advisory services and other related costs as we executed against our NASDAQ and M&A strategies, but we also invested and we'll continue to invest in operational excellence through the continued expansion of resources to enable our long-term objectives. Sequentially, our adjusted EBITDA declined from a loss of $400,000 in the third quarter to a loss of $6 million in the fourth quarter as a result of the top line shift that I previously discussed, execution of the Coolbet acquisition and our ongoing investments in resourcing and infrastructure. The IPO and follow-on offerings contributed to our ending cash balance of $153 million, and we continue to operate without any debt. A portion of the capital raised will support the software development as we continue to enhance the platform and our capabilities, for example, the continued development of one account, any product, any state, which recently powered the launch of twinspires.com in Michigan and Tennessee. Overall, our capital expenditures increased from $2.9 million in 2019 to $5.9 million in 2020. It is a critical time to innovate and advance our platform. And we will continue to invest in proprietary software development to bring Coolbet's sports offerings and other critical product development to the market. We are well capitalized to address this. And our key priorities of securing market share, entering new states as they legalize, delivering the best platform technology to the market and exploring opportunistic and accretive M&A. Looking forward to 2021 guidance and our current trending on Slide 12. As we look to the future, we are excited about the organic growth and momentum of our B2B business carrying into 2021 as well as the accretive addition of Coolbet B2C. The launch of Michigan in January exceeded our expectations. And as Dermot mentioned, we anticipate over $200 million in gross operator revenue in the first quarter, which is organic growth of approximately 62% versus the prior quarter and 170% versus the prior year, excluding FanDuel OSB. Coolbet is also trending well ahead of expectations as they continue to see success across all territories. On the strength of this momentum and our anticipated favorable Q1 results, we are guiding to an annual revenue range of $100 million to $105 million with $24 million to $25 million for the first quarter split approximately 50-50 between our B2B and B2C businesses. We also estimate that for Q1, no customer will exceed 15% of revenue. And this concentration will continue to reduce with the anticipated growth in our core businesses. We are not providing guidance for 2021 adjusted EBITDA at this time, but we are squarely focused on a return to positive EBITDA. Given we are now completing some of our critical growth-focused investments, this should allow for solid operating leverage gains as our revenue continues to scale. And we'll look forward to updating the market further throughout the year as we execute this plan. On one final and more technical note, we have now fully transitioned from foreign private issuer to domestic filer under the SEC guidelines, which means that our financial statements are now presented under U.S. GAAP. This required a heavy lift over the last few months, which is why our call was delayed a few weeks to today. Moving forward, we will return to a more normal schedule, starting with the Mid-may date for . That concludes our remarks, and we will now open the line for questions.

[Operator:]

. Our first question comes from the line of Chad Beynon with Macquarie Group.

[Chad Beynon:]

Dermot, just want to start with a high-level question. I know there's been a lot of talk about vertical integration in the United States, and there's been some companies that have taken action. So now that you have the full suite of products with Coolbet coming in-house, and I know you went through this in your prepared remarks, are you still confident that there's a big ocean out there and there's a lot of potential partners for you guys to work with over the years to come? We're just seeing this trend, and I was just wondering how your updated views have come along.

[Dermot Smurfit:]

Thanks, Chad. It really hasn't changed. The reality is that this is very, very complex and scarce technology. And as much as many B2B operators of U.S. Internet gambling may covet the technology, there'll be very few who do go through that whole process. And regardless of the size of the individual B2C operator, they will always be reliant on a wide ecosystem of third-party content, particularly in the online casino or iGaming space. So we do see that this is a broad and deep ocean. We do believe there's going to be a significant customer diversity. There's going to be a lot more operators online than I believe are generally accepted by industry analysts. And I think we've just proven that again today with the announcement of Westgate Resorts. That is, I believe, our eighth real money gambling client here in the United States, and there are many, many more to come.

[Chad Beynon:]

Great. And then on the 2021 guidance, is it safe to assume -- I know you said $12 million for Coolbet in the first quarter. I believe, last quarter, when you announced the acquisition, you said this is roughly a $50 million revenue business. Is it safe to assume that out of your guidance, roughly $50 million is Coolbet and that we should only assume the $3 million Q1 patent license as certainties and then everything else is based off of GOR?

[Karen Flores:]

Yes. That's absolutely correct. The split between the B2B and B2C businesses is 50-50 for the short to midterm.

[Operator:]

Our next question comes from the line of Josh Nichols with B. Riley FBR.

[Michael Nichols:]

Good to hear the company is off to such a strong start for the first quarter. One thing I did want to ask a little bit about -- good to hear the integration is coming along nicely. What's the company's opportunity to expand into new states in the U.S., particularly those that may just have sports betting? Currently, in the back half, once Coolbet is integrated, and is that really built into guidance? Or would that be a potential source of upside?

[Dermot Smurfit:]

Yes. Josh, I mean, as you know, the GAN platform has got multiple different options for clients to choose from. And obviously, we prefer our clients to choose the Coolbet in-house sports capability, but I think we need to get that up and running and out the door later on this year and be able to demonstrate the unique capabilities that Coolbet brings to the GAN product proposition. In the meantime, yes, we're absolutely relevant and playing in the markets that are Internet sports, only we're expecting to be in a large number of Internet sports. I think we obviously just launched a few days ago in Tennessee, which is an Internet sports betting market only. We're going to be launching in Colorado shortly, which is an Internet sports betting market only. And of course, we look at Ohio, which seems to be coming down the legislative term like pretty quickly in 2021 and a large number of those states like we have a direct pathway to both Illinois and New York. So we absolutely have a clear play in all the Internet sports-only markets and look forward to growing our sports betting revenues both through the deployment of Coolbet and the deployment of third-party sports vendors.

[Karen Flores:]

Yes. And just to follow up on that with respect to the guidance, you can assume that there is a very low level of revenue that's embedded in the plan. It's low-7 figure.

[Michael Nichols:]

And just to hit on Coolbet a little bit more. Could you -- any updates you could provide? I know that they have a big B2C focus right outside the U.S. on how those markets are trending. Or what's the expectation on that front?

[Dermot Smurfit:]

Yes. So Coolbet is operating in just a relatively small number of European and Latin American markets at the moment. They are generating considerable profits from significant scale, and we're extremely excited by the expansionary opportunity in Latin America, which has got a secular growth profile to it for the next 10 to 12 years.

[Operator:]

Our next question comes from the line of Ryan Sigdahl with Craig-Hallum.

[Ryan Sigdahl:]

Dermot, on the last conference call, you mentioned $100 million of pro forma revenue in 2021, excluding any synergies with Coolbet. So I guess it sounds like we're assuming a little bit of synergies there from sports betting revenue as well as $3 million of license award getting deferred from 2020 to 2021 as well as significant increase in Michigan assumptions. So I guess, what are the offsets here? What are the levers that maybe are coming down?

[Dermot Smurfit:]

Thanks, Ryan. So the first thing I'd say is, I mean, this is based on our best current estimates, right? So increasing guidance is not undertaken lightly or without significant consideration. It's principally from the very rapid market launch of Michigan, which I think the whole industry has noted. And we've had a record period of trading activity as we progressed through the bulk of Q1 already, and we don't see any sign of that slowing down anytime soon. So I think we're being conservative by lifting our guidance. And Karen, would you like to comment further?

[Karen Flores:]

Yes. I mean I would say that, again, we'll look to update the market again in the first quarter. I mean we're coming back out with our Q1 guidance in roughly 6 or 7 weeks. So you can expect another update relative to the full year at that point, and we'll be talking about it further just based on continued performance.

[Ryan Sigdahl:]

Got you. Then if I look at Slide 17, it looks like platform and content fees, development services, the bottom two bars there, the recurring pieces of the business, the SaaS pieces, those are declining on a percentage basis. I guess I thought the recent deals had better pricing as well as customers were taking more services, and there was a path to 10%. So I guess, can you help walk through the year-over-year decline there?

[Karen Flores:]

Yes. So I mean there is a little bit of an impact relative to the mix of jurisdictions and the impact on the take rate. So between gross operator revenue and our revenue, you have taxes that come into play, bonusing, et cetera. So it's going to be -- to the extent that there's states with higher tax rates, such as Pennsylvania coming in, it's going to put a little bit of downward pressure on that take rate. And then relative to how we're executing against that strategy that's here and looking to push up that take rate, we've always said that, that content and investments in content are going to continue to push up that take rate. And that is a huge part of our focus this year. So there's that. And then with the GAN sports tech offering through the Coolbet technology, we expect those take rates to come up over time. So this year, for us is really about executing on the content and sports tech strategies.

[Dermot Smurfit:]

Just an additional piece of comment. I mean we are finding that our commercial terms are trending to improve and certainly not staying static or declining.

[Ryan Sigdahl:]

Got you. Then last question for me, just on Parx. Nice to see the patent license there. But also it did remove exclusivity. So can you talk through the puts, takes on the removal of the exclusivity, their launch plans in Michigan, which is play tech and then kind of what that means for Pennsylvania and New Jersey for you guys?

[Dermot Smurfit:]

Yes. I mean there's a limit on what we can disclose about that relationship change. But of course, we couldn't deliver all things for all people. And we had a huge heavy lift just getting 3 clients live in Michigan. So we've been serving Parx for a long period of time. We delivered a very substantial business for them, and it's business as usual for the time being.

[Operator:]

Our next question comes from the line of Greg Gibas with Northland Securities.

[Gregory Gibas:]

Congrats on the strong Q1 guidance and everything and the Westgate Resorts addition, like you said, the eighth real money gaming client? I think that you said sports betting side in Colorado and New Jersey and then iGaming in New Jersey. Just wondering -- sorry if I missed this, but if you could comment on the timing of that launch and then maybe the expected gross operator revenue contribution or uplift from that and whether that's included in guidance.

[Dermot Smurfit:]

Thanks, Greg. Yes. So it's an extremely exciting customer win for us. It's the eighth U.S. retail casino operator client of ours for real money gambling here in the United States. So very exciting increase in our client roster. Westgate Resorts is extremely well-known brand in the U.S. among sports gambling enthusiasts. I think they've got a strong commitment to Internet sports betting. They're up and running in Colorado already. So that's a competitive replacement. We'll be launching Colorado, steer you towards the back end of summer. Everybody wants to be live before NFL kicks off in August for the pregame season. So that's always the target whenever you announce a client win in early part of the year. It's really focusing on an actual up-and-running launch in time to capture the NFL user acquisition opportunity. So that's a sense of timing. In terms of market share, I think I will leave that for our clients to comment on in due course. But they got a fabulous brand in sports gambling, and they've had some degree of success already online in Colorado with an alternative vendor.

[Gregory Gibas:]

Got it. Great. And to follow up, I guess, on the Coolbet integration. Could you provide an update on estimated timing when we'd see that integration completed in the U.S. and the launch there? And I guess along those lines, what still needs to be done or completed to reach integration in the U.S. markets?

[Dermot Smurfit:]

Okay. Well, the technical integration was very much designed as part of the due diligence process in fall of last year. So the technical integration is kind of one part of it, and that's in the bag already. The second process is slight additional localization for the U.S. marketplace, which has already taken place. Of course, you got to win a client for that, and we've already announced we've secured our first client for Coolbet's capability for deployments in an Internet sports-only marketplace here in the U.S. And we are, again, referencing the earlier comment about Westgate. We are leaning towards a pre-NFL launch of Coolbet here in the U.S.

[Gregory Gibas:]

Great. I guess last one for me. Just kind of drivers of the decline in take rate sequentially, it sounds like that was kind of pushed out from the licensing fee move Q1. It seems your guidance implies a pretty nice uplift in take rates just based on the gross operator revenue expectations for the year. What kind of gives you confidence, I guess, in that uplift?

[Karen Flores:]

Yes. I mean there is already substantial momentum with our current client base. And I would just make a general statement that our revenue projections for 2021 are primarily based on things that are already known. So there's always going to be just a little bit of adding new clients and assumptions around that. But we have line of sight into much of what we're planning for 2021 in terms of the road map and are already seeing the strong start to the year, as we've talked about. So there's a very high level of confidence with the revenue estimates for this year.

[Dermot Smurfit:]

I'll also add a little bit of color there, Greg, that as we deploy more proprietary, wholly owned or exclusively licensed content, we'll be keeping a full rev share on the deployment of the online casino games, which means our take rate in the online casino will go up. So it's not just about deploying Coolbet sports to get our take rate up substantially. It's also incrementally lifting our take rate in the online casino side as well. And we should see some impact on that in Q2 and beyond.

[Operator:]

There are no further questions in the queue. I'd like to hand the call back to Mr. Smurfit for closing remarks.

[Dermot Smurfit:]

Thanks, Doug. That's greatly appreciated. And thank you all for joining today our fourth earnings call as a U.S.-listed company. Again, we would like to thank all GAN stakeholders, not just our shareholders, but also crucially, our employees have been incredibly resilient during this extraordinary pandemic period. So thank you to all GAN-sters, Cool or otherwise, worldwide. I'd also, of course, like to thank all of our corporate clients. Without you guys, the magic doesn't happen. So thank you to our clients. We're now greatly extending our market leadership this year with the support of everybody at Coolbet as well as GAN. And naturally, we note the recent acquisitive activity in the industry and remain wholly satisfied that our proven U.S. technology and U.S. capability has increased in scarcity, and therefore, strategic value. Meanwhile, we're trebling revenues in 2021, which remains our best current estimate. And we already returned the business to positive EBITDA. The capital investment cycle is largely behind us, and we offer investors a pristine balance sheet. We also now have a deeper stable of long-term clients and greatly reduced customer concentration. All this means we have firm visibility over our domestic and international growth and solid control over our business going forward, which is now equipped with a strong balance sheet and that all-important burstable bandwidth and engineering resources required to continue delivering for all of our clients. Accordingly, we look forward to delivering on the fast scaling opportunity for all our shareholders as we progress through 2021. And I've said it before and I'll say it again, our future continues to represent the future of American gambling, where growth will likely be predominantly in the online channel for many, many years to come. Look forward to speaking with you all again in May. Thank you.

[Operator:]

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.