Bragg Gaming Group Inc. (NASDAQ:BRAG) Q1 2023 Earnings Call Transcript May 10, 2023

Bragg Gaming Group Inc. beats earnings expectations. Reported EPS is $-0.03, expectations were $-0.05.

Operator:

Operator: Thank you for standing by. My name is [Indiscernible], and I will be your conference operator today. At this time, I would like to welcome everyone to the Bragg Gaming Group First Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. [Operator Instructions]. I would now like to turn the call over to Chief Strategy Officer, Yaniv Spielberg. You may begin.

Yaniv Spielberg: Thank you, operator. Good morning everyone, and thank you for joining our first quarter of 2023 earnings conference call. I’m Yaniv Spielberg, Chief Strategy Officer for Bragg Gaming Group. I’ll be hosting today’s call alongside my colleagues, Chief Executive Officer, Yaniv Sherman, who will comment on our first quarter’s performance, and Ronen Kannor, our CFO, who will review and discuss our first quarter results. If you have not already done so, you can follow our earnings call presentation from our website at investors.bragg.group in the section called Latest Presentations. On this call, we will review Bragg’s financial and operating results for the first quarter of 2023. Following our prepared remarks, we’ll open the conference call to a question-and-answer period.

I’ll start the call with some brief cautionary remarks regarding certain statements that may be made on this call. Certain statements made on this conference call and our responses to various questions may constitute forward-looking information or future-oriented financial information within the meaning of applicable securities laws. Statements about expected growth, prospective results, strategic outlook, and financial and operational expectations, opportunities and projections rely on a number of assumptions concerning future events, including market and economic conditions, business prospects or opportunities, future plans and strategies, technological developments and anticipated events, trends and regulatory changes that may affect the corporation and its subsidiaries and their respective customers and industries.

While we believe these assumptions to be reasonable, they are subject to a number of risks, uncertainties and other factors, many of which are outside the company’s control and which could cause the actual results, performance or achievements of the company to be materially different. There can be no assurances that these assumptions or estimates are accurate or that any of these expectations will prove accurate. For a complete discussion of these factors, please refer to our recently filed press release and other publicly available disclosures. With that behind us, I’d like to turn the call now to our CEO, Yaniv Sherman. Yaniv?

Yaniv Sherman: Thank you Yaniv. Good morning. I am Yaniv Sherman, Bragg CEO. And I’m very happy to welcome you all to our first quarter presentation. Our first quarter of the year had marked another successful step in our digital quest. We continue to execute against our mission and strategic plan, complementing our award winning iGaming proposition. With a growing number of premium Bragg developed game titles offered to players around the world who are operating partners. Our execution is driving persistent top line and cash flow growth. Consistent with our previously presented game plan, we continue to expand in new markets with new customers. So far, this year has been no exception, because we are excited to welcome new partners in Mexico, Belgium, Switzerland, Italy, Spain and the UK.

Our U.S. rollout is progressing well, and we’ve recently marked another key milestone with the launch of our newest tech stack and games launch in Pennsylvania; our fourth U.S. state to-date. I’ll share more business and operational details shortly. But first, I’d like Ronen to elaborate about our recent financial key performance indicators. Ronen?

Ronen Kannor: Thank you, Yaniv and good morning, everyone. I’ll begin my comments on slide six. As Yaniv indicated earlier, the first quarter of 2023 was another successful step in our digital journey. We continue to execute against our mission and strategic plan and we can see that in our financial and operational results. In the first quarter total revenue were up by 18.1% year-over-year to €22.9 million. The growth was mainly derived organically through our existing customer base launch in financial year 2021 and 2022, which performed better than expected on the content segment. The new onboarded customers in various jurisdictions, in particular the Netherlands, with three new PAM customers turnkey solutions and content offering and the solid revenue performance from the Wild Streak Gaming studio, and Spin Games existing U.S. customers.

From an operational KPI perspective, total wagering generated by the games and content offered by the group during the quarter was up by 35.7% from the same period in the previous year, to €5.2 billion. As you can see from the wagering chart on the right hand side, Bragg saw positive momentum since the effect of the inception of the German regulator restrictions on gameplay in the first quarter of 2021, which demonstrates our ability to transform and diversify our operations. In addition, the total number of unique players using our games and content in the period, which is excluding Wild Streak and Spin went up by 42.8% from the same period in the previous year to 2.8 million unique players. The increase is associated with the significant improvements to our core content offering, including recent technical developments, giving us a powerful competitive advantage.

Gross profits for the quarter increased by 22% to €12.2 million with gross profit margins increasing by 170 basis points to 53.5%. The margin increase is a direct effect of a change in the composition of revenue derived from PAM, managed services and proprietary game studios, which have no cost of sale compared to third-party games and content which have associated third-party costs. Adjusted EBITDA for the quarter was up by 28.1% to €3.9 million with adjusted EBITDA margin reaching 17%, an improvement of 130 basis points from the same period in the previous year. The change in margin was mainly as a result of scale, a change in the product mix and higher profitability, that come with alongside with higher salaries costs as part of the group strategy to expand the software development and product portfolio, all with the focus to margin control.

Operating profits for the quarter amounted to €0.5 million, an improvement of €0.6 million from the previous year, operating loss of 0.1 million, and as a result of improved underlying performance and more efficient cost control. We are pleased that since the start of the second quarter, we have seen a strong trading in line with our expectations. As a result, we are reiterating our 2023 guidance of revenue in the range of €93 million to €97 million with the midpoint of €95 million implying 12% growth from 2022 levels, and adjusted EBITDA of €14.5 million to €16.5 million with a midpoint of €15.5 million implying 28% growth and adjusted EBITDA from 2022 levels. As you can see on slide seven, the gross profit margins and growing trajectories in the third quarter of 2021 due to the shift in Bragg’s product mix.

We continue to execute against our mission and strategic plan. We’re scaling up our business in line with both our revenue growth and the continued movement in product mix, as indicated in the right hand side of the slide. Product mix has changed noticeably since last year third quarter, while the revenue scaling, it is also training towards proprietary content, PAM and turnkey solutions by leading to improvement in gross profit margins and overall profitability. Gross profits increased by 22% to €12.2 million in the first quarter of 2023 with margin improving by 170 basis points to 53.5%. The first quarter of 2023 revenue performance was driven mainly from the content, which is aggregated third-party, exclusive content and proprietary content, while PAM and turnkey solution was slightly lower proportion.

In the first quarter of 2023 the total games and content revenue segments amounted to €17.6 million and represented 76.8% of total revenue, compared to €13.9 million and 71.6% last year. Proprietary content deployment is positively progressing both in the U.S. and EU markets by increasing both distribution in game performance. And as the Yaniv indicated, we have recently marked another key milestone with the launch of the newest tech stack launch in Pennsylvania, our fourth U.S. states to-date. As we indicated in the previous quarters, we are targeting gross profit margin improvement to reach 60% with full years of 2024 mainly by increasing the proportion of revenue which comes from proprietary content, PAM and turnkey solutions. Moving to slide eight.

Adjusted EBITDA amounted to €3.9 million against an operating profit of €0.5 million. The gap was driven by the following non-cash and exception items, Depreciation and amortization, the increase of intangible amortization, part of the Wild Streak and Spin acquisition in June 2021 and June 2022 respectively, and increase with capitalized software development cost, share-based payment and reduction in the charge for awards granted to senior management during the period composed of the DSUs and RSUs and share options. Exceptional cost, costs mainly associated with the discontinued contractor relationship of several employees. And gain of remeasurement of the Fed consideration, this is cost mainly associated with the acquisition of Spin in June 2022 on the total outstanding deferred liability.

As you’ll see on slide nine, we ended the quarter with a cash balance of €15.1 million, compared to €11.3 million as of December 31, 2022 with outstanding liability of $8.5 million in convertible debt. As of May 2023, the total outstanding liability is $7.5 million after several conversions and a cash repayments of $0.5 million in April 2023. Our net working capital at the end of March 2023 is approximately €7.7 million excluding deferred consideration. This is compared to €6.6 million at the beginning of the year. From a cash flow perspective a total of €6.4 million generated from the operating activities with underlying performance reaching to €3.4 million and the movement in working capital and income taxes of €3 million. A total of €1.9 million investment in intangible assets related to the capitalization of software development costs in the period.

Looking forward management are projecting a positive free cash flow from operations where there is no CapEx or technology debt required in the business. In addition, management is confident that there are no immediate refinancing of further debt requirements needs for business. And with that, I will turn the call back to Yaniv.

Yaniv Sherman: Thanks Ronen. I wanted to use this opportunity and spend a few minutes talking about the general state of the markets. In the big picture, 2022 was one of the most volatile and challenging years in recent memory from a macro and financial perspectives. In 2023, at least to-date while some markets and sectors seem to be turning a corner, it remains to be seen whether we are at the end of this cycle. High interest rates and general uncertainty means companies must operate prudently with a clear focus on their business’s fundamentals. Specifically in our sector the global growth of online gaming continues with digital surpassing physical gaming in many territories. However, increased regulation, as we’ve recently seen with the publication of the white paper in the UK and different restrictions in Holland, and Italy, just to name a few requires a different playbook one where we need to be nimble.

I’m pleased that we have established a foundation of Bragg with this exact state of mind and we are better positioned than ever to compete in a marketplace of regulated gaming. Diversification, prudence and capital deployment and operational excellence are no longer the proverbial extra mustard. There are preconditions for navigating in these stormy waters and to continue to grow as we have, and expect to continue doing so in the near and long-term. Moving to slide 12, we’ve been busy ramping up our Bragg studios and powered by Bragg outputs, and we’re starting to see the results. As I’ve stated in the past, building Bragg into a must have game provider is a marathon. We’re already considered a partner of choice for turnkey and game aggregation offerings, but at scale game production requires building and honing additional capabilities such as game design, creative and math development, just to name a few.

I’m very pleased about the progress we’ve made in a relatively short amount of time. This is an incredibly competitive and exciting landscape, and we aim to create a healthy balance between quality and quantity. Bragg studios are now working under the guidance of our new Las Vegas Content Hub added by industry leading talents. We expect our production and rollout cadence to increase through 2023 as we continue to develop market specific titles, with additional features and functions built into our tech stack. In slide 13, we can see the manifestation of the growing number of exclusive and proprietary titles in our partner network through their share in gross profit. The continued expansion of our share of wallet and gross gaming revenues across different markets underpins the business rationale behind this effort and gets us closer to our long-term margin and profitability targets.

Moving on to the next slide, game production is built on a robust product and technology based, developed by our amazing Braggers across Europe and India. We continue to show growth on our turnkey vertical and our ability to partner with proven operating partners in power their digital growth in regulated markets makes Bragg more than a one trick pony. Diversification and scale are two critical aspects we continue to drive towards their fundamental components in our resilience and something Bragg’s management are extremely focused on. And in my last slide, just to cap things off. We’re marking another strong revenue and adjusted EBITDA quarter. Game production is firing on all cylinders, complementing our expansion with new and existing partners across several key markets including the U.S. and Western Europe.

We remain focused on long-term value creation, credibly exciting and dynamic sector powered by our amazing team members around the world. Thanks again for joining and listening in. We’re happy to take your questions now.

Q&A Session

Operator: [Operator Instructions]. Our first question comes from the line of Gianluca Tucci with Haywood Securities. Your line is open.

Operator: And the next question comes from the line of Matthew Lee with Canaccord Genuity. Your line is open.

Operator: And our next question comes from the line of Edward Engel with Roth MKM. Your line is open.

Operator: And the next question comes from the line of Jack Vander Aarde with Maxim Group. Your line is open.

Operator: And the next question comes from the line of David McFadgen with Cormark. Your line is open.

Operator: And I will now turn the call back over to Yaniv Sherman.

Yaniv Sherman: Thanks, operator, and thank you all for attending first quarter presentation and questions. Encourage everyone to further review the materials on our investor website. And looking forward to seeing you over the upcoming yearly call for 2023. Thank you and have a great day.

Operator: This concludes today’s conference call. You may now disconnect.