Bragg Gaming Group Inc. (NASDAQ:BRAG) Q4 2022 Earnings Call Transcript

Bragg Gaming Group Inc. (NASDAQ:BRAG) Q4 2022 Earnings Call Transcript March 21, 2023

Operator: Ladies and gentlemen, thank you for standing by. My name is Brent and I will be your conference Operator today. At this time, I would like to welcome everyone to the Bragg Gaming Group fourth quarter and fiscal year 2022 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. If you would like to ask a question at that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again press star, one. Thank you. It is now my pleasure to turn today’s call over to Mr. Yaniv Spielberg, Chief Strategy Officer. Sir, please go ahead.

Yaniv Spielberg: Thank you Operator. Good morning everyone and thank you for joining our fourth quarter and full year 2022 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 fourth quarter and full year performance, and Ronen Kannor, our CFO, who will review and discuss our fourth quarter and full year 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 fourth quarter and full year of 2022.

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 that 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: Thanks. Hi everyone, I’m Yaniv Sherman, Bragg’s CEO. Thanks for attending our 2022 fourth quarter and full year results presentation. We’re excited to take you through our strategic, operational and financial highlights, as well as sharing some more of our plans for 2023 and beyond. Moving to Slide 4, 2022 marked a transformational year for Bragg. Beyond our financial results, our record revenues and adjusted EBITDA, we continued to transition from a regional central European leading online platform to a global content-led iGames solution provider with extensive distribution across the U.S., Europe and Latin America. We’ve integrated our teams and sites under a unified brand, Bragg, working towards a joint mission and vision.

The Braggers are consistently executing against a strategy and the course that we’ve charted, and I’m very happy to share the progress we’ve made. On Slide No. 5, after concluding our U.S. acquisition, we are perfectly positioned to fast forward Bragg into its future. We marked the launch of two new Bragg game studios, Atomic Slot Lab and Indigo Magic, and we were able to develop the first batch of proprietary and exclusive market-tailored games for the U.S. and Europe. Our U.S. rollout is progressing well, leveraging Bragg’s cutting edge tech stack and development core coupled with unique game production know-how. Having launched in new regulated markets in Europe, our recent success in the Dutch market was complemented by customer and game roll-out in the U.K., Switzerland, Belgium, and the Czech Republic, just to name a few.

On the product front, we are religiously developing our products, tools and features to introduce our partners and their players with the best possible customer experience in online gaming. While 2022 and 2023 are by no means the end of the journey, I’m happy to say we are definitely on our way. I’d like to turn this to Ronen for a review of our financial results and then take you through some more operational highlights in more depth. Ronen?

Ronen Kannor: Thank you Yaniv, and good morning everyone. I’ll begin my comments on Slide 7. As Yaniv indicated earlier, 2022 was a transformational year for the Group and we can see that in our financial and operational results. The Group continued to execute very well during the fourth quarter. The fourth quarter total revenue was up by 50.3% year-over-year to €23.7 million and up by 13.3% from the previous quarter, representing an all-time record revenue for the Group. In addition, the Group’s year-over-year revenue growth was 45.3% and reached a record of €84.7 million. The growth was mainly derived organically through its existing customer base, new on-boarded customers in various jurisdictions, in particular the Netherlands, with a solid revenue performance from the Wild Streak game studio and Spin Games’ existing U.S. customer base.

From an operational and KPI perspective, total wagering generated by games and content offered by the group during the quarter was up by 65.4% from the same period in the previous year to €5.1 billion and up by 24% to €17.7 billion year-over-year. As you can see from the wagering chart on the right-hand side, Bragg has seen positive momentum since the effect of the inception of the German regulatory restrictions on game play in Q3 2021, which demonstrated its ability to transform and diversify its operations. Gross profit for the quarter increased by 61.6% to €13 million with gross profit margin increasing by 390 basis points to 54.9%. On a full year basis, the gross profit increased 59.2%, reaching €45.1 million, moving margins by 460 basis points to 53.2%.

The margin increase is a direct effect of the change in our composition of revenue derived from the increase of iGaming platform, managed services and proprietary game studios, which have no cost of sales, compared to third party games and content, which have associated third party costs. Adjusted EBITDA for the quarter was up by 128% to €3.6 million with adjusted EBITDA margins reaching 15.4%, an improvement of 530 basis points from the same period in the previous year. On a full year basis, adjusted EBITDA was up by 64% to €12.1 million, a record result for the Group. The change in margin was mainly as a result of scale, a change in the product mix of iGaming alongside high investment in salary costs as part of the Group strategy to expand its software development and product portfolio, all with a focus of margin control.

Operating profit for the quarter amounted to €0.2 million, an improvement of €2 million from the previous year and on a yearly basis it saw an improvement of €5.5 million to an overall €0.8 million operating loss as a result of improved underlying performance. Finally, we are pleased that in the first few weeks of the year, we have seen a strong current trading matching our expectations. Now turning to Slide 8, as I mentioned earlier, our entry into new markets, particularly the Netherlands, has been exceptionally strong. This coupled with new client wins and the ramping up with operators launched early in the year has given consistent quarterly growth since third quarter 2021, with the fourth quarter of 2022 seeing a 30.4% increase quarter-over-quarter and 50% from the previous year.

The key drivers for the fourth quarter outperformance is new launches of iGaming and turnkey solution customers mainly in the Dutch market, which is ComeOn and Betnation, and Merkur in the Czech market. Performance of customers launched in financial year 2021 and in financial year 2022 was better than expected mainly on the content segment and North American content revenue tracking in line with our expectations with the roll-out of new content in Michigan and New Jersey. Overall, the new business pipeline, new market entry, and more focused sales underpin the financial year 2023 revenue targets. As you can see on Slide 9, gross profit margins are on a growing trajectory since third quarter of 2021 due to the shift of Bragg’s product mix. We are scaling up our business in line with both our revenue growth and the continued movement in product mix, as indicated on the right-hand side of the slide.

Product mix has changed noticeably since last year’s third quarter. It is trending towards PAM turnkey solutions of proprietary content, leading to improving gross profit margins and profitability. The gross profit increased by 61.6% to €13 million in the fourth quarter with full year growth of 59.2%, reaching €45.1 million with margins improving for the quarter by 390 basis points to 54.9% and for the full year by 460 basis points to 53.2%. The fourth quarter revenue performance driven mainly from the content, aggregated and third party exclusive content and proprietary content, while platform and turnkey solutions were slightly lower proportionately. In the fourth quarter, total games and content revenue segments amounted to €18 million and represented 76% of the total revenue compared to €11.4 million and 72% of last year.

Proprietary content deployment is positively progressing both in the U.S. and EU markets by increasing both distribution and games performance. As we indicated in the previous quarters, the growth is targeting gross profit margin improvement to reach 60% by financial year 2024, mainly by increasing its revenue portion of its proprietary content, PAM and turnkey solutions. Moving to Slide 10, adjusted EBITDA amounted to €3.6 million against an operating profit of €0.2 million and on a full year basis to €12.1 million against an operating loss of €0.8 million. The gap was driven by the following non-cash and exceptional items: depreciation and amortization, the increase in intangible amortization as part of the Wild Streak and Spin acquisitions in June 2021 and June 2022 respectively, and the increase of capitalized software development costs; share-based payments, the charter for awards granted to senior management during the period composed of deferred share units, restricted share units, and share options; transaction and acquisition costs, costs mainly associated with the acquisition of Spin in June 2022, M&A activities during the year, and costs associated through the convertible debt financing completed in September 2022; exceptional costs, costs mainly associated with the strategic review process that took place early in the year with one-time board compensation and recruitment fees.

As you’ll see on Slide 11, we ended the quarter with a cash balance of €11.3 million compared to €16 million at December 31, 2021, with outstanding liability of $10 million convertible debt. As of this date, the total outstanding liability after share conversion is US $9 million. Our net working capital is approximately €8 million excluding current convertible liability compared to €11.6 million at the beginning of the year. The cash difference between the start of the year and the end of the year is explained by €9.1 million consideration paid upon the Spin acquisition, a continuing investment in capex and tech for a total of €7.3 million, and this was offset by €8.1 million net proceeds from the convertible debt and improvement in the Group performance.

Looking forward, we are projecting positive free cash flow from operations while there is no capex or technology debt required in the business. Management is confident that there is no immediate refinancing or further debt requirements needed for the business. Turning now to our outlook for 2023, we started off the year so far with continuing momentum and expect that we will continue to successfully execute on our growth drivers throughout the year. This morning, we have provided revenue guidance in a range of €93 million to €97 million and adjusted EBITDA guidance in a range of €14.5 million to €16.5 million. The midpoints of these ranges represent year-over-year growth of 12% for revenue and 28% for adjusted EBITDA. With our record fourth quarter performance and strong current trading, to date guidance compares positively to the initial outlook we provided last November when we reported our third quarter results.

With that, I will turn the call back to Yaniv.

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Yaniv Sherman: Thanks Ronen. Our games and product development machine has been reinforced with top content partners and complemented with tier one customers, partnerships with leading companies like Bluberi and Galaxy Gaming, produced online-first games and deployed with blue chip operators in the U.S. and Europe, including our newly launched turnkey partners, the Netherlands and the Czech Republic. Our ability to successfully operate on both sides of the Atlantic and our focus on iGaming has proven to be a key differentiator for Bragg in what is a crowded and competitive marketplace. Slide 15 showcases our recent content production and development headed by our Las Vegas content hub, developed and integrated by our amazing teams across Slovenia and India.

Within a year, we have established two new studios and managed to develop and deploy 20 new titles across our network. We aim to more than double this production capability within 2023. On top of this proprietary portfolio, we’ve developed and integrated 23 titles from our exclusive partners under our Powered by Bragg program. This combination offers another point of differentiation, and by working closely with our operating partners, we are already optimizing game performance and applying the growing data set to the 2023 games development road map. This is a key driver in our quest to become a must-have content partner in all markets we operate in. Slide 16 demonstrates the initial impact already apparent of our content-led strategy. By expanding our proprietary and exclusive portfolio, we are able to offer a unique selling point and simultaneously expand margin towards our long term goal.

This is just the beginning. Game development, when done right, takes time and persistence, however the teams’ ability to set up, produce and roll out t his new game portfolio in a short time frame is an amazing achievement. We are now focused on ramping up our game production and distribution through 2023 as we want to leverage this early success, create momentum and brand recognition as proven performers. The bottom graph also demonstrates our strategy’s execution effect on revenue and market diversification, another key differentiator in our ability to offer content coupled with regulated and compliant tech stack. It’s not just about the games. It enables us to create new revenue sources that serve as a foundation for future growth. We’re going toe to toe with much larger competitors and aim to disrupt our field and gain additional market share.

Online gaming has always been a super dynamic sector and Bragg’s agility and creativity has allowed us to succeed even under extremely challenging conditions. Product excellence and market diversity are key to our future success and will eventually win the day. Moving on to Slide 17, specifically in the U.S., which is the fastest growing iGaming market in the world, our existing distribution and existing relationships are helping us roll out new content across major gaming states at a growing pace. Online casino is now recognized as a key component in the U.S. growth and profitability story for the operators, and we see an increasing demand for well performing games. Atomic Slot Lab’s game development philosophy, which leverages proven land-based titles and game mechanics, has resulted in a new content portfolio we are very excited about and has already been well received by American players and complements the already established Spin Games roster.

We are now focused on cranking up our production capabilities, aiming to introduce more proprietary and exclusive games from our partners and working closely with the operators in order to deploy and promote these games. Our clear goal for 2023 and beyond is to position Bragg as a content must-have partner across the key iGaming states. On Slide 18, 2022 was no different than previous years in terms of online market regulation, which has only accelerated. For Bragg, it has been a year of new market entries alongside existing markets expansion. Establishing Bragg as a market leader in the Netherlands was complemented by new content deployed in the U.K., Sweden, Canada, and Switzerland. Our hub aggregation platform was deployed into the Belgian market and our PAM went live in the Czech Republic.

This of course follows our new content deployment in the U.S. Deals to introduce our content in the Italian market, the second biggest in Europe, and in Mexico have been signed, and we are now looking to launch and expand our presence in these important markets. Looking ahead, new opportunities lie in markets going through different stages of regulation. Brazil is one key Latin American market we have our sights set on. We also continue to monitor the developing German online sport and casino regime re-launched earlier this year. Our tech and games have long been proven performers in this market. In North America, our license and certified proposition will help us capitalize on future U.S. states and Canadian provinces regulating online gaming in the mid and longer term.

To summarize, we are now lapping another record year for Bragg financially and operationally. We are consistently executing against our product and market strategy, entering new markets with our multi-product approach and increasing our proprietary content footprint. We are continuing to reinvest into our product and teams as we grow Bragg into a B2B key player organically. This also enables us to take on additional inorganic opportunities in the future. With our strong current trading and 2023 guidance of between €93 million and €97 million in revenues and €14.5 million to €16.5 million of adjusted EBITDA, we are excited about the opportunities we have in front of us and we can’t wait to execute against them. I wanted to take this opportunity to thank our Braggers for their dedication and an amazing year.

These are truly their achievements. Thanks again for listening. We’ll be happy to take any questions you may have.

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Q&A Session

Operator: Your first question comes from Edward Engel with Roth MKM. Your line is open.

Edward Engel: Hi, thank you for taking my question, and congrats on a nice quarter. Last quarter, you had a slide up that showed a timeline of your state-by-state U.S. rollout of proprietary content, which was largely being completed by the end of 2023. Can you just talk about how you’re tracking in terms of rolling out in new U.S. states and then, I guess, major operators within those states?

Yaniv Sherman: Sure, hi Ed. Yes, the plan as we’ve presented it is progressing well. We are live in the three major gaming states with top operators there, being New Jersey, Michigan and Connecticut. We have Pennsylvania, as planned, we communicated last time around on plan, on target in final stages of testing and we hope, pending regulatory approvals, that we can go live very imminently, so in terms of our rollout plan both with operators and in the different U.S. states, we’re on track and now it’s about, as I mentioned, getting more share out of the operators and also moving down the list, sort of increasing our market share in each one of those states and our share of wallet in each one of the operators, but it’s progressing per the time we’ve communicated.

Edward Engel: Perfect, thanks. Then on Slide No. 16, it shows there’s a pretty decent uptick in your gross profit from Bragg studios. Was that just a factor of a lot of game leases, or I guess, what was kind of driving that strength in December?

Yaniv Sherman: Well, it represents the fact that we’re already seeing the effect of over-indexing. In terms of monetary value, this is still a low base we’re working off, but the proportion of Bragg studios inside our overall game proposition, both exclusive and proprietary, is growing at a nice pace, again reaffirming the business rationale behind expanding our production capabilities around it, so that is trending well and the initial batch of games has been performing per our expectations, in some cases exceeding them, but these are good initial signs.

Edward Engel: Perfect, then just one last one, if I can squeeze it in. The gross margin in 4Q had a nice uptick. Just wondering, would it be fair to assume that gross margins should be higher in the second half of the year as you’re kind of rolled out with your provider content across more states?

Yaniv Sherman: Well, that was the original plan, again focused on deployment in the first half of the year and starting getting that effect in second half of the year. We are mostly demonstrating our ability to consistently grow that margin. Having said that, if we have opportunity to invest or to develop a product or the proposition further, we may choose to apply more capital towards it. At this point, that seems to be the direction we’re heading in, but again, if we wanted to ramp up our game development and product development capability, we’re able to do that, but the trend is to expand gross margin through the second half of the year and into ’24.

Edward Engel: Great, and congrats again.

Yaniv Sherman: Thanks Ed.

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

Matthew Lee: Hey, morning guys. I’d love to start by breaking down the updated guidance in terms of what’s changed, both in terms of revenue and, maybe more importantly, profitability. The midpoint of your guidance suggests high teens EBITDA margin, which is a pretty substantial jump from current levels, so just wanted to get your thoughts there.

Yaniv Sherman: Yes, what changed, we maintain consistency in terms of our previous guidance, just the monetary value we’ve communicated, low teens on revenue, and at least 20% growth on adjusted EBITDA. Develop is that the fourth quarter was stronger than we anticipated on the back of a good–mostly activity around the World Cup, that momentum continued into this year, so that’s mostly–we revisited the growth trajectory and we wanted to make sure that we were bullish enough on our estimates at this point. But that was mostly when we spoke last November, it was pre-World Cup and we were cautious about our expectations because, frankly, no one has ever seen this type of event at this time of the year. But again, we were pleasantly surprised by increased gaming activity around it, which led us to revising the guidance.

Matthew Lee: Right, that’s fair. Then maybe on the content side, you know proprietary, it sounds like it makes about 10% of your total revenue. Maybe can you help us understand where you expect that to be for 2023 and then maybe longer term, given your expectations of acceleration of that business? Then have you changed the number of proprietary games that you’re expecting this year and then maybe next year?

Yaniv Sherman: Sure, so I’ll take the second one first. We’re changing the number of proprietary games, we’re putting more development resources behind them, so we’ve established them again, as we outlined, in record time, we were able to re-group or re-establish two new studios around the resources that were in the company acquired through the U.S. acquisitions, and we’re building around them, so more developers, more game production, more authentications in more territories, also separating between the EU and the U.S. production lines, and that’s the reason why we’re looking to increase both production and deployment, because deploying in regulated territories is not a trivial task, and we’re streamlining that process so we can do more with the existing resources.

On the proprietary content, basically what we’re expecting is that production and the deployment capability ramp-up will result in accelerating their proportion of the total revenues, since right now it’s taking up to 10% and then naturally every percent we expand there should have a bigger impact on the bottom line, and that’s basically the plan. We don’t have a separate target for proprietary content for ’23 and ’24, but we do realize that it is embedded inside the guidance and our budget, so if you look at the budget or the guidance and the number of proprietary games that we’re planning to deploy, you pretty much get the full picture of the effect that it will have, the bottom line is growing faster than the top line.

Matthew Lee: All right, appreciate that. Thanks. I’ll pass the line.

Yaniv Sherman: Thanks Matt.