Genius Sports Limited (NYSE:GENI) Q1 2023 Earnings Call Transcript May 9, 2023

Genius Sports Limited misses on earnings expectations. Reported EPS is $-0.12 EPS, expectations were $-0.09.

Operator: Hello. My name is Jean-Louis. Welcome to the Genius Sports First Quarter Earnings Results 2023. 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 will now turn the conference over to Brandon Bukstel, Investor Relations.

Brandon Bukstel: Thank you, and good morning. Before we begin, we’d like to remind you that certain statements made during this call may constitute forward-looking statements that are subject to risks that could cause our actual results to differ materially from our historical results or from our forecast. We assume no responsibility for updating forward-looking statements. Any such statements should be considered in conjunction with cautionary statements in our earnings release and risk factor discussions in our filings with the SEC. Including our annual report on Form 20-F filed with the SEC on March 30 of this year. During the call, management will also discuss certain non-GAAP measures that we believe may be useful in evaluating Genius’ operating performance.

These measures should not be considered in isolation or as a substitute for Genius’ financial results prepared in accordance with U.S. GAAP. A reconciliation of these non-GAAP measures to the most directly comparable U.S. GAAP meters is available in our earnings press release and earnings presentation which can be found on our website at investors.geniussports.com. With that, I’ll now turn the call over to our CEO, Mark Locke.

Mark Locke : Good morning. And thank you for joining us today. We’re happy to begin 2023 on a positive note, continuing our momentum from the past year. We noted last quarter how 2023 will mark a key turning point for the business, as we triple our EBITDA profitability and generate positive free cash flow in H2. Our first quarter results prove that we are already well ahead of our expectations giving me even greater confidence in the year ahead. We hold ourselves to a high standard of accountability to our shareholders and in once again delivering results ahead of expectations for Q1 2023. We feel confident enough to increase our full year guidance to $400 million of revenue, and $49 million of adjusted EBITDA, significantly ahead of where we guided at the start of the year.

We will come back to the multiple ways Genius wins, but for now the operating leverage of our business model is now demonstrably coming through and the strategic position we find ourselves in remains as strong as ever. To recap the quarter, on a constant currency basis, we grew our revenue by 19% to $97 million well ahead of our target of $92 million. More importantly, this year-on-year revenue growth also dropped through to the group adjusted EBITDA at a near 100% margin, further demonstrating the operating leverage of the business model. We delivered $8 million in group adjusted EBITDA, exceeding our $3 million target and representing an $11 million increase from Q1 of last year and growth of nearly 40%. The profitability improvement this year is a function of the multiple growth drivers that come with minimal cost.

As a reminder, some of these growth drivers include: increased handle or total volume of bets placed. Growth of in-play betting, higher operator win margins, successful contract renewals and cross-sell with existing sports book customers and new customer wins. So these growth drivers have worked in our favor and fueled revenue growth, while our cost base has remained relatively fixed and should not need to increase. We are encouraged by these positive trends across the globe as well as in the U.S. where we continue to see solid improvement in rationalization in the online sports betting market. Our sports books are becoming more profitable, this will benefit Genius than the entire ecosystem. I mentioned last quarter that our strategic technological and financial position is the best it has ever been during my time at Genius.

Our results in the quarter give me even greater confidence in the business. And as mentioned, we are raising our revenue guidance from $391 million to $400 million and our group adjusted EBITDA from $41 million to $49 million implying a group adjusted EBITDA margin of 12%, up from our prior guidance of 10% and more than double our 2022 margin of 5%. In summary, we are excited about our trajectory towards our long-term objective of 30% plus EBITDA margins, as we persistently execute on our plan ahead of expectations. Moving along, you may remember a version of Slide 6, from the prior earnings presentation and it is worth revisiting this list, considering these are exact growth drivers that led to our outperformance this quarter. I hope it is absolutely clear, that Genius has multiple ways to win and we incur no direct cost increases, as we pull these growth levers.

This is how we achieved EBITDA margin accretion, alongside accelerated growth. Let me provide just a few examples, of how this benefited us in the quarter, starting with Handle. Q1 saw the successful launches of regulated online sports setting in Ohio and Massachusetts. Our revenue share agreements with the US sportsbook operators, meant that we received immediate, revenue uplift at no additional cost. Our expenses related to rights fees, people and operational overhead that would have remained the same, regardless of whether these two states had launched. In addition to the overall handle growth, we’ve also tracked, how much of it is driven by In-Play betting. Our revenue share agreements with the US sportsbook operators, earn us a 3 times higher take rate on In-Play versus pre-match.

Again, all on the same cost base, making this a significant profit driver for Genus. Using the NFL season as a proxy, we saw in-play betting handle increased by approximately 40% and in our second full season, outpacing the rate of the broader market. Taking this a step further, sportsbooks have also improved their win margins on In-Play bet, which increases the actual revenue earned from these bets. This is called gross gaming revenue or GGR. In our second full NFL season, we saw in-play GGR grow by over 100% year-on-year. The next growth driver is operator win margin. Essentially this is the metric, that measures how much of the handle is being converted to revenue, from the operators and hence for Genius. You’ll have heard operators talk frequently about a significant improvement in win margins, largely driven by the success of parlays and same game parlays.

Genius also shares in this, in addition to, the In-Play revenue. Lastly, Genius has had a successful track record of increasing its take rate in contract renegotiations and renewals. This represents much of the year-on-year growth of our betting revenue. Remember real-time official data is a crucial input, that powers the entire sports betting industry and something that bookmakers simply cannot operate without. And while sports betting has existed for decades in mature market, the product of official data is relatively new and we have a long runway, to continue increasing our pricing power. We expect this to be a substantial source of growth over the next 12 to 18 months and for many years ahead. Our business was founded on the principle of building technology-driven partnerships with leagues to: one, obtain a high-quality portfolio of official data rights; and two, position the business to capture additional revenue opportunities afforded to us, through differentiated technology and relationships.

This has been the bedrock of our business, for the past 20 years. Today, sports leagues, teams, broadcasters, sponsors and bookmakers like many companies around the world, all face the challenge of leveraging the rapid advancements in AI technologies to accelerate their businesses. We have proven without a shadow of a doubt, that Genius is the clear generative AI technology leader in our industry, and perfectly positioned to help our partners be at the forefront of innovation, within the sports media ecosystem. Our second spectrum demo, which we held last month, detailed the decade plus of technological development and investment that is already behind us and fully costed, as part of our current plan. None of our competitors are anywhere close to where we are on this, and this will lend itself to a significant competitive moat in the years ahead.

It’s why the biggest names in sports like the NFL, NBA, English Premier League, ESPN, Amazon, CBS and others are already beginning to adopt our generative AI technology to transport their offerings, as they enter the digital age. This is what makes us a sticky long-term partner to leagues, which helps us to secure our ownership of data rights and reinforce our commercial position with the sportsbooks. It is why we will maintain our position as a technological leader helping our partners across leagues team’s sports books, broadcaster’s brands and sponsors. At this stage of our journey, we are operating a business model with a large global scale accelerating profitability and a clear path to free cash flow, all while building a platform around second spectrum to capture the next layer of long-term growth.

While others in our space may see this changing technological landscape as a challenge it represents an incredible opportunity for us and one on which we are already actively capitalizing. We are continuing to improve the scale of this opportunity at a rapid rate and our focus remains on continuing to win contracts that will drive broad-based adoption of our generative AI technologies. To conclude as you continue to watch us deliver on our financial targets like you have for the past five quarters and see increased adoption of our technology. You should recognize this as a clear signpost that we are proceeding exactly to plan on our near-term and long-time growth and profitability targets. And on that note, I’ll now hand the call to Nick to discuss our financials in more detail.

Nick Taylor: Thank you, Mark. As mentioned at the start, we have consistently delivered on our strategic and financial plan. And this marks the fifth consecutive quarter of meeting or beating expectations. Our strong execution in Q1 led to another period of outperformance relative to our guidance. The largest outperformance was in our betting product, where we grew revenue by 30% year-on-year to $65 million exceeding our guidance of $61 million. On a constant currency basis, this represents even greater growth of 39%. Given this is high-margin revenue for us it contributed meaningfully to our group adjusted EBITDA in the quarter. Our Media revenue was also ahead of expectations, having generated $22 million of revenue versus our guidance of $20 million.

As we pointed out previously, the advertising landscape has changed since Q1 of last year amidst an evolving macroeconomic backdrop. This is particularly true for sports betting customers, who have monitored their overall promotional spend more closely. Q1 of last year, with a period of heightened promotional intensity for sports books. This was also characterized by a handful of one-off marketing events such as the launch of online sports betting in New York for instance which was unique to Q1 2022. Nevertheless, our guidance implies media revenue growth in excess of 10% this year, and we’re pleased to be tracking ahead of that forecast. Lastly, our sports PEC revenue was in line with our expectations earning $11 million in revenue. This equates to total group revenue of $97 million for the quarter well ahead of our guidance of $92 million and representing 19% year-on-year constant currency growth.

Importantly, this $5 million revenue outperformance contributed to group adjusted EBITDA and nearly 100% margin. As a result, we reported group adjusted EBITDA of $8 million versus our guidance of $3 million, representing an $11 million increase from Q1 of last year. The results from the quarter are evidence of the operating leverage and the scale that exists in our business model. We have achieved sizable revenue growth without the need to materially increase our operating expenses. Going forward the business can support substantially higher revenue with the fixed cost base we have today. Based on everything you’ve heard today, you can likely feel the sense of excitement in the business and therefore, we are raising our 2023 guidance accordingly.

We are increasing our revenue guidance from $391 million to $400 million based on our outperformance in Q1, and the positive trends we expect will persist through the remainder of the year. Similarly, we are raising our group adjusted EBITDA guidance from $41 million to $49 million. As much of this additional revenue should drop through to our adjusted EBITDA and we do not anticipate any incremental changes to our cost base. Just to be clear, unless communicated otherwise our guidance will typically assume an exchange ratio that is consistent from the time of our first issuing guidance, which in this case was 1.2 GBP to US dollars. We understand that foreign exchange rates will fluctuate throughout the year. However, as it relates to our public guidance, we do not intend to predict these fluctuations.

In other words, we are focused on guiding the market on a like-to-like basis. Therefore, unless these short-term movements are truly material in nature much like we experienced last year, we will continue to guide based on a consistent currency. Looking beyond EBITDA and into our cash position, we finished the quarter with $131 million in cash which is slightly ahead of our guided figure of $130 million. As a reminder, our first quarter cash flow typically includes seasonal working capital outflow and an annual cash payment related to our CSL investment. Looking ahead to Q2, expect our closing cash balance to be approximately $115 million which should represent our cash low point for the year. From there we expect Q3 will be roughly cash flow breakeven before flipping positive in Q4.

Overall, we expect to generate positive free cash flow in the second half of this year as guided last quarter. Again our Q1 outperformance and increased guidance demonstrate the profitability potential of the business model. And in 2023 is the year in which this begins to accelerate in the form of rapid margin expansion.We’re excited about the progress we’ve made this quarter and from the strong momentum we have through the remainder of the year. With that, we will conclude our prepared remarks and open the line to Q&A.

Q&A Session

Operator: We will now begin the Q&A session. [Operator Instructions] Your first question comes from the line of Jordan Bender of JMP Securities. Please go ahead.

Operator: Thank you. Your next question comes from the line of Jed Kelly of Oppenheimer. Please go ahead.

Operator: Thank you. Your next question comes from the line of Bernie McTernan of Needham Company. Please go ahead.

Operator: Thank you. Your next question comes from the line of Clark Lempen of BTIG. Please go ahead.

Operator: Thank you. [Operator Instructions] Your next question comes form the line of Ryan Sigdahl of Craig-Hallum Capital Group. Please go ahead.

Operator: Thank you. Your next question comes from the line of Michael Hickey of Benchmark. Please go ahead.

Operator: Thank you. There are no further questions at this time. This concludes today’s conference call. You may now disconnect.