Bragg Gaming Group Inc. Q1 FY2024 Earnings Call

Thank you for joining us. My name is Joe, and I will be your conference operator for today. I would like to welcome everyone to the Bragg Gaming Group First Quarter '24 Earnings Conference Call. I will now hand the conference over to Yaniv Spielberg, Chief Strategy Officer. You may begin.

Thank you, operator. Good morning, everyone, and thank you for joining our first quarter of 2024 earnings conference call. I'm Yaniv Spielberg, Chief Strategy Officer for Bragg Gaming Group. I'll be hosting today's call alongside my colleagues, our CEO, Matt, who will comment on our first quarter performance, and our CFO, Ronen, who will review and discuss our first quarter financial results. If you have not already done so, you can follow our earnings call presentation from our website at investorssdn.bragg.group in the section called latest presentation. On this call, we will review Bragg's financial and operating results for the first quarter of 2024. 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 outlooks, 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 achievement of the company to be materially different. There can be no assurance that these assumptions or estimates are accurate or that any of these expectations will prove to be correct. For a complete discussion of these risk factors, please refer to our recently filed press release and other publicly available disclosures. I'd like to turn the call now to our CEO, Matt. Matt, go ahead.

Good morning, everyone. My name is Matevz Mazij. I'm Chairman and CEO of Bragg. On this call, I'm going to make some initial comments, and I'll run through some key operational highlights from the first quarter of 2024. Then I'm going to pass the line over to Ronen Kannor, our CFO, who will take you through the company financials. After our financial recap, I'll be talking more about some of our main strategic and operational focus areas before wrapping up with our outlook and summary, and we'll then open up the call to your questions. To start, let me recap and comment briefly on the special committee, which we announced last quarter. This committee has been set up to review possible strategic alternatives for Bragg. This is a Board-run process, chaired by Independent Director, Don Robertson. The special committee was established against the backdrop of recent market activity, which included plenty of iGaming mergers and acquisitions and the recently priced Games Global IPO, where we have seen increased interest in Bragg. Possible strategic alternatives may include a sale, merger, acquisition, or additional investment. While no assurances can be made that any transaction will be completed as a result of this process, management has been informed by the special committee that the process is going well. I am pleased to report that the special committee confirms it has retained bankers and counsel, London-based Oakley Capital and Toronto-based Blake, respectively, to assist with the process and that it is encouraged by the progress made to date. As we've previously indicated, the Board does not plan to provide any further updates on the process until it has material developments to report. But in the meantime, management continues to focus on business growth and delivering on its strategic initiatives. Turning now to operational highlights since the beginning of the year. Post-quarter end, we secured funding to support the working capital needs of the business and help seize growth opportunities, including newly regulated markets. It is important to note that this financing is a one-year loan intended to provide the company with short-term financial flexibility, supporting our objective of maximizing shareholder value through the strategic alternatives review process. Recently, we were pleased to report that we have hired our new Chief Commercial Officer, Neil Whyte, in what was a key open role, and we have also been further strengthening our teams through the addition of key global, LATAM, U.K., and U.S. hires. These hires ensure that we maximize the return on the content we develop and the technology that we build and that we are able to fully deploy in all the jurisdictions in which we operate. Once again, it is important to recognize that these hires are critical for achieving our growth objectives and will have a direct impact on our ability to maximize shareholder value through the strategic alternatives review process. As you will be aware, this is Ronen's final quarterly earnings call, and he will be departing the company in June. I thank Ronen for his service to the company, and I can confirm that the Board is looking to recruit an experienced financial resource to lead the finance team and assist with the strategic alternatives review process. Next, let me talk about our recent advancements in content development and deployment. In the first quarter, we released 19 new exclusive online casino games, including 7 from our in-house Bragg Studios. This compares to 11 exclusive games launched in the first quarter of last year, and we will continue to grow our games portfolio at this cadence for the rest of the year. During the first quarter, we launched online games in the U.S. for the first time from popular land-based slots developer King Show Games, which further boosts our strong exclusive games roadmap for North America. We also delivered and deployed our second custom slot game developed for Caesars Digital, Boardwalk Slots: Bankers in Cash, which is now exclusively live on Caesars Palace online casino and Caesars Sportsbook online casino in Michigan and New Jersey. We continued to push growth in multiple international iGaming jurisdictions, and during the first quarter, we laid the foundations for growth in the soon-to-be regulated market of Peru, where Bragg was registered as an approved service provider by the Peruvian Ministry of Foreign Trade and Tourism. This B2B license allows us to distribute both our exclusive and aggregated game portfolio via the Bragg hub content delivery platform to operators in Peru. After Ronen presents our financial results for the quarter, I will give you an update on our momentum in the U.S. and Canada with our exclusive content rollout, and I will discuss some of the newly regulated or reforming iGaming jurisdictions in which we believe we are well-positioned to take market share. We continue to expand our distribution network for our exclusive content in existing markets. During the first quarter, we expanded in the U.S. by launching new online casino content with Golden Nugget in Michigan. After quarter-end, we were pleased to announce that we have agreed on an international online casino content distribution deal with Light & Wonder. This agreement will see our exclusive games, including those from our proprietary studios, Automic Slot Lab, Indigo Magic, and Wall Street Gaming added to Light & Wonder's online ecosystem, opening up multiple new operator partners for us. Lastly, this week, we announced our continued growth in Italy, Europe's second-largest regulated iGaming market, most recently by making our exclusive content available with leading local operator Caesars. After Ronen takes you through the financial results, I will come back to take some of these points in more detail. Ronen?

Thank you, Matt, and good morning, everyone. I'll begin my comments on Slide 7. In the first quarter, total revenue was up by 4.2% quarter-over-quarter to EUR 23.8 million. The growth was mainly derived organically from our existing customer base, particularly the PAM and Turnkey solution customers in the Netherlands, along with the content offering and solid revenue performance from the Wild Streak Gaming studio customers. Gross profit for the quarter decreased by 2.8% to EUR 11.9 million, with gross profit margin decreasing to 49.9%. The quarter-over-quarter gross profit decline, both in gross profit and margins, is primarily due to the revised commercial terms agreed with key strategic partners derived from the managed services and aggregation products. Adjusted EBITDA for the quarter was down 12.4% to EUR 3.4 million, with adjusted EBITDA margin decreasing by 270 basis points to 14.3%. The change in margin is mainly the result of changes in the revenue product mix, which reduced gross profit while increasing the level of selling, general, and administrative expenses. As of March 2024, cash balance ended at EUR 7.7 million with a positive net working capital position. On April 2024, the company obtained a secured promissory note in the principal amount of $7 million from certain entities controlled by the company's related party, bearing interest at an annual rate of 14%, payable quarterly. The purpose of this note is to provide the company with maximum financial flexibility as we continue to progress our strategic alternatives review process. Finally, the company reiterated its full-year revenue and adjusted EBITDA guidance for 2024 at EUR 102 million to EUR 109 million in revenue and EUR 15.2 million to EUR 18.5 million of adjusted EBITDA. We continue to execute against our mission and strategic plan. 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. Gross profit decreased by 2.8% to EUR 11.9 million, with the margin dropping by 316 basis points to 49.9%. In the first quarter, total gains in the content revenue segment amounted to EUR 19.4 million, representing 81.5% of total revenue. This is compared to last year's EUR 17.6 million and 76.8%. Exclusive third-party and proprietary content also increased by 12.5% quarter-over-quarter to EUR 7.3 million, compared to EUR 6.5 million, demonstrating positive momentum. Proprietary content deployment is positively progressing in the U.S. and EU markets by increasing distribution and gains performance consistently. Bragg expects an improvement in gross profit margin to occur in the financial year 2025 by increasing its higher-margin revenue portion from its proprietary content, PAM, and turnkey solutions. Moving to Slide 9. Adjusted EBITDA amounted to EUR 3.4 million against an operating loss of EUR 1.3 million. The gap was driven by non-cash and exceptional items. The increase in depreciation and amortization resulted from additional investments, primarily in software development costs, along with exceptional costs related to legal and professional issues incurred as a result of nonrecurring corporate and regulatory matters, including gains on the remeasurement of deferred consideration associated with the acquisition of Spain in June 2022, reflecting an adjustment to the current fair value. Moving to Slide 10. As you will see on the slide, we ended the first quarter with a cash balance of EUR 7.7 million compared to EUR 8.8 million at December 31, with outstanding liabilities of $2.5 million related to convertible securities. As of May 9, 2024, total outstanding liabilities further reduced to $2 million. We expect to continue exercising the right to pay down the existing convertible securities subject to ongoing management assessment. Net working capital, excluding the third consideration and convertible debt at the end of March 31, 2024, amounted to EUR 3.8 million compared to EUR 5.1 million at the beginning of the year. Post-period end, the company secured a USD 7 million debt facility with a related party to improve the net working capital position and provide further flexibility to the company's needs. From a cash flow perspective, cash generated from operating activities amounted to EUR 2.7 million, with underlying performance reaching EUR 3.6 million, including a negative movement in working capital and income taxes totaling EUR 0.8 million. A total of EUR 2.8 million was used in investing activities, primarily related to the capitalization of software development costs totaling EUR 2.6 million, and the remaining balance for property and equipment. A total of EUR 0.7 million was used in financing activities, predominantly related to the repayment of loans concerning convertible securities totaling EUR 0.5 million. Looking forward, management is projecting positive cash flow from operations while there is no CapEx or technology debt required in the business. Thank you very much, everyone. This has been my last quarter after four years with the company. I would like to thank all of my colleagues, especially my finance team and the Board for all the support during my time. With that, I will hand over the call back to Matt to continue the commentary on strategy and operations.

Thank you, Ronen. Last quarter, we showed you that we have seen encouraging growth in North America with exclusive content on our new Bragg. Notably, in the fourth quarter, the sharp growth you see in the chart on the right of this slide has continued through the first quarter. We have seen an 8x increase in wagering on our exclusive games, which come both from our proprietary Bragg Studios as well as from our powered by Bragg partners between April 2023 and March 2024. Our localized portfolio for North America includes many online titles that already have a following in the land-based sector, and we believe this represents a key strength in our portfolio for this market. We are encouraged that we will see significant potential upside, including by continuing our rollout in Pennsylvania and Ontario, as well as opportunities in other Canadian provinces where we see considerable interest in our portfolio of exclusive content, aggregated content, and player engagement. Our content is fully supported by our fuse engagement tools. In the coming months, we look forward to rolling out our first progressive jackpot on the Bragg Studios in the U.S. and in Europe and other markets. Our growth as a content provider in North America is being driven by both in-house and partner studios delivered and boosted by our newest RGS technology and promotional functionality. As we continue to develop and deploy our exclusive online casino games, we are building a critical mass of revenue-generating content. The games we released last year and the year before continue to generate revenue for us, even as we roll out new games weekly. In the first quarter, we released 19 new exclusive games, including 7 from our proprietary Bragg Studios. This is up from 11 exclusive games released in the same period last year. Exclusive content continues to be a key pillar of our growth strategy, and we balance our portfolio between in-house games, which carry high margins, and games from partner studios, which diversify and localize our roadmaps. If you have specific questions about content, Ronen, Yaniv, and I are joined today by Doug Fallon, our Group Director of Content and Founder of Wall Street Gaming, who would be pleased to answer. As I mentioned earlier, we believe that Bragg is well-placed to benefit from multiple jurisdictions on the brink of introducing or reforming iGaming regulation. Brazil is already a significant market for both our exclusive and aggregated content, and we recently hired our first dedicated account manager focused on growing our market share in what we see as one of the world's fastest-growing iGaming markets today. In the United States, we still expect further regulation to open up online casinos in more states in the coming years. This week, we received official permission to conduct gaming business transactions in Delaware, while our B2B license application there is being processed. So we are on track to launch games in Delaware later this year, and we will be ready for other states as regulations arise. We believe Bragg is going to be involved in these markets once they are fully regulated. We don't have an exact timeline, but we expect further regulation in Europe, positioning us as a supplier of tech to operators in those markets and as a content supplier as well. I also mentioned that we obtained our license for Peru ahead of new regulations opening up that jurisdiction to exclusive and aggregated content delivered by Bragg. We are also well positioned to enter the French iGaming market if new legislation is introduced. We see France as a potential top 5 global iGaming jurisdiction in the coming years, and we have the right content and technology ready to deliver to aspiring French online casino operators. Finland is in the process of moving away from a state monopoly system, and as the market opens up, we see many opportunities for Bragg, including PAM, aggregation, engagement, and content delivery. Other countries that are in the process of online gaming regulation, which we see as having good potential for us, include Poland, Chile, Argentina, South Africa, and other African jurisdictions. We are confident that we are well placed to succeed in many of these markets due to our highly localized content and technology solutions. We have previously proven, in markets such as the Netherlands, that we can quickly adapt and deploy to meet new regulations, giving us a valuable first-mover advantage. To conclude, our first quarter revenue rose 4.2% compared to the same period last year, totaling EUR 23.8 million, representing record first quarter revenue for Bragg. Adjusted EBITDA in the quarter was EUR 3.4 million, a decrease of 12.4% against the first quarter of 2023. As Ronen discussed, this expected short-term decrease is due to renegotiations with a key partner last year. Gross profit for the first quarter of 2024 was EUR 11.4 million, down 2.8% compared to the first quarter of 2023 and partially due to changes in our product mix. We completed refinancing, delivering balance sheet strength and flexibility, and have been successful in filling key positions in our commercial and other teams, helping us to deliver on our ambitious growth plans. With trading in line with expectations, we are reiterating our full-year revenue and adjusted EBITDA guidance, with ranges of EUR 102 million to EUR 109 million for revenue and EUR 15.2 million to EUR 18.5 million for adjusted EBITDA. Lastly, it is worth repeating that we are encouraged by the progress made to date in advancing our strategic alternatives review process, and the Board and management team continue to be 100% focused on maximizing shareholder value. Thank you for listening, and I also want to thank all of the dedicated staff at Bragg for their continued hard work and dedication this quarter. I will now turn the line back to the operator, and Ronen, Yaniv, Doug, and I will be happy to take questions.

Our first question comes from Gianluca Tucci of Haywood Securities.

Just to start off, I'm wondering if you can give us a bit of an update on how the recently signed content global distribution deals are rolling out. And if there are others of these types of distribution with big players in the works.

Gianluca, we're rolling out proprietary content and third-party exclusive content across our network of clients in various jurisdictions in the United States, Europe, and Latin America, and we're pleased with the performance of the content so far.

And for contextual purposes, are these staged rollouts through these new partners? Or do they just turn on a light switch and it's available to all of their brands globally? Can you get into that level of nuance, if you can, Matt?

So these rollouts are largely dependent on the licensing procedures and approvals, as well as certification processes. As soon as these procedures are completed, we tend to roll out all of our content according to a certain placements and promotions plan across all the brands that certain operators operate in a particular jurisdiction. As I said, it largely depends on the licensing certification approval process in certain jurisdictions and the marketing plan of these individual operators. But it's our desire to roll out simultaneously across all these brands in all the jurisdictions that B2C operators operate in, as that provides maximum effect.

And I guess, to the extent that you can and are able to, Doug, you did mention that the process on the strategic front is going well, but hasn't met your expectations thus far in terms of activity or in terms of level of interest?

As I previously indicated, we don't plan to provide any updates on the process until we have a material development to report on.

Perhaps maybe a question for Ronen. Can you remind us when the convert is expected to be paid off completely, Ronen?

End of August.

Your next question comes from the line of Jordan Bender of Citizen JMP.

For my question, as you look at entering new markets, what's the bar that you're looking for to enter these? And maybe can you help us walk through the revenue opportunities brought on by some of these incremental opportunities you talked about, France, Delaware, etc.?

So the bar is very different in different jurisdictions. As I said again, you have to go through the process of licensing in most of these jurisdictions. You have to go through approvals and certification processes for our tech and for our content. Then you have to go through the integration process with the operators' tech stack and ensure that your roadmap is well adapted to the needs of certain operators. This is a standard process when launching content with operators in new regulated markets. As far as opportunity is concerned, we feel that a market like Delaware is going to grow significantly, and we are going to be one of the leading content providers in this market.

Let me rephrase that. When evaluating new markets, you consider your product roadmap and assess the potential return. What I'm trying to get at is that you've mentioned several emerging markets. Should we expect Bragg to enter those markets eventually? Or is there a specific criterion you need to meet to decide if it's worthwhile to pursue these new markets?

Bragg will enter those markets when and if they are fully regulated. We don't have an exact time line, but we believe that further regulation is expected in Europe and that we will be a supplier of tech to operators in those markets along with content as well.

Then just based on what you know for the upcoming launches or I guess, let's say, 12 to 24 months, should the gross margin structure or your revenue mix look pretty consistent with what your total portfolio looks like today?

Yes, but we do expect a change in the product mix, and we intend to aggressively monetize our content portfolio in existing markets and in newly regulated markets, which should increase our margin in the future.

Your next question comes from the line of Sid Dilawari of Cormac Securities.

Firstly, if I can just focus on margins there. We've set out some compression, and I think it was nothing that us and the street didn't expect. Just given that the compression we got in Q4, should we expect a similar level of margin compression through Q2 and Q3? And then just a follow-up to that, do you see any near-term opportunities related to your PAM or managed services with the Netherlands to replace some of that lost revenue with BetCity?

We have a very strong pipeline of clients in the segment of turnkey solutions, which includes managed services and PAM, obviously, third-party and proprietary content in existing jurisdictions and in what is expected to be newly regulated European and Latin American markets. We believe that we will be able to report good results in the next 12 to 24 months that will include managed services and tech stack along with content. I'll let Ronen respond to your questions about the compressed margins.

As we communicated in our trading update and in several conversations, the margins have dropped because of the retreat of the deal with BetCity. However, we're expecting during the next couple of quarters to increase our managed services to PAM with an aggressive pipeline, as Matt indicated earlier, which will improve the margin. While we will focus more on our proprietary content, which is currently progressing very well. Will it hit a particular threshold? I believe the margin will scale up in the right direction. We have always said that our margins are set to improve by the end of 2025. We're heading toward that direction. The composition of revenue in content is higher than the PAM services at this stage. However, second, third, fourth quarters and next year, we will see the positive impact of those PAM customers and proprietary content, which every dollar contribution will have a material effect on your gross profit and adjusted EBITDA. So yes, there will be an effect, but it will come over time. I suggest looking at the first quarter or second quarter of 2025 to see significant changes towards improved margins both on gross profit and adjusted EBITDA.

I would just like to add my perspective. We believe we are well positioned to add clients in existing markets and to win clients in newly regulated jurisdictions, both in Europe, the United States, and Latin America. We are technically ready to deploy this, meaning we have the product and solutions, both on the tech side, and we are prepared to roll out content in all of these new jurisdictions, leveraging both our proprietary and third-party portfolios without significant changes required to our portfolio to lead the supply process for clients operating in those jurisdictions.

And just maybe Matt, can I get your color on the regulatory market conditions and the level at which we've been seeing a lot of announcements from the regulators. Are you seeing an impact on your customer base and wagering activity based on that just yet? Or do you think anything material will come out of those regulatory announcements, and how do you sort of see that market evolving this year?

We believe that it is very difficult to expect that the regulators will revert to square one and ban slots only three years after they have regulated the market. We have seen a first set of restrictions being implemented last year, and we are noticing certain negative effects on wagering in our portfolio of B2C operators.

Then just one last one for me. You highlighted Peru. Can you just touch on the market opportunity maybe in terms of TAM, the existing grey market there? And how that stacks up against the Dutch market like three years ago or any of the newly regulated markets that you entered in the past.

We expect the market to grow. It is a decent market, and we obviously do not have the data after TAM improved because it was a grey market. We expect to be live with a number of clients in Peru as a content provider and as an aggregator.

Your next question comes from the line of Jack Vander Aarde of Maxim Group.

I wanted to touch on new title releases, so 19 new titles in Q1 and then I think in the slides it says you're on track for 17 in Q2. I was wondering if you could provide any additional color on the cadence of these releases for the remainder of the year. And what gives you confidence in that?

I will let Doug answer your question.

Title releases are also impacted by regular approvals. We are adjusting our release schedule based on the strategic value we see for when to bring the right games to the market, and some are seasonal by nature. Therefore, we expect to refine that cadence but plan to launch a significant number of titles for the remainder of this year from both the partner side and the aggregation side of our proprietary content. The timing of the releases can shift slightly when titles are released in the last days of the quarter versus the beginning of the next quarter, so the numbers, while just a week away, can skew slightly in the larger picture.

That concludes our Q&A session. I will now turn the conference back over to Yaniv Spielberg for closing remarks.

Thank you, everyone. I'd like to thank everybody who joined us this morning. I'd like to, as Matt already did, thank all the Bragg team for putting this all together into another great quarter. And of course, I'd like to thank Ronen for all these years at Bragg, and we wish him the best of luck and success in his future endeavors. We will chat soon for our Q2 presentation, but until then, have a great day.

This concludes today's conference call. You may now disconnect.