Genius Sports Ltd Q1 FY2022 Earnings Call

Ladies and gentlemen, thank you for holding. Welcome to the Genius Sports First Quarter Earnings Results 2022 call. Throughout the call, all participants will be in a listen-only mode, and afterwards, there will be a question-and-answer session. Today, I am pleased to present Genius Sports. Go ahead with your meeting.

Good morning, and thank you for joining us today. 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 forecasts. 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 last Annual Report on Form 20-F filed on March 18th of this year. During the call, management will also discuss certain non-GAAP measures that we believe may be useful in evaluating Genius's operating performance. These measures should not be considered in isolation or as a substitute for Genius's financial results prepared in accordance with U.S GAAP. A reconciliation of these non-GAAP measures to the most directly comparable U.S GAAP measures 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.

Good morning, and thank you again for joining us today. For those who follow Genius, over the past few months, you may have heard us frequently reference our Investor Day where we provided a deep dive on our business model and outlined our strategic plan supporting a profitable outlook for 2022, 2023 and beyond. Our 2022 outlook also included detailed quarterly guidance on the segmental levels to demonstrate near-term progress of our strategic plan. We are pleased to share that we are successfully executing on that plan to begin the year, and we have delivered financial results ahead of our expectations in the first quarter. Our group revenues increased 60% year-on-year to $86 million, exceeding our guidance of $78 million. Group adjusted EBITDA was negative $2.9 million in the quarter, also ahead of our expectations of negative $5 million. While we maintain a long-term view of the business and overall vision, this near-term milestone gives us confidence in our ability to execute against our profitable forecast for the full year. Much of our success this quarter came from the continued execution of our strategy of expanding our tech partnerships with leagues, sportsbooks, media departments, and brands. To start, we continue to actively manage our portfolio of data and streaming rights in the quarter. But let me be clear, we have a deep portfolio of official content, including flagship assets that carry value in various regions across the world. The NFL in the U.S., English Premier League in the UK, CFL in Canada, or Argentinean and Colombian football in Latin America, just to name a few. This, along with a long tail of other events under our official coverage, gives us the competitive advantage and allows us to approach new rights deals from a position of strength. In other words, we aim to only acquire new rights where we see commercial value, particularly for schools or regions with strategic importance to Genius. We obtain rights because we are increasingly deploying our technology, the core components of our offerings. This is about much more than just betting. Leagues are becoming more sophisticated and see the value in our technology. Our full-scale platform solutions help leagues better engage and understand their audience, which enables additional monetization opportunities. Let me walk through a few examples from the quarter to illustrate the ways we work with leagues beyond just sports betting. First, we expanded our capabilities with the NCAA by powering augmented broadcasts of the men's and women's basketball tournament in March. We'll cover this in more detail shortly. Also, within college sports, our partnership with the Mid-American Conference will leverage our full suite of services, including live data collection and integrations, Second Spectrum tracking, and fan engagement marketing solutions and sponsor inventories, marks, and logos in stadium signage, digital media, and customer acquisition platforms. The NBA G League will also leverage Second Spectrum's optical tracking system and advanced analytics to support players, coaches, fans, and forecasters. We're also announcing a new partnership with Icelandic football, where Genius will provide a suite of free-to-play games to deliver engaging digital experiences for fans. Collectively, we expect the partnership to help accelerate the growth of the sport in Iceland and internationally. Lastly, we announced our first tracking and video augmentation partnership in Latin America with Liga MX franchise Club Necaxa. Through our Second Spectrum technology, we will capture transformative new data points like player speeds, expected goal conversion rates, shot velocity, and more. All of which power immersive experiences for fans and insights for players and coaches. So, why are partnerships so important? Our unique tech capabilities give us a differentiated approach on how Genius secures long-term rights deals. They integrate our technology, making us a sticky partner. They enable us to monetize data in more ways than just sports betting. And our range of solutions diversifies our revenue streams generated from leagues and clubs even when data rights are not on the table. While we are continuing to strengthen our league partnerships, we are seeing similar success with our sportsbook partners as well. In this quarter alone, Genius acquired 13 new sportsbook customers that contributed to our financial results. Importantly, we've also expanded our relationships with existing customers by successfully cross-selling various services and content which provides incremental revenue uplift. We also benefited from continued market normalization, particularly in North America, which saw successful launches in New York and Ontario, which opened after the quarter. The normalization in utilization of online sports betting is an important and unique driver of profitability for Genius. Unlike B2C, sportsbook operating partners who have to invest heavily to acquire customers and win market share in new states, Genius's business model benefits from economies of scale. What this means is that as soon as people in New York, Ontario, Brazil, or any other state or province start wagering, Genius enjoys immediate revenue at little incremental cost, allowing those revenues to contribute meaningfully to our margins. It is what makes our business model so unique in the sports betting ecosystem. We also delivered strong results in our media and engagement segment. This was primarily organic growth driven by higher than expected programmatic advertising spend around the Super Bowl and March Madness. Our unique access to real-time data and odds, combined with audience data obtained through our league partnerships, helps deliver strong results in our performance-based advertising campaigns for customers, which helped drive increased spend in the quarter. Our execution in this quarter and momentum through the remainder of the year gives us confidence in reaffirming our guidance for 2022 and 2023. Nick will cover our detailed results and outlook shortly. I've already spoken at length about the importance of our tech-driven league partnerships, and Second Spectrum is an important pillar of our offering. Our differentiated technology helps further embed Genius in sports, betting, and media ecosystems and increases our competitive advantages. Each quarter, we get to show real-life examples of how this technology is being used by leagues and broadcasters. Our most recent and notable application is during the men's and women's Division 1 basketball tournaments during March Madness. You may have seen ESPN's mega cast presentation at the NCAA women's final four, a national championship game, which featured real-time data visualizations and video augmentations powered by Second Spectrum. For example, during the tournaments, the ultimate broadcast could track real-time shot probability, play distances, and other data-driven graphical overlays. This live tracking and video augmentation tool was also used in the broadcast of the Men's March Madness tournament, bringing fans even closer to the action on the floor. This will contribute to a more personalized and engaging experience, which brings increased value to leagues and broadcasters alike. In fact, the NBA on ESPN and NFL on CBS reached nominations for Sports Emmy awards with the support of Genius and Second Spectrum. We are proud of our progress toward the nominations, and we're delighted to have been part of it. I also discussed pre-played games as another key tool for leagues to digitally engage fans, improving our reach. We've delivered this to leagues and federations like the NFL, NOB, IFC, and others. This is true not just for leagues and federations, but to any brands seeking to connect to sports audiences such as Jersey Mike's, Buffalo Wild Wings, or others. Through the acquisition of FanHub, Genius strengthened its total offerings with a suite of best-in-class, free-to-play games, and our solutions have driven success for our customers. We continue to deliver results to others in this space, as we talk about. This has not only helped us to secure long-term technology partnerships with leagues, but also diversified our revenue streams. I'd like to give you a close in-depth of how we drove success for our customers in this quarter. First, in partnership with the MLB, we launched a series of free-to-play games to start the season, which includes the well-known 'Beat the Streak' games. This was designed to help the MLB engage fans, capture first-party data, and generate excitement to begin the season. With the addition of FanHub, Genius has expanded its relationship with MLB by further integrating itself in the MLB's wider tech ecosystem and strengthening its position as a trusted partner across multiple areas of expertise. We also launched the NFL Super Bowl Challenge, which has helped the league reach an international audience across nine countries. The NFL set out to acquire and engage new NFL fans in international markets. Our free-to-play games are an important tool for them to achieve this. Like the MLB, the NFL can use this platform to better engage their international fan base, which can then be leveraged to better activate their own sponsors. Free-to-play games are just as valuable for brands as they are for leagues, and our work with BetVictor is an excellent example. This sportsbook brand utilized free-to-play games to convert a wider pool of potential betting customers. Free-to-play contributed meaningfully to our results in the media and engagement section, but the biggest organic driver of revenue was our performance-based digital advertising. Genius is uniquely positioned to help brands acquire customers more efficiently. This is the result of our access to data, real-time sports data, live odds betting, and audience data, all of which is obtained in partnership with the leagues. This enables us to deliver highly personalized content to the right audience at the right time based on a unique understanding of that audience and the relevant context from live sporting events. This is what differentiates our programmatic advertising and how we have executed highly effective and cost-efficient campaigns. This is exactly what sportsbook customers continue to spend with us in the quarter, especially around key events like the Super Bowl and March Madness. To give you some context, during the 2021 and 2022 NFL season, Genius acquired one new first-time depositor every five minutes on behalf of our sportsbook customers. In the 48 hours leading up to the Super Bowl, we acquired a new client every 24 seconds. Importantly, we've done this at an average CPA of $225, which is 25% below the industry average. In a world where brands are rationalizing promotional spend, Genius's performance-based solutions present a cost-effective solution to acquire players with long-term value. It is separate and distinct from promotional sign-up bonuses on national television advertising, and these technologies are as high-performing for customer retention as they are for customer acquisition. So we're optimistic about the opportunities ahead in this segment. With that, I'll now turn the call to Nick who will cover our financial results in more detail.

Thank you, Mark. As Mark mentioned, we are delighted to begin the year on a positive note with the first quarter group revenue and group adjusted EBITDA exceeding our expectations. Remember, on our Investor Day we set our full-year guidance for a profitable 2022 position. Within the annual outlook, we aim to provide more transparency on a quarterly basis to give a near-term view on how the business is tracking along our plan towards profitability. As a step further, we've also provided a quarter review of each reporting segment to show seasonal trends and contributions throughout the year. This quarter, each segment met or exceeded our expectations. Firstly, our betting revenues grew 28% year-on-year to $50 million. This growth was primarily driven by price increases in existing contracts, renewals, renegotiations, along with new value-added services and premium data and streaming content, including our expanded portfolio of U.S. content. We also successfully executed on our cross-selling opportunities with several customers in the quarter, helping to lift revenues ahead of expectations. Our major segment with the most significant outperformer in the quarter. Revenues increased by over 2.5 times year-on-year to $24 million, representing the third consecutive quarter of over 100% year-on-year growth. The success in this business continues to be driven by our performance-based programmatic advertising, which has proven to be an effective method for our multiple customers to acquire new clients. Lastly, our sports revenue doubled year-on-year to $12 million in line with our expectations. This was primarily driven by ongoing integration and successful roll-out of Second Spectrum technology, as well as expanded services provided to existing sports league and federation customers. This all aggregates to group revenue of $86 million, which is 60% higher than the same period last year and 10% above our guidance for the quarter. Our group revenue performance contributed to group adjusted EBITDA of negative $2.9 million, which is roughly 40% better than our quarterly guidance. The first quarter results relative to our guidance demonstrate our progress along the plan we outlined on our Investor Day. We remain confident in our execution as we look ahead to the remainder of the year. Our strong Q1 results enable us to reaffirm our full-year 2022 guidance for approximately $340 million in revenue and $15 million in group adjusted EBITDA. This is despite currency fluctuations and an escalating war in Ukraine, both of which impact our reported revenue. From a currency standpoint, the fluctuating GBP/U.S. dollar exchange rate poses no operational risk to the business itself, but rather just the conversion of revenues in sterling to our presentational currency in U.S. dollars. Given our media business is predominantly U.S.-focused, most of the currency pressures’ presentational risk is in our betting revenue, which you can see in the revised segmental guidance we provide. We believe on a constant currency basis, i.e., if we used a fixed exchange rate of 1.35 as we presented at the time of our January Investor Day, our strong Q1 results would enable us to raise our guidance to approximately $348 million in revenue and $17 million in group adjusted EBITDA. So long as exchange rates remain volatile, we will continue to provide this constant currency view in our business. To recap, despite this presentational currency and other headwinds, based on the strong operating performance to date, we're confidently maintaining our full-year revenue and adjusted EBITDA guidance. Before we conclude, I'd like to touch on our liquidity position as well. You will see in our financial statements, we finished the quarter with $174 million on the balance sheet. Approximately $28 million of the cash spent in the quarter related to various timing differences or nonrecurring one-off events. For instance, we had a working capital outflow of approximately $17 million in the quarter. This was largely due to higher media revenues with direct variable costs and the larger proportion of U.S. betting revenues on profit share contracts, which are typically paid at the end of the period compared to fixed fee contracts paid at the beginning. We expect much of this timing to work in our favor in quarter two. Additionally, it's worth calling out a one-off cash outlay of approximately $8 million relating to our investments in the CFL. Our cash position is also impacted by a further $3 million presentational reduction due to exchange rates as the U.S. dollar continues to strengthen against the British pound. Lastly, you'll notice $10 million of capitalized development costs in the quarter, which we expect to remain consistent through the end of the year as we continue to invest in our technology platform. We wanted to address this quarter's cash flow because it's primarily driven by timing, as expected. We anticipate net cash flow to be broadly break-even in quarter two and project a closing cash balance of roughly $150 million by year-end as EBITDA and cash flows are expected to increase. We are fairly comfortable with our capital position and have ample liquidity to continue funding the business on the plans in place today, particularly as we expect to be adjusted EBITDA positive through the remainder of the year and to generate closer to break-even cash flows by the second half of 2023. And with that, we conclude our prepared remarks and open the line for Q&A.

There will be a brief pause while we register questions. The first question comes from Bernie McTernan with Needham. Please go ahead.

Great. Thanks for taking the questions. I want to focus on the media part of the business and the better-than-expected results in the quarter if it was new customer additions or existing customers spending more. I know that you called out your CPA being about $225, which is about 25% below industry averages. How long can you keep that 25% discount, especially as you think that operators appear to be pulling back in terms of their spending, and how you can continue to grow that business substantially while delivering below-average CPAs? Thank you.

Hi Bernie, this is Josh Linforth. Just to answer your question in terms of growth in the quarter, really the growth was driven by two factors. One, us winning new customers, both in Europe and the U.S., as well as our existing customers increasing spend with us. Our increase in spend is partly down to seasonality, but also partly down to us introducing new strategies with our customers to help them diversify their spend. So ultimately, helping them spend more to drive further player acquisition. And in terms of CPA, the markets targeted are quite mature. We expect that success to continue in the U.S. as well, and particularly with additional States rolling out. Each new State for us is a new market that our customers need to spend with us in. This continues the growth for us there. And in terms of operators discussing pulling back marketing spend, I actually spent considerable time with one of the largest sportsbooks this week, and we were discussing exactly that topic. They said that when it comes to looking at promotional spending and related aspects, the first things they'll cut will be promotional offers and top-line marketing spend in TV. The marketing that Genius offers to our customers is very performance-driven, so it's not something that you'll ever see them really cutting back on because it's directly attributable to their new customer sign-ups and player value.

Makes a lot of sense. I appreciate the insight, Josh.

Bernie, hi, it's Mark. Thanks for joining today. It's worth highlighting where our business model is very different from a lot of the operators. When new states come online, that gives us a huge opportunity to get more spend through our media business, but that also applies to our sports betting side as well. One of the things that I think is sometimes missed by a lot of the market is that we benefit from new states coming online because fundamentally we already have the technology in place and we don't need to spend more money to service them. So that's very high-margin new business that flows through. Whereas if you're an operator and new states come online, you've got to spend marketing dollars and put more money to work. As the states grow and our footprint of regulated states increases, we’re going to be very well-positioned to see our business flowing through and dropping through to help us.

Mark, if you don't mind, just one follow-up on that. Did New York generate positive revenue for you guys in the quarter in both media and betting?

Yes, New York coming online was hugely beneficial to us in two ways: through the spend that we put through the media business, and obviously the data that we're selling to the sportsbook. There's no incremental costs to Genius to service that. So they're enormously beneficial. If another major state comes online, like California, or there's a few bits and pieces going on with Florida, Massachusetts, Minnesota, if any of these come through in the next period, what we will see is great opportunities to bag more marketing spend to help acquire new customers and also selling that data for new betting handle, which fundamentally we benefit from. The key point to understand is that we do that without any real additional costs because we already have the infrastructure in place. So from our perspective, New York was enormously beneficial, and so will all these other states that are coming through.

Yes. Just to clarify, did New York have a positive revenue impact for you in both media and betting?

Yeah, sure. Yes, New York was a benefit to us in terms of the additional handle and turnover. We are somewhat protected from the scale of marketing spend because of the caps we have in our business. Our customers want to spend marketing, as we've discussed before, because that drives turnover and handles which benefits us. We do not operate totally immune from marketing spends, but our caps protect us from the scale of it. It helps us maintain profitability in that market.

Understood. Thanks for taking the questions.

Next question is from the line of Ryan Sigdahl with Craig Allen. Please go ahead.

Maybe just to be abundantly clear, did New York generate positive revenue for you guys in the quarter and then positive incremental to the bottom line?

Yes, Ryan. It did.

Thank you, I appreciate that clarification. Now looking at FX, it appears to have a material negative impact down about 10% relative to a couple of months ago when you gave that guidance. A lot of good things are happening in the business, but incrementally what is going better relative to that plan to help offset that unfavorable FX translation?

Hi Ryan, it's Jack again. From a marketing point of view, we're ahead of where we thought we would be with some of our sports relationships. We're delivering revenue in the media business, and some of the fan engagement efforts have paid off. The key lever driving our performance is the media business and its performance-based marketing. If we continue to do our job, and our customers keep spending more, we will continue to deliver great results for them.

Hi Ron, it's Nick here. You're right to call out the currency issue. It's a presentational issue, not an underlying issue in business. This is only really impacting us because we must present our numbers to the street in dollars as opposed to our functional currency, which is obviously GBP Sterling. The underlying business performance remains strong. That's why I previously mentioned that our guidance essentially remains unchanged despite the fluctuating exchange rates.

Absolutely, that's helpful. Just curious if you could drill down on the media business a bit more. It looks like you had a strong quarter. How much of that was organic growth in performance-based marketing versus contributions from your smaller acquisitions?

Hi, Ryan. The majority of the growth was all organic through our core programmatic business. Our upper growth was principally through the success of existing customers increasing their spending with us abd successfully winning new customers.

Hi Ryan. On the betting business, there is no inorganic growth in there, so that is all organic. The media business features a mix, but most of the growth there is also primarily organic. I think if you took away the contributions from the Second Spectrum revenues, I think you're looking at just shy of 40% organic growth in the quarter year-on-year against the 60% growth on a total basis.

I wanted to ask a similar question about what percentage of revenue growth was organic versus from acquisitions. I know you addressed that for the media piece, but could you give some color on the other segments too?

Yes, Robin. In the sportsbook and betting business, there is no inorganic growth there, so that is all organic. I think I pointed out on the previous questions that the growth in the media, sports business is almost exclusively from the Second Spectrum, while organic growth year-on-year is nearly 40%.

Okay, great. That's helpful. Thank you. And also just wanted to clarify, looking at your full-year guidance, I realize there's some nuances with the accounting recognition of the equity granted to the NFL and so forth. Would you be able to comment on your GAAP gross margin expectations?

Yes, there are some nuances around the accounting specifically for that NFL equity. On the gross margin, I expect to see improvements next quarter due to some non-cash components currently affecting our valuation. We are anticipating a quarter-on-quarter improvement as the non-cash impact from the NFL is addressed.

Hey. Great. Thanks for taking my question. Looking at the media business as a strong segment, if you apply normal seasonality seen in advertising, it looks like that business could do well over $100 million in revenue this year. So can you talk about what's implied in your back half guide for media? Is there anything you're being conservative about in terms of inflation or potential political advertising impacts that could boost CPM? And while betting operators are leaning into your solutions, can you talk about your success with other sports-related entities not tied to betting?

Hi Jed, it's Nick. Regarding the media business, as you noted, there's natural strength in Q1, given the sports calendar with major events contributing. We expect that while there may be seasonal shifts throughout the year, our positive trend remains. I would also add that considerable pressure will come from previous contracts with U.S. sportsbooks, which we expect will be up as we monitor how marketing strategies evolve. As for your point on non-betting related business, I'll let Josh provide further insight.

Hi, Jed. I just want to add that we also do a lot of advertising for casinos. So besides the sports events, we also conduct casino advertising for our customers. Furthermore, we've seen great success in winning several new customers on the non-betting side such as Hennessy, Destination Canada, 3D Seltzer, Rocket Mortgages, and others.

Hi, Jed. The NCAA’s reinterpretation of their bylaw has been a significant and positive moment for us. To recap, we signed a deal with the NCAA three years ago, which was a 10-year agreement that allows us to digitize their entire estate. We are putting technology solutions, mainly live stats, into all of the NCAA’s schools and colleges. We have made significant progress and are in an incredible position as a result of this distribution and utilization of technology. The MAC deal is also very good for us, and it seems natural for conferences to partner with their technology providers. We have an unbeatable position here and the deals we consider will be ones that will be profitable for Genius. We feel confident about where we stand.

Thanks. What percent of revenue growth was organic versus from acquisitions? Could you give insights on the other segments too?

In the sportsbook segment, all growth is organic, while for the media business, the growth is nearly 40% organic when excluding the impacts from Second Spectrum.

Hey, Mark, Nick, Brandon, Josh, Jack. Good morning, good afternoon, guys. Nice quarter. First question for clarity on your first-quarter performance versus guidance.

You're right; Q1 results were strong especially driven by media segment performance. We're very pleased with how the business performed compared to our earlier guidance.

Good luck going forward.

Yes, Ontario became a new regulated market, and we've seen great opportunities as it relates to betting and media revenue there. There's some initial restrictions, but we believe we can effectively manage through them and support our partners.

Thank you, guys!

Ladies and gentlemen, we conclude today's session. You may now disconnect.