Genius Sports Ltd Q1 FY2023 Earnings Call

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. We will now turn the conference over to Brandon Bukstel, Investor Relations.

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 metrics 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 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-selling with existing sportsbook customers and new customer wins. 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 sportsbooks are becoming more profitable; this will benefit Genius and 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 over 30% 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 betting in Ohio and Massachusetts. Our revenue share agreements with the U.S. sportsbook operators meant that we received immediate revenue uplift at no additional cost. Our expenses related to rights fees, people, and operational overhead 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 U.S. sportsbook operators earn us a three times higher take rate on In-Play versus pre-match, again all on the same cost base, making this a significant profit driver for Genius. Using the NFL season as a proxy, we saw in-play betting handle increase by approximately 40% 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 bets, 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. 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. While sports betting has existed for decades in mature markets, 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 beyond 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 budgeted 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 transform their offerings as they enter the digital age. This is what makes us a sticky long-term partner to leagues, which helps us 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, teams, sportsbooks, broadcasters, 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-term growth and profitability targets. And on that note, I'll now hand the call to Nick to discuss our financials in more detail.

Thank you, Mark. As mentioned at the start, we have consistently delivered on our strategic and financial plan. 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 witnessed a period of heightened promotional intensity for sportsbooks, characterized by a handful of one-off marketing events such as the launch of online sports betting in New York, 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, 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 throughout 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, in relation 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, 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 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 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.

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

Great. Thanks for taking my question and nice quarter. As we look out to the 2023 updated guidance, can you just remind us how you're thinking about some of the shifting factors impacting guidance that you kind of walked through on page six of the slide, play and hold throughout the year? Thank you.

Hi, Jordan, it's Nick. Yes, I guess, the headline answer to that is we're thinking about it for the rest of the year how we've seen it really in Q1. To remind everybody, we've seen a really strong NFL season through Q4 and Q1 this year. There are a lot of tailwinds in our favor, and you've heard that from the sportsbook operators over the course of the last weeks and a half through their own earnings season. Just to give you an idea of what that growth looks like for NFL: the in-play has been growing the fastest of all the different betting metrics. We've got total NFL handle up 21% season on season, and actually in-play is up 40% from that basis. When you look at it on a GGR basis, total NFL GGR was up 86%, while total in-play GGR was at 100%. So they are the sort of key tailwinds that we're forecasting through to the end of the season, but in order to hit our numbers in our revised guidance, we're not looking at any material changes in those underlying metrics.

Great. For my follow-up, I want to talk about the U.S. business. Were you guys EBITDA positive in the first quarter there? And how should we think about that trend throughout the year as well? Thank you.

Yes. I mean, we don't give a geographical split, partly because it's very difficult since many of our contracts are multinational. What we said at the year-end, and I think it still holds true today, is that the losses in the U.S. have reduced and will continue to decline through 2023. We weren't EBITDA positive; I think that's a fair comment. I expect we will be looking at around a single-digit EBITDA loss in the U.S. for 2023, which is considerably better than it was in 2022, and I expect that to continue to progress towards breakeven and a positive position for 2024.

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

Hey, great. Thanks for taking my question. Just two if I may. You've had a lot of nice announcements with the second spectrum, and you had a very nice tech demo back in March on the technology. Can you just remind us how or where we'll see that start to help some of the other revenue line items, and how that will impact the financials? And then looking out over the next 12 months, are there any contracts up for bid or renewal that we should be aware of? Thank you.

Hi, Jed, it's Mark. Yes, it's a good question on second spectrum. To recap, we have spent significant time focusing on an investment phase. Second spectrum has had over 10 years of investment, and an important point is that it's fully budgeted in the numbers that we have provided both now and in our guidance. This is a significant differentiating factor for Genius. The way that second spectrum impacts us is quite similar to how we have used technology in the rest of our business. We've got a long history of building and delivering technology for sports and using that to acquire rights and drive revenues in all aspects of our business. What you're seeing now, and what you'll see significantly more over the coming period, is revenue increases in all aspects of our business as a result of second spectrum. New rights deals or potential renewals of rights deals are driven by our second spectrum relationship as well. We've made announcements with Bet365, and that will start to have positive effects over time. Additionally, we strive to distribute our technology across many broadcasts; we've successfully worked with Amazon, CBS, and are doing projects in the UK with the Premier League. This gives us enormous revenue potential. I think we're feeling good about where we stand commercially and the lead we have in this space due to our previous investments. Regarding rights renewals, there are a few conversations ongoing, primarily around data co-rights that are up shortly. We have strong relationships with various rights holders and are looking to leverage our second spectrum relationships to drive strategy and growth.

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

Great. Thank you for taking the questions. I would love to just get some thoughts on the recent investor presentation on second spectrum. Has it advanced any conversations with stakeholders in the industry for bringing this technology to market? And as a follow-up, in the letter, it talks about Q1 benefiting from higher take rates driven by contract renegotiations. Was second spectrum a catalyst for revisiting those contracts? If not, what drove the early renegotiation of those contracts?

Yes, I'll take those questions front to back. The renegotiations of the contracts are part of the normal course of business. We constantly renegotiate our contracts, and that's been consistent for years. New technologies, such as second spectrum, certainly give us a significant opportunity to expand those relationships and work more closely with our clients. Regarding the rights negotiation, all conversations with rights holders now incorporate second spectrum and its rollout, which has become a core part of our business strategy and is currently driving revenues.

Hey, Bernie, it's Nick. Just to follow on from Mark's answer regarding the contract renegotiation. It's important to note that 30% of our revenues are from the U.S. A lot of those renegotiations in Q1 are actually the non-U.S. contracts since the U.S. contracts generally run until mid-2024. It's not just about renegotiation, but also about the classic one-and-expand position with our global sportsbooks, where we aim to add additional services. Second spectrum's new products and technology align closely with what sports leagues and federations are interested in.

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

Hi, thanks. Good morning. I had a question on the programmatic ad business maybe for Mark or Josh. Can you update us on what you're seeing with customer growth and demand trends between the respective sports betting and non-sports betting markets? Additionally, what are you seeing right now in the broader ad market; is it trending weaker or improving relative to when you set guidance earlier in the year?

Hi, Clark, it's Josh. In terms of our overall programmatic business, we continue to be really happy with its progress. To date, the majority of revenue still aligns with the sportsbook side but we continue to win new business with non-betting advertisers, and we're really satisfied with how that's progressing. It's early days; 18 months ago, this was a very new area for us, and we’re thrilled with the number of new brands that we have brought on in that timeframe. We are feeling positive about it. Overall, I think some of the initial jitters are starting to ease, and we're seeing new cash budgets come in from various brands. So we are quite optimistic right now and do not see the market limiting our progress.

Yes, hi Clark, it's Nick. To add to what Josh just mentioned, that is part of the reason we've adjusted our guidance for Q3 on media upward by a couple of million dollars because we are seeing interesting and favorable conversations, especially around the start of the U.S. sports season at that time. Initially, we were relatively conservative concerning our guidance in that area due to the visibility we had at that moment. Our media numbers year-on-year imply a growth rate of 11%, which we find encouraging, especially considering Josh's comments on the overall market position.

Thank you. Your next question comes from the line of Ryan Sigdahl of Craig-Hallum Capital Group. Please go ahead.

Good morning, guys. You mentioned price increases that you took on several of the global sportsbook contract renewals. Curious if there was any churn in those customers as part of that negotiation?

Yes. Hey Ryan. No churn. Genius operates on the principle that given the number of sports and our broad product offerings, if you run a legalized sportsbook globally, you must work with Genius. Jack and the commercial team have done a great job over the last 12 months to ensure we continue to drive value from the services we provide. This isn't just about raising prices, although pricing improvements, as Mark pointed out in the prepared remarks, will be a significant growth lever for us going forward. It's also about the one-and-expand approach, which continues to be a strategy for us.

For a follow-up, you raised your EBITDA guidance for the year, which is good to see. The cash low point is now lower than what you previously expected last quarter. What are the puts and takes regarding the cash reconciliation versus the EBITDA guidance?

Yes, hey Ryan. We didn't actually provide a previous cash flow point number. So it's pretty much in line with what we've said before, around $115 million. Our position remains that we expect to be positive in cash in H2 and continue being positive into 2024.

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

Hey, Mark, Nick. Good morning, guys. Congrats on a strong quarter and your updated guidance here. Nick, I had trouble getting online, but did you discuss fourth quarter projections? You've raised expectations for every other quarter, except for Q4. Why didn't you bump up Q4?

Yes, hey Mike. You're right. We've raised Q2 by a couple of million dollars. We have much better visibility for Q2, and some of the tailwinds we noticed, particularly in the betting sector in Q1, appear to be repeating in Q2. One of the previous answers discussed our increasing confidence regarding media spend as we approach the start of the sports season in Q3. For Q4, it's purely about visibility. We're only just one quarter in, but we are confident about those numbers. While it's great to have raised our guidance to $49 million, we will continue to monitor things and will come back to discuss the rest of the year once we wrap up Q2 performance.

Okay, cool. And the 100% contribution margin for the quarter is exceptional. You've raised your EBITDA guide for the year. Could you discuss your success in controlling expenses and how you think about the progression from Q1 into the remaining quarters in terms of expense control?

Yes, Mike. You and everyone else has heard us talk a lot about our operating leverage in the business and the levers we have at our disposal to increase revenues without a corresponding increase in our cost base. We've always maintained that this requires a certain level of scale, and we're at that tipping point now, which is why we're transitioning from a $15 million EBITDA position to a $49 million EBITDA position in 2023. The conditions that facilitate this should continue to exist beyond 2023. If we look at Q1 year-on-year, our cash operating expenses totaled $24 million this quarter, down from $27 million in the same quarter last year. The business remains focused on driving profitability and cash profitability, and we're beginning to see that now, expecting it to continue throughout the rest of the year.

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