Earnings Call Transcript - GENI Q4 2022

Operator, Operator

Good day, and welcome to the Genius Sports Fourth Quarter 2022 Earnings Results Conference Call. All lines have been muted to minimize background noise. After the speakers' presentations, there will be a question-and-answer session. Thank you. I will now turn the call over to Genius Sports. You may begin your conference.

Brandon Bukstel, Executive

Good morning and thank you for joining us. 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 last Annual Report on Form 20-F filed with the SEC on March 18, 2022, as amended by Form 20-F filed with the SEC on November 10, 2022. 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.

Mark Locke, CEO

Good morning and thank you for joining us today. 2023 is an exciting year for Genius Sports and operationally, strategically, technologically, and financially is the best it has ever been during my time as CEO of the company. Before we get into the year ahead, I’d first like to revisit the objectives that we outlined in our Investor Day at the beginning of 2022. As you may recall, we disclosed several financial and operational targets as part of our strategic plan. In particular, we outlined 25 different financial targets to provide clear benchmarks for success and to hold us accountable to our shareholders throughout the year. With the year now behind us, I’m pleased to share that our team has delivered or exceeded all 25 of those targets throughout the year while at the same time executing on our strategy to deliver our long-term goals. Among the highlights, we delivered 41% constant currency revenue growth to $341 million and $16 million in adjusted EBITDA, each outperforming our guidance. All this despite strong macro headwinds, including significant foreign exchange challenges and the cessation of business in Russia. We continue to execute on our plan across the globe supporting hundreds of leagues in sports with partners in every time zone. Our highly profitable and cash-generative core underlying business outside of the U.S. continued to scale both in size and margin, which is now in the high 30% range. We still see plenty of profitable growth ahead. In our second full year in the high-growth U.S. market, we’ve established ourselves as the dominant player with market-leading competitive advantage and revenue growth of 108%, far outpacing the growth of the broader industry. Keep in mind, the U.S. is still a relatively new market within our global business. We expect this region will continue to be a long-term driver of significant growth at Genius, particularly as our losses continue to narrow year-over-year and we approach profitability in the U.S. in 2024. We have continued to consolidate our technology position at the heart of the ecosystem by deploying technology across various profiles, sports leagues, sports books, and broadcasters, including the NFL, CBS, ESPN, and Amazon, just to name a few. Our media business has also outperformed and we have achieved our objective of not only growing revenues in excess of 50%, but also diversifying our client base to enter long-term partnerships with major global brands, including Pepsi, American Express, Audible, Destination Canada, and much more. And this business really is just getting started. Finally, we’ve proven beyond argument the operating leverage of our business. Our core underlying business is generating strong and improving free cash flow, and we expect a meaningful inflection in group cash flow starting in the second half of 2023. Given our revenue growth and predominantly fixed cost base, we expect to nearly triple our growth EBITDA from $16 million in 2022 to $41 million in 2023 and generate positive free cash flow in the second half of the year. More importantly, we expect to deliver these results with the partnerships and assets that we have today. In other words, we are comfortable achieving our 2023 forecast without the need for any new rights deals or opening any geographical markets, M&A, or any other exceptional factors. Therefore, with $159 million of cash on our balance sheet as of year-end, no debt financing, and the move to positive cash flow in H2, Genius is extremely well positioned. 2023 marks a key turning point. In the years ahead, we expect to continue along our path towards our long-term objective of group adjusted EBITDA margins in excess of 30%. Given the strong and improving margins in our core underlying business, we feel confident in reiterating our long-term objectives. What gives us confidence is our second-to-none position at the heart of the ecosystem, which has only strengthened since going public. We are the technology partner of choice for leagues, bookmakers, sponsors, brands, and broadcasters. We have pioneered official data rights technology that makes us a sticky long-term partner to leagues providing mission-critical data and services to bookmakers. We develop the most effective sports-focused digital advertising technology and inventory and implemented Second Spectrum's AI and computer vision technology to deliver the next generation of sports broadcasts. In essence, Genius is the trusted technology partner for anyone seeking to engage and monetize a sports audience in a personalized and cost-effective way. Our CFO, Nick Taylor, will provide more detail on our financials and guidance later on. But first, I’ll walk you through the headlines. To recap Q4 and starting at the top of the page, we delivered $105 million in group revenue and $3 million in adjusted group EBITDA. This represents 36% constant currency growth in revenue and a $15 million improvement in adjusted EBITDA compared to Q4 of 2021. Again, this brings our full year revenue and adjusted EBITDA to $341 million and $16 million, respectively, exceeding our guidance for the year. This represents 41% constant currency revenue growth and a significant uplift in adjusted EBITDA from the $2 million reported in the full year of 2021. The outperformance in 2022 was multifaceted. First, we won new business throughout the year, with a total of 71 customers in 2022. Second, among existing customers, we continue to expand our value-add services, having successfully completed contract renewals and renegotiations with large global sports books. Thirdly, in the U.S. specifically, we’ve seen an increase in total sports betting volume, improvement in operating margins, and strong growth within play betting. Each of these factors resulted in U.S. revenue more than doubling in 2022. Additionally, our relationships with leagues have strengthened throughout the year, and our tech integrations were on full display this past quarter. More on this shortly. Looking ahead, our execution in 2022 and strong tailwinds entering the New Year give us confidence in our guidance of $391 million in revenue and $41 million in adjusted EBITDA in 2023.

Nick Taylor, CFO

Thank you, Mark. As you’ve already heard, 2022 was the year of consistent execution. Looking ahead, we consider 2023 to be the year of inflection, where we expect to ramp up EBITDA growth with free cash flow generation. But first, let’s quickly discuss the results of our strong execution in 2022. We finished the year with $341 million in group revenue, and $16 million in group adjusted EBITDA, exceeding our guidance of $340 million and $15 million, respectively. This is despite the presentational currency headwinds we’ve communicated in each quarter this year. As a reminder, we initially set out guidance in January 2022, assuming a GBP-U.S. dollar exchange rate of 1.35. This exchange rate has fluctuated throughout the year, having seen 1.15 and 1.2 for much of the fourth quarter. Therefore, we have provided a prior constant currency view of our growth to remove this presentational currency volatility. For example, our revenue and adjusted EBITDA would have outperformed our guidance by an even greater margin, close to $20 million and $5 million outperformance if not for the FX headwind, which is entirely presentational in nature. On the right-hand side of slide 10, you’ll see the breakdown of Q4 group revenue, which grew 36% in constant currency year-on-year to $105 million. As we progressed in 2022, all three products performed in line or ahead of expectations. First, betting revenue grew to $65 million representing 35% constant currency growth. This was driven by new customer wins, contract renewals, and an expanded offering of value-added services and products. Our media revenue continued its strong pace, growing 58% constant currency to $26 million in the quarter. This was driven by new customers and highest spend in North America, primarily through programmatic advertising services. Sports revenue also increased nearly 14% year-on-year to $14 million, mostly driven by Second Spectrum. Given our relatively fixed cost base, which does not need to grow nearly in line with revenues, this resulted in group adjusted EBITDA of $3 million in the quarter marking a significant improvement from Q4 of 2021, an increase of $15 million year-on-year. Moving on to slide 11, we want to highlight the consistent track record we’ve established throughout the year. As Mark mentioned at the start, we issued highly detailed financial forecasts on our January 22 investor day, including quarterly group revenue and adjusted EBITDA targets, and quarterly revenue targets for each of our product groups. This sums to 25 individual financial targets for us to measure our performance this year. Now, as we reflect on 2022, we are delighted to say that we hit or exceeded all 25 of those targets. In addition to our performance by product group, I also wanted to touch on our performance by geography to provide helpful context as to the dynamics of our underlying position. As Mark mentioned at the start, our trading outside the U.S. is already highly profitable and cash generative today, with margins in the high 50% range, and they continue to expand. In the U.S., our losses have narrowed from about $20 million in 2021 to approximately $10 million in 2022 as we continue to march towards profitability in 2024. We have made significant investments in the U.S. over the last few years to better position ourselves to capture the growth in this market. At this point in time, much of that heavy investment is now behind us. Our operating expenses do not need to grow nearly in line with revenues going forward. This brings me to slide 12, where we provide more detail on our 2023 revenue and EBITDA guidance. When we initially issued 2023 guidance some 14 months ago, the Sterling-U.S. dollar exchange rate was 1.35. As we sit here today, March 2023, this exchange rate is now 1.2. We are adjusting our revenue outlook accordingly. Given that our numbers are reported in U.S. dollars as our chosen presentational currency. To be clear, our view of the underlying business has not changed from the time we initially gave 2023 revenue guidance last year. We’re simply adjusting our outlook to reflect the difference in exchange rates. We’re now expecting to generate $391 million in revenue in 2023, in line with current consensus. It is worth flagging that many of our expenses are also paid in currencies other than the U.S. dollar, and therefore most of our profitability is naturally hedged, and our 2023 group adjusted EBITDA outlook is impacted to a lesser degree. We expect to generate $41 million in group adjusted EBITDA in 2023, also in line with current consensus. Additionally, you will find another detailed breakdown of our group revenue and adjusted EBITDA forecast by quarter as well as the forecast of revenue by product group, just like how we guided to in 2022.

Mark Locke, CEO

And just to pick up on your conference questions. Yes, there’s a lot going on in the conference space. I think the first thing, just before I hit the conference points is that in order for us to hit or exceed the numbers this year, we don’t need to win any new deals. So there’s no requirement for us to bring in any new rights deals. If we do, we’ll bring them in only if they’re profitable and make sense for us. We’re in an incredible place. And we have fantastic operational leverage that’s coming through in the business. In terms of specifics of the conferences, look, there’s obviously a lot going on like the Big Ten making moves, with some changes at the Commissioner level. The SEC is also progressing. Our focus on those deals is as they make sense for us, as I’m sure everybody else is. But importantly, we’re incredibly well placed with March Madness coming up soon. That provides an enormous opportunity for us to deploy technology as well as generate revenues from the data and our relationships with leagues and direct relationships with the bookmakers that have us in a very strong position. We’re feeling pretty good about our position in college. The technology rollout that we’ve made over the last year or 18 months in college is pretty complete now. We’re in the majority of schools, and we have our technology in most areas. So the data we’re collecting is second to none.

Nick Taylor, CFO

We expect our cash flow to point in 2023 to come sometime in Q3, before turning positive for the remainder of the year. In Q1 of 2023 specifically, we expect our closing cash balance to be approximately $130 million on current exchange rates, principally due to seasonal working capital outflow and annual Q1 cash payments related to our CFL investment. Lastly, as a matter of housekeeping, you may have noticed that we recently exchanged all of our outstanding public warrants for ordinary shares of common stock. The purpose of this transaction was to simplify our capital structure, eliminate a future diluted overhand for common shareholders and remove certain legal, tax, and accounting considerations and costs associated with those warrants. As a result, the company should have greater financial flexibility, and investors can be certain of our capital structure going forward. As always, you can find an updated share count in the appendix of our earnings presentation, which will illustrate the reduction in our fully diluted share count.

Mark Locke, CEO

In the past few months, we’ve all been blown away by the capabilities demonstrated by AI-powered technologies like ChatGPT. If anyone didn’t realize it before, they now understand that AI and machine learning will soon change every aspect of human life. Genius’s Second Spectrum technology is the sports equivalent of ChatGPT. Our technology enables machines to autonomously understand sports at a level far beyond even the best pundit or commentator. Second Spectrum’s unique understanding is built on over a decade of computer vision and machine learning development, leveraging a corpus of training data unparalleled by any other technology. We now have a unique advantage and opportunity to apply this capability and revolutionize sports at every level. In our vision of the not-so-distant future, through generative AI, every fan, bettor, player, coach, will be able to watch the game in a fully personalized way tailored to their exact needs and preferences. I’ll give you one small example of how we’re already doing this today. Up until last year, all 110 million people who watched the Super Bowl watched the same broadcast. This year, if you’re a data geek or fantasy player, you could watch an alternate broadcast produced by Second Spectrum tailored to your interest. Our technology has automatically produced these kinds of personalized broadcasts through the NFL regular season and playoffs for NBA games and EPL games, personalizing the experience for data heads, bettors, analysts, casual fans, and even kids, all automatically. We believe this will showcase how we are already bringing these concepts to life. Sports betting is a major growth driver of our business, but so too is revolutionizing the sports industry and the fan experience through AI. There is a lot more to come, and we’re excited to share it with you in the months and years ahead.

Operator, Operator

Your first question comes from Ryan Sigdahl from Craig-Hallum Capital Group. Please go ahead.

Ryan Sigdahl, Analyst

Good day, Mark, Nick, congrats on all the business progress and updates. I want to start with guidance. So curious, Nick, if you can give kind of more of the underlying assumptions. One, why not provide a range? Two, why pick consensus as your point estimate? And three, I guess FX is a little higher than when you last reported. So curious, I guess with the business outperforming why you’re reaffirming the underlying assumptions from a year ago.

Nick Taylor, CFO

Hey, Ryan. Well, I guess the first thing is, the underlying assumptions haven’t changed. So there’s still the same assumptions that we set out in approximately 14 months ago now, Ryan, wasn’t it? So, as you said in the prepared remarks, our underlying business hasn’t changed. If the U.S. dollar exchange rate was at 1.35 to Sterling today, we’d still be guiding to the 4.30, 4.40 range. But given the percentage movement, I think we’re using 1.2, which is almost dead on as it is today and until 2023. It’s not an exact science, right, Ryan? We have revenues in Sterling, in euros, in dollars, and lots of other currencies. What we are is we’re very confident that at 1.2, we will hit the metrics that we’ve set out. In terms of not giving a range, we didn’t give a range last year. We’re very precise in our forecasting. And again, we said in prepared remarks, we’re pleased to hit all 25 of the metrics that we set out and very confident at 1.2 that we will hit the 25 that we set out to 2023.

Mark Locke, CEO

Yes, it’s – hi, it’s Mark. It’s a great question. The Second Spectrum technology stack, once it’s built, is the ability for us to effectively democratize that across all of the other leagues that we have. The relationship with the NBA is just one of the many relationships we expect to have within basketball globally. I mean, to remind you, we do roughly 60,000 FIBA basketball events across colleges all over the U.S. The technology stack that we built and our ability to roll that out globally is something that’s very significant. The ability for us to collect data in a more efficient manner also allows us to collect richer data because machines can understand the game better than a human can. It gives us a much higher barrier to entry, and that data can’t be replicated or accessed by anyone else. It’s our data or the league’s data. Additionally, it begins a shift in the type of data required by bookmakers and broadcasters. Our mesh technology rollout will provide much greater clarity. Ultimately, we’ll have unique sets of data that can only be collected by us, reducing operating costs in the business and expanding opportunities to sell to leagues.

Jed Kelly, Analyst

Hey, guys, great. Thanks. Thanks for taking my question, and good year. Just a couple of - just one on the guidance for this year, looking at the Media segment, it kind of implies a decent deceleration in Q1, maybe single-digit growth in Q2 then re-accelerating in the second half. Can you kind of talk about what’s going on there? Is that being driven more by some of the sports books pulling back or some economic pressures we’re seeing in digital advertising? And then, Mark, can you just give us an update on where we are in terms of some of the bigger college conferences like Big Ten, SEC, and others regarding data rights?

Jack Davison, CCO

Hi, can you hear us, Jed? Yes, sorry. Yes. Hi, Jed, this is Jack. Just on your media question. As we said last quarter, we’re expecting our media revenues to be more closely in line with our forecast. That’s really down to last year in H1, media spend being unusually high. We’re seeing it come back down to our expectations. In terms of media performance, we’re really happy with how it’s going. We’ve got a number of new customer wins over the course of last year. When you look at the broader ad tech market, we’re starting on the non-betting side of things. We’re starting from a very low base, and we’re seeing good success there in terms of growth. So we’re feeling very positive about it.

Mark Locke, CEO

Yes, and Jed, it’s Mark. To touch on your conference questions, there’s a lot going on at the moment in the conference space. Before I hit the conference points, I want to emphasize that for us to hit or exceed the numbers this year, we don’t need to win new deals. We’re in a fantastic place, and we have fantastic operational leverage coming through. In terms of the specifics of the conferences, there are some changes, such as the ones in the Big Ten and SEC. From our point of view, we’re very much focused on those deals as they make sense for us. With March Madness coming up, we have enormous opportunities to deploy technology and generate revenues from data through relationships with leagues. We’re in a strong position, especially as our technology rollout in colleges is now pretty complete. We are collecting unparalleled data.

Mike Hickey, Analyst

Hey Mark, Nick, Charles, Brandon, congrats on the quarter, guys. And nice to see that growth. Yes, two questions from me. The first is just looking at your 2023 guidance, obviously, there’s huge operating leverage here, and you spoke to that. I think that incremental revenue is contributing to a 50% EBITDA margin. Can you give us a little bit more color about the fixed nature of your expenses? And how you think that should trend over the medium term in terms of sustaining this elevated leverage we've seen?

Nick Taylor, CFO

Yes, hey, Mike. Yes, you and others have heard me talk for a number of years about the fixed nature of our cost base. We’ve seen that we’re at an inflection point this year. You’re right, we’re expecting incremental revenues to drop to around 50%. That’s due to the fixed nature of the cost base. The operating costs for R&D, marketing, G&A are forecasted to be flat year-on-year. Therefore, we expect these dynamics to continue through 2023 into 2024 and beyond, with revenues growing at a higher rate than the costs.

Mark Locke, CEO

In essence, the investment in our tech stack is going to start to deliver improvements in our ability to do rights deals, and indeed, the value of those rights. This is something we see clearly coming through the business and in the deals that we’ve done, such as our relationship with the NFL. We’re rolling out partnerships with major media platforms. The investments we make are optional, and at the moment, we feel comfortable with our spending level. If anything, we may even assess that in the opposite direction as time goes on because we have a major technology head start. Our focus is to ensure we get the right balance between that head start and investment.

Jason Bazinet, Analyst

Hi, good morning. I just had a question on U.S. EBITDA losses and the shape of that curve as you move towards profitability in 2024. Last year, I believe you mentioned U.S. EBITDA losses widening, but now it sounds like they actually narrowed to about $10 million of losses. So do you expect more investments in the U.S. that might pause a little on the path to profitability in 2024?

Nick Taylor, CFO

Great. Thanks, Jason. Yes, when you look at the U.S. we are seeing a narrowing of EBITDA losses, which was always our anticipation. We expected a narrowing of losses in 2023 as we continue to move towards profitability.

Ben Chaiken, Analyst

Hey, how’s it going? Good morning. I wanted to dig in on your follow-through guidance of 50% for 2023 versus 2022. Is this 50% the right flow-through for the business? Where do you expect to be higher or lower than that moving forward?

Nick Taylor, CFO

Hey Ben. We’ve provided detailed forecasts on our cost base on a line-by-line basis. Our revenues are expected to be up $49 million year-on-year, and as I outlined, the dynamics we expect to continue into 2024. It’s worth reiterating that we expect strong revenue growth while costs remain largely stable.

Mark Locke, CEO

Yes, hi Ben. To clarify, for each new state that launches, that doesn't cost us anything additional. We just switch on a new state, and our clients generate new revenues. Therefore, growth from new states is beneficial for us.

Bernie McTernan, Analyst

Great, thank you for taking the questions. Maybe it’s a follow-up to that. Parlay certainly is a focus for the sports books right now. How should we think about the parlay pay rate versus the 1.5% to 2% for pre-match betting?

Jack Davidson, CCO

On a more general level, same game parlays just fall into a pre-match bet. Our take rate is slightly less than what we take on pre-game bets. We have many customers for this product, and our overall position remains strong since operators need the data to power their products.

Mark Locke, CEO

Yes, the second half of the year is going to see positive cash flow. We are forecasting positive cash flow as growth in revenues and EBITDA increases in the second half of the year.

Robin Farley, Analyst

Great, thanks. You’ve talked about the net technology with Second Spectrum and the new contracts. Can you talk about how much this is contributing to year-over-year growth in your sports technology revenue?

Nick Taylor, CFO

The NBA deal we announced is an extension of our partnership, included in our forecast for 2023 and is significant for our growth story in 2024 and beyond. However, we don’t need to win any more rights to achieve 2023 numbers.

Operator, Operator

And there are no further questions at this time. This concludes today’s conference call. Thank you for your participation. You may now disconnect.