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Amaya Gaming Group August 15, 2014 Investor Conference Call [30:42]
Operator: Good morning, Ladies and Gentlemen, and thank you for standing by. Welcome to Amaya’s 2014 Second Quarter Conference Call. Amaya issued an earnings press release [xx] [00:08] yesterday after markets closed. The release has been filed on SEDAR and will be available on Amaya’s website at www.amayagaming.com.
Before beginning its formal remarks, Amaya would like to remind listeners that portions of today’s discussion contain forward-looking statements that reflect current views with respect to future events such as Amaya’s outlook for future performance, revenue and adjusted EBITDA growth, as well as potential benefits from the interest acquisition of raw share growth. Any such statements are subject to the risks and uncertainties and assumptions that could cause actual results to differ materially from those projected in these forward-looking statements.
Forward-looking statements involve risks and uncertainties, and undue reliance should not be placed on such statements. Certain material factors or assumptions are implied in making forward-looking statements, and actual results may differ materially from those expressed or implied in such statements.
Factors that could cause actual results or events to differ materially from current expectations, among others, include: risks related to market factors, ability to achieve the expected benefits of the acquisition of companies, and other factors discussed in materials filed with applicable securities regulatory authorities from time to time including matters discussed under risk factors and the company’s annual information form for the year ended December 31, 2013 and its management information circular dated June 30, 2014. Amaya does not undertake to update any forward-looking statements except as required.
During the call there will be a discussion of some items that do not conform to IFRS, including adjusted net income and adjusted EBITDA. Amaya has reconciled these items to most comparable IFRS measures as in yesterday’s earnings release.
At this time all participants are in a listen-only mode. Following management’s commentary we will conduct a question and answer session. Instructions will be provided at that time for financial research analysts that are covering the company to queue up for questions. We ask that you please limit yourself to two questions per person and be mindful of others. If anyone has any difficulty hearing the conference, please press *450 for operator assistance at any time. As a reminder, this conference is being recorded today, Friday, August 15, 2014. Replay details are included in the earnings release.
I will now turn the call over to David Baazov, Chief Executive Officer of Amaya Gaming. Please go ahead, Mr. Baazov.
David Baazov: Thank you, Operator. Good morning, Ladies and Gentlemen. Thank you for participating on today’s call. I’m joined on the call today by Daniel Sebag, our Chief Financial Officer.
Our 2014 Second Quarter results were released yesterday and are available on SEDAR, where you can also find our financial statements and MD&A. We’re very excited with the progress of Amaya during the quarter. The company has been transformed through its acquisition of the Rational Group, which we announced during the quarter and which was completed on August 1.
Rational, of course, is the owner and operator of the PokerStars and Full Tilt Brands which collectively are the global market share leaders in online poker. Rational is also the world’s largest producer of live poker tours, events, and broadcast programming. Rational’s B2C operations provide Amaya with a scalable global platform for growth. The company has built a large, loyal, and recurring consumer base through the company’s dedication to player protection, payment security, and game integrity, as well as its innovative software technology, tournaments, and game formats.
Rational, of course, also has identified initiatives to expand into adjacent gaming verticals which presents a large opportunity for revenue and profitability growth with relatively minimal technology and personnel investment required. The benefits for Rational’s poker players from these growth initiatives are: 1.) Growth in new verticals provide the ability to attract new customers, which has the potential to result in the increase in the liquidity of the poker market as well. 2.) We estimate up to half the existing active players are playing casino and/or sportsbook on other sites. Providing these verticals in the jurisdictions where they are able to be offered gives players the opportunity to combine loyalty points on a single individual platform, one they already trust. 3.) I’ve noted previously the expansion into sportsbook is targeted for 2015, and the company has already been building up this effort. We will provide further details on sportsbook in the future.
Regarding casino, the company has launched casino games on Full Tilt in 2014 through its downloadable poker client. The results this far have been encouraging, though the exposure to the percentage of Rational’s player base is still quite low. There has not been a major marketing push behind it as yet. The company has been focused on assuring its casino platform is up to its high technological standards. We do not want to provide any disruption to the core poker offering.
Going forward, we anticipate significantly scaling up the casino exposure to Rational’s player base, including launches into new regulated jurisdictions in Q4 2014 and in 2015. Additionally, we plan to launch a casino client and the ability to play via mobile. We anticipate being able to provide more details at our next conference call in November.
On the subject of regulation, we continue to see a trend toward more jurisdictions looking to regulate online poker or online gaming in general. Both Amaya and Rational Group support the regulation of online poker and gaming, and are committed to working with regulators to create responsible and tax-efficient means to regulate within their jurisdictions.
We believe there are important benefits from regulating online gaming operations for the protection of consumers and the overall health and legitimacy of the market, just as is done with land-based operations. These benefits include protecting consumer funds, ensuring game integrity, combating collusion fraud and money laundering, and ensuring responsible gaming processes are in place.
The trend toward regulation has been most evident in Europe, where Rational generates a majority of its revenues. However, we anticipate that trend will continue in the Americas and Asia in the future, though we do not have a crystal ball on timing.
Turning to our B2B operations which comprise the second quarter results released yesterday, as we did not complete the acquisition of Rational Group until the third quarter. Our land-based operations had a strong quarter. Our right sales revenues were generated by Cadillac Jack [07:07] which included Class II gaming machines as well as some Class III sales in various jurisdictions, including Oklahoma and California. During and subsequent to the quarter, Cadillac Jack also received transaction waivers to begin placing Class III gaming machines in multiple casinos in New Jersey as well as in Wisconsin and Louisiana. Through Diamond Game and Cadillac Jack, Amaya had an install base of approximately 12,500 gaming machines generating revenues on a participation basis.
Regarding our lottery business, Diamond Game has more than 1,000 of its instant ticket vending machines placed at this time. During the quarter the company continued preparations for installations pursuant to its contract in Maryland and is still on track for rollout of machines in Q3 expected to begin in September. The company expects to roll out 100-200 machines under this contract by the end of this year.
Related to our B2B online business, there was a year over year decline in software licensing revenues, led into lower revenues from Ongame and higher fees during the second quarter 2013 for platform setups and platform licensing. However, during and subsequent to the quarter we completed integration of our casino gaming system and launched games with operators such as bwin.party’s websites in Europe, Cherry AB, and Ultimate Gaming in New Jersey, which we expect to result in an increase in revenues in the back half of 2014. We also completed the integration of new games onto our casino gaming system for the benefit of our customers from several major suppliers including IGT, Bally SHFL, and Leander. We are continuing to integrate content from other leading suppliers as well.
I’ll now pass the call to Danny for a look at our financial results.
Daniel Sebag: Thanks, David.
Starting with our top line, revenues were $42.5 million in the second quarter of 2014 compared to $37.3 million in Q2 2013 with the growth driven by gaming machine sales from Cadillac Jack, higher participation agreement to revenues in part from the consolidation of Diamond Game’s revenues, offsetting the lower software licensing revenues, and the absence of hosted casino revenues due to our sale of WagerLogic in Q1 2014.
Moving on to expenses, our total expenses increased on a year over year basis to $61.6 million from $45.2 million in Q2 2013 with the increase driven by acquisition costs related to the Rational Group transaction, higher cost of products which reflect the increase in gaming machines sold outright, increased expenses related to the consolidation of Diamond Game, and higher depreciation and amortization expense.
Adjusted EBITDA in the quarter was $14.3 million vs. $14.2 million in Q2 2013. A reconciliation for IFRS net income is included in our earnings release. Our net loss in the quarter was $2.9 million vs. a loss of $11.4 million in Q2 2013. The improvement was driven by increased revenues, income from investments, and a deferred income tax recovery stemming in part from a tax election adjusting the tax basis of assets acquired in the Diamond Game acquisition.
The Corporation generated negative cash flows of $3.5 million from operating activities in Q2 2014. The cash flow used for investing activities in Q2 was $72.4 million driven by the U.S. $50 million deposit made in June related to the Rational Group acquisition. Cash flows provided from financing activities in Q2 was $193.7 million driven by proceeds from long-term debt financing related to Cadillac Jack.
Contingent on our earnings press release yesterday is our updated 2014 guidance. Due to the Corporation’s acquisition of Rational Group, whose results will be consolidated under Amaya’s as of August 1, 2014, Amaya has updated its 2014 full year financial targets originally identified May 15, 2014. We are guiding revenues of $669-$715 million, adjusted EBITDA of $265-$285 million.
The updated targets reflect the following: consolidating five months of results from Rational Group, elimination upon consolidation of the contribution that was originally included in Amaya’s May guidance from the integration of its online casino games onto Rational Group’s Full Tilt Casino offering, as Rational Group is now a fully owned subsidiary of Amaya. The guidance range provides a buffer to reflect the timing of Rational Group’s rollout of casino in new jurisdictions. We are not providing official 2015 guidance at this time. However, as noted in our June 12 press release, our projection for a run rate for the combined company under our first year of ownership, which has fumed [?] [12:24] an execution of Amaya’s plans for growth, is for $654-$698 million.
Please note, we are working on a business acquisition report that will be filed within the next 60 days which will include more detailed financial statements related to Rational for the first six months of 2014. Additionally, we expect the notes to our financial statements in November include the year-to-date results for Rational including for the time period that we did not own the asset. I’ll refer you to our cautionary comment on forward-looking statements announced at the beginning of the call.
I’ll now turn the call back over to David.
Baazov: Thanks, Danny.
Before we get to questions I just want to express my appreciation to Amaya’s shareholders for their ongoing support. During much of the first half of 2014 there was limited visibility into our strategy as related to iGaming for obvious reasons; however continued to show a belief in Amaya’s management to execute on plans that would improve the company and enhance shareholder value.
Finally, I just want to note a video that has been released by PokerStars providing a bit of an inside look into this fantastic company. The video has received very positive feedback and I encourage those interested to spend a few minutes watching it. It can be found on the corporate blog of rationalgroup.com.
At this point I’d like to ask the operator to open the lines for questions. Thank you.
Operator: [xx] [13:51] I’d like to remind everyone that if you’d like to ask a question, please press *1 on your telephone keypad. Please limit your questions to one question and one follow-up so we can answer as many questions as possible.
Your first question comes from Eyal Ofir from Clarus Securities. Your line is open.
Eyal Ofir: Thank you. Congratulations on closing that acquisition, guys.
Ofir: So, first question for me. Obviously the focus now shifts to growth under the Rational Group and the new company. You talked about launching casino product into new jurisdictions. Can you remind us where you’re at now? We know you have this Spanish license note to launch PokerStars casino offering, but I just wanted to know where you’re at, what the plans are, and then maybe if you can give me more detail on other jurisdictions you plan to have into.
Baazov: Yes. Currently I’d say that the launch of casinos has only been done on a small subset and only on Full Tilt. The company of Rational Group press released in advance of closing that they were launching casino in Spain.
I would say that this calendar year we expect it to launch on PokerStars as it relates to Spain and Italy, and to have a more broad rollout in terms of Full Tilt.
Ofir: Okay, great. Just to verify, the Full Tilt deployment so far is only within the UK market, is that correct, or is it a little bit broader in Europe?
Baazov: No, it’s not just in the UK market. It’s in a number of markets, but I would say that it’s only to a small subset and not a full rollout.
Ofir: Okay. For it, thanks. Then I’ll pass the line, but one last question. Just on the strategy here in terms of sportsbook, you talked a little bit about this having into with the acquisition announcement, but what should we be looking for from your end of it? Are you guys trying to develop this in-house, or are you going to potentially look at licensing third-party? What’s the strategy there, and when could we expect an update theory as well? Thanks.
Baazov: I’d say that this is something that we’ll elaborate on in the future. Right now the OPEX is built in, in terms of already developing an in-house sports betting product. Whether we decide to license or look at any other options will be something we can clarify in the future.
Ofir: Okay, great. Just before I pass the line, on the KPIs, most of your competitors provide some data points or on KPIs for active player counts, revenue per head, and all that stuff. Will you be able to provide that in the future? Also, on the Full Tilt side, is there anything you can share from an actual metrics of take-up rates or any other metrics in terms of how the casino product is going so far? Thanks, I’ll pass the line.
Baazov: In terms of elaborating on uptake and other metrics, we can’t do so at this specific time, but moving forward we’re obviously going to be segmenting the financial results of the business into the B2C and B2B components; and we’re going to be assessing which relevant KPIs we will be disclosing moving forward. That should be as of Q3.
Ofir: Okay, great. I’ll pass it along, hope I get in the queue. Thanks.
Operator: The next question comes from Robert Young from Canna Courts Annuity [?] [17:27]. Your line is open.
Robert Young: Hi, good morning. I was hoping that I could touch on something you were speaking about in the dialog: the new guidance provided with the quarter relative to the guidance provided through the announcements of the acquisition of Rational Group. I was wondering if you could just quickly draw a simple bridge between the two numbers again and outline whether there’s any assumption of cost or revenue synergy in there. Could you just re-outline that one more time? I know that’s an area that’s going to be a lot of focus.
Baazov: Hi Rob, this is David. The pro forma projection, assuming we own Rational Group as of January 1. So it’s our projection for what we would do in our first year of ownership of Rational Group and executing on our plans including a broader rollout of casino. Obviously we didn’t assume ownership until August 1.
Young: Yes, but I was hoping that you could look at just the five months as opposed to the full year.
Baazov: In terms of five months, we’re not really segmenting or breaking it out. The only thing I would add is that the largest quarter is Q1 and the smallest quarter of the year is Q3.
Young: Okay. So should we expect to see Q3 the largest quarter of the remaining five months yet? Could you talk a little bit what the cost of acquisition that you have seen at PokerStars relative to your competition? If you are planning to grow the user base, I think that will be a key item. I know you’re not providing KPIs or if you could provide a bit of data around what you’re seeing initially.
Baazov: So obviously the cost of acquisition is better than industry averages, but as discussed previously with Eyal, we’ll be assessing which KPIs we’ll be disclosing in Q3 more clearly.
Young: Okay. Last question for me, it would be on the asset that you’ve held for sale in the past. I think you said you’d provide a little more data on that in Q2. Just an update there, and then I’ll pass the line.
Baazov: In terms of the asset held for sale, I’d say that we’re still – clients that have to be sold in calendar year 2014, and there’ll be an update provided on it shortly. I think that that’s a strategy that we’ve taken internally to decide what we want to do with it, post-acquisition.
Young: Thank you.
Operator: The next question comes from Ralph Garcia from Global Maxfin. Your line is open.
Ralph Garcia: Good morning, guys, and congrats again on closing the deal. Just along the line of your Jan. 1 pro forma outlook. How does the seasonality look for a full sort of PokerStars with your Cadillac Jack and DGE business? I mean, your core business before was for the first half of the year was always a lower EBITDA than the second half. Did you answer it on the last question that Q1’s going to be your largest quarter and then Q3 the lowest on the pro forma?
Baazov: So Ralph, given the size of Rational Group, I’d say the majority of the revenue and EBITDA said that Q1 is the largest, and then it’s Q4, Q2, and Q3 from a seasonality perspective. I’d also add the fact that from a – Danny mentioned in his – as he mentioned earlier that I believe the pro forma in Canadian dollars is about 650 to roll over 690 assuming we take ownership of the business as Jan. 1.
So that could give people in terms of insight from when we took ownership as of August 1. The only other thing I’d add is that Q3 had the World Cup as well. It definitely had an effect. We can actually see that during games the traffic went down and during half time you see a spike. [laughter]
Garcia: [Laughter] As in respect of countries were losing and guys were sort of licking their wounds, and umm…
Garcia: Along those lines, if you had a sportsbook, would you look to sell Cadillac Jack and your land-based business down the road if you had the sportsbook? Theoretically you’re north of $2 billion run rate with PokerStars and a sportsbook, but what do you do with this land-based business?
Baazov: At this time we really wouldn’t be able to comment on that. I would say that there’ll be more information that comes out in Q3 and Q4 in terms of the broader strategy as it relates to sports betting as well as – we’re still very committed to all of our existing customers.
Garcia: Then just lastly, of the other two consolidations in the space with GTECH, IGT, and then Scientific Games and Bally, which one worries you the most, if any, going forward?
Baazov: From our perspective, neither one does. The majority of the business will now be coming from lottery as well as land-based gaming. I also think that to know of [?] [23:13], I wish them both well in their acquisitions. I think that potentially there’ll be further consolidation space.
Garcia: Okay. Thank you.
Operator: Your next question comes from a David McFatchen from Carl Marks Securities. Your line is open.
David McFatchen: Hi. I have a couple of questions. Just on PokerStars, you talk about new verticals, you know what they are, online casino and sportsbook. Then you talk about additional geographies. Outside of the U.S., what additional geographies do you see as potential to expand the business?
Baazov: That’s a good question, and David, I’d answer it from two perspectives. I think that the verticals that you mention and we talk about are gaming-specific.
When we look at this company, we look at it as having 86 million consumers, not just gamblers. We look to expand into other verticals that are potentially non-gaming as well; but in terms of geographies outside of the U.S., I’d say that there are geographies that we look at in terms of India as well as some other Latin American countries where we feel there’s going to be significant growth.
McFatchen: Okay. Then you gave a number for Cadillac Jack. You said there are 12,500 machines approximately installed on a participation basis. So it looks like there are about 1,000 deployed in Q2 on that basis, is that correct?
Baazov: David, that number actually includes Diamond Game as well. So it’s our land-based, participation-based revenue.
McFatchen: Oh, okay. Can I get just the Cadillac Jack number?
Baazov: I think it’s 11,500-11,700.
McFatchen: Okay. Then just this last thing. When I look at your North American revenue, in Q1 it was $18, in Q2 it was about $30. It looks like the delta there would be all sales and machines by Cadillac Jack. I was just wondering if you can confirm that that is correct?
Baazov: I’d say that a significant portion was, David.
McFatchen: Yeah, okay. That’s it for me, thank you.
Operator: The next question comes from Justin Kew from Cantor Fitzgerald. Your line is open.
Justin Kew: Good morning. Thank you for taking my question, David and Daniel. So David, just so that I understand clearly then, the guidance as provided, does it assume significant material cross-aisle or rollout of casinos in that number? What I’m hearing is that the difference between pro forma and the guidance was the pro forma assumed full ownership and full rollout. So based on the run rates, should we assume that the –
Baazov: Justin, I’d say that – I wouldn’t say a full rollout, but I’d say that it’d definitely be a broader rollout.
Kew: Okay. Let me get it straight. So the guidance includes some rollout of casino in that number, then, as well.
Baazov: Very little, yes.
Kew: Okay, little. Just in terms of – which is good – you gave some of the five months ended growth on the Rational side, five percent of top line and much higher on the net income line. Can you talk a bit about the growth that they’re seeing year over year and what’s driving that? I mean, it’s possibly coming from casino rollout, but then can we also assume that some of it’s coming from player yields as well?
Baazov: The only thing I’d comment on that, is that you’re seeing higher player yields as well as growth in the poker outside of the casino as well.
Operator: The next question comes from Eyal Ofir from Clarus Securities. Your line is open.
Ofir: One thing I also want to touch on is the regulatory environment in the U.S. Obviously that’s a potential growth opportunity for you guys. It sounds like New Jersey could be turning on in the near term, I guess it would be in the fall timeframe, but can you just talk about various states, where they’re at. Obviously in California there’s been an update there recently. I just wanted to get your thoughts and take on the regulatory environment in the U.S. If you can, also, I think there was comments over the last month about Russia potentially looking at regulation, and there’s also been discussions about you guys talking [xx] [27:45]. Can you give us any more clarification on the U.S. and some of the other markets as well? Thanks.
Baazov: Eyal, as it relates to the U.S. I think that a lot of states are looking at the regulation because of the benefits of consumer protection, however legislation takes time and it’s difficult to predict when it’ll be passed. We’re going to examine proposed legislation on a state-by-state basis.
I would say that as there’s been some public comments made by New Jersey’s Division of Gaming Enforcement, and at this time we would not make any statement on that but we’re very excited about the U.S. opportunity. California in 2015, we believe other states as well.
In terms of Russia, there was some public comments that Russia is looking to add to the regulation of online poker. They’ve just recently approved online sports betting with the licenses to be issued I believe in January 2015. The expectation is poker’s going to be around the same time.
In terms of, you mentioned Quebec, I would say not just Quebec, but every single province in Canada has been discussed with some of them before the transaction as well. I would say from a compliance or regulatory perspective, the revenue base that’s being generated as it relates to poker is already done and approved from a compliance perspective. We’re now looking at the markets from a casino and sports betting perspective in terms of those growth initiatives.
Ofir: Okay, great. Then just before passing the line, just in terms of strategy as well, we just saw I think PokerStars sponsored an event at the Hard Rock in Florida. So I want to get your thoughts about, is the company looking to do more of these type of sponsorship deals across the U.S. to get the PokerStars brand back in there following the close of this acquisition? Thanks, and I’ll pass the line.
Baazov: So that is correct. There is something that we did with Hard Rock. I can’t really comment on that at this time.
The only thing I’d say is that another vertical that we see from a growth perspective is branding and licensing the brand to land-based operators in order to rebrand their land-based poker room the PokerStars room and being able to significantly increase their traffic and help our brand as well.
Operator: This brings us to the end of our Q&A session today. I will turn the call back over to the presenters for closing remarks.
Baazov: I’d like to thank everyone for participating on today’s call. We certainly appreciate your questions and your ongoing interest and support of Amaya. Thank you and goodbye.
Operator: Thank you everyone. This concludes today’s conference call. You may now disconnect.
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