Inspired Entertainment, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended June 30, 2018; the three-month period corresponds to fiscal Q3. The filing was signed August 14, 2018. Amounts are U.S. dollars in millions unless otherwise noted.
Business context
Inspired is a global business-to-business gaming technology provider, with Server Based Gaming (SBG) and Virtual Sports segments. Its products and services are supplied to regulated gaming, betting and lottery operators. More than half of revenue was generated in the UK; Greece was a key source of recent SBG growth.
Financial results and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $36.9 | $32.3 | $105.8 | $87.4 |
| Operating income (loss) | $1.6 | ($0.7) | ($3.7) | ($12.1) |
| Net loss | ($4.0) | ($8.3) | ($8.7) | ($39.8) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $17.8 | $4.2 |
| Investing cash flow | Not provided for quarter | Not provided for quarter | ($28.1) | ($29.1) |
| Adjusted EBITDA (non-GAAP) | $15.5 | $9.7 | $37.8 | $26.8 |
- Q3 revenue rose 14.3% reported and 7.9% at constant currency. Service revenue growth outweighed lower hardware sales. Nine-month revenue rose 21.0% reported; management cited 13.1% growth on a constant-currency, like-for-like basis.
- Q3 operating results improved to income, while the nine-month operating loss narrowed. Net losses also narrowed substantially year over year; the prior-year comparison included substantial acquisition-related costs and interest on shareholder loan notes that were later waived.
- Q3 service revenue was $34.5 million and hardware revenue $2.4 million, versus $26.8 million and $5.5 million, respectively, a year earlier. Q3 SBG revenue was $26.9 million; Virtual Sports revenue was $10.0 million.
- Nine-month capital expenditure was $32.9 million by segment disclosure; cash purchases of property and equipment and capital software totaled $28.1 million. Operating cash flow less investing cash outflow was negative $10.4 million.
- Cash was $10.2 million at June 30, down from $20.0 million at September 30, 2017. Total assets were $206.6 million, total liabilities $211.6 million and stockholders’ deficit $5.0 million. Management reported a $7.7 million working-capital deficit; the filing notes that this measure includes non-cash-settled earnout and deferred-revenue items.
- June 30 debt disclosures show $127.9 million of senior bank debt on the balance sheet and $128.6 million including capital leases in the debt note. The company said it complied with relevant debt covenants. Debt maturity and current-classification disclosures should be read carefully alongside the subsequent refinancing.
Changes and operating drivers
- Q3 constant-currency SBG revenue increased 9.2%, mainly from Greece terminal deployment and a $3.4 million Greek software-license sale. The installed SBG base grew 16.3% year over year to 32,579 terminals, but customer gross win per unit per day fell 5.1% and net win per unit per day fell 6.1%.
- Virtual Sports Q3 revenue grew 4.5% at constant currency. Management said underlying growth was 12.8% excluding $0.6 million of revenue decline from expired long-term licenses. Live customers increased to 95 from 82; Mobile RGS customers rose to 25 from nine.
- For the nine months, SBG service revenue growth was led by Greece, including terminal rollout and software-license sales. Hardware revenue declined as certain prior-period and nil-margin terminal sales fell. Virtual Sports underlying growth was partly obscured by expired licenses, a major-customer renewal timing difference and recognition of previously unreported prior-year revenue.
- SG&A increased, including restructuring costs associated with senior-management changes. Nine-month stock-based compensation rose to $5.9 million, including a $2.1 million award-modification charge. Depreciation and amortization increased to $31.3 million for the nine months as new platforms, games and terminals entered service.
Outlook, refinancing, risks and unusual items
- Management said available cash, expected operating cash flow, ability to control or defer capital projects and external borrowing availability were expected to fund net cash requirements through August 2019. It cautioned that results for the interim period are not necessarily indicative of full-year results.
- After quarter-end, the company refinanced its prior facilities. On August 13, 2018, it arranged $140 million of five-year senior notes and a £7.5 million revolving facility with a three-year term. The notes carry a LIBOR-based margin of 9% or a base-rate margin of 8%; the revolver carries 4% plus LIBOR on drawn amounts and a commitment fee on unused capacity. The notes are secured, include leverage, fixed-charge-coverage and minimum-liquidity covenants, and have mandatory-prepayment provisions and, in some cases, a 3% repayment premium. A three-year cross-currency swap was also entered into. These are post-quarter-end terms, not June 30 balances.
- The company disclosed an expected annualized Adjusted EBITDA reduction of approximately £7–8 million ($10–11 million at the then-current exchange rate) from the UK government’s announced plan to reduce the maximum stake on B2 gaming machines from £100 to £2. Timing and actual impact remained uncertain and depended on approval, implementation and management assumptions.
- The earnout liability was $9.0 million at June 30 and may be settled in up to 2.5 million shares, based on EBITDA in specified jurisdictions for the year ending September 30, 2018. A $7.8 million nine-month fair-value credit reduced the liability and improved reported earnings; it is not operating cash flow.
- Key risks include customer and revenue concentration, contract renewal and retention, gaming regulation and taxation, competition, technology and cybersecurity, foreign-exchange and interest-rate exposure, and Greece’s capital controls. Three customers each represented at least 10% of Q3 revenue; the top ten customers generated 70% of revenue for the three- and nine-month periods.
- The filing said no legal matters were then considered material, while noting that ordinary-course matters could have an adverse effect. Disclosure controls were assessed as effective at June 30, 2018, and no material change in internal control was reported for the quarter.
Important facts for investors to verify
- Confirm the refinancing’s final executed terms, effective borrowing costs, currency-swap exposure, covenant headroom and resulting debt-service burden.
- Track the UK B2 stake-limit implementation and compare realized SBG impact with management’s £7–8 million annualized Adjusted EBITDA estimate.
- Reconcile the reported $7.7 million working-capital deficit with balance-sheet current assets and liabilities, and assess cash availability given Greek capital controls.
- Assess whether Greek rollout growth and Virtual Sports customer gains can offset lower SBG win metrics, hardware declines and expiring or renewed contracts.
- Review customer concentration, earnout valuation and potential share dilution, and distinguish non-GAAP Adjusted EBITDA from GAAP earnings and cash generation.