Inspired Entertainment, Inc. — Q2 2023 Form 10-Q
Business context and reporting period. The company supplies gaming content, platforms, terminals and related services to regulated lottery, betting and gaming operators. This unaudited filing covers the quarter and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods. Amounts are in U.S. dollars unless noted.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $80.4M | $71.3M | $146.4M | $131.9M |
| Operating income | $12.4M | $13.1M | $18.5M | $19.7M |
| Net income | $4.1M | $7.2M | $3.9M | $8.4M |
| Net income per diluted share | $0.14 | $0.25 | $0.13 | $0.29 |
| Net cash from operating activities | Not separately provided for the quarter | $37.5M | $15.9M | |
| Adjusted EBITDA (non-GAAP) | $26.2M | $26.1M | $47.4M | $46.2M |
- Q2 revenue increased 13% as reported; six-month revenue increased 11%. Product sales rose sharply, mainly from gaming-terminal sales. Excluding $4.4M of low-margin gaming hardware sales, adjusted revenue was $76.0M for Q2 and $142.0M for the half year; the company reports these as non-GAAP measures.
- Cost of sales excluding depreciation and amortization was $23.2M in Q2 and $39.9M for the half year. Calculated gross margins on this basis were approximately 71% and 73%, respectively, versus approximately 77% in both prior-year periods; the mix of low-margin hardware sales affected comparison.
- Calculated operating margins were approximately 15% in Q2 and 13% for the half year, down from approximately 18% and 15%. Higher SG&A, stock compensation and, for the half year, restructuring costs contributed to lower operating income.
- Cash was $42.1M at June 30, 2023, versus $25.0M at December 31, 2022. Working capital was $64.4M, including $31.1M of deferred income. The company also reported $25.4M available under its undrawn revolver.
- Balance-sheet long-term debt was $294.0M, compared with $277.6M at year-end 2022. The senior debt has a fixed interest rate; net leverage for the revolver covenant was 2.4x, within the 5.75x maximum applicable at June 30. No covenant breaches were reported.
- Six-month investing cash outflow was $20.6M, including $9.3M for property and equipment and $10.7M for capitalized software. Cash increased $17.1M over the half year.
Material changes versus prior periods
- Service revenue grew 5% in Q2 and 4% for the half year; product revenue grew 89% and 98%, respectively, with low-margin terminal sales an important factor.
- Virtual Sports and Interactive grew, supported by online activity, new launches and customer expansion. Leisure revenue was slightly lower for the half year, while Leisure operating income declined amid higher costs.
- Net income fell to $4.1M in Q2 and $3.9M for the half year. Higher interest expense and taxes also weighed on results; the prior-year half included a $0.9M gain on disposal of the Italian VLT business.
- Operating cash flow improved year over year, but management said the increase primarily reflected working-capital movements, including invoice timing and higher deferred revenue.
- The company revised prior-period financial statements after identifying delayed amortization of completed software projects. The revision reduced Q2 2022 net income by $0.3M and first-half 2022 net income by $0.6M; 2022 year-end software development costs and total assets were each reduced by $1.0M.
Outlook, risks and unusual items
- Management believes cash, expected operating cash flows, access to external borrowings and the ability to control or defer capital projects will fund net cash requirements through August 2024. The filing provides no specific earnings or revenue guidance.
- Management cited favorable working-capital timing as a contributor to first-half cash generation. Inventory increased to $48.0M from $31.0M at year-end, and deferred revenue rose to $33.9M from $8.5M.
- The company reported a $3.0M group restructuring cost for the first half, excluded from Adjusted EBITDA. Q2 SG&A also reflected audit-fee timing, insurance, IT, legal and seasonal staffing costs.
- One customer represented 12% of Q2 revenue and 14% of first-half revenue. The business is exposed to regulation, competition, technology changes, customer and supplier relationships, seasonality, working-capital needs and foreign-exchange movements. UK operations are the largest revenue source.
- Management said disclosure controls were not effective at the reasonable-assurance level at June 30 because of previously identified material weaknesses; remediation efforts had not operated long enough to conclude the weaknesses were fully remediated.
- The UK defined-benefit pension scheme had a prior funding shortfall and is subject to a recovery plan through October 2026. The company expects $1.1M of deficit-reduction and $0.3M of expense contributions in 2023. Management said it currently has no material legal matters, while noting ordinary-course matters could arise.
- A full valuation allowance remained against deferred tax assets. Management said a significant release may become supportable within six months, depending on actual profitability; timing and amount are uncertain.
Most important facts for investors to verify
- Whether operating cash flow remains strong when the favorable deferred-revenue and invoicing timing effects reverse.
- How much future revenue and margin are attributable to low-margin Vantage terminal sales, and whether deployments translate into recurring service revenue.
- The debt maturity and refinancing plan, fixed-rate interest burden, revolver availability and continued covenant compliance.
- Progress in remediating the material weaknesses in disclosure controls and the effect of the software-amortization revision on future reporting.
- Whether earnings support a deferred-tax-asset valuation-allowance release and whether customer concentration or regulatory and foreign-exchange exposures change.