Inspired Reports Second Quarter 2023 Results

• Revenue of $80.4 million, grew 13% on both a reported and functional currency basis vs. prior year
• Adjusted Revenue¹, which excludes Low Margin Gaming Hardware Sales, was $76.0 million, up 7% on both a reported and functional currency basis vs. prior year
• Segment revenue growth in all segments, highlighted by increases of 24% in Gaming (6% in Adjusted Revenue), 8% in Virtual Sports and 28% in Interactive, as measured in functional currency vs. prior year quarter
• Net Income of $4.1 million, or $0.14 per diluted share
• Adjusted Net Income¹ of $5.3 million, or $0.18 per diluted share, vs $0.24 per diluted share in prior year quarter
• Adjusted EBITDA¹ of $26.2 million, constant on a reported basis and up 1% in functional currency vs. prior year quarter, which includes impact of timing related to certain equipment sales and certain expenses shifting approximately $2 million of Adjusted EBITDA from the second quarter to the second half of the year

NEW YORK, Aug. 09, 2023 (GLOBE NEWSWIRE) -- Inspired Entertainment, Inc. (“Inspired” or the “Company”) ( INSE), a leading B2B provider of gaming content, technology, hardware and services, today reported financial results for the three-month period ended June 30, 2023. The second quarter 2023 results reflect continued double-digit revenue growth in the Company’s aggregate digital businesses, which comprise the Virtual Sports and Interactive segments, as well as ongoing growth in the Gaming segment and the return to revenue growth in the Leisure segment. Reported results reflect the relative stability of the GBP versus the USD on a year-over-year basis (GBP 1.25: USD 1.00 for the three months ended June 30, 2023 as compared to GBP 1.26: USD 1.00 for the three months ended June 30, 2022).

“Revenue grew in each of our business lines during the second quarter reflecting solid underlying fundamentals. The digital businesses once again generated record reported quarterly revenue and are steadily contributing a greater proportion of our earnings and cash flow,” said Lorne Weil, Executive Chairman of Inspired. “Interactive revenue increased 28% year-over-year on a functional currency basis, posting a quarterly record as we increased our footprint through new customer launches as well as revenue growth from existing customers. Virtual Sports produced record reported quarterly revenue of $15.0 million with very high conversion to earnings and cash flow, as Adjusted EBITDA grew faster than revenue. It is also worth mentioning that we successfully negotiated long-term extensions for our Virtual Sports strategic partnerships with both bet365 and Paddy Power.”

Weil continued, “In our land-based business, recent initiatives both during the quarter and subsequent are expected to add to future growth. For instance, we are beginning to benefit from the sales of our new Vantage terminals. Through last week with over 40% of the installations complete, early results indicate an improvement in revenue per machine in the high single digits with potential to reduce operational costs. In addition, during the quarter we entered into $4.4 million of “low margin” terminal sales, whereby product sold today will secure longer term recurring revenue streams utilizing an asset-light model. We anticipate additional sales of this nature during the second half of the year.”

Weil added, “We have an exciting pipeline of new products and further enhancements across our businesses. Most significant is that we are on target to deliver our new National Football League (NFL) product in time for the start of the upcoming season. We continue to be very excited about the potential of our offering and the experience the product will deliver to NFL fans globally. In both Virtual Sports and Interactive, we remain more convinced than ever that we are in the early stages of an expanding global opportunity.”

Weil concluded, “The long-term fundamentals and health of the business remain very strong. We are optimistic about the compelling growth dynamics in our digital markets as a wider audience engages with online betting and gaming and new jurisdictions continue to open up. Combined with a resilient land-based business and retail customer base, our diversification and proven ability to expand our business will enable us to deliver further progress against our omni-channel strategy combining our high-margin, capital efficient digital businesses with our steady land-based businesses.”

Results for the Three Months ended June 30, 2023

• Total Revenue of $80.4 million for the three months ended June 30, 2023 compared to $71.3 million for same three-month period a year ago, was an increase of 13% on a reported² and functional currency basis. Total Revenue excluding Low Margin Gaming Hardware Sales was $76.0 million, an increase of 7% on both a reported and functional currency basis. Results included revenue increases in all segments, led by the Gaming, Virtual Sports, and Interactive segments.
  • Gaming Revenue of $31.5 million increased 24% year-over-year on a reported and functional currency basis from the prior year quarter. Gaming Revenue excluding Low Margin Gaming Hardware Sales was $27.1 million, an increase of 6% on a reported and functional currency basis, primarily driven by an increase in UK Product Revenue as well as an increase in North America and UK Service Revenue, partially offset by lower revenue from Greece driven by the reduction of long-term license revenue due to the expiration of software licenses for terminals installed in 2018.
  • Virtual Sports Revenue of $15.0 million increased 7% year-over-year on a reported basis (+8% on a functional currency basis), driven by growth from existing online customers and an increase in Retail Virtuals.
  • Interactive Revenue of $7.4 million increased 28% year-over-year on a reported and functional currency basis, with growth principally driven by growth within our existing customer base in the U.K., U.S. and Canada due to the steady introduction of new content and an increase in exclusive deals with tier-one customers as well as new customer launches.
  • Leisure Revenue of $26.5 million increased 2% year-over-year on a reported and functional currency basis, predominantly due to an increase in Holiday Parks revenue of $1.1 million due to the addition of new holiday parks, partly offset by a decline in Pubs revenue of $0.5 million. This decline was primarily due to the structured withdrawal of non-core low-margin amusement and prize vend machines as recognized in the third quarter of 2022 in the Pubs sector, as well as the reduction in the number of gaming machines.
• Net Income of $4.1 million, or $0.14 per diluted share, compared to net income of $7.2 million, or $0.25 per diluted share, in the prior year quarter primarily due to increases in selling, general and administrative expenses, depreciation and amortization expense, interest expense (primarily due to foreign exchange movements on bank accounts) and income tax expense.
• Adjusted Net Income of $5.3 million, or $0.18 per diluted share, compared to adjusted net income of $6.9 million, or $0.24 per diluted share, in the prior year quarter.
• Adjusted EBITDA of $26.2 million was constant year-over-year on a reported basis (+1% on a functional currency basis). The Company’s aggregate digital business, which includes Virtual Sports and Interactive, generated 57% of Adjusted EBITDA contribution³ compared to 51% in the prior year quarter. Current year results reflect the inflationary impact of $0.6 million due to the government-mandated wage increases in the UK and the pull-forward of $0.8 million of certain recurring expenses into the second quarter this year versus the second half last year.
• Adjusted EBITDA Margin was 33%, compared to 37% in the prior year quarter. Adjusted EBITDA Margin excluding Low Margin Gaming Hardware Income was 34%. The decline in margin was primarily due to an increase in non-staff costs of $1.5 million due to phasing of audit fees, an increase in insurance and informational technology costs and additional legal fees, as well as an increase in staff costs of $1.3 million, driven by an increase in Leisure staff costs.
  

Recent Highlights

Virtual Sports

• Contracts – Inspired signed the following contracts in the second quarter 2023:
  • Long-term contract extensions as the provider of Virtual Sports products with prominent online B2C operators Paddy Power and bet365.
  • Launched Virtual Sports in Turkey under the brand Milli Piyango in partnership with Sisal Sans.
    
• Content – During the second quarter, the Company successfully launched the following:
  
  • Introduced Re-Play eSports™ featuring Counter-Strike™: Global Offensive in partnership with GRID, a game data platform specialized in providing in-game data solutions for the eSports and gaming industry to new and existing customers.
  • Netherlands Lottery went live with Soccer, Cricket, Darts, Basketball, and American Football Virtual events, all streamed via the Company’s streaming platform.
    

Interactive

• New Customers –
  • Launched premium iGaming content with Caesars Sportsbook & Casino in Pennsylvania and FanDuel in Michigan and Pennsylvania.
  • Went live with nine new operators during the second quarter including Soaring Eagle in Michigan, Eurobet in Italy and DAZN Bet in the United Kingdom. Year-to-date, the Company has a net increase of sixteen new operators.
    
• Content –
  
  • Released Gold Cash Freespin Megaways™.
  • Released 1001 Arabian Nights™.
  • Launched operator-branded exclusive Big William Hill Fortune™ online title.

Gaming

• Commenced installation of “Vantage®” terminals – Completed trial period and installed over 950 new “Vantage®” terminals into venues of three major customers, with a total of 6,500 expected to be live by the fourth quarter.
• Announced the Launch of New VLT System for Codere in Partnership with Cristaltec – In partnership with Cristaltec S.p.A. (“Cristaltec”), a leader in design, production and distribution of games and devices for the amusement with prize sector in Italy, the Company announced the installation of the new Cristaltec VLT cabinets running on Inspired’s platform in Codere, a leading Spanish multinational company in the private gaming sector across Europe and Latin America. Codere is the seventh concessionaire to adopt Inspired’s platform in Italy.

Leisure

• Pubs and Holiday Parks Contracts Renewed and Extended –
  • Signed a renewal five-year contract with our largest customer, JD Wetherspoon for the supply of over 2,000 Category C gaming machines and a three-year agreement with Whitbread, strengthening our position in the Pubs sector.
  • Executed a two-year extension with holiday park Center Parcs and signed a new three-year agreement with holiday park Verdant, supporting our continued partnership.
• Commenced the technical trial of our brand-new Vantage Category C cabinet in the pubs market.

Revision of Prior Period Results

The Company has provisionally concluded that certain completed software development projects were, but should not have been, delayed in the shift from work in progress to completed projects. Consequently, the commencement of amortization for certain projects was delayed and the reported amortization was lower than the actual amortization.
While we do not provisionally believe that any individual prior period was materially misstated, we do believe that an out of period correction in the three months ended June 30, 2023, could be viewed as such, and have therefore revised prior periods.

The following table summarizes the effect of the revision to the Company’s financial statements.

Of the total adjustment, the split between segments was Gaming 44%, Virtual Sports 23%, Interactive 23%, Leisure 4% and Corporate 6%.

There is no change to the non-GAAP metric Adjusted EBITDA as a result of these non-cash revisions.

These numbers are subject to change.

Non-GAAP Financial Measures
We use non-GAAP financial measures, including Adjusted EBITDA, to analyze our operating performance. We use these financial measures to manage our business on a day-to-day basis. We believe that these measures are also commonly used in our industry to measure performance. For these reasons, we believe that these non-GAAP financial measures provide expanded insight into our business, in addition to standard U.S. GAAP financial measures. There are no uniform rules for defining and using non-GAAP financial measures, and as a result the measures we use may not be comparable to measures used by other companies, even if they have similar labels. The presentation of non-GAAP financial information should not be considered in isolation from, as a substitute for, or superior to, financial information prepared and presented in accordance with U.S. GAAP. You should consider our non-GAAP financial measures in conjunction with our U.S. GAAP financial statements.

We define our non-GAAP financial measures as follows:

EBITDA is defined as net loss excluding depreciation and amortization, interest expense, interest income and income tax expense.

Adjusted EBITDA is defined as net income (loss) excluding depreciation and amortization, interest expense, interest income and income tax expense, and other additional exclusions and adjustments. Such additional excluded amounts include stock-based compensation U.S. GAAP charges where the associated liability is expected to be settled in stock, and changes in the value of earnout liabilities and income and expenditure in relation to legacy portions of the business (being those portions where trading no longer occurs) including closed defined benefit pension schemes. Additional adjustments are made for items considered outside the normal course of business, including (1) restructuring costs, which include charges attributable to employee severance, management changes, restructuring, dual running costs, costs related to facility closures and integration costs, (2) merger and acquisition costs and (3) gains or losses not in the ordinary course of business.

We believe Adjusted EBITDA, when considered along with other performance measures, is a particularly useful performance measure, because it focuses on certain operating drivers of the business, including sales growth, operating costs, selling and administrative expense and other operating income and expense. We believe Adjusted EBITDA can provide a more complete understanding of our operating results and the trends to which we are subject, and an enhanced overall understanding of our financial performance and prospects for the future. Adjusted EBITDA is not intended to be a measure of liquidity or cash flows from operations or a measure comparable to net income or loss, because it does not take into account certain aspects of our operating performance (for example, it excludes non-recurring gains and losses which are not deemed to be a normal part of underlying business activities). Our use of Adjusted EBITDA may not be comparable to the use by other companies of similarly termed measures. Management compensates for these limitations by using Adjusted EBITDA as only one of several measures for evaluating our operating performance. In addition, capital expenditures, which affect depreciation and amortization, interest expense, and income tax benefit (expense), are evaluated separately by management.

Adjusted Revenue (Revenue Excluding Low Margin Gaming Hardware Sales) is defined as revenue excluding hardware sales that are sold at low margin with the intention of securing longer term recurring revenue streams.

Adjusted Net Income is defined as net income (loss) excluding the effects of certain exclusions and adjustments. Such excluded amounts include income and expenditure in relation to legacy portions of the business (being those portions where trading no longer occurs) including closed defined benefit pension schemes. Additional adjustments are made for items considered outside the normal course of business, including (1) restructuring costs, which include charges attributable to employee severance, management changes, restructuring, dual running costs, costs related to facility closures and integration costs, (2) merger and acquisition costs and (3) gains or losses not in the ordinary course of business. These items have been adjusted to reflect the tax impact from excluding them from net income (loss).

Adjusted Net Income per diluted share is computed by dividing the Adjusted Net Income by the weighted average number of common shares outstanding during the period, including the effects of any potentially dilutive securities, including RSUs, using the treasury stock method, and convertible debt or convertible preferred stock, using the if-converted method, unless the inclusion would be anti-dilutive.

Functional Currency at Constant rate. Currency impacts shown have been calculated as the current-period average GBP:USD rate less the equivalent average rate in the prior year quarter, multiplied by the current period amount in our functional currency (GBP). The remaining difference, referred to as functional currency at constant rate, is calculated as the difference in our functional currency, multiplied by the prior year quarter average GBP: USD rate, as a proxy for functional currency at constant rate movement.

Currency Movement represents the difference between the results in our reporting currency (USD) and the results on a functional currency at constant rate basis.

Reconciliations from net loss, as shown in our Consolidated Statements of Operations and Comprehensive Loss, to Adjusted EBITDA are shown below.

Conference Call and Webcast
Inspired management will host a conference call and simultaneous webcast at 8:00 a.m. ET / 1:00 p.m. UK on Wednesday, August 9, 2023 to discuss the financial results and general business trends.

Telephone: The dial-in number to access the call live is 1-888-550-5864 (US) or 1-646-960-0275 (International). Participants should ask to be joined into the