GAN mulls sale options after revenue rises in 2018

iGaming and software provider GAN has commenced a strategic review to consider a potential sale, listing in the US stock exchange or bringing in new investment, after posting a 16% year-on-year increase in net revenue for 2018.

GAN has enlisted investment bank Union Gaming to assist with the process as it considers its options in the wake of releasing its full-year financial results.

Revenue for the 12 months through to December 31, 2018, amounted to £10.6m (€12.3m/$13.8m) compared to £9.1m in the previous year.

GAN put this down to an improved performance by its real-money gaming arm, where revenue increased by £1.2m to $4.9m for the year, as well as an improved performance by its Simulated Gaming operation.

Simulated Gaming development fees were also down £200,000, while revenue share increased £400,000 to £4.2m, which resulted in an overall 5% rise for this area of the business. GAN said that growth in New Jersey in the US and Italy helped boost Simulated Gaming, with the provider having deals in place with 14 casinos across the two markets.

However, GAN was hit by a rise in both distribution costs and administrative expenses in 2018, with total operating costs climbing from £13.2m in 2017 to £16.9m in the past 12 months.

Distribution costs, which include royalties to third parties, direct marketing and the costs of operating hardware platforms across the business, totalled £9.6m, up from £9.1m. GAN put this down to increased royalties payable to providers of third-party games content in Europe for real-money gaming and in the US for Simulated Gaming.

In terms of administrative expenses, which include the costs of personnel and related expenditure for its offices in the UK, Israel and Bulgaria amounted to £7.3m, compared to £5.5m in 2017.

This seemingly had an impact on earnings and profit for the year, with clean earnings before interest, tax, depreciation and amortisation slipping from a profit of £454,000 in 2017 to a loss of £1.5m last year.

Among the reasons for this decline were greater investment in technology headcount to support a growing sales pipeline and partner expansion plans, as well as a loss of £200,000 on its overseas internet casino, launched on behalf of tribal operator the Chichasaw Nation, and the recognition of the sale of Moneygaming.com and its associated website in 2017.

Operating losses also widened from £4.1m to £6.4m, while loss before taxation also increased from £4.2m to £6.7m. Loss for the year attributable to owners of the parent company amounted to £6.0m, up from £3.5m in the previous year.

However, despite posting wider losses, GAN’s CEO Dermot Smurfit was upbeat about the past year, describing it as a milestone 12 months for the provider. He said GAN had continued to adapt to positive changes in the online gaming market and now is well positioned for 2019.

Smurfit cited the repeal of PASPA in the US as one of the key highlights of 2018 for GAN, saying this will open up a host of new opportunities for growth in regulated states.

“The repeal of a 25 year-old Federal ban on sports betting in America in May 2018 cleared the path for GAN to launch internet sports betting just four months later following a complex re-allocation of our internal engineering resources in order to integrate the first sports betting application into our enterprise software platform,” he said. “A number of significant commercial and strategic developments occurred in 2018 and early 2019, the most significant of these was the launch of internet sports betting but the second most significant was the licensure of GAN’s US Patent to PaddyPower Betfair’s US subsidiary.

“Management believes that the recognition of GAN’s US Patent significantly underpins GAN’s intangible asset value and could potentially lead to further client partnerships and US Patent licensing revenue opportunities,” Smurfit explained. “We believe GAN has developed considerable momentum in the US market and that the Company is well-positioned to secure additional profitable opportunities from incremental US States which regulate real money internet gambling over time.”

Outside of the US, Smurfit cited further growth potential in Europe singling out Italy as a key market for the provider moving forward.

“Our Italia regulated internet gaming business grew substantially with the addition of our ninth client, Goldbet, a major retail sports betting and gaming operator,” he said.

“The Overseas Internet Casino, WinStar.com, launched user acquisition and retention marketing in September 2018 through the efforts of our newly-established multi-client digital marketing agency ‘GAN Digital’, established in Tel Aviv, Israel earlier in the year.”

Smurfit added: “We remain confident in our prospects for 2019 and beyond.”

Analysts at Regulus also picked up on this US focus, saying that GAN is now at a strategic crossroads, having covered its UK licensee exit with a commitment to the US.

However, Regulus warned that “with nearly all of its eggs in the US basket (from a strategic potential perspective), albeit spread across platform (including sportsbetting), casino and Simulated”, it remains to be seen whether this strategy will pay off.

Regulus said: “The big question is whether a small company with limited resources can compete in the US even with a head start, given the level of competitiveness, investment required and uncertainty of both timing and outcome.

“GAN has perhaps answered this question by putting itself up for sale this morning.”