Revenue growth helps Inspired reduce net loss in 2018

New York-listed Inspired Entertainment saw revenue rise 15.4% to $141.4m for its 2018 financial year, helping it narrow its net loss, but admitted it faces more setbacks as result of the reduction in B2 gaming machine stakes in the UK from April 2019.

The gaming technology supplier, which saw its share price fall by 2.44% on Monday after releasing its results for the year ended September 30, grew revenue across both its Server Based Gaming (SBG) and Virtual Sports divisions.

Growth was primarily driven by the continued roll-out of terminals in Greece with OPAP Group, as well as increased interactive and virtual sports revenue, aided by the launch of products in new channels for existing customers, and favourable currency movements.

SBG revenue increased 11% to $103.6m on a like-for-like basis. Inspired’s total number of installed gaming terminals increased by 16% to 33,194 during the year, with 5,500 now live in Greece thanks to the company’s agreement with OPAP. SBG service revenue increased by 20.7%, to $93.2m, primarily due to an increase in Greece of $14.3m.

Virtual Sports revenue increased 8% year-on-year to $37.8m, driven by a 14% increase in partners to 97, including Boylesports in Ireland, Fortuna in Poland, and Veikkaus in Finland. It was also boosted by the launch of virtuals for the Pennsylvania Lottery in August, its first major US customer agreement in the US lottery market, and an increase in revenue from existing customers, due in part to additional products offered. 

This growth helped earnings before interest, tax, depreciation and amortisation (EBITDA) rise 32.9% to $54.1m. EBITDA margin increased from 34.7% to 39.5%, primarily as a result of a more profitable revenue mix, more effective business processes, and operating leverage in the cost structure. The company also benefitted from a restructuring of $150m of its borrowing facilities in a series of transactions.

The company reported a net loss of $20.6m for the year, down just over 50% from $49.1m in FY2017 with a net operating loss of $7.3m, compared to $11.9m in 2017. The balance sheet was impacted by an increase in general and administration expenses, including staff costs, to $60.1m. Cost of sales, excluding depreciation and amortisation, which includes items such as machine cost of sales and content royalties, increased by $4.1m, or 15.4%, on a reported basis, to $30.8m.

Depreciation and amortisation increased by $8.0m, or 23.7%, on a reported basis, to $41.8m, primarily due to additional machine and machine-related depreciation on SBG of $1.7m and additional amortisation in connection with new platforms and games going live. Inspired also incurred an impairment expense of $7.7m following a review of key strategic areas where the carrying value of certain assets was deemed to be in excess of their current value.

Looking ahead, Inspired said it expects its revenues to be reduced by between $10-11m per year due to the reduction of maximum stakes allowed on B2 machines, or fixed-odds betting terminals (FOBTs) in the UK.

Analysts at Regulus Partners said they expect the decision to slash FOBT maximum stakes from £100 to £2 to significantly impact Inspired's cash flow from the second quarter of 2019. 

Regulus noted that by bringing B2 machines in line with B3 in terms of stakes, Inspired and Scientific Games – which dominate the FOBT market – would be forced to compete in a crowded marketplace, driving down revenue.

“We struggle to see the UK FOBT duopoly of Inspired and Scientific Games continuing once all LBO machine product is B3,” Regulus explained. “Competition with the much broader range of B3 providers is likely to reduce this figure materially, in our view – especially in the medium-term.”

Lorne Weil, executive chairman of Inspired, added that the company expects that North America will become an increasingly important market in the coming year.

“While we continue to focus on maintaining […] growth, we are also intentionally targeting growth across our businesses in North America,” Weil said. “I am optimistic that we can execute on this strategy much as we have done in Greece, where, in less than two years, we have grown the Virtual Sports business exponentially, recently adding another channel of content, and have become the largest supplier of terminals in the marketplace.

“North American lottery and gaming operators are looking for innovative new products that have proven performance, and with Greece as an example, we believe our products will scale.”

Inspired is to reschedule its financial calendar to run from January to December from 2019, and as a result will report transitional figures for the final three months of 2018 in the coming months.