Inspired reports results for period ending 31 December

11 February 2019

(PRESS RELEASE) -- Inspired Entertainment, Inc. today reported financial results for the three-month period ended 31 December 2018. As previously announced, the company changed its fiscal year end from 30 September to 31 December beginning with the 2019 year, making this period a transitional period. The Company expects to report financial results for the first quarter of 2019 in May.

"As we complete our transition to a traditional calendar year reporting cycle, we're expecting good performance in the first quarter of 2019 driven by continued growth in Greece and Italy, as well as Interactive and additional hardware sales opportunities in conjunction with a reduced overhead expense base," said Lorne Weil, Executive Chairman of Inspired Entertainment. "I'm encouraged by what I see across the business. Accordingly, and based on trends in the quarter to date, we are establishing First Quarter 2019 Adjusted EBITDA guidance that could represent approximately 20% growth year over year in functional currency."

Mr. Weil continued, "As we move from the first quarter into the second quarter, we expect to begin to see the impact of the implementation of new regulations as a result of the Triennial. We have been investing in the resources necessary to satisfy the new requirements and meet player needs in the UK and we are extremely optimistic about our strategy to mitigate a portion of any potential impact."

Mr. Weil concluded, "We had a tremendous showing at last week's ICE tradeshow where we introduced our Virtual Basketball and gave a sneak peek of our new Valor™ gaming cabinet, which we expect to drive additional hardware sales opportunities in new jurisdictions. We continue to believe our content and solutions provide an ideal platform for growth and, based on our proven success throughout Europe, we see a unique opportunity to build our VLT, Virtual Sports and Interactive businesses in North America."

Server Based Gaming ("SBG")
  • Average Installed Base Increased 15.4% Year Over Year – Overall average installed terminal base increased to 33,811 due to the continued terminal rollout in Greece and growth from new contract awards in the UK Licensed Betting Office ("LBO") estate.
  • Total OPAP Terminals Installed Increased to 7,100 – The roll out into Greece continued during the period, with a further 1,300 terminals being deployed on site and live as of December 31, 2018 and a further 300 since the quarter ended. The performance of our Greek terminals continues to be strong compared to other suppliers.
  • Strong Growth in Italy Estate –Customer Gross Win per unit per day in Italy increased by 16.9% (in Euros) across all customers compared to the same period last year, principally driven by new content releases. This was partly offset by a tax that reduced Net Win per unit per day growth to 14.6%.
  • Introduced New Valor™ Gaming Terminal at ICE London – This cabinet supports open standard G2S VLT protocol, allowing entry into new jurisdictions with specific content developed for North America and Europe.
  • 125 Self Service Betting Terminals ("SSBTs") sold and deployed in the UK – In addition to the hardware sale margin, these terminals are expected to generate ongoing recurring service fees.
  • Over 150 "Flex" B3 Terminals to a Major Customer in the UK – Terminals are expected to commence installation in the first quarter of calendar 2019 and to result in ongoing recurring rental fee and content revenue share to Inspired.
  • Over 100 "Sabre Hydra" Terminals Sold – Terminals were sold to a major casino customer in the UK and are to be installed during the early half of 2019.
Virtual Sports
  • Additional Virtual Sports Operators – Number of Virtual Sports operators increased to 100 live worldwide (as of December 31, 2018), up 16.3% from the same time last year, including the recent launch of the Danish Lottery, Danske Spil.
  • Launched Second Virtual Sports Channel with OPAP – Latest football product, Matchday, launched across full estate of over 3,400 venues.
  • Signed Exclusive Worldwide Contract with BetStars – Both scheduled and on-demand Virtual Sports will be provided online to BetStars, the international online sports betting brand of The Stars Group Inc., one of the world's largest online gaming operators.
  • Renewed Multi-Year Contract with bet365 –Signed multi-year extension to provide Virtual Sports online to bet365, the world's largest online sports betting company.
  • Launch of New Virtual Basketball – Introduced the newest and most realistic Virtual Sport to the line-up at ICE London.
Interactive
  • Eight new customers launched within Interactive in the quarter, including BGO, Buzz Bingo and Sun Bingo –31 total customers were live, an increase of 17 over the same period last year.
  • Michigan Lottery Launched the First Instant Win Virtual Sports – Inspired and IWG, the award-winning supplier of online instant win games, have partnered together to deliver Endzone Payout™ for the Michigan Lottery - a new– instant win version of Virtual Football.
"During this reporting period we started the process of consolidating our six facilities throughout the UK into two primary locations, which has resulted in lower headcount and increased efficiencies," said Stewart Baker, Executive Vice President and Chief Financial Officer of Inspired. "These redundancies and a number of other unique line items contributed to a larger reduction in cash flow during the quarter than we otherwise would have exhibited. However, these measures have long-term margin benefits and will help to prepare the organization for the new regulations in the UK."

Management outlook and commentary
Following the transitional period, Management is establishing guidance for its First Quarter ending March 31, 2019. We currently expect to have Adjusted EBITDA of $13.25 million to $14.25 million, assuming exchange rates remain stable. While we are not providing annual guidance, we continue to estimate the projected impact of the reduction in the maximum FOBT betting stake mandated by the Triennial Review on our Adjusted EBITDA to be approximately $10 million to $11 million annually on a steady state basis.

Overview of transition period results
Total Revenue for the three months ended 31 December 2018 was $30.7 million on a reported basis. Revenue for the period increased 2.3% year-over-year on a functional currency (£) basis, driven mainly by SBG growth in Greece and Italy and offset by lower hardware sales in the UK and software license sales in Greece. Participation and other recurring revenue across the Company, which excludes hardware sales and software license sales, increased 9.1% year-over-year and remained virtually flat quarter-over-quarter on a functional currency (£) basis. The exchange rate for GBP:USD negatively affected the reported results year over year.

Adjusted EBITDA for the three months ended December 31, 2018 was $10.5 million, a year-over-year increase of 11.3% on a functional currency (£) basis and an increase of 6.4% on a reported basis. Adjusted EBITDA margin increased to 34.1%, from 31.3% in the prior year, primarily as a result of overhead savings due to lower staff related costs.

SG&A expenses decreased by $1.1 million, or 6.8%, on a reported basis, to $15.3 million. This decrease was driven by staff related cost savings of $1.8 million. These savings were offset by an increase in Italian tax related costs relating to prior years invoicing of $0.9 million (removed from Adjusted EBITDA) and a decrease in net labor capitalization and manufacturing recoveries of $0.8 million due to mix of projects and lower factory throughput as a result of fewer machines being built in the quarter.

On a reported basis, net operating result during the period improved from a loss of $4.4 million in the prior period to a loss of $2.4 million, mainly due to an increase in revenue, a reduction in stock-based compensation, acquisition related transaction and SG&A expenses, partly offset by higher cost of sales and depreciation and amortization.

Non-GAAP financial measures
We use certain 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 and we believe that they are the most relevant measures of our performance. 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 specific rules or regulations 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, or 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 measures.

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