Thank you for standing by. My name is Kayla Baker, and I will be your conference operator today. At this time, I would like to welcome everyone to the Bragg Gaming Group's Q1 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, press star followed by one on your telephone keypad. If you would like to withdraw your question again, press the star and one . I would now like to turn the call over to Chief Strategy Officer, Yaniv Spielberg. You may begin.
Thank you, operator. Good morning, everyone, thank you for joining our Q1 of 2023 Earnings Conference Call. I'm Yaniv Spielberg, Chief Strategy Officer for Bragg Gaming Group. I'll be hosting today's call alongside my colleague, Chief Executive Officer, Yaniv Sherman, who'll comment on our Q1's performance, and Ronen Kannor, our CFO, who will review and discuss our Q1 results. If you've not already done so, you can follow our earnings call presentation from our website at investors.bragg.group in the section called Latest Presentation. On this call, we'll review Bragg's financial and operating results for the Q1 of 2023. Following our prepared remarks, we'll open the conference call to a question and answer period. I'll start the call with some brief cautionary remarks regarding certain statements that may be made on this call.
Certain statements made on this conference call and our responses to various questions may constitute forward-looking information or future-oriented financial information within the meaning of applicable securities law. Statements about expected growth, prospective results, strategic outlooks, and financial and operational expectations, opportunities and projections rely on a number of assumptions concerning future events, including market and economic conditions, business prospects or opportunities, future plans and strategies, technological developments and anticipated events, trends and regulatory changes that may affect the corporation and its subsidiaries and their respective customers and industries.
While we believe these assumptions to be reasonable, they are subject to a number of risks, uncertainties and other factors, many of which are outside the company's control and which could cause the actual results, performance or achievement of the company to be materially different. There could be no assurances that these assumptions or estimates are accurate or that any of these expectations will prove accurate. For a complete discussion of these factors, please refer to our recently filed press release and other publicly available disclosure. With that behind us, I'd like to turn the call now to our CEO, Yaniv Sherman. Yaniv?
Thank you, Yaniv. Good morning. I'm Yaniv Sherman, Bragg's CEO. I'm very happy to welcome you all to our Q1 presentation. Our Q1 of the year marked another successful step in our digital quest. We continue to execute against our mission and strategic plan, complementing our award-winning iGaming proposition with a growing number of premium Bragg-developed game titles offered to players around the world who are operating partners. Our execution is driving persistent top line and cash flow growth. Consistent with our previously presented game plan, we continue to expand in new markets with new customers.
Far, this year has been no exception as we are excited to welcome new partners in Mexico, Belgium, Switzerland, Italy, Spain, and the U.K. Our US rollout is progressing well. We've recently marked another key milestone with the launch of our newest tech stack and games launch in Pennsylvania, our fourth US state to date. I'll share more business and operational details shortly. First, I'd like Ronen to elaborate about our recent financial key performance indicators. Ronen?
Thank you, Yaniv Spielberg, and good morning, everyone. I'll begin my comments on slide six. As Yaniv Spielberg indicated earlier, the Q1 of 2023 was another successful step in our digital journey. We continue to execute against our mission and strategic plan, and we can see that in our financial and operational results. In the Q1, total revenue were up by 18.1% year-over-year to EUR 22.9 million. The growth was mainly derived organically through our existing customer base launch in financial year 2021 and 2022, which performed better than expected on the content segment. The new onboarded customers in various jurisdictions, in particular the Netherlands, with three new PAM customers, turnkey solutions and content offering, and a solid revenue performance from the Wild Streak Gaming studio and Spin Games existing U.S. customer base.
From an operational KPI perspective, total wagering generated by the games and content offered by the group during the quarter was up by 35.7% from the same period in the previous year to EUR 5.2 billion. As you can see from the wagering chart on the right-hand side, Bragg saw positive momentum since the effect of the inception of the German regulatory restrictions on gameplay in the Q3 of 2021, which demonstrates our ability to transform and diversify our operations. In addition, the total number of unique players using our games and content in the period, which is excluding Wild Streak and Spin, were up by 42.8% from the same period in the previous year to 2.8 million unique players.
The increase is associated with the significant improvements to our core content offering, including recent technical developments, giving us a powerful competitive advantage. Gross profit for the quarter increased by 22% to EUR 12.2 million, with gross profit margins increasing by 170 basis points to 53.5%. The margin increase is a direct effect of a change in the composition of revenue derived from PAM, managed services and proprietary game studios, which have no cost of sale, compared to third-party games and content which have associated third party costs. Adjusted EBITDA for the quarter was up by 28.1% to EUR 3.9 million, with Adjusted EBITDA margin reaching 17%, an improvement of 130 basis points from the same period in the previous year.
The change in margin was mainly as a result of scale, a change in the product mix and higher profitability. That come with alongside with higher salaries cost as part of the group's strategy to expand its software development and product portfolio, all with a focus to margin control. Operating profit for the quarter amounted to half a million EUR, an improvement of EUR 0.6 million from the previous year operating loss of EUR 0.1 million, and as a result of improved underlying performance and more efficient cost control. We are pleased that in the start of the Q2 we have seen a strong trading in line with our expectations. As a result, we are reiterating our 2023 guidance of revenue in the range of EUR 93 million-EUR 97 million, with a midpoint of EUR 95 million implying 12% growth from 2022 levels.
Adjusted EBITDA of EUR 14.5 million-EUR 16.5 million with a midpoint of EUR 15.5 million, implying 28% growth in Adjusted EBITDA from 2022 levels. As you can see on slide 7, the gross profit margins are in growing trajectories in Q3 2021 due to the shift in Bragg's product mix. We continue to execute against our mission and strategic plan. We're scaling up our business in line with both our revenue growth and the continuing movement in product mix, as indicated in the right-hand side of the slide. Product mix has changed noticeably since last year's Q3. While the revenue is scaling, it is also trending towards proprietary content, PAM and turnkey solutions by leading to improvement in gross profit margins and overall profitability.
Gross profit increased by 22% to EUR 12.2 million in the Q1 of 2023, with margin improving by 170 basis points to 53.5%. The Q1 of 2023 revenue performance was driven mainly from the content which is aggregated in third party, exclusive content and proprietary content, while PAM and turnkey solution were slightly lower proportionally. In the Q1 of 2023, the total games and content revenue segment amounted to EUR 17.6 million and represented 76.8% of total revenue, compared to EUR 13.9 million and 71.6% last year. Proprietary content deployment is positively progressing both in the US and EU markets by increasing both distribution and gain performance.
As Yaniv indicated, we have recently marked another key milestone with the launch of the newest tax stack launch in Pennsylvania, our fourth US state to date. As we indicated in the previous quarters, we are targeting gross profit margin improvement to reach 60% by the full year of 2024, mainly by increasing the proportion of revenue which comes from proprietary content, PAM and turnkey solutions. Moving to slide 8. Adjusted EBITDA amounted to EUR 3.9 million against an operating profit of EUR 0.5 million. The gap was driven by the following non-cash and exceptional items. Depreciation amortization, the increase of intangible amortization, part of the Wild Streak and Spin acquisition in June 2021 and June 2022 respectively, and the increase of capitalized software development costs.
Share-based payment, a reduction in the charge for awards granted to senior management during the period composed of DSUs and RSUs and share options. Exceptional cost. Costs mainly associated with the discontinued contractor relationship of several employees. Gain of remeasurement of deferred consideration. This is cost mainly associated with the acquisition of Spin in June 2022 on the total outstanding deferred liability. As you'll see on slide 9, we ended the quarter with a cash balance of EUR 15.1 million compared to EUR 11.3 million as of December 31st, 2022, with outstanding liability of $8.5 million in convertible debt. As of May 2023, the total outstanding liability is $7.5 million after several conversions and a cash repayment of half a million US dollars in April 2023.
Our net working capital at the end of March 2023 is approximately EUR 7.7 million, excluding deferred consideration. This is compared to EUR 6.6 million at the beginning of the year. From a cash flow perspective, a total of EUR 6.4 million generated from the operating activities, with underlying performance reaching to EUR 3.4 million and a movement in working capital and income taxes of EUR 3 million. A total of EUR 1.9 million investment in intangible assets related to the capitalization of software development costs in the period. Looking forward, management are projecting a positive free cash flow from operations, while there is no CapEx or technology debt required in the business. In addition, management is confident that there are no immediate refinancing of further debt requirement needs for the business. With that, I will turn the call back to Yaniv.
Thanks, Ronen. I wanted to use this opportunity and spend a few minutes talking about the general state of the markets. In the big picture, 2022 was one of the most volatile and challenging years in recent memory from a macro and financial perspectives. In 2023, at least to date, while some markets and sectors seem to be turning a corner, it remains to be seen whether we are at the end of this cycle. High interest rates and general uncertainty means companies must operate prudently with a clear focus on their business's fundamentals. Specifically, in our sector, the global growth of iGaming continues, with digital surpassing physical gaming in many territories.
Increased regulation, as we've recently seen with the publication of the White Paper in the U.K. and different restrictions in Holland and Italy, just to name a few, requires a different playbook, one where we need to be nimble. I'm pleased that we have established a foundation at Bragg with this exact state of mind, and we are better positioned than ever to compete in a marketplace of regulated gaming. Diversification, prudence in capital deployment, and operational excellence are no longer the proverbial extra mustard. There are preconditions for navigating in these stormy waters and to continue to grow as we have and expect to continue doing so in the near and long term. Moving to slide 12, we've been busy ramping up our Bragg Studios and Powered By Bragg outputs, and we're starting to see the results.
As I've stated in the past, building Bragg into a must-have game provider is a marathon. We're already considered a partner of choice for turnkey and game aggregation offerings, but F-scale game production requires building and honing additional capabilities such as game design, creative, and math development, just to name a few. I'm very pleased about the progress we've made in a relatively short amount of time. This is an incredibly competitive and exciting landscape, and we aim to create a healthy balance between quality and quantity. Bragg Studios are now working under the guidance of our new Las Vegas content hub, headed by industry-leading talents. We expect our production and rollout cadence to increase through 2023 as we continue to develop market-specific titles with additional features and functions built into our tech stack.
In slide 13, we can see the manifestation of the growing number of exclusive and proprietary titles in our partner network through their share in gross profit. The continued expansion of our share of wallet and gross gaming revenues across different markets underpins the business rationale behind this effort and gets us closer to our long-term margin and profitability targets. Moving on to the next slide, game production is built on a robust product and technology base developed by our amazing Braggers across Europe and India. We continue to show growth on our turnkey vertical, and our ability to partner with proven operating partners and power their digital growth in regulated markets makes Bragg more than a one-trick pony. Diversification and scale are two critical aspects we continue to drive towards. They are fundamental components in our resilience and something Bragg's management are extremely focused on.
In my last slide, just to cap things off, we're marking another strong revenue and Adjusted EBITDA quarter. Game production is firing on all cylinders, complementing our expansion with new and existing partners across several key markets, including the U.S. and Western Europe. We remain focused on long-term value creation, incredibly exciting and dynamic sector powered by our amazing team members around the world. Thanks again for joining and listening in. We're happy to take your questions now.
As a reminder, if you would like to ask a question, please press star, then the number one on your telephone keypad. Our first question comes from the line of Gianluca Tucci with Haywood Securities. Your line is open.
Hi. Good morning, guys. Congrats on a nice quarter. Could you provide an updated rollout timeline for the U.S.? The company just entered Pennsylvania, so just wondering what your near-term expectations are for the U.S. market.
Hi, Gianluca. Good morning. We've just launched our newest tech stack in Pennsylvania. Just to clarify, we are live in all 4 states with through the Spin and in Ontario through the Spin acquisition and the legacy tech stack and games. The relaunch is basically introducing our latest Bragg RGS into those states, Pennsylvania marking the 4th one. We essentially have our new foot in every state that we were looking to do so. Now we are basically ramping up in both additional operators and additional games with each operator.
The game plan right now is to have a few more operators live this quarter and next in Pennsylvania, as well as in New Jersey and Michigan. W e're working down that list, but the idea is to have at least the first and second set of Bragg-developed games in each one of these states with the top, let's call it 5 to 8 operators by year's end. we're working towards that and we're making good progress, but that is the idea. We are modernizing and including new content as we roll forward.
That's great color. Thanks, Yaniv. On your cash flow generation, impressive, in the quarter there.
Yes.
How do you plan to deploy the excess cash flow that you guys internally are generating now? Are there any M&A opportunities out there or perhaps buying back stock at these depressed valuations? If you can comment on that.
Yeah, a good question. Right now, we're happy to make progress there. Naturally, this is the base or the foundation of everything that we do. At this point, we're quite proactive in mapping out the options. What's the best value creation opportunities in terms of redeploying that cash. Right now, it is redeploying it back into the business to make sure we further accelerate.
Bolster our content and tech development capabilities as well as sales and account management. Basically redeploying into business so far. In the near term, I believe that will bring the best return on investment. Looking into the H2 of the year into next, naturally there are some interesting acquisition opportunities out there, mainly around content that we're constantly evaluating. I'd like to personally see the business c onsistently generate the cash at this cadence, and then we can address both potential buybacks, refinancing or M&As further down the field. I want to make sure that this is consistent and that we deliver against our expectations.
Perfect. Thanks, Gianluca. Just lastly, in terms of seasonality, how should we be thinking about that for the balance of the year, given that the company is in an onboarding phase right now? Does that mean that traditional seasonality is to be thrown out the window for this year?
Well, you know, we do live at the shoulders or the, at the stream of our partners. Activity is always a function of the B2C operator's performance. This year, I think that we can expect more seasonality. If you remember last year was 2021 and 2022 were odd years because of the post-COVID effect and then the World Cup in the Q4. This year I think we can expect a bit more seasonality, especially around travel season in terms of activity performance. I hope to be able to c urtail that with more content deployment that may compensate. I think it will be a more traditional year with no major global sports events on the calendar.
Okay. Thanks, Gian, and congrats on the quarter, guys.
Thank you.
The next question comes from the line of Matthew Lee with Canaccord Genuity. Your line is open.
Hi, guys. This is Betty Chan for Matthew Lee. Congrats on a good quarter. My first question is that, yeah, you had a great quarter with 18% revenue growth, which looks like it's driven by every segment of the business. Your unchanged guidance suggests a slowdown throughout the year. Can you talk to what you're expecting on that front or what could cause revenue growth to slow a little bit throughout the year?
Thanks, Betty. Well, I think that, again, when we provided guidance, t wo tranches lately last year into this one, we felt that was, you know, reflected sufficient growth. We did take into account that a big portion, at least in the H1 of the year, would be dedicated to distribution and deployment. We're happy to see that other segments of the business and the diversity is performing well and helping us exceed those expectations. At this point, I wanted to, again, because of some seasonality and a relatively short amount of time since we reported last, we wanted to get a bit more runway under our feet for this year before we revisited revisited guidance, especially between now and summer to see how the business performs. The trend is very encouraging.
Awesome. Thanks for the additional color. Margin looks very strong this quarter. Is that entirely due to the shift to proprietary, or are there other factors driving that profitability gain?
Actually, from a proprietary perspective, the proprietary segment, because we're focused on deployment, technical deployment mostly, and game development through the 1st and 2nd quarter, has grown, but the other segments have been growing even faster. From a margin perspective, it's a combination of proprietary, but also some cost control measures that we started to implement in regards to our commitment to, you know, shareholders that margin will continue to expand. We want to make sure that that progress is consistent. This is on both ends of the spectrum, both the revenues... The revenue mixture is trending in the right direction, and also margin protection or cost control is also starting to give its signs, and we're continuing to focus on that to be as cost efficient as possible without naturally jeopardizing the growth.
Awesome. My last question is on Mexico. What are you expecting in terms of contribution from Mexico and which appears to be a massive potential market for you?
Just to make sure I understand the question and I heard it correctly around Mexico, contribution expected from Mexico?
Yes.
I think Mexico will be an interesting additive contribution for our overall business. I think the market has grown consistently, so we're definitely. We've launched with a market leader, and we're looking to launch with additional operators. I think it will be definitely additive. From the Latin American markets right now, Mexico is by far the biggest regulated market. I think it will definitely be additive. I don't think it'll be, you know, a takeover or become bigger than the U.S. states or any of our major European countries. This is a good example of a small, and we're working off a very low base in Mexico.
I think anything we'll be able to generate with our content and our operators there will be additive. Both to revenues and contribution. We're very excited about the prospect there, and it's also a very effective gateway to Latin America regulated gaming with the larger economies there poised for regulation, hopefully in the near term. Again, both on a P&L and a strategic aspect, Mexico has been an important deployment for us.
Awesome. That's very helpful. Thanks. I'll pass the line.
Thanks, Betty.
Our next question comes from the line of Edward Engel with Roth MKM. Your line is open.
Hi, thanks for taking my question. I've seen the presentation. It looks like you're targeting 15 game launches by Bragg Studios in the H1 of 2023. Then, in the press release, you talked about ramping that further in the H2. I know quality over quantity, but, like, any idea of how many titles you're hoping to launch in the H2 of the year? I guess, to that point, I guess, what's the target number of proprietary titles you would like hope to launch on a normalized basis?
Hey there. Good morning. Broadly speaking, and again, this is. Don't want to get in too many details, but the way we count titles is on a unique basis and then titles based on territory, mostly because in some cases the titles we are adjusting them per market almost. For unique titles, we're looking at total numbers of the year around 50-55 titles. We're comfortable with that pace with an even balance between proprietary and exclusive. We're making good progress at this point, so we're pretty comfortable being able to produce that amount of titles.
Having said that, the balance between proprietary and exclusive may change during the course of the year because when exclusives are concerned, we're also dependent on our partners working with us on specific, on specific games and titles. We've been very focused on ramping up the development, the production and development capabilities out of Las Vegas and Europe. Right now I think that the machine is in a much better shape to meet those numbers and hopefully exceed them. We understand the balance between quantity and quality. We need to get to critical mass with all of our operating partners.
Got it. That's helpful. You talked about or you announced a bunch of interesting, I guess, content deals throughout, I guess this year so far in a couple different markets. Just curious, I guess what studios have you found have more traction with some of these international markets? Is Wild Streak still working abroad or is it more so, is it less that content coming from your studios in Europe?
No, I mean, Wild Streak, the brands that we operate under Wild Streak, Atomic Slot Lab and Indigo Magic. Indigo Magic was built and ramping up in Europe as a European-focused content production. Atomic Slot Lab is North American-focused. Those two... when I talk about bolstering up is making sure that each one of these studios has enough resources to self-sustain and produce its own content. Having said that, we've already seen some very interesting cross-pollination between the two, using each other's titles, adjusting math, developing different themes with derivatives.
It's definitely been a cross-section. Generally speaking, content specifically developed for the U.S. or North America does better there than in Europe and vice versa. Some titles, I mean, we recently launched one of our partners, Bluberi, Devil's Lock is a title that is a very well-known game in the US. It's been doing well in Europe. It was launched in Europe first. It's now being rolled out in the US. That's a good example of a title that enjoys headline awareness but also very good game production and performance, and we hope to get more of those out the door on both sides of the Atlantic.
Helpful. Thank you.
Thanks.
The next question comes from the line of Jack Vander Aarde with Maxim Group. Your line is open.
Okay, great. Good morning, guys. Nice, nice quarter. Thanks for the update. Let me give a question on the PAM side of the business. Can you just provide an update on recent PAM customer growth? I think I heard something about 3 new PAM customers added in the prepared remarks. Can you just talk about what other markets you're adding new PAM customers, and then just for the outlook of the year, how you expect that to ramp? Thanks.
Sure. Thanks, Jack. PAM has been, naturally an important vertical of the business. We've added new PAM customers in Europe, Central Europe mostly around Holland and additional territory. We are now looking at expanding that into additional markets and saying we're considering each one very carefully because from a new market perspective, as we all know, PAM requires a different setup and deployment. We're very selective in our approach. Having said that, as you can see from the numbers, PAM has been a very effective, both from a revenue but also from a content delivery perspective. That has been an important pillar of the business, helping us u nderpin growth for the other areas of the business.
As we've stated in the past, the overall strategy is content-led. We are looking to deploy our PAM into additional European with the existing markets. We've launched it in Holland and Czech Republic, the last 2 markets that we deployed in, and we're looking to expand in those. Also new territories during, I believe, sorry, the H2 of the year. Again, we'll be on a more selective basis with strategic partners to allow us to put enough focus behind them because as I said, PAM turnkey in general requires a different set of resources and focus from the business. We are very much focused on allowing our partners the best tools to succeed.
Okay, great. Then just one follow-up separately. I think you touched on the German market briefly in the prepared remarks. Can you just provide an update there? I didn't quite catch that. Just remind us again if it's a de minimis contributor to your current guidance for the year, and if there's upside to that number from the German market. Thanks.
Sure. I mean, that's a fair analysis of where we are. I mean, it is a de minimis contribution, and it's pure upside. I think we've been following that market carefully. I think the new regulating body is now looking to deploy or to issue more licenses in the marketplace, and we see more operators, local operators applying for those. I think one of the major challenges right now for the operators in the market is still the tax structure and the contribution that it brings. With the turnover tax and additional restrictions both to casino and sport, that makes it very challenging with the current state of affairs to operate a profitable business in the marketplace.
I think that once this is revisited, both from a lender or a state and then the federal perspective, I think we'll see much better chances in seeing tangible and consistent growth there. We are keeping, you know, our product up to speed. The content suite that we offer, still I think is second to none in terms of its Central European and German compatibility. We want to make sure that we don't drop the ball on that. When growth is more material, we'll be able to monetize on it. Right now, from a regulated perspective, we haven't seen the inflection point. Hopefully, we'll see it later this year or next. You know, I have little visibility at this point, about the operator's ability to change the current circumstances. I know they are very much focused on it. This is a moving target, and we're very much involved.
Okay, great. Again, nice quarter. Thanks for the update.
Thanks, sir.
The next question comes from the line of David Navratil with Cormark. Your line is open.
Oh, hi, guys. Yeah, just a couple of questions. I would imagine there's probably one or two that have performed a lot better than the other ones, but if you could just give us an update and maybe call out what those games are. Secondly, on the intangible asset spend as shown in the cash flow statement under the investing section, I was wondering if you could give us your outlook on how much you think you'll be spending this year. Thanks.
Sure. I'll take the first one and let Ro nen answer the second one. In terms of the game performance, as we've seen, we've been very focused on game development and deployment of the games that we have deployed late last year and this year. We've seen a couple of outstanding performers, mostly in the U.S. market, pertains to Michigan, which a couple of the new games have performed well. I don't want to get into specifics titles because we haven't provided that breakdown, the titles in Michigan have performed well over time. In Europe, a few of the newer titles that we deployed in both the U.K. and Holland, talking about both Atomic Slot Lab and Indigo Magic Games have shown some very good initial results.
Again, we're measuring those over time. One of the key parameters outside of the initial performance, both on wagers and rounds played, is also how fast they churn because we know games churn relatively quickly. The games have been holding up quite nicely so far. We are very encouraged by... Not all games perform that way naturally of all the game sets that we've deployed. Generally speaking, we see more hits than misses at this point. We are looking now. We're very focused on further distributing so we can get these games and the new ones effectively distributed.
Our goal, as we've outlined in the past, is to have a constant, predictable cadence of games that will go to the widest possible network at any given moment. We still have some work to do to make that happen. Right now, the deployment is still a bit staggered, and that's why the financial effect is not as dramatic as we want it to be. That is one of our major focal points for the remainder of the year, to get the games out faster and more streamlined. That's on game performance and deployment. I'll let Onen take the second question.
Hey, David. Good morning. We always indicated that our investment, especially on the cash flow side, is predominantly software development costs. As we know, we are capitalizing the cost of our dev team, especially on the areas which are revenue-enhancing, a new product, new games especially. The design now goes on new games, a new design of games, which is very, how to say, revenue-enhancing, and it's very easy to just give an information about that. In this quarter, it was EUR 1.9 million. We are targeting over the year between EUR 9 million-EUR 10 million.
It's also developed on how many developers we have, what type of project we're working, but that's our roughly estimation as part of the year-end guidance. On top of that, we just need to remember there's also certification of games. As Yaniv Spielberg mentioned, we have 55 different games to launch over the year. We're talking about certification costs in which every single jurisdiction, location have different certification costs, which also we're capitalizing it. We also register our IPs and our trademarks. Roughly, that's what I think is the best way or the best way to estimate where we're going to be by the end of the year.
Okay. All right. Thanks for that, guys.
Thanks.
I will now turn the call back over to Yaniv Sherman.
Thanks, operator. Thank you all for attending the Q1 presentation and questions. Encourage everyone to further review the materials on our investor website. Looking forward to seeing you over the upcoming yearly calls for 2023. Thank you, and have a great day.
This concludes today's conference call. You may now disconnect.