A platform for growth

Gaming Realms 21 October 2015

Gaming Realms

A platform for growth

Interim results

Travel & leisure

20 October 2015

Price

27.00p

Market cap

£67m

$1.54/€1.35/£

Net cash (£m) at 30 June 2015

1.3

Shares in issue

249.2m

Free float

69%

Code

GMR

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

16.1

(17.6)

(14.3)

Rel (local)

12.5

(12.4)

(16.9)

52-week high/low

40.00p

22.50p

Business description

Gaming Realms creates, develops and markets interactive next-generation online gambling and social games delivered via mobile, tablet and desktop computers. It listed on AIM via a reverse takeover (of Pursuit Dynamics) in August 2013.

Next event

Trading update

January 2016

Analysts

Eric Opara

+44 (0)20 3681 2524

Jane Anscombe

+44 (0)20 3077 5740

Gaming Realms is a research client of Edison Investment Research Limited

Powered by its own proprietary platform, Gaming Realms’ aim is to become a meaningful player in the entertainment-led, real-money gambling and social gaming markets. After a period of heavy investment in platform development and marketing, its Q315 trading update reported that revenues are ramping up as expected (up 48% on Q215), with the company set to deliver a step change in profitability in FY16. Its FY16e EV/EBITDA is 11.3x, falling to 4.3x for 2017e, a material discount to the sector.

Year end

Revenue (£m)

EBITDA
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

EV/EBITDA
(x)

12/14**

11.2

(7.8)

(8.4)

(5.0)

0.0

N/A

N/A

12/15e

22.5

(4.0)

(4.9)

(2.2)

0.0

N/A

N/A

12/16e

49.5

5.8

4.9

1.8

0.0

15.0

11.3

12/17e

65.0

13.5

12.6

4.7

0.0

5.7

4.3

Note: *Normalised (and fully diluted EPS), excluding exceptional items, amortisation of acquired intangibles and share-based payments. **15-month period.

Proprietary platform driving performance

Formed in August 2013, Gaming Realms has already brought together all the components required to deliver success in online social gaming and real-money gambling, including its in-house software development and digital marketing capabilities. The company’s own mobile-focused proprietary platform, Grizzly, has demonstrated that it can deliver substantial player revenue gains (Pocket Fruity revenues grew by 72% following its March 2015 migration to the Grizzly platform), and is being rolled out across an increasing number of brands.

Experienced management team

Gaming Realms’ management team is highly experienced and comes with an impressive track record, having already successfully built a very profitable gaming company (Cashcade, sold to bwin.party for £96m in 2009). The recent purchase of the Slingo brand and related assets from RealNetworks brought exposure to the large social gaming industry, further management expertise in that space and diversified the company’s geographic spread. This has pushed out the time to break-even slightly, although we still expect a move to profitability in FY16, with the operational leverage that is inherent in online gaming businesses leading to a further step change in profitability and cash generation in FY17.

Valuation: Current KPIs point to upside

Although Gaming Realms is relatively new to what is a very competitive market, current customer acquisition cost and retention performance indicators on its Grizzly platform suggest the market has room for a new player with a differentiated proposition. The FY16e EV/EBITDA of 11.3x underappreciates the step change in profitability that we expect at the company. Should the company deliver what we believe are eminently achievable revenue growth and profitability targets, the FY17e EV/EBITDA of 4.3x represents a significant discount to the peer group and exceptional value for an international business in a growing market.

Investment summary

Company description: Real-money and social gaming

Gaming Realms is an online gaming company, which creates, develops and markets social and real-money games. The company’s main focus is on mobile-led, real-money games in the bingo and casino verticals. The recent acquisition of popular brand Slingo, together with its related assets, brings in a social games portfolio offering exposure to the US market, with significant potential for growth and cross-selling opportunities. The company’s products are fully regulated and offered under licences in the UK and Alderney. It employs about 150 people in offices in London, Seattle in the US and Victoria, BC, Canada.

Valuation: Backing management

Gaming Realms has yet to reach profitability, but is growing strongly. Given the present momentum in the business, we are confident that profitability will be achieved in 2016, putting the shares on a 2016e EV/EBITDA of 10.8x vs a peer group average of 7.8x. As a challenger operator in the competitive but growing mobile gaming market, the company has strong growth headroom, and we expect it to achieve growth well ahead of the peer group as it takes market share. However, we recognise that this requires a degree of faith in the ability of management to successfully carve out a profitable slice of its chosen markets. We do not expect that further external funding will be required to achieve this. Should the company deliver as anticipated, we expect a further step change in profitability in FY17, which would leave the company’s shares trading at a significant discount to its peers on an EV/EBITDA of 4.6x.

Financials: Revenues ramping up, profits to follow from 2016

Interim results (to end June 2015) showed H115 revenues of £8.0m, an increase of 89% on H114. Its Q315 trading update states that the strong growth in revenues has continued post its interim results (Q315 +48% over Q215), underpinning our FY15e revenue estimates. As is often the case for new businesses, the company has had to incur costs ahead of its revenues as it has been building out and promoting its product offering. Consequently, we expect an FY15 EBITDA loss of £4.0m (previous estimate £3.0), including a £1-1.5m loss from the recently acquired social business, before turning positive in FY16. With much of the software development ‘heavy lifting’ complete in 2015, our unchanged estimate is for EBITDA of £5.8m in FY16, more than doubling to £13.5m in FY17 as it benefits from significant operational leverage. The business’ strong cash conversion profile means that barring further corporate activity, net cash flow should be c £7.6m in FY17, leaving the company with net cash of £9.5m.

Sensitivities: Investment made, now time to deliver

Gaming Realms is beginning to prove that there is space for an innovative operator with a differentiated product that incorporates more fun gaming elements and creative marketing, in an extremely competitive market. The Grizzly platform is performing well, but is yet to demonstrate that it can operate just as successfully at scale. Furthermore, the success of future product launches cannot be guaranteed. However, management have previously demonstrated a willingness to take timely action to address emerging challenges. It is widely accepted that the full effects of the UK point of consumption (POC) tax are yet to fully work their way through the system. This may result in unforeseen changes to the competitive landscape that may require additional resources, such as increased marketing and/or software development spending. The addition of the social gaming business transforms Gaming Realms into an international business with the associated currency and management challenges that come with it. The business is fully licensed and regulated in the UK and Alderney, but would be affected by any change in the licensing or tax regimes.

Mobile-led, real-money and social gaming company

Investors in Gaming Realms are buying into the secular shift to mobile gaming in both real-money and social forms, together with the management team’s experience and track record as it seeks to carve out a profitable slice of what continues to be a growing but very competitive market. Management has identified three critical success factors on which it remains focused on achieving to deliver on its aims: to adopt a mobile first approach, with differentiated content and innovative marketing optimised by data-driven decision making. Experience in the social gaming market has shown that new brands can take off quickly if they catch the player's attention. Gaming Realms is placing a lot of effort into delivering differentiated content across multiple brands to maximise its share of wallet. The level of marketing support is then flexed according to almost real-time data outputs to maximise the commercial opportunity across the company’s stable of brands. Success will be demonstrated by the company achieving lower acquisition costs than is typical for the industry, signifying that its marketing techniques are working. Higher customer retention rates would also provide evidence that its products are indeed striking the right chord from a game-playing perspective.

Key investment considerations

Continued strong growth in the UK online bingo and casino markets and the global social gaming market:

Online bingo had a CAGR of 9.9% from 2012 to 2014, rising to total market size of $2.0bn according to H2 Gambling Capital. It expects growth of 4.2% pa between 2014 and 2018.

The global online casino market was worth $7.6bn in 2014 and is expected to grow at a CAGR of 10.3% pa between 2014 and 2018.

The global social casino market is expected to grow from $3.5bn in 2015 to $4.4bn in 2017, with substantially all of that growth coming from mobile as it extends its leadership position over Facebook (source: Eilers Research).

Management track record:

Grew the Cashcade online bingo business to net revenue of £45m and EBITDA of £12.2m in less than 10 years, before its sale to PartyGaming in 2009 for £96m (and on to an EBITDA of £16.9m in 2011).

Highly effective and specialist marketing techniques:

Creatively optimised, data-driven approach to marketing to minimise cost per acquisition (CPA).

Proprietary platform, Grizzly, demonstrating strong performance:

Games on the company’s Grizzly platform are registering significant step changes in performance. It already has two brands on the platform and plans to launch more throughout the coming year.

Business overview

Gaming Realms creates, develops and markets mobile-focused online bingo and casino games in the real-money and social space. The primary distinction between real-money and social games comes in the form of the ability to ‘cash out’ in real-money games. Social games lack this ability, and as a result are free of the licensing and regulatory restrictions that apply to real-money gambling (RMG).

In H115, 80% of funded players on Gaming Realms’ proprietary real-money platform were using mobile, well ahead of the 30% industry average. Some of the company’s games are developed and operated in house (eg Pocket Fruity, Slingo Riches). Others are operated by third parties, such as Iceland Bingo on the Dragonfish platform (888). In the case of the latter, Gaming Realms receives a marketing services commission related to the net gaming revenue. It also owns Quick Think Media (QTM), a specialist online gaming marketing agency, as well as e-gaming affiliate company Blueburra Holdings. Its social gaming assets are housed in a new company called Blastworks, based in Seattle, Washington, US.

Background: Formation in 2013

Gaming Realms listed on AIM in August 2013 via a reverse takeover of Pursuit Dynamics (a shell with cash of £3.2m). It simultaneously raised £3.4m via a share placing and acquired two businesses for £5m in shares: BeJig, a developer and operator of online multiplayer social games, and AlchemyBet, a developer and operator of mobile real-money casino games. Gaming Realms had been formed to develop a new bingo concept, incorporating social gaming experiences into RMG. In December 2013 it acquired QTM for £2.2m, a specialist gaming marketing agency with particular expertise with Facebook. Its marketing capability was further bolstered with the purchase of online bingo affiliate company Blueburra Holdings in September 2014 for an initial £5.0m consideration. Gaming Realms’ largest and most recent acquisition saw it pay $18m to purchase the popular Slingo brand, platform and related assets in August 2015, providing it with a US-focused international social gaming business.

Management: Online gaming pedigree

Management has an unusual breadth and depth of experience and a strong track record. The executive directors were together at Cashcade, an early entrant to online bingo and casino with an innovative television-led marketing approach, whose flagship Foxy Bingo brand was in the top three in the market. Cashcade was founded in 1999 and was sold to PartyGaming (now bwin.party digital entertainment) 10 years later for £96m; the management team stayed on and the business continued to grow strongly, with EBITDA rising from £12.2m in 2008 to £16.9m in 2011.

Chairman Michael Buckley, CEO Patrick Southon and executive director Simon Collins were co-founders of Cashcade (biographies on page 12). Patrick and Simon remained at bwin.party until 2010/11 when they set up NewGame, an investment fund focusing on innovation in the gaming sector, whose investments included BeJig and AlchemyBet. CFO Mark Segal was finance director at Cashcade and remained at bwin.party until 2013.

Atul Bali joined the board as a non-executive director and now serves as president of its social gaming division, Blastworks, post the Slingo acquisition; he has previously served as president of RealNetworks’ games division, as president and CEO of Aristocrat’s US operations, a leading provider of games systems to regulated casinos and lotteries and has held a number of senior roles at GTECH.

Strategy: Mobile-led, differentiated games, data driven

Gaming Realms hopes to become a market leader in the mobile-led casual gambling market. The company has three key factors that it believes will drive success: to maintain a focus on the mobile experience in all the company does; to develop and distribute unique content, achieved through the cross-pollination of the best ideas from the real-money and social gaming worlds; and to place data analytics at the heart of its decision making.

Game play on mobile devices is growing rapidly and is expected to account for almost 44% of interactive gambling by the end of 2018 (source: H2 Gambling Capital). Moreover, mobile offers an opportunity to attract a new demographic of players who are typically younger and more entertainment focused than traditional PC-based online bingo and casino players. Many of these players are already used to the ‘freemium’ payment model of social gaming.

We believe that Gaming Realms’ willingness to innovate and try new things, both in terms of game-playing features and marketing methods, is a key competitive advantage. Online bingo and casino is a very competitive market. However, Gaming Realms is beginning to demonstrate that there is space for an operator that is prepared to provide a fresh twist on familiar features. Market researcher Kadence estimates that 12 million people play social games in the UK, but that only 12% also play online bingo (source: Kadence UK Bingo Market Report, May 2014) – a large potential new market for real-money operators that can attract players with social gaming features and brands that they are used to, in a real-money product.

Highly effective marketing expertise is another competitive advantage, which we believe is one of Gaming Realms’ core competencies. This is made possible by the company’s data-driven approach to decision making. The effectiveness of its various marketing campaigns is monitored almost in real time. Management can then increase or reallocate its marketing pounds towards those channels that offer the lowest CPAs. Data are also used to personalise the games that are offered to players once inside the platform to ensure they are offered the games most likely to resonate with them. This helps ensure high rates of retention and thus to raise player lifetime values (LTVs).

Business model – gaming entertainment on the move

Gaming Realms’ brands are positioned to take advantage of the trend towards entertainment on the move as it targets casual gamers, in both the real-money and social gaming spheres, seeking a fun way to be entertained on their mobiles. Although the real-money and social gaming industries have developed almost in parallel, the line between them is becoming increasingly blurred. Ultimately, the two industries serve customers with the same profile, with the same style of product. The only real distinction between them is the ability to cash out in real-money gaming and the accompanying regulatory restrictions. Gaming Realms’ business model is simple and can be applied equally well to either vertical: effective marketing to attract players at the lowest cost possible, develop compelling content to retain players for as long as possible to maximise their LTVs.

We believe that Gaming Realms differentiates itself from other online bingo and casino operators in three ways: firstly, it is building innovative mobile-led brands, which incorporate social features (eg levels) in real-money gaming; secondly, it is highly marketing driven, with a 2015 CPA of just under £60 vs an industry average of over £100; and its proprietary platform facilitates product differentiation and is mobile optimised, with 80% of players accessing the game on their mobiles versus an industry average of c 30% (management estimates).

Gaming Realms employs approximately 150 people across its various business units. These businesses are organised across four main complementary activity verticals.

RMG is operated on its proprietary platform (Spin Genie, Pocket Fruity);

Social gaming is operated out of the US under its Blastworks subsidiary;

White label bingo ‘skins’ is operated on the 888 Dragonfish platform, marketed by Gaming Realms via its Blueburra Holdings and QTM arms; and

A consumer marketing agency (part of QTM).

RMG

Pocket Fruity is a real-money casino with 22 proprietary games, mainly played on mobile devices. Revenues grew by 72% post its migration to Gaming Realms’ Grizzly platform, with 80% of players playing on mobile, well ahead of management’s estimate of a 30% industry average. Slingo Riches was launched in early 2015 and quickly became the most popular game on the platform, accounting for 13% of gross gaming revenues. The company intends to launch its own bingo product and further Slingo variations in the coming months, including Slingo.com for RMG in the UK.

Social gaming

Blastworks is Gaming Realms’ US-based social gaming subsidiary, run by Atul Bali. The division consists of the Slingo brand and related assets acquired from RealNetworks. Social games do not need to be licensed (since players cannot cash out) and can be played on mobile and by Facebook users worldwide, giving Gaming Realms a significant US social casino database. Revenue is generated via the sale of a virtual currency, which game players can use to purchase additional levels and game-playing features. Having been a non-core business function under ReaNetworks, Gaming Realms now intends to grow the business through the development of marketing of further original content on the back of Slingo’s success. BeJig previously operated two social games: Five Star Slots and Avatingo, but these have been turned off temporarily while the company works on the migration of its real-money brands onto the Grizzly platform.

White-label bingo ‘skins’

Both Blueburra Holdings and QTM were acquired for their industry-leading marketing capabilities. Blueburra in particular is a specialist e-gaming affiliate company and owner of the bingoport.com portal, while QTM also had existing bingo affiliate operations when it was acquired. Both companies market bingo sites that are operated on the 888 Dragonfish platform, with Iceland Bingo currently the most significant of these. While it is hard to differentiate in terms of game-playing features on these games, they allow Gaming Realms to leverage the value of its marketing expertise. QTM specialises in marketing techniques that use emerging digital channels such as Facebook. It also provides valuable player databases to which Gaming Realms can cross-sell additional games, both its own and those from third parties, to increase its share of wallet.

Marketing agency

QTM’s speciality is marketing on new digital channels, especially Facebook. As well as marketing Gaming Realms’ brands, it derives agency and affiliate income from clients such as Macmillan, Expedia and Zynga, as well as betting companies such as Ladbrokes, Paddy Power and Bet365. The Slingo acquisition saw QTM gain a data science team from GameHouse. It is presently using its data analytics expertise to build a new game and bonus recommender. The new data science team has already run its algorithms on Gaming Realms’ databases and demonstrated to management that its algorithms are more effective than Gaming Realms’ existing capabilities, and the intention is also to fully integrate this into the Grizzly platform to increase player LTVs.

Online gambling and social gaming markets

An OpenBet and eGaming Review survey about why people like to gamble online revealed that four of the five top reasons relate to entertainment-type motivations (see Exhibit 1 below). At the same time there has been a growing demand for entertainment on the move as technological advancement has enabled a much richer user experience on mobile devices.

Exhibit 1: Why do you like to gamble online?

Source: eGaming Review/OpenBet webinar, August 2015

Almost 2.5 million adults play online bingo in the UK (up from 1.1 million in 2008, a CAGR of c 20%) and 1.73 million play online slots (Kadence market research, May 2014). There is some crossover: 33% of bingo players also play slots, and 47% of slots players also play bingo; more than half also play online social games. Players typically play on more than one site and Kadence ranks the most played sites as Sun Bingo, Foxy and Gala, followed by Jackpotjoy and Tombola, with Iceland Bingo already about as big as Mecca Bingo. The most played online casino sites in the UK are Jackpotjoy, Ladbrokes, 888, Paddy Power, Sky, Gala and Mecca.

The market for social games is global and Eilers Research estimates that the 2014 market for casino-based games was worth about $2.8bn; it is forecast to grow to $4.4bn by 2017. Having been originally dominated by Facebook, the mobile channel is expected to contribute more than 100% of that growth, as Facebook revenues are expected to fall. Key growth drivers include rising broadband penetration, growing trust in online e-commerce, the rapid growth in mobile devices and their sophistication. Eilers estimates that mobile surpassed Facebook for the first time in 2014, accounting for 56% of social casino revenues, and that it will rise to 81% of social casino revenues by 2017.

Exhibit 2: Global social casino market

Source: Eilers Research

Gaming Realms’ main competitors are Intertain (Jackpotjoy and Costa Bingo), Gala Coral, bwin.party (brands including Party and Foxy), 888 (888 plus B2B bingo sites, eg bwin and Mirror Bingo), Rank Group (Mecca), Tombola and SkyBet, as well as the major sports-betting companies that also have popular bingo and casino sites (bet365, William Hill, Ladbrokes, Paddy Power). Competitors to Pocket Fruity’s mobile casino include games operated by mFortune and Probability (GTECH), while competitors to Blastwork’s social games include Caesars and DoubleDown (IGT).

Sensitivities

Gaming Realms is a new business and our forecasts are based on our best estimate of the success of current and yet-to-be launched products, on both proprietary and third-party platforms. There may be a considerable variance in our revenue forecasts, either on the upside or the downside. Many costs are variable, but there is a fixed-cost element, mainly related to staff, and Gaming Realms is investing heavily in marketing.

Management has an excellent track record and excellent experience in its markets, but faces a high level of competition from much larger and well-established companies. Regulatory issues include pension funding and litigation risks.

The business is fully licensed and regulated in the UK and Alderney, but would be affected by any change in the licensing or tax regimes. Although the new POC tax has been in effect since December 2014, we believe the full effects on the industry’s competitive landscape are yet to be felt. It is unclear how the tax is affecting competitors’ behaviour, including bonus structures and marketing budgets, and the extent to which it will be absorbed in margins or passed on to consumers.

The business is dependent on key personnel, on the ability of the BeJig and AlchemyBet development teams to successfully develop and operate games and platforms, and on third-party providers of games and platforms (notably Bede Gaming and Dragonfish [888]).

The establishment of the company’s US-based Blastworks social gaming division creates a predominantly US dollar-denominated cost and revenue stream, with the associated currency risk.

Valuation

Exhibit 3: Peer group comparison

 

Price

Market
cap

EBITDA
(£m)

EV/EBITDA
(x)

P/E
(x)

(p)

(£m)

2015e

2016e

2015e

2016e

2015e

2016e

Gaming Realms

26.5

66

(4.0)

6.0

N/A

10.8

N/A

14.2

32 Red

74.0

62

6

10

9.1

5.5

13.2

7.0

888 Holdings

163.8

584

74

80

10.0

9.2

19.3

17.7

bwin.party digital ent.

109.4

905

69

71

11.8

11.4

24.4

23.6

Netplay TV

10.3

30

3

4

5.0

4.6

14.6

11.4

XL Media

529

85.2

24

30

7.0

5.5

11.3

8.7

Average

9.0

7.8

16.6

13.8

Zynga

$2.50

$1,943

16

91

58.7

8.8

N/A

68.3

King Digital Entertainment

$14.80

$4,653

783

745

4.7

5.0

8.0

8.9

Average

31.7

6.9

8.0

38.6

Source: Bloomberg estimates, Edison Investment Research. Note: Prices as at 19 October 2015.

Gaming companies are usually valued on an EV/EBITDA basis. We have pushed back our break-even point by a year and consequently believe that 2016 is a more instructive year on which to make valuation comparisons. The peer group average (Exhibit 3) is 7.8x for 2016 versus our forecast EV/EBITDA for Gaming Realms, which is higher at 11.3x. We believe this premium is justified given that profits are still very much in the ramp-up phase and growth is significantly ahead of the generally more mature peer group constituents.

We also list two social gaming businesses for comparison. Despite being among the hottest stock market subsectors just three years ago, valuations of social gaming companies have come back a long way and 2016 valuations now lag those found in the real-money space. This is partly because valuations among the bigger listed social gaming companies recognise the relatively short product lifecycle among ‘blockbuster’ titles that contribute a significant proportion of their revenues. However, the social gaming industry is significant in size and offers Gaming Realms a strong additional growth runway in a complementary vertical.

Financials

Gaming Realms has spent much of the time since its formation in a heavy investment phase. The natural company lifecycle means that developing content has come first. This has included the conversion of the BeJig-developed Grizzly platform from purely social to a real-money platform and the development of Spin Genie, Slingo Riches and the yet-to-be-launched bingo product. The company has also invested significant sums on an aggressive marketing programme. Marketing spend is more flexible and can be reallocated to the bingo and casino brands, from which the company achieves the highest return. We originally forecast that the company would break even in FY15. However, despite contributing significant additional revenues to our H215 forecasts, the acquired Slingo business is not expected to be profitable until 2016 and we have therefore pushed back our break-even timing to FY16. Gaming Realms will consolidate the Slingo assets for 4.5 months of 2015 and we assume a revenue contribution of $5.5m (£3.5m) and an EBITDA loss of about c. $2.3m (£1.5m). We expect Slingo/social revenues to grow rapidly, to $20.0m (£13.0m) in 2016 and $27.0m (£17.5m) in 2017 as the company benefits from increased management attention and marketing investment outside RealNetworks, where it was regarded as a non-core business.

Exhibit 4: Recent results and estimates

£m

H114 (6m to Jun)

FY14 (15m to Dec)

H115

2015e

2016e

2017e

Real-money gaming

0.81

2.67

4.18

11.00

26.50

35.50

Social gaming

0.48

1.18

0.05

3.50

13.00

17.50

Marketing services*

2.92

7.38

3.72

8.00

10.00

12.00

Revenue

4.20

11.23

7.95

22.50

49.50

65.00

Marketing expense

(4.60)

(10.21)

(5.05)

(13.10)

(19.80)

(22.10)

Marketing % revenue

109.3%

90.9%

63.5%

58.7%

40.0%

34.0%

Operating expense

(0.87)

(2.32)

(1.77)

(4.50)

(7.43)

(9.10)

Operating expense % revenue

20.7%

20.7%

22.3%

20.0%

15.0%

14.0%

Gaming tax est**

(0)

(0.14)

(0.63)

(1.65)

(3.97)

(5.31)

Gaming tax % real-money gaming revenue

15.0%

15.0%

15.0%

15.0%

15.0%

14.9%

Admin expense

(2.24)

(6.38)

(3.32)

(7.25)

(12.52)

(15.00)

Admin % revenue

53.2%

56.8%

41.8%

32.2%

25.3%

23.1%

Adjusted EBITDA

(3.51)

(7.82)

(2.82)

(4.00)

5.80

13.50

Adjusted EBITDA margins (%)

N/A

N/A

N/A

N/A)

11.7

20.8

Source: Gaming Realms, Edison Investment Research. Note: *Marketing services revenues are stated net of the new 15% UK POC tax introduced on 1 December 2014. **Estimated gaming tax (POC) is calculated as 15% of real-money gaming revenues.

Online gaming revenues depend on the number of active customers and the yield per customer, itself a function of the customer’s average spend and lifetime. The number of daily active depositors rose by 85% y-o-y to 7,108 at the end of June 2015. Real-money gaming revenues are net gaming revenues from own-operated sites (bets less payouts, less promotional bonuses). Commissions on marketing services are a percentage of the operators’ net gaming revenues, after a share of certain costs (including UK gaming duty from December 2014). Marketing services also includes a small amount of marketing agency income. Social gaming revenues come from the purchase of virtual currency (credits and tokens) in the company’s Blastworks business division, which houses the Slingo assets acquired from RealNetworks.

Gaming Realms most recent results (H115 interims) show that revenues increased 89% y-o-y from £4.2m in H114 to £8.0m. This was largely due to significant growth in its RMG division. Boosted by the launch of Slingo Riches, RMG revenues rose by 419% to £4.2m (up from £0.8m in H113). This is expected to continue as investment in marketing drives continued growth of Slingo Riches and Pocket Fruity, plus the soon-to-be-launched bingo product. Its Q315 trading update demonstrates continued strong growth with revenues up 48% to £6.2m from Q215. Real money gambling revenues were up 18% q-o-q. The Slingo free to play business also continues to grow solidly recording monthly revenues of over $500,000 for the first time in September. This serves to add confidence to our FY15e estimates. We expect real-money gambling revenues to more than double to £26.5m in 2016, before rising by a further 34% in 2017. The Slingo acquisition adds immediate scale to the company’s social gaming operations. We expect growth in marketing services to come from continued growth in Gross Gaming Revenues (GGRs) among associated brands, supplemented by continued client wins.

Marketing continues to be Gaming Realms’ biggest cost item, totalling £9m in CY14. We expect it to continue to grow as Gaming Realms increases the number of brands it offers, including supporting its soon-to-be-launched bingo product with TV advertising. As the business continues to scale, we expect that marketing as a percentage of revenues will fall significantly from 108% in 2014 to 58% in 2015 and down to 34% by 2017, which we expect to be around its normalised level. Marketing is a variable cost, which management can flex accordingly to maximise its ROI. Gaming Realms already pays UK gaming tax in respect of Pocket Fruity and Slingo Riches, which we have accounted for as 15% of real-money revenues (across all products).

Brought together, we expect an EBITDA loss of £4m in FY15, a loss of £4.9m at the PBT level (as shown in Exhibit 5). While marketing and development costs are incurred upfront, the benefits are incurred over multiple periods as acquired players continue to play and deposit. As a result, margins should improve over time and we expect FY16 to be Gaming Realms’ first profitable year as the benefits increase scale and the company’s earlier marketing spend comes through. This is a year later than previously forecast, but we believe the addition of Slingo increases the opportunity at Gaming Realms, and as a result we expect adjusted EBITDA to rise further to £13.5m in FY17.

A highly cash-generative business once profitable

Gaming Realms has invested heavily ahead of revenues bringing together its various segments. Its numerous acquisitions to date include QTM for £2.2m in December 2013 (£1.47m cash plus a deferred payment of 3.571m ordinary shares equivalent to £0.75m at a share price of 21p/share in December 2014). Blueburra Holdings was acquired in September 2014 for an initial consideration of £5.0m (50/50 cash and shares) and up to £5.5m of earnouts (also 50/50 cash and shares). Finally, the Slingo brand and related assets were acquired in August 2015 for $10m (£6.5m) in cash upfront plus $8m (£5.2m), of which $4.0m is payable on the first anniversary of the deal and $4.0m on the second anniversary. Up to 50% of each tranche can be satisfied in shares at the option of RealNetworks. The Slingo acquisition was funded via an accompanying share placing, which raised £12.5m gross (£11.9m net), with 49.9m shares placed at 25p.

We expect a net cash outflow of £3.2m in FY15, resulting from negative operating cash outflows (marketing and staff costs), in addition to the company’s M&A activities. We expect positive operating cash flows of £4.3m in FY16, rising to £12.1m in FY17. After deducting £2.1m and £2.0m of deferred M&A payments (in FY16 and FY17 respectively), we expect net cash to rise to £9.5m by FY17.

Exhibit 5: Financial summary

£'m

2013*

2014**

2015e

2016e

2017e

September/December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

0.88

11.23

22.50

49.50

65.00

EBITDA

 

 

(2.32)

(7.82)

(4.00)

5.80

13.50

Operating Profit (before amort. and except.)

 

(2.44)

(8.33)

(4.80)

4.90

12.60

Amortisation of acquired intangibles*

(0.05)

(0.80)

(1.00)

(0.90)

(0.80)

Exceptional items

(0.87)

(0.23)

0.39

0.00

0.00

Share based payments

(0.04)

(0.44)

(0.50)

0.00

0.00

Operating Profit

(3.40)

(9.80)

(5.91)

4.00

11.80

Net Interest

(0.00)

(0.04)

(0.13)

0.00

0.00

Profit Before Tax (norm)

 

 

(2.44)

(8.38)

(4.93)

4.90

12.60

Profit Before Tax (FRS 3)

 

 

(3.40)

(9.85)

(6.04)

4.00

11.80

Tax

0.00

0.09

0.03

(0.20)

(0.59)

Profit After Tax (norm)

(2.44)

(8.28)

(4.90)

4.70

12.01

Profit After Tax (FRS 3)

(3.40)

(9.75)

(6.01)

3.80

11.21

Average Number of Shares Outstanding (m)

36.4

165.2

220.0

249.0

251.0

EPS - normalised (p)

 

 

(6.7)

(5.0)

(2.2)

1.9

4.8

EPS - normalised diluted (p)

 

 

(6.7)

(5.0)

(2.2)

1.8

4.7

EPS - (IFRS) (p)

 

 

(9.3)

(5.9)

(2.7)

1.5

4.5

Dividend per share (p)

0.0

0.0

0.0

0.0

0.0

EBITDA Margin (%)

(264.1)

(69.6)

(17.8)

11.7

20.8

Operating Margin (before GW and except.) (%)

(277.7)

(74.2)

(21.3)

9.9

19.4

BALANCE SHEET

Fixed Assets

 

 

6.03

17.06

30.20

30.00

30.10

Intangible Assets

5.92

16.76

28.00

27.50

27.30

Tangible Assets

0.12

0.30

2.20

2.50

2.80

Investments

0.00

0.00

0.00

0.00

0.00

Current Assets

 

 

6.53

6.24

4.20

6.10

15.70

Stocks

0.00

0.00

0.00

0.00

0.00

Debtors

1.34

2.22

2.60

4.00

6.00

Cash

5.06

3.99

1.40

1.90

9.50

Other

0.12

0.02

0.20

0.20

0.20

Current Liabilities

 

 

(1.80)

(5.26)

(9.30)

(8.60)

(9.00)

Creditors

(1.78)

(5.25)

(9.10)

(8.60)

(9.00)

Short term borrowings

(0.02)

(0.01)

(0.20)

0.00

0.00

Long Term Liabilities

 

 

(0.02)

(2.43)

(5.10)

(3.70)

(2.30)

Long term borrowings

(0.02)

0.00

0.00

0.00

0.00

Other long term liabilities

0.00

(2.43)

(5.10)

(3.70)

(2.30)

Net Assets

 

 

10.74

15.61

20.00

23.80

34.50

CASH FLOW

Operating Cash Flow

 

 

(3.90)

(8.02)

(7.20)

4.30

12.10

Net Interest

0.00

(0.04)

(0.10)

0.00

0.00

Tax

0.00

0.05

0.00

0.00

(0.50)

Capex

(0.44)

(0.69)

(0.50)

(1.00)

(2.00)

Acquisitions/disposals

3.42

(4.12)

(7.30)

(2.10)

(2.00)

Financing

5.91

11.81

11.90

0.00

0.00

Dividends

0.00

0.00

0.00

0.00

0.00

Net Cash Flow

4.99

(1.01)

(3.20)

1.20

7.60

Opening net debt/(cash)

 

 

0.00

(5.02)

(3.98)

(0.70)

(1.90)

HP finance leases initiated

0.00

0.00

0.00

0.00

0.00

Other

0.03

(0.03)

(0.08)

0.01

(0.00)

Closing net debt/(cash)

 

 

(5.02)

(3.98)

(0.70)

(1.90)

(9.50)

Source: Gaming Realms accounts, Edison Investment Research. Note: *Includes AlchemyBet and BeJig for two months. **15-month period.

Contact details

Revenue by geography

44 Southampton Buildings
London
WC2A 1AP
UK
0845 123 3773
www.gamingrealms.com

Contact details

44 Southampton Buildings
London
WC2A 1AP
UK
0845 123 3773
www.gamingrealms.com

Revenue by geography

Management team

Chairman: Michael Buckley

CEO: Patrick Southon

Michael was chairman of Cashcade, which he founded with Patrick and Simon in 2000 and which was sold to bwin for £96m in 2009. Michael has invested in and been a chairman of a number of public companies, including SelecTV, and he was a founding director of Meridian Television in 1991.

Patrick has been working in online gambling for 13 years and is particularly focused on marketing, brand building and media buying. He was managing director of Cashcade and managing partner of NewGame, an investment fund focusing on innovation in the gambling sector.

Commercial director: Simon Collins

CFO: Mark Segal

Simon was the co-founder and commercial director of Cashcade. Following the sale of Cashcade, he remained at bwin.party until April 2011 where he focused on innovation, R&D and social network brand development. When he left bwin he joined Patrick in setting up NewGame, an investment fund focusing on innovation in the gambling sector.

Mark qualified as a chartered accountant in 2003 and joined Cashcade in May 2005, where he was finance director responsible for the full finance function. He joined bwin when it acquired Cashcade in 2009 and left in April 2013, joining Gaming Realms in May 2013.

Management team

Chairman: Michael Buckley

Michael was chairman of Cashcade, which he founded with Patrick and Simon in 2000 and which was sold to bwin for £96m in 2009. Michael has invested in and been a chairman of a number of public companies, including SelecTV, and he was a founding director of Meridian Television in 1991.

CEO: Patrick Southon

Patrick has been working in online gambling for 13 years and is particularly focused on marketing, brand building and media buying. He was managing director of Cashcade and managing partner of NewGame, an investment fund focusing on innovation in the gambling sector.

Commercial director: Simon Collins

Simon was the co-founder and commercial director of Cashcade. Following the sale of Cashcade, he remained at bwin.party until April 2011 where he focused on innovation, R&D and social network brand development. When he left bwin he joined Patrick in setting up NewGame, an investment fund focusing on innovation in the gambling sector.

CFO: Mark Segal

Mark qualified as a chartered accountant in 2003 and joined Cashcade in May 2005, where he was finance director responsible for the full finance function. He joined bwin when it acquired Cashcade in 2009 and left in April 2013, joining Gaming Realms in May 2013.

Principal shareholders

(%)

Michael Buckley

8.2%

Rich Ricci

6.8%

Helium Rising Stars Fund

6.2%

Henderson Volantis

5.9%

Standard Life

4.9%

Patrick Southon

4.6%

Simon Collins

4.3%

Companies named in this report

32Red (TTR), 888 Holdings (888), bwin.party digital entertainment (BPTY), Intergain Group (IT), King (KING), Netplay (NPT), Rank Group (RNK), XL Media (XLM), Zynga (ZNGA)

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority (www.fsa.gov.uk/register/firmBasicDetails.do?sid=181584). Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2015 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Gaming Realms and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2015. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Share this with friends and colleagues