Delivering operationally and financially

Bragg’s Q120 results demonstrated strong top-line growth, adjusted EBITDA margin expansion and improving cash flow generation. Exhibit 1 highlights the company’s quarterly and annual financial performance for its continuing operations since FY18.

Below adjusted EBITDA, the most notable expense was the increase in deferred consideration liability for the Oryx earnout of €4,968k, a reflection of the strong growth the business is delivering, and the financial accretion of the liability. The significant improvement in adjusted EBITDA since Q319 is notable as the company builds customers.

Exhibit 2 illustrates Bragg’s financial performance on a pro forma basis, ie as if the acquisition of Oryx had been completed on 1 January 2018 and fully settled in cash and equity at that time.

Q120 revenue growth of 44% y-o-y to €8,784k was Bragg’s highest quarterly growth rate since Q119, when revenue grew by 85%. This reflects the strong increase in customer numbers and organic growth with some inherent seasonality due to weather, etc. The key driver of growth was from Games & Content (c 58% of total revenue), which grew by 54.6%, and Software Platform Licensing (35% of total revenue), which grew by 43%.

Management attributes its success in winning new customers to two things: superior content and functionality relative to its competitors that is available through a single API, which ultimately enables Bragg to drive more revenue through its most profitable customers; and the speed of integration. For example, during the COVID lockdowns, a new customer in Latin America was live within two weeks from the initial conversations between Bragg and the client. This compares with the typical six to nine months that competitors would require.

Management highlights high customer retention (never losing a customer other than as a result of the customer’s own financial difficulties) as a clear indication of customer satisfaction. Bragg signed nine new customers (including Gamesys, SkillOnNet, Leon, Casino Secret and Hub 88) during Q120, which will help growth through the remainder of FY20 and in future years. Client concentration has reduced year-on-year, with the top five clients representing 48% of revenue in Q120 vs 68% in Q119. Looking to Q2 and beyond, management points to very advanced conversations with 20 potential new customers. These are likely to increase its exposure to Latin America and new countries in Europe, which should help to reduce client concentration and de-risk the business.

During Q120, the company enhanced its technology and product offering. A key launch included the Data Analytics Platform, which will enable Bragg’s customers to better segment and target their own end customers to grow. In addition, the new Player Engagement Platform, which was launched with a view to increasing the lifetime value of a customer, has been well received.

Gross margin deteriorated by 220bp from 47.4% in Q119 to 45.2%, which is solely attributable to mix, ie the revenue streams outside Games & Content typically do not have material cost of goods sold.

Adjusted EBITDA increased by 92.4% to €760k as strong revenue growth, control of costs and the natural gearing to margin that should be enjoyed as Bragg scales fed through to greater profitability. The adjusted EBITDA margin increased from 6.5% in Q119 to 8.7% in Q120. Net staff costs, the most significant element of costs, fell by 4.5% to €2,167k. Within staff costs, share-based payments, which are excluded from adjusted EBITDA, declined by 93% y-o-y to €51k, an absolute cost saving of €695k or 7.9 margin points. On a gross basis, employee costs increased by 34.9%. Elsewhere, there were absolute declines in other costs such as corporate, sales & marketing, and travel entertainment, which, although not significant in absolute terms, reflect management’s focus on improving profitability and cash flow generation while growing the business.

The company’s cash flow generation improved significantly in Q120. At €2,540k, operating cash flow improved from the outflow of €2,737k in Q119 and €98k for the whole of FY19. The important drivers of improved operating cash flow generation were the higher adjusted EBITDA margin mentioned above and positive working capital of €1,861k in Q120 versus an outflow of €3,115k in Q119, which reflects the ongoing growth profile of the business and better management of working capital.

Free cash flow generation also improved to an inflow of €2,178k versus outflows of €2,990k in Q119 and €1,757k in FY19, driven by improved operating cash flow generation. Management therefore believes that operational activities are self-funding.

The cash position of €2,487k has improved from €1,828k at Q119 and €682k at the end of FY19. Gross debt of €28,754k (excluding leases) is solely the deferred consideration for the acquisition of Oryx, which has increased by €5,022k since FY19. Net debt excluding leases has therefore increased by €3,217k at the end of FY19 to €26,267k.

There is no further news on how the deferred consideration for the Oryx acquisition is likely to be settled. Previously, management disclosed that the first instalment of the deferred consideration, which was payable in June 2020, has been delayed to September 2020 with the agreement of the vendor. Management has engaged Canaccord Genuity to provide financial advisory services in connection with financing the earnout. This is critical given the low but improving free cash flow.

The company has reiterated its guidance for revenue of €35–38m (C$59.3–64.4m) and adjusted EBITDA of €5.2–5.6m (C$8.8–9.5m) in FY20. This would represent year-on-year growth for revenue of 31.6–42.9% versus FY19 and adjusted EBITDA growth of 349–383%. The middle of both ranges implies an adjusted EBITDA margin of 14.8% versus 4.4% in FY19.

The revenue booked by Bragg during Q120 represents 23.1–25.1% of management’s guided revenue range for FY20. This compares with Q119 revenue, which represented 22.9% of total revenue earned in FY19, and the Q120 performance is therefore encouraging in this context. As shown in Exhibit 2, comparative growth rates ease through the remainder of the year and management has indicated that Q220 is likely to demonstrate strong growth, as the online gaming industry has been a beneficiary of the lockdowns due to COVID-19. In addition, management points to increasing interest in online casino games as businesses begin to emerge from the lockdowns.

We have moved the functional currency of our model and forecasts from Canadian dollars to euros to be consistent with the recent change in Bragg’s functional currency.

Our new model reflects higher growth in FY20 for Games & Content of 45% and for Software Platform Licensing of 35%, and lower growth for other revenues (c 2% in aggregate) given the growth rates recorded in Q120. In aggregate, our FY20 revenue forecast of €36.6m is in the middle of management guidance of €35–38m. This represents growth of 37.5% y-o-y vs our prior estimate of 35.6%. For FY21, we assume 12% revenue growth vs c 18% previously, reflecting the higher base and a slightly more conservative forecast. Our absolute revenue estimate for FY21 of €40.9m is c 6% higher than our prior Canadian dollar forecast at the current exchange rate of €0.65/C$ versus €0.62/C$ previously, a like-for-like increase of c 11%.

The higher growth rate from Games & Content is likely to dilute gross margin in FY20, before better growth from other higher-margin revenues improves in FY21. We forecast a modest deterioration in gross margin of 20bp to 45% in FY20, and an increase of 200bp to 47% in FY21.

Our new FY20 adjusted EBITDA forecast of €5.4m is also in the middle of management’s guidance for FY20 of €5.2–5.6m. This represents a margin of 14.8% versus 4.4% in FY19. The margin is lower than our previous forecast of 15.6% due to gross margin decline as a result of mix and higher operating expenses as growth has accelerated. Our FY20 adjusted EBITDA forecast of €5.4m is equivalent to C$8.3m and compares to our prior forecast of C$7.9m. For FY21, our adjusted EBITDA estimate is €6.1m and we assume a flat margin of 14.8%.

Our forecasts show positive operating cash flow of €4.4m in FY20 and €4.8m in FY21, which covers investment in tangibles and intangibles of €1.8m and €2.2m respectively. Free cash flow pre-interest is forecast to be €2.6m in both FY20 and FY21. We forecast free cash flow post interest of €0.5m in FY20 and €1.5m in FY21. We continue to assume that half of the deferred consideration for the earnout, due in September 2020 and June 2021, is funded by an equity raise at the same time as payment of the consideration. We assume that equity is raised at a 20% discount to the current share price, which is the maximum discount permitted by the Canadian exchange. We assume the remainder is funded by debt with an interest rate of 6%.

We forecast the net debt position excluding leases to be €23.0m at the end of FY20.

The share price performance has been strong since reaching C$0.17 in April. On our new forecasts, at the current share price of C$0.57, the stock trades at 2.0x and 1.8x EV/sales in FY20e and FY21e, respectively. The EV/adjusted EBITDA multiples are 13.3x and 11.8x, respectively.

In addition to the recent improvement in Bragg's share price, we note the recent strength in the share prices of peers such as GAN and DraftKings. For the year-ended December 2021, the companies trade on EV/sales multiples of 95.9x and 15.4x respectively, per Refinitiv.