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) |
|
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