Golden Nugget Online Gaming, Inc.'s (GNOG) CEO Tilman Fertitta on Q1 2021 Results - Earnings Call Transcript

Golden Nugget Online Gaming, Inc. (GNOG) Q1 2021 Earnings Conference Call May 17, 2021 4:30 PM ET

Company Participants

Sloan Bohlen - Investor Relations

Tilman Fertitta - Chairman and CEO

Thomas Winter - President

Mike Harwell - Chief Financial Officer

Conference Call Participants

David Katz - Jefferies

Operator

Good day and thank you for standing by. Welcome to the Golden Nugget Online Gaming First Quarter 2021 Earnings Call. At this time, all participants are in listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Sloan Bohlen, Investor Relations. Thank you. Please go ahead.

Sloan Bohlen

Good afternoon, everyone. And thank you for joining us today to discuss our first quarter results for 2021. With me today our Chairman and Chief Executive Officer, Tilman Fertitta; and our President, Thomas Winter; and our Chief Financial Officer, Mike Harwell.

Before we begin, I’d like to remind all participants that our comments today will include forward-looking statements within the meetings of the federal securities laws. Forward-looking statements are not statements of historical facts, and a number of factors and uncertainties could cause our actual results in future periods to differ materially from what we talked about today.

We assume no responsibility for updating the forward-looking statements, and therefore, you should exercise caution in interpreting and relying on them. For a complete discussion of these risks, we encourage you to read the company’s earnings release, as well as our filings with the SEC.

In addition, we refer to non-GAAP measures during the call. Please refer to our earnings release for a full reconciliation of net income or loss to EBITDA and adjusted EBITDA, and for the definitions of our non-GAAP measures.

And with that, let me turn the call over to Tilman for his opening remarks. Tilman?

Tilman Fertitta

Thank you, Sloane, and thank you to all the investors and analysts on the call. Before I turn the call over to Thomas and Mike, I will begin with a few high level points from the quarter. First, as you can see by revenue growth in the quarter, we feel increasingly confident about what Golden Nugget Online Gaming can be as we expand into our new geographic areas and continue to build our scale.

I mentioned the significant and growing addressable market for iGaming last quarter. But seeing what our team has accomplished historic 2021 really emphasizes how well positioned we are with the right assets, people, and of course, execution.

Second, as you will hear from Thomas, our state expansion plans are going extremely well and we’re now under agreements in geographies that represent nearly a third of the U.S. population. But very simply, we have a very strong playbook to run from based on our experience in New Jersey and it’s our aim to recreate that same success in more and more states across the country.

In Michigan, our results have exceeded our own expectations. In April alone, we grew our casino revenues there by 14%. Also, I believe our results in Michigan next year will equal our 2019 New Jersey revenues and that will turn profitable they’re sometimes in the latter part of 2022 way ahead of our expectations. I really can’t help it but my DNA requires that we operate our business that makes money. I’ve got to generate EBITDA and we’re so happy about it in Michigan next year.

Lastly, I’ll close by reiterating how powerful the Golden Nugget brand is combined with our broader businesses. A lot of our competitors have given up lots of equity or paid significant dollars to enhance media relationships. From a customer connectivity and royalty standpoint, ours is so strong, we already are able to go into markets and people know who we are. We definitely have our own strategic advantage.

It is Landry’s massive customer base. Across Landry’s over 500 restaurants, five casinos and many other entertainment venues across 40 U.S. states, we have access to tens of millions of customers and we’re just in our infancy of unlocking the value there. I don’t think the market really understands the powerful relationship that exists and is available to GNOG through Landry’s.

With that, let me end by getting highlighting our excitement for the future and the great results Golden Nugget Online Gaming team is produced to begin 2021.

With that, I’ll turn it over to our President, Thomas Winter.

Thomas Winter

Thank you, Tilman, and welcome everyone. I’d like to begin by echoing Tilman’s comments. We are truly excited about the start of 2021 and have a lot of promising results that support our long-term view about the sizable growth opportunity. We’ll start with a quick review of our success quarter.

In Q1, we generated $26.7 million in revenues, a 54% increase from a year ago and our largest quarter on revenue on record. We are especially pleased with this growth. A 60% came organically for New Jersey, while 40% came from Michigan, our first of many planned expansions across North America.

Our growth was driven by continued strong player acquisition and retention, while operating in the competitive markets of New Jersey and Michigan. As you will see in our materials, the growth is broad-based and continues to expand beyond the COVID-related tailwinds we experienced early last year.

In fact, we grew significantly in the quarter across both new and returning active depositors. Most encouraging, our first time deposit of grew by 386% over a year ago, mainly driven by our new market expansion, which I will elaborate on in a minute.

While returning active deposits, growth of 49% is just as exciting and was driven by continuous strength in retention. Overall, our average monthly active deposits grew 126% over last year and 62% sequentially, which really shows how rapidly we can grow even earlier in new markets.

Looking at New Jersey, major markets, our monthly net average revenue per user for the quarter was $550, compared to $613 in the first quarter of 2020, which was boosted in the early stages of the COVID-19 pandemic. Still our Q1 2021 net ARPU shows an increase of 6% of the first quarter in 2019, which we believe is a more meaningful comparison.

In Michigan, earlier few numbers have been encouraging too, while median household income is 30% lower in Michigan than it is in New Jersey. The gross gaming revenue of Michigan’s first most depositors has been only 8% short of New Jersey’s over the last three months, which makes us confidence in the long-term value we can create in Michigan.

Overall, our nationwide casino net ARPU was $434 in the first quarter of this year, temporarily dampened by the record number and share of first time depositors were accounted for 57% of our total active depositors. You will recall that new players will spend less initially and net ARPU is also lower by virtue of welcome bonuses that are measured against revenue. We expect casino net ARPU to progressively ramp up closer to historical levels as new iGaming markets mature.

Overall, I would remind you of the major growth drivers we outlined in our last call. First, iGaming is experiencing tremendous growth and is still in its early innings. Second, our players are loyal and tend to increase their spend over time. And third, we continue to grow our footprint as we enter new states.

In summary, our revenue trajectory continues to progress nicely in line with a 50% compounded average growth rates we have exhibited over the past four years. Building on our last earnings call, we are continuing to see immense potential in the size of the iGaming market in the U.S. In key states where iGaming is already regulated, iGaming revenues were more than twice that of online sports betting revenues in Q1 this year.

Together, New Jersey, Michigan and Pennsylvania already generates around $300 million in gross gaming revenue or more, while representing just 10% of the U.S. population. We expect more states to consider iGaming legislation, as a tax revenue potential will become harder to ignore and we have seen several states discussing iGaming legislation in the last few months, including Indiana, Illinois, and more recently, Nevada.

Let’s now speak to our expansion and give some updates for our key market build over the next number of quarters. We have been aggressively working to expand our footprints across North America and have no secure potential market access across 12 states, which represent 29% of the U.S. population.

We are especially pleased to announce our most recent market access agreements in Colorado with Z Casino and in Iowa with the Wild Rose Casinos where our agreements cover both iGaming and online sports betting, legislation and regulatory approvals permitting.

In addition to Colorado and Iowa, GNOG has negotiated market access for online sports betting and/or online casino in West Virginia, Virginia, Pennsylvania, Illinois, New York and through our affiliation with a Golden Nugget casinos Louisiana, Nevada and Mississippi.

While some of these states are still pending legislation and regulation, we anticipate going live in four additional states this year. Next quarter, we are getting ready to launch online casino and sports in West Virginia and online sports in Virginia. In the fourth quarter, we plan to launch online casino in Pennsylvania and online sports in Illinois. Early next year, we look forward to launching in Colorado, Iowa and Louisiana.

We are currently in discussions for market access in several other U.S. states, in addition to the Canadian province of Ontario, which we believe will open the iGaming markets as soon as next year.

As we ramp up our expansion into new markets, we will continue to make significant strategic investments in player acquisition. Each new jurisdiction will be slightly different. But in general, we expect our investments to result in negative EBITDA in the first two years of operation, while achieving breakeven in year three in iGaming space. As Tilman noted, we’re excited to build each of these new markets in the same way with growing and achieve profitability in New Jersey.

I’d like to take a minute to discuss our progress in Michigan to-date. First of the many months of planning, we were thrilled to launch with the first wave of operators in Michigan at the end of January.

We are pleased with the static rules we have achieved there in a market where some of our competitors have large homegrown database and are spending incredible amounts and promotions and marketing.

In our first full month of operation, we generated $3.9 million in gross gaming revenue, which took us more than four years to achieve in New Jersey. In April, Golden Nugget was one of only two operators to increase it iGaming GGR at 14% month-over-month. This contributed to more than doubling our market share over the last three months and we look forward to continuing that a fourth trend.

Finally before I turn the call to Mike to review our financials, I’d like to give an update on our product roadmap of 2021. Since launching in 2013, GNOG has always emphasized product quality and innovation as core to its business. We were the first operator in the U.S. to launch live dealer to our own studio. We were the first to launch a branded slot game, the Golden Nugget Video Slot and we’ve been successful in launching new slot categories like, Steppers and Megaways. The results of our focus on product and innovation speak for themselves with the success we’ve seen to-date in New Jersey.

We were recently shortlisted by eGaming Review for the 2021 North American Awards in five categories, more than any other operator. Categories we are dominated for, casino operator, mobile operator, customer service operator, marketing campaign, but also Operator of the Year and a one we have already won four years in a row.

In 2021, we have a series of initiatives underway to build upon our product success. In Michigan, we are excited by the upcoming launch of Live Dealer, which we expect to happen in the coming weeks. We also plan to expand our content offering by launching over 100 new games from several content providers, including Evolution Gaming, IGT, Inspired Gaming and Spin Games in the next couple of months. Content is a key driver of player activity and spend, and these additions should be instrumental to our revenue growth in the states.

In New Jersey, we are thrilled to announce that we will be significantly expanding our Live Dealer Studio. The expansion will add an additional 1,800 square feet of studio space and we’ll increase its capacity from 18 tables to 33 tables. We expect to complete this project in the third quarter of this year. We also plan to launch a 24x7 auto roulette, which will be an excellent complement to our existing studio and casino flow roulette tables.

And while focused on Live Dealer doesn’t mean we forget about slots. In the first quarter, we launched no less than 14 new games on an exclusive basis and are on track to do the same in Q2. We are working with our technology partner Scientific Games on delivering a newly designed casino portal and we expect our first deployment of this will be in West Virginia. This new design we come with user interface improvements, a quicker navigation and will allow us to release new features faster. Eventually, this new portal should be deployed across all states we operated.

We are also making solid progress on mobile applications. We deployed our first new native iOS app last quarter and have submitted our Android apps to the Google Play Store in Michigan and New Jersey.

The last thing I would like to note is how we are investing in the in-house development of a new centralized data warehouse and business intelligence solution with the first phase to be completed in Q3. This will build further on our analytics capabilities, as we move into more jurisdictions.

So to summarize, as Tilman begins the call, we are very excited not only by our organic growth in New Jersey, our promising starts in Michigan, but also by the growing list of new states we plan to launch in the coming months and years.

With that, let me turn the call over to Mike to walk through our financials for Q1.

Mike Harwell

Thank you, Thomas. Good afternoon, everyone. Revenues reported for the first quarter of 2021 totaled $26.7 million, representing a 54% increase on a year-over-year basis when compared to revenue of $17.3 million reported in the first quarter of 2020.

Net income for the quarter totaled $69.6 million, which includes a number of non-cash discrete items, including a non-cash gain on warrant derivatives of $81.1 million and a non-cash gain on a tax receivable agreement liability of $1.3 million, both of which were based on a change in a fair value of these liabilities during the quarter.

We also recorded debt extinguishment costs of $2.2 million, including $0.6 million in non-cash expense recorded as interest expense associated with the accelerated amortization of debt discounts and deferred debt issuance costs in connection with the repayment of $10.6 million of our term loan indebtedness.

When that income is adjusted for these non-cash and discrete items, we recorded a net loss of $10.5 million during the first quarter of 2021, compared to net income of $4.2 million in the prior year period.

Adjusted EBITDA for the quarter was negative $3.5 million, compared to $5.9 million in the first quarter of 2020. Looking further at adjusted EBITDA, at the state level, adjusted EBITDA for the quarter was negative $1.4 million, compared to $6.2 million in the prior year quarter. Corporate adjusted EBITDA was negative $2.1 million, compared to negative $0.3 million in the first quarter of 2020.

Cost of revenue for the quarter was $12.1 million or 45% of revenue, compared to $6.7 million in the first quarter of 2020.

Advertising and promotion expense totaled $14.4 million for the quarter, compared to $3 million during the first quarter last year.

General and administrative expenses for the quarter were $6.1 million or $3.8 million net of stock-based compensation, compared to $1.7 million for the first quarter of 2020.

Advertising and promotion expenses for the quarter at 54% of revenue plus the incremental spend associated with our launch in Michigan. We expect to keep investing significantly in advertising this year, with a likely increase when we launched in Pennsylvania and Illinois later during the fourth quarter.

General and administrative expenses for the quarter reflect our first quarter of non-cash stock-based compensation expense, which amounted to $2.3 million and our first full quarter of incremental costs associated with operating as a public company.

Stock-based compensation expense is currently expected to be approximately $3 million for the second quarter and $3.1 million the third and fourth quarters of 2021. Corporate general and administrative expenses excluding stock-based compensation are expected to remain relatively flat throughout the year. While state level general and administrative expenses are expected to increase linearly with the increase in revenues as we launch in new markets.

Interest expense net for the first quarter totaled $5.7 million, which included $0.6 million of non-cash expense associated with the accelerated amortization of debt discounts and deferred debt issuance costs. Interest expense net for the remaining three quarters of the year is currently expected to approximate $5.2 million a quarter.

Gain on warrant derivatives for the first quarter were $81.1 million, which included gains on the public warrants till the date they were exercised or redeemed. As previously discussed, all of the $10.5 million public warrants were exercised or redeemed during the first quarter for cash proceeds of $110.2 million. No additional gains or losses will be recorded for the changes in the fair value of these warrants in future periods. However, it should be noted that all $5.9 million private warrants remain outstanding and we will record non-cash gains and losses related to the change in the fair value of these warrants in future quarters.

We finished the first quarter of 2021 with cash and cash equivalents of $153.6 million. As you heard from Tilman and Thomas, we are very excited about our planned state expansion over the next year and we believe our current capitalization is more than sufficient to fund those plants.

I’d like to take a second to provide some additional detail on our outlook for 2021. First, as you saw in our release, we reiterated our full year revenue expectation of $130 million to $145 million. In addition to that and in an effort to help answer questions we’ve received from investors and analysts, we acknowledge the challenge in modeling the pace of startup and advertising costs as we enter new markets.

As you saw in the first quarter results, our EBITDA as a percentage of revenue was negative 13%. Based on our current state expansion plans for the year, we would expect our EBITDA to trend in that same range in the next two quarters and that our loss percentage will be higher in the fourth quarter, primarily driven by our launch in Pennsylvania, given the size of that market. For the full year EBITDA should trend in a range of negative 15% to 20% of revenues.

Finally, I’ll point out two other dynamics for your forecasting. First, I’d echo Thomas’ comment that we will expect EBITDA to break even in each of our expansion iGaming markets on average three years.

Second, as you consider the initial expansion of new states, there will likely be an inverse relationship between our revenue growth and our EBITDA margin, simply because of the initial cost to build our player database.

With that, I’ll turn the call back to the Operator for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from David Katz from Jefferies.

David Katz

Hi. Good afternoon, everyone. Thanks for all the detail. I just wanted to talk about the state rollouts so far. And the degree to which you’re finding landscape to be as you expect it, right, from a competitive, and ultimately, a cost perspective? And second, I wanted to ask about incremental state access where you’ve added a couple in the quarter, are the economics around those staying the same or how would you characterize whether they are or not becoming just a bit more expensive?

Thomas Winter

Okay. David, thank you for your questions. I will -- this is Thomas. I will start with a second one on new market access. So, yeah, as you saw we are -- we’ve added two new states in terms of market access, Colorado and Iowa, and we are hopeful to announce more states in the coming weeks and months. We are working of course on that.

In terms of the economics of new states, the first thing is that you really need to look at iGaming states versus sports in new states differently. One, because when you offer a new sports, it’s extremely difficult to get to profitability, the real profitability comes when you add iGaming to that.

So when we have the opportunity to operate in an iGaming state, as this is really where we want to focus our marketing investments, because this is where we will get the higher return on investment.

In states that our offering only sports at least at staff because we definitely believe that eventually, most if not all sports betting states will offer iGaming, it more for us a way to -- together presenting the state to start increasing our brand awareness, to build the player base. But that’s really ahead of an expected iGaming launch later on.

So if we refocus on iGaming states, we believe that in all states we should see the same types of economics and return on investments as we saw in New Jersey. So the main difference from a state to another could be the tax rate. Of course, if you have a lower tax rate, you should expect a higher profit margin and conversely. But other than that, we think we will see the same time of -- type of returns. And what was your first question again?

David Katz

I was asking about the rollout into new states and the degree to which you’re finding them competitively to be as expected plus or minus or any surprises there?

Thomas Winter

So if we look at Michigan, of course, this is really early stage of that market, where we’ve been live for just three months or four months. But I would say, I haven’t seen any big surprise and if anything, I think, the KPI that we’ve seen were slightly better than what we would have expected.

So the first thing that was a kind of a surprise to us, but I believe to everyone else was how quickly that market revenues ramped up. So you had a lot of pent-up demand and the fact that this market is already above $90 million in gross gaming revenue for line gaming, after four months it is just unbelievable.

And that -- we think that is going to be the case in pretty much every new iGaming state moving forward, because we saw that in Pennsylvania, we saw that in Michigan. Of course, COVID-19 played its role in it, but we believe that it really depends on that. So that was really the first observation.

The second is when we look at the average revenue per user. It’s an interesting point, because for instance, when you want to assess the total addressable market, if all state were to regulate, basically you have kind of two methods, if you take, a New Jersey as a proxy, the first method is to say, New Jersey accounts for X percent of the population of the U.S. and then you apply your formula.

The other way to look at it is to, say, the median household income in New Jersey is a -- is that much higher than the average of the U.S. and that gives you another method. And when we did our budget, our forecast for Michigan, we said, Michigan is bigger by like 20%, 30% in population than the New Jersey, but the median household income is 30% lower than in New Jersey. And we saw that should have an impact on the average revenue per user, not to the extent of 30%, because we are going as the player with higher disposable income. But let’s say, about 15% was I think our assumption.

And what we’ve seen so far, especially on first time depositors in their first month is that their gross spend is about 8% lower than what we see today in New Jersey. And that I think is pretty encouraging.

In terms of churn rates of new players, we are seeing lower churn rates in Michigan than we see in New Jersey. You see is probably involved because it’s a new market, so the early adopters are probably the most motivated player. But definitely no bad surprise here either.

And in terms of cost per acquisition, that certain things that we disclose, but what I can say that today, our cost per acquisition of new players is lower in Michigan than it is in New Jersey, even if the market has grown so fast.

So, overall, really positive about the Michigan opportunity and we’ve seen other states. But I think globally, your economics are going to be pretty similar in terms of return on investment. I mean, the time it takes for your gross gaming revenue to recoup your cost per acquisition, for instance, I think, should be fairly similar, the churn rate should be fairly similar and the gradual increase in the average revenue per user and lifetime value we hope should be similar.

David Katz

Understood. Helpful and interesting. If I can ask just one more, if you don’t mind.

Thomas Winter

Sure.

David Katz

Around, pardon me, the Live Dealer Studio expansion.

Thomas Winter

Yeah.

David Katz

Where a fair portion of it is for Golden Nugget and in other cases, if I’m correct, I think other operators are using that studio on a B2B basis.

Thomas Winter

Yeah.

David Katz

How do you -- what is your vision for that product specifically over time. Is -- are those other operators just sort of building a beachhead so they can do it themselves? How unique and proprietary is what you have and defensible, ultimately is, what you have with it, which obviously is going pretty well so far.

Thomas Winter

Yeah. Sure. So I mean, if we go back to the genesis of that project for us. And at that time back in 2015, we really believe that Live Dealer was a big missing part in the offering of all online casinos in New Jersey. And we went to talk to a number of B2B suppliers who usually set up a studio and serve pretty much all brands in the market. And all of the big guys basically didn’t want to come to New Jersey because they thought the market was too small and it would be too hard for them to make money.

So we decided to do it on our own and we did partnership with Ezugi and that’s really the reason why we did it in the first place to be honest. So the situation right now is a bit different, because the likes of Evolution Gaming today and Playtech tomorrow buildings studios in a number of states in the U.S. So we don’t have the need to build a studio in order to feel like.

Still for us it’s good because we are controlling the operation. It is really, well, our start and our own studio. So we have some cost savings because of that. And also, because as you mentioned, we are acting here as a B2B supplier as well. We have six brands using that studio today. And the combination of all these brands means that the activity has grown tremendously, especially last year.

And today we are close to reaching capacity in our existing studio. So we will increase our capacity for my 18 to 33 tables and out of the 15 additional tables, I think, we will have probably around 10 or 12 of them pre-booked already by some brands using the studio in short order. So it’s really a good asset. These are also tactical revenues for us that are good to have.

And in other states, we will use as a studio of B2B provider. So that’s going to be Evolution Gaming for us in Michigan and Pennsylvania as a start. Right now, all the states have asked that they like our studio serving the local residents is located in the state.

But it might change because I think that you used to have some uncertainty around the way like for iGaming. You don’t have that anymore. So if at any point in time, we are authorized by a regulator to use our own studio in other states, of course, we will do that and that would be a positive.

David Katz

Perfect. Thank you very much.

Operator

That was our last question. At this time, I will turn the call back over to Tilman Fertitta for closing remarks.

Tilman Fertitta

Well, thank you very much. We very much feel great about the future and it’s a great industry to be in and we look forward to continuing to build this out. And we’re always available, Thomas or Mike or any of us, even myself if we can ever help you all or answer more questions. And we’re so excited about Michigan, like I said, it kind of validates our strategy and our conviction to how future the bright -- how bright the future is and that we can get to positive EBITDA in just 24 months now in a major state like Michigan. So thank you all very much and everybody have a great week.

Operator

This concludes today’s conference call. Thank you for participating. You may now disconnect.