Inspired continues to feel impact of FOBT stake cut in Q3

13 November 2019

Gaming solutions provider Inspired Entertainment has reported a 25.3% year-on-year decline in revenue to $26.6m (£20.7m/€24.1m) for the third quarter of 2019, a 25.3% year-on-year decline, which showed the business continues to suffer from the reduction in fixed-odds betting terminal (FOBT) stakes in the UK.

Of the $26.6m in revenue, services made up the vast majority, at $23.8m, but this figure was down 27.4% from 2018. Hardware revenue made up the remaining $2.8m and remained flat year-on-year.

Lorne Weil, executive chairman of Inspired, said that the reduction of FOBT stakes in the UK to £2 was a significant reason for the revenue decline.

"Results for the third quarter were in line with our expectations, considering the negative impact from the triennial implementation [of the FOBT stake reduction],” Weil said. “Additionally, we are seeing a considerable improvement in trend in the UK in the fourth quarter.

Weil added that, although the stake limit hurt Inspired’s revenue, the business is performing better than it initially expected when the limit came into effect.

“A large part of our mitigation efforts will be driven by shop closures. Since the 30 September closing of 700 shops within our estate, our revenue appears to be tracking higher than we initially anticipated, prior to the Triennial Implementation.

“This trend illustrates, in practice, our previously outlined thesis that a substantial portion of revenue lost due to shop closures would be recovered throughout our remaining estate. Additionally, because our costs are generally aligned with our total machine count, the overall industry restructuring and consolidation is likely to assist our cost mitigation efforts going forward due to the benefits of supporting a smaller, more profitable estate.”

Despite the lower revenue, Inspired’s total cost of sales came to $7.0m, up 6.1%. The supplier’s cost of sales from services declined 14.5% to $4.7m, while costs from hardware more than doubled to $2.3m.

Selling, general and administrative expenses cost Inspired a further $11.5m, down 10.2% from 2018, while stock-based compensation expenses increased 46.7% to $2.2m. Acquisition and integration-related transaction costs came to $3.3m, more than 30 times the total in 2018.

The company did not incur any impairment costs, however, after a $7.7m expense in 2018. This expense in 2018 was due to a review of key strategic areas that determined Inspired’s valuation of assets were above their fair market value.

A further $8.3m of expenses came from depreciation and amortisation, 27.7% less than in 2018.

These costs totalled $32.3m, down 17.8%, and resulted in a net operating loss of $5.7m, 54.1% more than 2018’s loss.

Interest expenses came to a further $4.4m, down 18.5% from 2018, while the business received no interest income compared to $100,000 in 2018.

Inspired took in a further $2.9m due to the decline in value of financial derivatives from which it would owe money, a drastic difference from 2018, when Inspired incurred a further cost of $7.3m from the increase in value of these derivatives.

Other finance costs came to $1.2m, bringing Inspired’s total other expenses to $2.7m, down 67.0% from 2018 and leaving a pre-tax loss of $8.4m, down 29.4%.

After paying $100,000 in income tax, Inspired’s net loss totalled $8.5m, down 28.6% from the prior year.

Inspired made an additional $500,000 from foreign currency transactions, in addition to $3.1m in income from an increase in value of a hedging instrument used as security to offset potential losses in Inspired’s core business or other investments.

However, this instrument’s earnings were not classified in the company’s income last year, meaning that both the $3.1m and the $300,000 earned last year are included as a cost on 2019’s balance sheet, totalling $3.4m.

In addition, the company lost $3.1m on pension plans, after gaining $2.9m in 2018.

This resulted in a comprehensive loss of $11.4m for the quarter, up 26.7% year-on-year.

The business has already implemented plans to expand its business into new verticals, completing the purchase of Gaming Technology Group (NTG), a division of Novomatic’s UK subsidiary, on 2 October.

Weil said that this acquisition should set up Inspired for growth in future quarters.

"We believe we have reached a turning point in the implementation of our three-pronged strategy to mitigate the triennial, generate new business to offset the impact of Triennial and return to pre-triennial Adjusted EBITDA levels, and integrate the NTG acquisition and realize additional revenue opportunities between the complementary businesses, and we are extremely excited for our growth prospects in 2020 and beyond."