US strategy is falling into place
Elys Game Technology (NASDAQ:ELYS, NEO:ELYS) stock soared this week following the news that it had been granted a sports betting licence in Washington DC. The licence win, which had been anticipated, is significant as it is the first of its kind in the US market, and provides a model for future deals in North America. The news comes in wake of the group's important acquisition of USBookmaking which enables Elys to handle its risk management and trading activities from US soil rather than rely on its Italian trading desk. We also note that last month Elys announced strong first-half figures with total revenue increasing by 73% to $25.8mln.
Transformational acquisition of US Bookmaking (USB)
In July, Elys announced the acquisition of Las Vegas, Nevada-based-USB for an initial $12mln in cash and stock. There is also an aggressive earnout schedule which Elys management is confident in achieving, and could involve additional payments of up to $41.8mln in cash and stock over five years. Founded in 2016, USB is a provider of sports wagering services such as design and consulting, turn-key sports wagering solutions and risk management. USB's management team has renowned experience in bookmaking and sports wagering. USB had been discontent with the third-party solutions available in the market, and was attracted by the modern Elys Gameboard platform. The acquisition of USB provides Elys with an operational footprint in four US states (New Mexico, Colorado, Michigan and North Dakota) with two additional territories (Washington, DC and Iowa) in progress. Importantly, t provides the group with an established client base.
Strong first half puts group in position to beat its internal targets for the year
The first-half numbers, which entirely reflect the group's European gambling business, showed a 73% increase in total revenue to $25.8mln. However, the loss from operations also jumped as the business geared up its preparations for its foray into the US sport-betting market. While web-based activity soared in Q2, the land-based activity slumped to a trickle, with shops in Italy closed due to the lockdown. Management anticipates that some land-based betting shops could re-open by the beginning of the 2021-2022 European soccer season which may provide additional B2C growth in Italy for the remainder of 2021.
Source: Elys Game Technology accounts
Elys has a market capitalisation of $132mln and had a net cash position of $18.5mln (including leases) as at 30 June 2021. On a pre-USB deal basis, Elys trades at around 2.1x annualised first-half revenues, which appears to suggest significant undervaluation as the stock sits in the hot sports-betting/igaming space. We also note that the stock remains loss-making and is expected to burn cash for the next two years. Nevertheless, if the North American strategy is successful, we believe there is scope for significant upside in the shares.
Valuation
The acquisition of USB brings on board a US-based provider of sports wagering and risk management services, enabling the group to provide a full service to the US sports-betting market without relying on its Italian trading desk. Further, USB brings an established client base and holds licences in four states. USB’s management team has renowned experience in the field, and includes legendary sportsbook operator Victor Salerno, president, with over 40 years of experience in the Nevada sportsbook business; Bob Kocienski, CEO, with over 40 years of experience in the gaming industry; Robert Walker, director of bookmaking, with over 30 years of experience in managing sportsbooks at several casinos; and John Salerno, director of operations and compliance with over 20 years of experience in the sports wagering industry. Elys closed the transaction to acquire 100% of USB in July, paying 50% or $6mln in cash and 50% in 1,265,823 common stock. The agreement also provides for potential earnouts of up to $41.8mln through December 31, 2025, which ties in the USB management for more than four years.
USB spent three years looking for a sports betting platform to replace the third-party solution it had been using and says that Elys platform was superior to all the other platforms that it had tested. Rather than purchase the software, USB agreed to become part of Elys. USB will become an integral part of Elys’ US-facing brand, providing risk-management and trading operations. In the US, Elys is operating on a B2B basis (in Italy it operates on B2C), which means it offers a solution to businesses that then provide the solution to their own customers, and they share the profits. USB will establish the odds which are offered by all customers.
USB aims to onboard four to five new customers, such as casinos, per year, and it takes typically around four to six months to onboard a new customer. However, a customer such as a tribal casino, that already has regulatory issues dealt with, can take less than two months to onboard.
Acquisition of US Bookmaking
Source: Elys Game Technology
Elys announced last year that it had applied for a joint Class B sportsbook licence along with Grand Central. We discussed this in our initiation note which was published last December. Grand Central has been awarded an operator licence while Elys has been awarded a standard managed service provider (MSP) licence. We understand that the delay in the licence approval was largely due to the COVID-19 crisis and a lack of available personnel at the regulator. The licence expires in August next year, and rolls annually thereafter.
The Grand Central venue will offer sports betting alongside food and beverages and this is believed to be the first sportsbook of its kind to be operated within an independently-owned business establishment in the US. The sportsbook is expected to go live next month, with patrons initially able to make bets from point of sale staff or kiosks. By early next year, they will be able to bet on-premise via the Elys Gameboard on-premise mobile app when accessed via the in-house Wi-Fi connection. The application is currently in development and needs to pass the necessary certification process. While the sports bar betting concept has been likened to a mini-casino, it is quite different, in that it benefits from the typical bar environment banter. Elys believes that Grand Central sportsbook will be particularly attractive for patrons visiting DC as they will not need to register for a new gaming account in order to play.
Elys will provide the retail betting solution on point of sale (POS) and kiosk hardware, along with the on-premise mobile app, as well as managed services to operate the sportsbook, including back-office and business intelligence, odds and event offerings, risk management and trading services. Elys and Grand Central will collaborate on customer engagement campaigns, marketing, and any co-branding ventures. It is a revenue share business model.
Sports betting licence approval in Washington DC
Evolving strategy
Elys is confident that the launch of the Grand Central sportsbook will lead to other bars and restaurants adopting the model across North America, as regulation permits. The hope is that the unique Class B classification established by the DC Office of Lottery and Gaming will provide the model that can be adopted across multiple states, with Elys now well-positioned to provide a proven turnkey technology platform and services, including risk management. Following the acquisition of USB, Elys can now offer a complete solution to US gaming providers, such as casinos, right through to restaurants, bars and coffee shops, without now relying on the bookmaking abilities of its Italian team.
The group is expanding, not only in the US but also has plans for other regulated markets, such as Canada, as well as European markets such as Spain, France and Germany. Meanwhile, the Italian market is fragmented and highly competitive. With Italian federal licence renewals coming up in 2022, it is anticipated that smaller players will be forced to consolidate, and Elys believes it is in a great position to act as a consolidator in the Italian market.
Management changes
In July, Matteo Monteverdi stepped down as CEO, but he continues to work for Elys as a non-executive employee with the title 'head of special projects', reporting directly to the executive chairman. The decision to step down as CEO was made since Mr Ciavarella had been handling the bulk of CEO duties. As head of special projects, Mr Monteverdi is responsible for, among other things, various product and business development activities. Mark Korb, CFO, has become a full-time employee, having previously worked on a split-time basis. This move is important for the business, as it will relieve Mr Ciavarella of considerable time.
In June, the company appointed Andrea G Mandel-Mantello to the board as a non-executive director. Philippe Blanc resigned as a non-executive director in July, while simultanously entering into a two-year consulting agreement with Elys. Hence, the size of the board remains at five members. Mr Mandel-Mantello has approximately 40 years of experience in international corporate finance, M&A and equity banking matters. Since July 1997, he has served as the founder and CEO of Advicorp PLC, a London-based investment banking firm.
Second quarter and half year results
The group's European operations processed a record $463.3mln of betting handle in the first half (H1), reflecting $243.2mln in the first quarter (Q1) and $220.1mln in the second quarter (Q2). These numbers translated into revenue of $25.8mln in H1, with $14.2mln generated in Q1 and $11.7mln in Q2. Q2 is typically quieter that Q1, as most of the European football season is completed by the end of March. However, this year Q2 was stronger that anticipated due to an excellent performance from the EuroCup. The performance puts Elys in a strong position to beat its internal targets for the year.
While total revenue jumped by 73% in the first half, the operating loss swelled to $3.3mln. This was primarily due to increased investment in technology to adapt the software product for the North American market and the building of US and Canada infrastructure, as well as increased legal costs.
The group closed the period with $19.2mln in cash along with modest debt and leases which leave it with an overall net cash position of $18.5mln. In addition, the USB acquisition cost $6mln in cash after the period end.
Turnover data and gaming margins
Source: Elys Game Technology accounts