Genius Sports - Q2 2023

Transcript

Operator (participant)

Hello, welcome to the Genius Sports Second Quarter Earnings Results 2023 call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star one on your telephone keypad. If you would like to withdraw your question, again, press star one. We'll now turn the conference over to Genius Sports. Please go ahead.

Speaker 12

Thank you. Good morning. Before we begin, we'd like to remind you that certain statements made during this call may constitute forward-looking statements that are subject to risks that could cause our actual results to differ materially from our historical results or from our forecasts. We assume no responsibility for updating forward-looking statements. Any such statements should be considered in conjunction with cautionary statements in our earnings release and risk factor discussion in our filings with the SEC, including our annual report on Form 20-F, filed with the SEC on March 30th, 2023. During the call, management will also discuss certain non-GAAP measures that we believe may be useful in evaluating Genius's operating performance. These measures should not be considered in isolation or as a substitute for Genius's financial results prepared in accordance with U.S. GAAP.

A reconciliation of these non-GAAP measures to the most directly comparable U.S. GAAP measures is available in our earnings press release and earnings presentation, which can be found on our website at investors.geniussports.com. With that, I'll now turn over the call to our CEO, Mark Locke.

Mark Locke (Co-founder and CEO)

Good morning. Thank you for joining us today. We're pleased to continue our strong momentum through the first half of the year as we successfully execute on our strategic and financial plan. We began 2023 by telling you that this would be a key inflection year for our business, as we expect to triple our Adjusted EBITDA profitability. With the first half of the year now behind us, the $24 million of Adjusted EBITDA we delivered year-to-date is more than four times what we reported in the first half of 2022, and our latest full-year guide, which we are again raising today to $52 million, is now 27% higher than the $41 million guide to the start of the year.

Financial results from the first half of the year and the expansions of our marquee Football DataCo and NFL partnerships are a testament to the fact that our strategy is clearly working. Our differentiated technology-driven approach is solidifying our position at the heart of the sports media ecosystem, which is generating meaningful financial results across the entire organization. As a result of our successful execution, we now have greater long-term visibility in our business and find ourselves further along the path to our long-term Adjusted EBITDA Margin target in excess of 30% than we were when we started the year. We will discuss all of this in greater detail during today's call. To begin, we increased revenue by 22% year-on-year to $87 million for the second quarter, well ahead of our $80 million target.

This led to group Adjusted EBITDA nearly doubling in the quarter to $16 million, also beating our guidance of $14 million. This represents an Adjusted EBITDA Margin of 18%, up from 12% in Q2 2022. As mentioned in my earlier remarks, through the first half of this year, we have already more than quadrupled our Adjusted EBITDA compared to last year, demonstrating this rapid acceleration of profitability. Given the results we've delivered to date and the operational milestones we achieved, we feel confident in raising our full-year group revenue and Adjusted EBITDA guidance to $410 million and $52 million, respectively, significantly ahead of our initial 2023 guidance.

Additionally, we expect to reach an important inflection point as we turn cash flow positive in the second half of this year and plan to continue generating sustainable cash flow through 2024 and beyond. Among the highlights from the quarter was the extension of our two most important league partnerships, Football DataCo and the NFL. Our ability to retain and expand relationships with key league partners is driven by our technology-led approach, which creates multiple touchpoints with various stakeholders within the sports digital ecosystem. This includes the league itself, teams, broadcasters, and sponsors. This is fundamental to our strategy and a key reason why both organizations renewed our partnerships ahead of schedule and without a competitive bidding process. I'll touch on this again shortly.

By now, you should understand how our deep technology integrations enable us to secure long-term partnerships with leagues, which ultimately fuels growth across the entire business, not just in the betting, but also in the media. One of the long-term growth drivers of our media revenue is the expansion of our customer base. While most of our media customers are still bookmakers today, we are gaining traction with non-betting consumer brands, representing a sizable long-term opportunity. Through the first half of the year, we have supported successful digital advertising campaigns for several new customers, including Puma, Bayer, Stellantis, Ram, Jeep, and Cobra, just to name a few. Our expanding footprint should support long-term growth as we continue penetrating this market.

As a result of this strong momentum across the business, we have even greater confidence in our ability to achieve near and long-term results, particularly as we continue executing ahead of expectations and gain higher visibility by securing long-term rights renewal. In other words, we now know the exact amount of fees payable to Football DataCo through 2025 and the NFL through 2028, and we feel confident in our ability to continue growing our profitability through that time frame and beyond. To that end, I'd like to provide a bit more detail on recent rights renewals. Our unique approach to league partnerships has always been led by our suite of technology solutions. This is a key reason why leagues choose to work with us and stay with us over time.

While we'll focus on Football DataCo and NFL renewals today, it is this very same strategy that enables us to win in the new deals with leagues of all sizes across the world on a frequent basis. We maintain over 400 league relationships globally, all of which are centered around our technology. The recent renewals of our two most important partners now validate our core strategy and the quality of our technology, particularly as both sets of deals were renewed without any RFP or competitive bidding process, further proving the strength of our relationships. Importantly, they also strengthen our positioning as we negotiate contracts with sportsbook customers, so we continue to benefit from the tailwinds in the sports betting industry for many years to come. To quickly recap, first, we extended and expanded our partnerships with Football DataCo, which represents all professional UK football.

This includes the Premier League, English Football League, and Scottish Professional Football League. Collectively, this amounts to approximately 4,000 events annually, which are among the most bet on events in the world. By securing the exclusive rights to these events through 2025, we have not only gained stronger visibility of our cost base, but we will also maintain our competitive position within the network of global sportsbooks who require this data, especially as we renegotiate and renew these customer contracts on an ongoing basis. On that basis, we remain confident in our ability to continue growing our profitability through the term of this partnership. It is also important to understand that Second Spectrum was a critical component of this deal. Second Spectrum has long been the official player tracking technology provider of Football DataCo.

Most recently, we also utilized this technology to fully augment broadcasts of Premier League matches towards the end of the last season. As part of the latest extension, we have renewed this AI-powered tracking technology partnership with the English Premier League and expanded this to the EFL Championship, the fourth most watched league in Europe, further broadening the distribution of Second Spectrum. We also renewed and extended our strategic partnership with the NFL. As a reminder, the initial term of this partnership was a four year period, and years five and six renewed by the NFL in one year increments. Now, just two years into our partnership, and with two full seasons still to go, the NFL has not only renewed years five and six, but also added a seventh, securing our exclusive partnership through the 2028 Super Bowl.

This gives us high visibility of our rights fees through 2028, solidifies our commercial position in the sports betting market, and reaffirms our view that we can continue to grow our profitability through the life of our NFL partnership, much like we have in our first two seasons. The fact that the NFL renewed and extended the deal so early and without any tender process, should validate the strength of the relationship we've built in just two years and the potential it has for us, the NFL, and its partners and fans over the next five years. Our strategic partnership with the NFL has technology at its core, meaning it covers a wide range of initiatives beyond sports betting alone.

Among the many examples you can see on slide seven, the main components of the deal include exclusive distribution of official live game data and Next Gen Stats to global media and betting markets, exclusive distribution of our official Watch and Bet low-latency feeds to sportsbooks globally, now including U.S. and Canada. Exclusive distribution of digital advertising inventory and marks and logos to global sportsbooks, integrity monitoring services, and a broad-based technology partnership powering innovative broadcast through Second Spectrum augmentations and other interactive fan engagement tools, helping to grow the NFL's audience. In just two years, we've established a strong foundation for innovation. For example, you have seen the exciting features we've created for NFL broadcasts, including the Sports Emmy Award-winning Amazon Prime and CBS, or the free-to-play games we developed for the NFL's International Growth Initiative as another example.

The NFL has now expanded the scope of our partnership to also include long-term domestic Watch and Bet rights, which represents another area for further innovation. We're excited to leverage our technology on this platform to launch a unique set of products in partnership with the NFL, ultimately benefiting our sportsbook customers and their end users, who can enjoy a one-of-a-kind betting experience. We are thrilled for the opportunity to continue building this over the next five years to power the next generation of fan engagement. We are excited to share our progress with you along the way. As we introduce new products or technology to amplify the NFL fan experience, you should interpret these as further proof points of our collaborative strategy working as planned.

The objective in all of this, not just for the NFL, but for any partner, is to deploy tech-enabled solutions to help them enter the digital age of personalized fan engagement, benefiting multiple stakeholders and making us an integral part of the technology infrastructure. Many of these opportunities are driven by Second Spectrum technology, which remains front and center in many of our commercial conversations. This technology enables us to be an offensive winner with our AI strategy, considering that we have a massive head start in this space. There has been significant investment made in Second Spectrum over the course of the last decade, all with the intention of meeting the demand of our partners and ushering them into a new era of sports digitalization and personalization.

As a result, we are best positioned to capture the significant future revenue opportunities that come with it, spanning across broadcast, sponsorship, and sports betting. Our technology is already being used on live broadcast today with some of the biggest names in sport. We're beginning to gain traction with consumer brands, creating digital, data-driven content and other fan engagement tools, helping us establish long-term partnerships with these new customers. Of course, we have a rich history with bookmakers and plan to support their future success by developing next generation of betting products to drive in-play handle and improve overall customer experience. In addition to the multiple future revenue opportunities in new addressable markets, one important by-product of this technology, which also meaningfully benefits our business, is the long-term cost savings. Today, we have a network of 7,000 statisticians collecting data in sports venues around the world.

Over time, as Second Spectrum is deployed globally, this data can be collected automatically using low-cost computer vision cameras, which we expect to lead to considerable cost savings in data collection. These computer vision cameras will also capture a higher fidelity of data that cannot be analyzed by humans with the same speed and accuracy. For example, player speeds, relative positioning, shot probabilities, and more. This is exciting to leagues because it unlocks new assets for them to monetize, therefore, making Genius a true value-add partner for any league looking to monetize next-gen data. This is one of the ways we will continue to protect and reinforce our key league partnerships. As you can see, our technology plays a critical role in our growth strategy. Second Spectrum is a key pillar of our full offering, benefiting various initiatives across the business.

This technology is fundamental to maintaining our key partnerships and fueling the convergence of sports, betting, media, and broadcast, placing Genius at the heart of the ecosystem for many years to come. This should help emphasize the importance of Second Spectrum technology, especially in the context of our recent rights renewals. What gives us confidence in some of the aforementioned opportunities with brand sponsors is the work we have already done with this client base, namely through our programmatic and creative advertising capabilities. Our unique set of data and ad tech platform enables us to manage cost-effective, sport-centric digital advertising campaigns on behalf of our customers. Historically, we've been most successful with bookmakers seeking to acquire customers. However, our capabilities are just as effective for any brand looking to engage a captive sports audience.

This represents a sizable opportunity for Genius, as these brands have large marketing budgets that are increasingly being allocated to live sports. In most cases, these brands are partnering with Genius for the first time, giving us an opportunity to prove our value by delivering quality results. Following the success of these initial campaigns, many customers are now booking a second or third campaign with Genius. We have had a few notable examples this quarter, such as RCX Sports, who first partnered with us in Q4 to promote their flag football program as part of their NFL partnership. Off the back of that successful campaign, we executed another campaign this quarter to promote their Junior Home Run Derby as part of their MLB partnership. Additionally, the Orange Bowl was another example of a returning media customer following the success of our initial campaign.

Last year, we helped drive ticket sales for the Orange Bowl College football game, presented by Capital One. This quarter, the Orange Bowl partnered with us again to help sell tickets to their food and wine event in Florida, further demonstrating the breadth of content we can create and our wide range of capabilities. Our retention of these media customers validates the strength of our ad tech platform, and every new customer represents an opportunity to land and expand. For instance, in this quarter alone, we've managed successful campaigns for Puma, Bayer, Jeep, PGA TOUR, and many others. On slide nine, you can get a sense of the types of dynamic content we're creating on their behalf. The success is driven by a unique understanding of the sports, target audiences, and how these audiences interact with live events.

We're able to leverage this data to automatically deliver dynamic content on behalf of our customers that is contextually relevant during key moments of a game. This is an important first step in building long-term relationships with this new set of customers, and it sets the foundation to continue working together over time. Importantly, it also helps us establish a strong reputation in the broader digital advertising space with a niche focus in sports. As we continue to build credibility with this client base, we believe this can support sustainable long-term growth within our media business. Not only with our programmatic advertising services, but also with Second Spectrum products and other fan engagement tools we have to offer. Equally, as we manage more projects for an increasing number of league sponsors, it gives us even more touch points in the digital ecosystem and greater stickiness with our key league partners.

In summary, I'm more excited than ever about the long-term potential for our business. We are uniquely positioned to continue capturing the growth of the global sports betting market. We have greater visibility of our long-term fixed cost base following our recent rights extensions. We are distributing Second Spectrum technology with leagues and broadcasters across the globe to unlock new revenue streams. We are quickly expanding our client base beyond sports betting, now generating revenue from broadcasters and sponsors, and we're proving the operating leverage of the business model in the near term as we rapidly expand our EBITDA margins and inflect on free cash flow this year and beyond. These are just a few of the things that give us confidence in our ability to exceed our long-term EBITDA margin target in excess of 30%.

On that note, I'll now turn the call to Nick to discuss the financial results in more detail.

Nick Taylor (CFO)

Thank you, Mark. We are pleased to report another quarter of outperformance across all areas of the business. We are also seeing further evidence of the operating leverage of our business model, as our year-to-date revenue growth contributed to group Adjusted EBITDA at a 67% incremental contribution margin over the first half of the year. Most of the outperformance this quarter within our betting product, which grew 27% year-on-year to $57 million, well ahead of our guidance of $53 million. Our commercial contracts with bookmakers allow us to grow alongside our customers and mutually benefit from the secular tailwinds in the sports betting industry, including GGR growth, increased in-play betting, and improving win margins, for instance. Our media product also outperformed expectations, increasing by 22% year-on-year to $18 million, beating our guidance of $16 million.

You heard Mark touch on our success in winning new customers beyond our traditional sports betting clientele, and this has absolutely supported our growth in the quarter and will continue to do so over the next several years as our customer base expands. Meanwhile, we are also continuing to execute successful media campaigns for our sports betting customers as well, providing them with creative and dynamic methods to acquire and engage customers. Lastly, our sports product reported $12 million in revenue, also slightly ahead of guidance. Collectively, this resulted in $87 million in group revenue, well ahead of our guidance of $80 million, and $16 million in group Adjusted EBITDA, also beating our guidance of $14 million. As we re-reflect on the first half of the year, it's worth contextualizing our rapid acceleration of EBITDA profitability.

As you'll see on the right-hand side of slide 11, we have more than quadrupled our Adjusted EBITDA through the first half of the year. This has been a function of our multifaceted revenue growth, supported by a relatively flat cost base that enables revenue to drop through at a high margin. In fact, through the first half of the year, our cost of revenue is down 8% year-over-year, with operating expenses down 34%, driving our gross margins considerably higher. Because of this, through the first half of the year, our group-Adjusted EBITDA Margins are approximately 13%, compared to just 3% in H1 2022. This steady improvement is evidence of our operating leverage, and we see a clear runway for continued profitable growth and margin expansion ahead.

This, along with the exciting developments you've heard from Mark, gives us confidence in raising our guidance for the year. We are increasing our revenue guidance from $400 million-$410 million based on the outperformance to date and the positive trends we expect will persist through the remainder of the year. Similarly, we are raising our group-Adjusted EBITDA guidance from $49 million-$52 million, as much of this additional revenue should drop through meaningfully to our Adjusted EBITDA, and we don't anticipate any incremental changes to our cost base. This implies 20% revenue growth and Adjusted EBITDA Margin of 13%, up from our initial guidance of 10% and significantly ahead of our 5% margin last year. We are also maintaining our expectation to begin generating positive free cash flow in the second half of the year.

On that note, I mentioned last quarter that we would finish Q2 with approximately $115 million in cash, and we closed the quarter exactly in line with expectations. Looking ahead, we expect our cash flow to be broadly break even in Q3, before, before turning cash flow positive in H2 and accelerating in 2024 and beyond. This inflection point is an important milestone for the business, as this marks the beginning of sustainable free cash flow generation going forward. Many of the dynamics driving the inflection in H2 will remain in place going forward, and we feel an even greater sense of confidence now that we've renewed two of our largest rights deals, giving us increased visibility for the next several years.

As a final matter of housekeeping, we have received a few questions regarding the NFL warrants following the announcement of our renewal and extension. We want to be as clear as possible since this is a slightly nuanced point. As part of the original deal with the NFL, we issued them 18.5 million warrants, which are now fully vested, making them an 8% equity shareholder on a fully diluted basis. Under the original terms of the deal, we had agreed to issue an additional 2 million warrants for each of the years five and six upon renewal. Under the new terms of the renewal of years five and six, we've now removed the additional 4 million warrants and replaced them with a fixed cash consideration.

This incremental cash cost will be spread across the outer years of our deal and recognized as normal course data rights fees within our cost of revenue and our Adjusted EBITDA position. We believe that this is in the interest of our shareholders, as it is less dilutive than it would have been otherwise, and we have agreed a predetermined cash amount, which will be included in our rights fees and leaves us confident in our ability to continue growing profitability through the life of the deal. We are pleased with this outcome from a financial and strategic perspective, as the NFL remains one of our largest shareholders, and we've secured our position on mutually beneficial terms for the next five years. Each of our financial and strategic updates you've heard today gives us an even greater sense of excitement for the outlook of the business.

The runway for profitable growth and cash flow acceleration remains clear as we continue to execute and progress towards our long-term objectives. With that, we will conclude our prepared remarks and open the line to Q&A.

Operator (participant)

Thank you. If you have a question, please press star one on your telephone keypad. If you wish to remove yourself from queue, simply press star one again. One moment for your first question. Your first question comes from the line of Jason Bazinet of Citi. Please go ahead.

Jason Bazinet (Managing Director)

Thanks. I just had one quick question on the long-term EBITDA margin targets. I think at your Investor Day, the targets were 32%-42% was the range, and I think I heard you say high 30s. I didn't know if that was a change or, or if I'm making, making something out of nothing.

Nick Taylor (CFO)

Hi, Jason, it's Nick. No, there's no, no change in our long-term targets. I think we've just said that it would be... I think Mark just read the script, that it would be north of 30%, and that remains our long-term position.

Jason Bazinet (Managing Director)

Okay, great. Then regarding sort of free cash generation, is there any sort of long-term way you could sort of frame the size of capitalized software expenses as we all try and model, you know, free cash out in 2025, 2026?

Nick Taylor (CFO)

Yeah. Hi, Jason, it's Nick again. I mean, the first thing to say is in terms of free cash flow generation, we're at that inflection point now. As we reiterated on this call just earlier, that H2, we're expecting to be a cash positive. Capitalized software, I think I've said it on, on previous calls, is flat year-on-year, so it's running at around about $10 million a quarter currently. So as a percentage of revenues, it's reduced year-on-year. I'm not expecting that to grow in 2024 and 2025. If anything, I'm expecting it to come off a little bit and reduce. Therefore, you'll get a sense of our operating leverage and revenues continue to grow. You get a sense of the widening gap in cash generation.

Operator (participant)

Thank you. Your next question comes from the line of Bernie McTernan of Needham & Company. Please go ahead.

Bernie McTernan (Senior Analyst Internet and Consumer Tech)

Great, thanks for taking the questions. Assuming it's not a coincidence, the prepared remark had a confidence in the long-term margins after striking deals with the NFL and Football DataCo. With the rights inflation just being a key focus for investors, especially over the long term, after going through this round of renewals with your two most important partners, can you just talk about your position, your confidence in your positioning between the leagues and your sportsbooks, and why you think you'll be able to generate greater profitability over time?

Nick Taylor (CFO)

Hi, Bernie. It's Nick. I'll start, and Mark can join in if there's anything else to add. I mean, as you know, Bernie, you know, it's impossible to disaggregate any specific rights by the way we go to market. You know, I think it's fair to say the operating leverage dynamics that we're seeing right now in 2023 will continue, not just the rest of this year, but way beyond 2024 and beyond that. You know, I guess if you, if you look at the last, I guess, last 12 months, of which obviously we've had both FDC and NFL within that, you know, we've grown revenue significantly over the last 12 months. Indeed, I think EBITDA got to account to around 72%.

Again, you can see that those operating leverage dynamics that we're having today will continue. I think from as far as the NFL is concerned, you know, I think I said in the prepared comments that, you know, we're delighted with the NFL extension, both from a strategic and a financial perspective, and we are very confident in our ability to continue to grow properly through that life of that deal.

Mark Locke (Co-founder and CEO)

Just, just to add to that, I mean, I, I think, you know, we've always said that tech wins here, and I think this is a really good example of, you know, those, those rights renewals are a really good example of that. You know, there was no RFP process, and it wasn't a competitive tender, and, you know, we had early rights renewals, in a, in, in, in a scenario where, you know, it wasn't actually necessary to, you know, for them to do that. We feel that that's a very strong signal to the market. Separately, price increases, obviously coming through, through, to, to the bookmakers. That's something we've been pretty clear about in previous calls and, and, and obviously, and the, the conversations we'll be having.

We're in the middle of a lot of conversations at the moment, which, you know, we're feeling very positive about. Again, that should see, you know, strong, strong growth in the margin over time.

Bernie McTernan (Senior Analyst Internet and Consumer Tech)

Great. Maybe just a follow-up to that, to bring it back to this quarter, betting technology revenue outperformed expectations and the increase of the guidance. How much of this was attributed to better market growth versus a higher take rate?

Mark Locke (Co-founder and CEO)

Yeah, we, I mean, the answer is, is to do with both. I mean, we don't break it down. You know, we're seeing good market growth. We're also seeing operators operating more profitably, doing a better job. I mean, that's coming through clearly and, you know, some of the recent earnings, including DraftKings. All of that's flowing through. I mean, remember, we take a share of the bookmakers profitability on this stuff, and, you know, their improved performance, as well as the increase in market share, comes directly to us.

Operator (participant)

Thank you. Your next question comes from the line of Ryan Sigdahl of Craig-Hallum Capital Group. Please go ahead.

Ryan Sigdahl (Senior Research Analyst)

Good morning, guys. Nice job. Want to ask on the process with Football DataCo and NFL, just going through the process, whose idea was it to extend earlier, longer? I have a quick follow-up on each one.

Mark Locke (Co-founder and CEO)

Hi, Ryan. It's Mark. Look, I mean, these, these are all mutual conversations, and, you know, they, they surround the relationship that we've built over time, the technology providing... Sorry, that we're providing to them and, and sort of their, their view of the future, future, requirements. You know, in both cases, they were very productive conversations. We've got very strong partnerships. Obviously, you know, the N- the NFL has also seen the addition of the Watch and Bet contract, which is, which is exciting, and, you know, we're, we're taking that to market with some, you know, really, you know, exciting new features, which we will be sharing in due course.

You know, this has been a, you know, you know, I guess, part and course of the way that we operate the business, the way that we've presented this to the market over time, and it's really just a result of, you know, you know, us doing what we said we were gonna do.

Ryan Sigdahl (Senior Research Analyst)

Great. Just on the EPL, I guess it was a one-year add-on to that contract. I guess, why not longer on that one? Secondly, on the NFL, you reiterated your long-term EBITDA margin targets, and now presumably, that contract is shifting to an all-cash deal, at least for the last three years of this one. Is that long-term margin assuming kind of full cash going forward for the NFL? Thanks.

Mark Locke (Co-founder and CEO)

On the EPL, I mean, DataCo only goes through to 2025, so it, it wasn't possible to extend longer than that.

Nick Taylor (CFO)

Yeah. Hey, Ryan, it's Nick. I guess on the NFL, it's a little bit of a repetition of what I've just spoken to Bernie about in terms of the operating leverage that we're having in the business today. As you know, the NFL rights have stepped up over the course of the already the, the two seasons that we've had, and we've got a 72% drop through in the last 12 months. Those, those dynamics are not going to going to stop beyond 31st of December 2023 to 2024 and all the way out to 2028. What I will say on the warrants is that, you know, we, we felt it's the right thing to do. Twofold.

First of all, it means less dilution from, from a shareholder perspective, and also it just means that we will live within our means, as it were, from an EBITDA perspective, and we're still very confident on those long-term margin projections that we've given.

Mark Locke (Co-founder and CEO)

Yeah, sorry, Ryan, it's Mark. Just to clarify, just when I say DataCo doesn't go longer than 2025, I, I should, I should be really clear, it's the entity of Football DataCo itself doesn't go longer than 2025. Just hopefully that helps.

Ryan Sigdahl (Senior Research Analyst)

Reasonable to assume some, in some form, fashion, it will. It's just they have to extend the league first. That's it for me. Thanks, guys.

Operator (participant)

Thank you. Your next question comes from line of Jed Kelly of Oppenheimer. Please go ahead.

Jed Kelly (Managing Director and Senior Analyst)

Hey, thanks, thanks for taking my question. Just, just looking, circling back on the NFL contract.

Two things, like, can you talk about the opportunity as more thing, you know, more of their property strip to, you know, go to streaming, you know, thinking like YouTube, the ability to work closer with them? Is there an opportunity to develop special products or special betting products where you can participate in more of the economics?

Mark Locke (Co-founder and CEO)

Yeah, I mean, a great question and, as usual, you're bang on the money. I mean, that's exactly, exactly where we're going. You know, it's really, Watch and Bet is the first step along that line, the Watch and Bet contract that we signed with the NFL, which, you know, we'll be bringing to market shortly. When that product comes out, you'll see a lot of new features, a lot of actually, you know, really quite exciting innovations that, you know, we're able to do because of, you know, Second Spectrum and the work that we've done there.

You know, as, as those products come out to the market, clearly, you know, we, we, we're always, as you know, reviewing the way that we charge for this and, and, and, and the take rates that we are, you know, charging. We, you know, we expect to see, see that coming through. The other aspect that's probably worth, you know, it, it might not necessarily come straight to people's mind, is there's a compounding effect from the Watch and Bet product to our other NFL relationships. What I mean by that is clearly, you know, if sportsbook operators, you know, are now offering advanced streaming on their platform for the NFL, that is compounding that user's interaction with NFL bets on the site, which is also where we're making money.

We're sort of seeing this, you know, a strong future in certain sports where the compounding effect has an impact on our take rates.

Jed Kelly (Managing Director and Senior Analyst)

Thank you. Just one quick follow-up for, I guess, for Nick. Just, just looking at the 4Q growth rate for betting tech implies like somewhat of a deceleration, still high teens growth. I, I think if you look at like the US is gonna grow probably in the 30s, in the 4th quarter. Can you just talk about some of the dynamics around the 4Q growth rate for betting tech and how much is, is conservatism? Thanks.

Nick Taylor (CFO)

Hey, Jed. Well, you know us bets, we're conservative anyway, Jed. No, I, we're very confident about our Q4 position. We're confident with the guidance that we've just given. We have strong growth rates both in Q3, Q4 across, in fact, all three segments, you know, are running at a decent position. The great thing is, as we've already talked about, but prepared to answer the questions, is that those dynamics, both in terms of top-line revenue growth, but also in terms of operating leverage, doesn't stop on the 31st of December 2023, but ongoing beyond 2024 and further out.

Operator (participant)

Thank you. Your next question comes from the line of, Clark Lampen of BTIG. Please go ahead.

Clark Lampen (Managing Director)

Thanks. Good morning. Hopefully, I'm not misreading this with the sort of side-by-side comparison of the facts, but I guess as I sort of juxtapose some of the call commentary around customer wins and recurrence of campaign activity with an adjustment to the back half expectations for the media business, could you give us a sense of what's going on or what you're sort of experiencing within the ad market or spend from existing customers, spend from new customers? Mark, on capital allocation, you guys have talked a lot on this call so far about improving visibility, improving margins, cash flow trends. What does that really translate to for you guys in terms of sort of flexibility, whether it's exploring opportunities to improve the business from an inorganic standpoint, if you...

If you can't, I guess, find those opportunities, would you look at other avenue, avenues for, distributing some of that excess cash back to shareholders? Thanks.

Speaker 12

Hi, Clark, this is Josh. I'll take the first question on, on, on the media piece. There's a few things going on here. First of all, there's sort of a seasonality impact that we're seeing on the, on the sportsbook and sort of casino side of things. In Q2, we saw operators sort of shift budget in line with their ambitions of chasing profitability, essentially. We were seeing some really strong results in terms of player values, overall conversion rates in the market. We saw some operators shift budget into Q2 around NBA playoffs and just pushing casino products more heavily. That's sort of the reason for the, for the, for the shift there.

Also, as we mentioned in the prepared remarks, we also signed a number of new sort of non-betting, sort of traditional sponsor brands for sponsors and reactivation of campaigns there. Those were slightly ahead of our expectations with a couple of new wins there that we're really, really happy about, that we've mentioned. Overall, for the year, it's really just sort of a shift of budget and seasonality. Overall, the media business will, you know, end the year 15% up on last year, so we're feeling, we're feeling pretty good about it. The overall ad market, you know, isn't really impacting us on the brand side of things.

You know, we're starting from a very low base here, so there's plenty of stuff for us to go after. All in all, we're, we're feeling good about it.

Mark Locke (Co-founder and CEO)

Yeah, just, just to add to that as well, we, we, you know, we're sort of noticing a number of operators we think have a, have a number of financial targets that they're looking to try and achieve, you know, before the end of the year. Actually what we, you know, expect to happen is that spend generally in the, in the advertising space will increase towards the end of the year, certainly, in, into early next year as well, which will obviously be a net, net benefit to us. To answer your second question about capital allocation, you know, sort of what we're going to do with the money.

Well, I mean, look, you know, I've said, said for a long time, you know, we, we, we've, we've got everything that we need, in order to, you know, you know, achieve, achieve the goals that we've stated, and we feel very comfortable with the position we're in, the tech stack we, we have. You know, you specifically asked if there are any plans to return to cash to shareholders, and the answer to that is no, not at the moment. Therefore, you know, what, what will we use the money, you know, the cash that we're generating, the cash on the balance sheet for? Well, I mean, you know, we, we, as I said, we've, we've got, we've got all of the, you know, tech that we, that we need at the moment.

However, you know, we, we continue to remain optimistic about what's out in the market. We're in a very strong position, from, you know, a balance sheet point of view, from a cash generation point of view, from a technology point of view. You know, there are increasingly, you know, opportunities that we're seeing in the market come up, you know, none that we've yet decided are, you know, are sensible for us to, you know, to complete on. I think the number of opportunities will continue to increase, and I'm feeling very comfortable with the position that we're in, which allows us, you know, should we so wish, to get involved in some of those opportunities.

Operator (participant)

Thank you. Your next question comes from the line of Jordan Bender of JMP Securities. Please go ahead.

Jordan Bender (Director and Senior Equity Research Analyst)

Great. Thanks for taking my question. The 2023 guidance, that kind of assumes flow through around 55%. With the two contracts now locked up longer term, is there anything saying that you shouldn't be hitting that 50% flow through, in the coming years?

Nick Taylor (CFO)

Yeah. Hey, hey, Jordan. Nick. Yeah, no, you're that's exactly how you think about it. As I said earlier to the previous question, the dynamics that we're seeing in 2023 don't stop on the 31st of December. You know, the great thing about doing these two contracts now and extending them is it gives us even greater visibility of what our future finances look like.

Jordan Bender (Director and Senior Equity Research Analyst)

Great. Then you didn't give it this quarter, but event center coverage has been coming down in the last 18 months or so. As you're starting to prune some of those events, can you maybe just talk to the positive upside, whether it's the margin, cash flow, or however you can kind of quantify scaling back some of those unprofitable events?

Nick Taylor (CFO)

Hey, Jordan, it's me again. You're right. I think we've come down from a sort of, I think it's 195,000-200,000 events down to about 182,000, I think we announced this last quarter. You're thinking about it the right way. We pruned some of the events that we believe are not profitable and indeed are substitutional. Particularly, if you think about the way our non-U.S. contracts work, is that people sort of take packages from us, therefore, by removing these events, we've not seen any reduction in revenues on that basis. Therefore, what we're saving really is a double set of costs, because obviously there's a double substitution cost or a double trading cost.

We're seeing a slight margin increase by dropping a small number of events. I don't think we'll drop too many more from where we are today, but it's just sensible pruning of our portfolio.

Operator (participant)

Thank you. Your next question comes from line of Mike Hickey of The Benchmark Company. Please go ahead.

Mike Hickey (Senior Analyst)

Hey, Mark, Nick, Charles, Brandon. Good morning, good afternoon, guys. Congrats on a strong quarter. Thanks for taking our questions. Just, just two questions. They're kind of basket, so forgive me here, guys, but the, the first question or, or topic here, just curious if you could double-click on your U.S. business. Obviously, you're seeing pretty strong results from your operator partners in, in their June quarter. We're sort of wondering the, the impact here on the strength of the U.S. business and your partners in the quarter, and through the rest of the year. Then just thinking about, you're seeing a lot of market share consolidation with the operators. Mark, curious how that impacts your leverage on your take rate and the other pieces of your business moving forward. Second question on technology.

Obviously, congratulations on your renewals. It looks like it's a real proof point here, your tech is, is working. Just curious if you could remind us how your tech is different than your competitors, thinking Dragon here, and how you're ensuring you can keep this tech lead. Obviously, there's some investment from your peer set, to try to catch up with you guys. Thank you.

Mark Locke (Co-founder and CEO)

Hey, Mike. Thanks, thanks for that. Look, you know, in terms of U.S., you know, as, as you have seen from the operators and, you know, DraftKings' earnings the other day was, you know, particularly helpful giving a lot of detail on it. It's, you know, the U.S. opportunity is strong, it continues to be strong, and obviously, we continue to be extremely well-placed, especially with, you know, the recent renewal that we've announced and the additional products that we've, you know, that we've hinted at on this call. I think we're feeling very, very good about that. Obviously, the more profitable an operator, the better it is for us.

We're, you know, very excited to see these operators continue to improve, and, you know, continue to raise, retain customers and continue to shift customer spend, you know, from one sport to another sport to another sport. You know, these are, these are good trends for us, and, you know, really, they align very much with the theory that we came to market with, you know, a while ago, which was, around, you know, the shift from, of, players, from, you know, a lot of the pre-match betting to, you know, ultimately to, to in-play very much to mimic, you know, the, the, the trends and, and what we see in the European market. I think overall, you know, we're happy with how the U.S. is moving. In terms of-

Sorry, your, what, so your second, your second question, Mike, was around?

Mike Hickey (Senior Analyst)

Yeah, it was the piece that you asked was.

Mark Locke (Co-founder and CEO)

Sorry. Yeah.

Mike Hickey (Senior Analyst)

Yeah. Well, the share consolidation. Yeah.

Mark Locke (Co-founder and CEO)

Yeah, look, the, the, the tech differentiation, I mean, we've, we've talked, we've talked about it quite a number of times. We've got obviously, you know, without question, the leading, if not the only, you know, credible live machine learning, computer vision, and AI sports video business in the market. That's becoming an increasingly powerful tool in our armory, which is allowing us to renew and retain customers as well as, you know, is pretty much involved in every single conversation we've got with any sport league anywhere. That's a huge differentiation. What we're actually seeing now is we're seeing a much more active, you know, desire from sports to have AI, CV, and machine learning solutions.

I mean, you've seen this in the sort of wider AI space, where a lot of companies are now actively looking for solutions, looking for this. The sports are different. We're seeing this, again, it's giving us a real position of strength, a real differentiator. You know, I've said it before, but I'll say it again, you know, that's coming through in hard numbers. You know, already in our numbers, we have revenues coming in directly from this. We're already getting new contracts because of product we have live. It's already costed into our future growth. We don't need to spend, you know, you know, hundreds of millions to develop this stuff. We've already spent hundreds of millions.

This is, this is something that gives us a really, really strong competitive position in the market, and gives us a lot of confidence going forwards. You, you asked about Dragon. Dragon is going, I mean, brilliantly well. We're really, really pleased with how, how well that's going. The conversations we're having with our operators are sort of with our sports partners are going really, really well, and, you know, we hope to have some, you know, pretty exciting news coming down the line.

Operator (participant)

Thank you. Your next question comes from the line of Robin Farley of UBS. Please go ahead.

Speaker 11

Thanks. Good morning. This is RTN for Robyn. I had two quick ones. Do you have any kind of quantification for in-play betting mix that you could share for this quarter specifically, and how you expect that mix to play out in the back half?

Mark Locke (Co-founder and CEO)

Yeah, I mean, look, Robin Farley, I don't think we've broken it out, but I mean, we saw about 100% growth, year-on-year, last year to this year. Again, as, as, as we've seen, you know, DraftKings, you know, earnings and, and a lot of the, a lot of the news that's coming out of the operators, there's definitely a shift to a lot of these new products going forward.

Speaker 11

Okay. For this, I actually tried to find this in your slides, I couldn't. Apologies if we missed it, FX has obviously been a tailwind for the quarter in general. Wondering if your revised guidance for the year and the back half includes unchanged FX assumptions, is there some upside coming from FX that are changed from the 1.35 in pound USD rate that you had given previously?

Nick Taylor (CFO)

Hey, Robin, it's Nick. Look, at the moment, our updated guidance is exchanged. It's around about 1.25 to 1. That's obviously don't dollars to, to GBP. A, a couple of things that I think is probably worth just noting on that, Robin, if you don't mind, is that obviously the second half of the year is, is less sensitive to, to U.S. dollar movements, given the sort of U.S. seasonality of the business. We're trying to keep that as simple as possible, obviously, and particularly given the unpredictability of exchange rates as it is. I guess the, the important thing to note is that the outperformance in both, both the H1 and indeed, the course just gone, is predominantly underlying performance of the business.

As you say, there is some, a small level of tailwinds for foreign exchange, and that's been updated in our guidance. The guidance also has an underlying increase in, in revenues from the business. The other point, Robyn, that's just worth reminding everybody on the call is that exchange rates really only impact revenues, not EBITDA, and therefore, the lift from EBITDA, Adjusted EBITDA from, I think, an original $41 to the $52 now is all underlying business generation.

Operator (participant)

Thank you. Your last question comes from the line of Eric Martinuzzi of Lake Street Capital Markets. Please go ahead.

Eric Martinuzzi (Senior Research Analyst)

Yeah, curious to see, you mentioned the, in the betting technology, the increased customer utilization of available event content and growth in the business with existing customers. Is this strictly or primarily a tier one observation that you're making here, or is this across kind of league agnostic?

Mark Locke (Co-founder and CEO)

Yeah, I mean, look, we. Look, this is really just a part of everyday management of our business. It's making sure that we're tight on what we're offering, where we're spending, our shareholders' money and how we're running it. The way that we think about this is we think about it across all sports. Obviously, we sort of treat tier one. There are a lot of tier ones, but we treat tier ones pretty differently. We look at every sport, we look at every league, we look at every game. In fact, we cover, we look at our obligations to those leagues.

In fact, it's actually a phenomenally complicated calculation, but it's something that we do on an active basis to manage our expenditure and make sure that the way that we are operating the business is as efficient as possible.

Eric Martinuzzi (Senior Research Analyst)

Okay. Then in the media technology segment of the business, you talked about programmatic advertising services there. Are you? Is there a concentration here with particular DSPs who are seeing the richness of the targeting here? What's, what's driving that upside?

Speaker 12

Hi, Eric, this is Josh here. The targeting of the upside is essentially the three main USPs that Genius brings to market in this technology group. Firstly, it's our access to unique fan data. Through our deep relationships with the sports leagues, we've got access to first-party fan data that we're able to apply to our campaigns. The second part is the fact that we've developed a lot of our own programmatic technology on top of the ecosystem. Leveraging all the unique data points that Genius has as a business in terms of insight into betting handle, roster information, all this interesting stuff that ultimately can drive fandom. We pull that into our sort of technology from a sort of bid decisioning perspective.

Lastly, we've been doing this for 15 years at this point, 10, 15 years, so we've got a load of experience in-house with our team to actually trade this stuff. It's those three things coming together that's driving our success here.

Operator (participant)

Thank you. There are no further questions at this time. This concludes today's conference call. You may now disconnect.