People love to play lotteries. States have capitalized heavily on this with their own lottery programs. Some criticize it as a “regressive tax” but players respond to the lure of only needing “a dollar and a dream.” Government-sponsored lotteries are now woven into the fabric of our society and have become a key aspect of state budgets.

The wealthy are wiser and are more likely to own equities that profit from gambling than buy tickets themselves. NeoGames (NGMS) offers investors a way to play the growth of online lotteries which are growing rapidly as consumers prefer to buy tickets on their smartphones rather than convenience stores or vending machines in bowling alleys.

While the vast majority of states have lotteries most of them are not yet available online. NeoGames engages with state lotteries as a turnkey solution provider and also develops additional games that can be added to the array of options available on the iLottery platform. Unlike DraftKings (DKNG) which is consumer-facing, NGMS sells to governments and other businesses. In this way, they are similar to GAN LTD (GAN).

See IPO Candy Pro for the roadshow decks and more. Start with the NeoGames page.

The awarding of lottery contracts involves a long sales cycle and many specific requirements regarding legal, accounting, and compliance. The good news is that these contracts are long term (~4-7 years) and are often renewed due to high switching costs. Once deployed NeoGames receives revenue based on a percentage of gaming revenue.

Early results coming in from the states already offering iLottery are likely to spur more activity. The company presents its results in Michigan which illustrate a substantial lift in growth. Retail gross went from $1B to 2B in five years but iLottery added an additional $1.6B to the total over the same period. Combined with examples from more “mature” iLottery markets like Norway and Finland it confirms that iLottery penetration rates can easily be 30-50%.

Although each iLottery solution is customized the core functionality is mostly the same. NeoGames has developed a proprietary technology stack that serves as the basis for any iLottery solution. Many of these core functions will be familiar to investors in the space since they have heard about them repeatedly from DraftKings.

In addition to the player-focused functions shown here, Neogames has an additional platform specifically for “draw” style games like Powerball which depend on the number of players. They also have a configuration engine to make it easier to customize the game library available to customers.

Business Considerations & Numbers

LTM revenues as of 9/30/2020 were ~$50M of which ~$34M came from the turnkey iLottery business, ~$14M from development and implementation services, and ~$2M from game licensing fees. That figure compares to total revenues in 2019 of $35M.

Their go-to-market strategy in North America has enabled them to rely on their JV partners for sales and marketing which dramatically reduces the impact on the P&L while allowing for rapid expansion. For the 9 months ended 9/30/2020 NGMS had an operating income of $8.8M on revenues of $35.2M and $17.5M of cash flow from operations.

For a relatively small company, they have a wide global footprint, in part due to their business strategy and in part due to their operating locations. They are the leading player in North America with NPI (see below).

The organization of the company is a little unusual. The company itself is a spinout from Aspire Global where the team developed the technology and initial book of business.

William Hill (on the LSE) is a major client, investor, and lender to the company. Although WH is selling some stock in the IPO they will continue to be the largest shareholder and insiders will own more than 50% of the stock (as in a “controlled company” per NASDAQ rules.) They also have licensed their platform to William Hill for use in areas like B2C gaming where they are not in direct competition with NGMS.

They also have structured their operations in the US as a JV with Pollard Banknote and operate as NeoPollard Interactive (NPI). Pollard Banknote is a provider of traditional lottery solutions and has been using NPI to address the iLottery demand.

They are based in Tel Aviv, Israel but are organized as a public LLC in Luxembourg. Their development operations are concentrated in Ukraine.

Competition & Valuation

There is clearly lots of competition for betting and wagering. There are legacy players like Scientific Games (SGMS) and Intl Game Tech (IGT) that have been able to win some business on the digital side and continue to make progress on that front. Everyone wants to get into sports betting now that DraftKings (DKNG) has blazed the trail.

Most of these players are going after everything (iGaming, sports betting, governments, casinos) whereas NeoGames is more focused on iLottery. This figure below is demonstrative of the current state of competition.  In a few cases like Pennsylvania and Rhode Island, the incumbent retail provider won the iLottery contract. But in most cases, it got flipped and NPI has won three out of the last four deals.

Investors should expect all these contract awards to be competitive but NPI is currently in a leadership position despite their smaller size relative to the retail incumbents. It also illustrates the wisdom of partnering with a legacy provider like Pollard.

Turning to valuation, there will be 25M shares outstanding post-IPO which at the $15 mid-point results in a market capitalization of $375M which is about 7.5x LTM revenue and 16x CFOPS for the full year 2020.

For comparison purposes consider GAN which is trading with a $500M market value despite having lower revenues and generating substantial operating losses. We’ll estimate GAN will do $40M in revenue this year and lose around $15M on an operating basis.

NGMS should come close to $50M in revenue this year and if one were to apply the same 12.5x multiple of sales we’d get to a $25 share price. There is some debt and the structure of the company might result in some “haircut” to that but we’d argue that their profitability more than makes up for that.

UPDATE: NGMS priced above the range at $17 last night. We will see where it opens this morning. I expect to put in a ladder limit to get some on the open and then watch how it trades.

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1 Comment

  1. Yernur on 12/26/2020 at 1:43 pm

    Regret that i sold my position. Monitored Kris play with NGMS through StockTwits channel. Impressed on his patience. Good job!

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