Virtual Sports
- Approximately 250 venues with Boylesports in Ireland
- Over 400 retail venues with Fortuna in Poland
- Both retail and online channels of Veikkaus, Finland's National Lottery
Financial
"During the fiscal year, we were able to perform well across all segments and successfully strengthen our balance sheet, reduce our interest rate and add cash and undrawn capacity under our senior bank debt," said Stewart Baker, Executive Vice President and Chief Financial Officer of Inspired. "We believe this focus on strengthening our operations and our balance sheet in order to improve free cash flow will help us to deliver on our goals and strategic priorities."
Management outlook and commentary
Recently it was announced that the reduction in the maximum FOBT betting stake mandated by the Triennial Review would be accelerated from October 2019 to April 2019. This does not change the Company's estimate of the projected impact of the reduction in stake on our Adjusted EBITDA, after taking into account multiple moving pieces, of approximately $10 million to $11 million annually on a steady state basis. However, the acceleration in start date alters the timing of many of these pieces, including the benefits of the mitigation action to be taken by the Company's LBO customers, and therefore Management is not comfortable providing calendar 2019 guidance at this time.
Overview of consolidated full year results
Total revenue for the year ended 30 September 2018 increased by $18.8 million year over year, or 15.4%, to $141.4 million on a reported basis. Favorable currency movements accounted for $7.8 million of the increase, which was partly offset by a $1.6 million decrease due to six fewer days in the 2018 period. On a like-for-like basis, revenue increased by $12.6 million, or 10.4%.
SBG revenue increased by $9.9 million, or 11.3%, on a like-or-like basis, comprised of growth in service revenue of $15.1 million offset by a reduction in hardware sales of $5.2 million.
SBG service revenue increased by $15.1 million, or 20.7%, on a like-for-like basis, primarily due to Greece driving total incremental revenue of $14.3 million, which included $6.8 million of additional participation revenue, $2.3 million of other recurring revenue and $5.2 million of additional revenue from software license sales.
The decrease in SBG hardware revenue was driven by lower hardware sales into Greece and Colombia of $5.4 million and $3.5 million, respectively. This was partly offset by SBG terminal sales in the UK of $2.1 million and Electronic Table Games ("ETG") sales of $1.3 million.
Virtual Sports revenue increased by $2.7 million, or 8.1%, on a like-for-like basis, to $37.8 million, driven by new customer revenue in Interactive and new Virtual Sports customers in Greece, Ireland, Finland and Poland, as well as an increase in revenue from existing customers, due in part to additional channels offered. Growth was negatively affected by $1.7 million due to a reduction in revenue from long-term Virtual Sports licenses that have now come to an end, $0.7 million due to a timing difference in the 2018 contract renewal of a major customer and $0.5 million due to the recognition of revenues previously unreported to us in 2017. Excluding these items, underlying Virtual Sports revenue increased by $5.4 million, or 20.8%, with Virtual Sports land-based and online customers accounting for $4.2 million of the increase and $1.2 million from Interactive.
Cost of sales, excluding depreciation and amortization, which includes machine cost of sales, consumables, content royalties and connectivity costs, increased by $4.1 million, or 15.4%, on a reported basis, to $30.8 million. On a like-for-like basis, cost of sales increased by $2.5 million, or 9.6%.
Cost of service increased by $5.7 million, or 36.9%, on a like-for-like basis, mainly due to an increase in Greece SBG service costs of $3.5 million and an increase to service U.K. SBG terminals of $2.1 million.
Cost of hardware decreased by $3.2 million, or 29.6%, on a like-for-like basis, due to lower nil margin hardware sales in Greece and lower hardware sales in Colombia. This was partly offset by higher nil margin sales of the Flex 4k™ product terminal and other hardware sales in the UK, ETG and Italian markets.
SG&A expenses increased by $1.8 million, or 3.1%, on a reported basis, to $60.1 million. On a like-for-like basis, SG&A expenses decreased by $0.7 million, or 1.3%. This decrease was driven by staff related cost savings of $4.4 million, offset by additional public company costs of $1.8 million due to the prior period containing only nine months of post-Business Combination transaction expenses, as well as a decrease in labor capitalization of $1.1 million due to the mix of projects and incremental group restructuring costs of $0.5 million.
During the period, the company incurred an impairment expense, considered to be outside the normal course of business, of $7.7 million, following a review of key strategic areas whereas the carrying value of these assets were deemed to be in excess of their current fair value. Of the total impairment, $4.9 million was related to intangible fixed assets, $0.6 million to accrued income, $1.9 million to prepayments and $0.3 million to trade and other debtors.
Depreciation and amortization increased by $8.0 million, or 23.7%, on a reported basis, to $41.8 million. On a like-for-like basis, depreciation and amortization increased by $6.2 million, or 18.6%. This increase was driven by additional machine and machine related depreciation on SBG of $1.7 million and additional amortization in connection with new platforms and games going live on SBG ($4.5 million) and Virtual Sports ($0.4 million). This increase was partly offset by a reduction of non-market specific depreciation and amortization of $0.4 million.
On a reported basis, net operating result improved from a loss of $11.9 million in 2017 to a loss of $7.3 million in 2018. On a like-for-like basis, net operating loss improved by $4.7 million, mainly due to an increase in revenue and reduction in transaction expenses, partly offset by higher cost of sales, depreciation and amortization, impairment expense and stock-based compensation.
Adjusted EBITDA, which the company considers an important underlying business performance measure, increased by 32.9% year over year to $54.1 million before adjusting for foreign currency impact. After adjusting for foreign currency impact, Adjusted EBITDA increased 26.0%. Adjusted EBITDA is a non-GAAP financial measure. Our definition of the measure and its reconciliation to net loss are provided later in this release.
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