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Amaya Inc. (NASDAQ:AYA)

Q1 2017 Earnings Conference Call

May 12, 2017 8:30 AM ET

Executives

Tim Foran - Director, Investor Relations

Rafi Ashkenazi - Chief Executive Officer

Daniel Sebag - Chief Financial Officer

Marlon Goldstein - Executive Vice President, Corporate Development and General Counsel

Analysts

Chad Beynon - Macquarie Group

Kevin Wright - Canaccord Genuity

Eyal Ofir - Eight Capital

David McFadgen - Cormark Securities

Operator

Good morning, ladies and gentlemen and thank you for standing by and welcome to Amaya Inc.s First Quarter 2017 Earnings Call. And at this time, all participants are in a listen-only mode. Following managements commentary, we will conduct a question and answer session. Instructions will be provided at that time for financial research analysts that are covering the company to queue up for questions. [Operator Instructions] As a reminder, this conference is being recorded today, Friday, May 12, 2017. Replay details are included in Amayas earnings press release issued earlier this morning.

I will now turn the call over to Tim Foran, Amayas Director of Investor Relations.

Tim Foran

Thank you, operator. Welcome to Amayas first quarter 2017 conference call. This morning, Amaya issued an earnings press release and filed its unaudited interim condensed consolidated financial statements, and MD&A on EDGAR and SEDAR. These documents and the webcast presentation will also be available on Amayas website at http://www.amaya.com.

Before we begin, Amaya would like to remind listeners that portions of todays discussion contain forward-looking statements under applicable securities laws that reflect managements current views with respect to future events, such as Amayas outlook for future performance. Any such statements are subject to risks, uncertainties and assumptions that could cause actual results to differ materially from those projected in these forward-looking statements. Undue reliance should not be placed on such statements.

Factors that could cause actual results or events to differ materially are set forth in the documents Amayas filed or furnished with applicable securities regulatory authorities or otherwise made publicly available, including without limitation, todays earnings press release, Amayas Q1 2017 MD&A and financial statements. Except as required by law, Amaya undertakes no obligation to update any forward-looking statements as a result of new information or future events. This call will reference non-IFRS and non-US GAAP financial measures. Although Amaya believes these measures provide useful supplemental information about its financial performance, they are not recognized measures and do not have standardized meanings under IFRS or US GAAP. Reconciliations to the nearest IFRS measures are included in todays earnings press release, Amayas Q1 2017 MD&A and its earnings presentation, which will all be available on Amayas website.

Unless otherwise noted, all currency figures presented on this call are in US dollars. Please note a copy of our accompanying presentation is also available through the webcast link provided in todays earnings press release.

I will now turn the call over to Rafi Ashkenazi, Amayas Chief Executive Officer.

Rafi Ashkenazi

Thank you, Tim. Good morning, ladies and gentlemen and thank you for participating on todays call. I am joined on the call today by Daniel Sebag, our Chief Financial Officer. Today, we will review our first quarter 2017 results and discuss recent developments and initiatives for continuing to build momentum throughout the year and beyond.

We had a strong first quarter and we are pleased with our results. Our Q1 revenues increased 10% to $317 million. Our adjusted EBITDA increased 22% to $151 million and our net earnings increased by 18% to $66 million as compared to prior year period.

Along with strong earnings, so far in 2017, we were granted the first international online gaming license in the Czech Republic, launched Millionaires Island, our first in-house developed progressive jackpot that has already produced two lucky millionaires restated additional $150 million of our deferred payment obligation and we anticipate full repayment by the end of the first half of 2017 repriced and retranched our first lien term loans, which we expect will save approximately $15 million in annual interest expense and further improve our cash flow conversion and hired Robin Chhabra as Chief Corporate Development Officer and are in final negotiations with our Chief Financial Officer.

As for our key customer metrics, we recorded approximately $2.7 million total quarterly active unique players on our platform in the first quarter, an increase of 5% year-over-year led by innovative customer acquisitions engagements and reactivation initiatives. Online Poker remains very attractive for our business as we maintain significant competitive advantages through low player acquisition costs and the network effects of our sizable player base.

In Q1, approximately 2.5 million quarterly active uniques played poker, an increase of 2% year-over-year. We have been successful in marketing and cross-selling casino and sportsbook to our poker players with about one-third of them already playing casino.

In Q1, approximately 664,000 quarterly active uniques played casino and 277,000 made a bet on sports, with both verticals experiencing strong year-over-year growth. Our quarterly net yield, which represent our real-money online gaming revenues per quarterly active uniques, increased on both the regular and constant currency basis by approximately 5% year-over-year to $115, driven primarily by growth in casino yields.

Poker revenue increased 1% in the first quarter. As we have discussed on prior earnings calls, we have implemented a long-term plan to improve the poker ecosystem with a goal of creating a more attractive gaming environment and an improved experience for recreational players. We expect this will enable the recreational players to play longer on our platform across verticals and have more winning moments, which we believe allowed us to engage and retain our customers longer, increase net deposits and improve their lifetime value.

The positive momentum in poker continues despite the impact of anticipated cannibalization from our other product offerings, decreased poker revenues in Full Tilt, and the closing of certain small jurisdictions. As we continue to implement this long-term poker plan, we should take a few moments to talk about the continued evolution of our poker business model as we transition from our traditional professional player emphasis to a focus on recreational players.

We begun this evolution over a year ago, as we recognized shifting customer behavior, which were having a negative impact on our ability to successfully attract and retain new and recreational players. Our longstanding model was to handsomely reward high volume players based primarily on the number of hands theyve played. These allowed the company to gain market share during the time that we were aggressively opening markets and introducing poker to new audiences around the world.

At the same time, our marketing efforts created a generation of players you are able to make a living based upon with the combination of poker winnings from other players and the rich rewards we offered for high volume plays. In tandem, we tailored our poker product offering our pricing model, our innovation and our promotions to reinforce these behaviors.

In todays market, our old business model does not position poker for the long-term. We therefore begun to shift those rewards and tailored our product and promotions for recreational players who want to enjoy the game as a fun entertainment experience that offer many winning moments and the dream of the big pay out.

The initial changes that we had implemented are so far having the desired effect of enhancing the experience for recreational and new players leading them to deposit more money on our site and we believe we are capturing more of the overall gaming wallet as they play across all three verticals. We will continue this transition and adjust our product offering, our pricing, and our promotions to anticipate meet and exceed the demand of this next generation of online poker customers.

For instance, in March, we announced the end of the legacy loyalty program and the planned move to a new system, our cross-vertical loyalty program, which we expect to rollout in Q3. During this time, we anticipate that some of our customers, primarily high volume players may either adapt to the play or choose not to make this transition, which may result in short-term declines in revenue.

Although the ecosystem changes will be an ongoing focus, we anticipate the most fundamental of those changes that we have previously disclosed to be completed in this calendar year as we also introduced product innovations and geographic expansions. As we adapted as organization, we would not lose sight of the fact that poker is ingrained in our DNA.

We intend to remain the global leader in poker and continue to promote the game for the long-term. PokerStars has been and will continue to be the home of poker. We love this game. We are passionate about poker and we play it ourselves in all its variants. We want everyone to enjoy the game of poker as much as we do.

We are grateful and inspired by every customer that has taken the time to become a poker player and we have an obligation to provide a world-class poker experience in every aspect.

We recognize that we must adapt as an organization to provide the customer with the experience that they are seeking. We have a responsibility for the future of poker and we intend to continue to ensure we manage a well balanced and secure ecosystem while focusing on innovation.

We believe that our success means poker success. While we continue to improve our core poker business, we continue to successfully diversify our revenue stream through casino and sportsbook, which accounted for a combined 27% of our total revenue in the first quarter compared to 21% a year ago. Casino revenues grew as a result of an increase in uniques and higher per player yield in line with our strategy.

Casino yield improvement is partially due to the increased number of slots offering which we will continue to grow. The number of uniques playing casino increased 42% year-over-year, driven by growth from expansion into new jurisdictions and an increase of cross-sell to eligible poker players. Our casino offering is now available to 74% of poker players.

Despite almost no external marketing and no dedicated VIP programs, we have become one of the largest online casinos as measured by Active Uniques. As a reminder, almost all of our marketing efforts to-date are through direct cross-sell to our poker customers. Our aim continues to be one of the largest streamlining casinos in terms of revenues among our public competitors.

As for sportsbook, during the first quarter, year-over-year growth was positively impacted by opening of new jurisdictions, increase in quarterly active unique and improved product offerings, while the product was available to approximately 62% of our poker players. On a sequential basis, we saw growth in uniques and wagering.

Our first quarter operations performed very well and we saw strong year-over-year increases in revenue, adjusted EBITDA, adjusted net earnings per share and our key customer metrics as we continue to attract new customers and increase net deposits onto our platform. During the remainder of 2017, we plan on continuing to execute on our strategic priorities; growing the poker category and our poker leadership position, becoming a leader in online casino, and establishing the competitive online sportsbook.

Poker is the primary channel through which we acquire customers in an efficient and cost-effective manner. In 2017, we are continuing to actively manage the ecosystem and grow the poker category. We are excited to introduce our new cross-vertical loyalty program in the second half of the year, which would provide our recreational players with more targeted prices and more opportunities for winning moments.

In 2017, we expect our casino growth to continue by focusing on improving the quality of the offerings and launching a dedicated VIP program. Our goal is to add at least 150 new slots games to our casino and to improve our products.

For sportsbook, in 2017, we have refined our plans and strategies and will invest less on market expansion and more on product improvements and parity, especially on mobile, as well as delivering localized experience to our customer base.

I will now turn the call over to Danny to provide further details on our first quarter 2017 financial performance.

Daniel Sebag

Thanks Rafi. Our Q1 2017 revenues increased 10% to $317 million versus the prior year. This quarter, poker revenues comprised approximately 69% of total revenues and casino and sportsbook combined revenues comprised 27%, as compared to approximately 75% and 21% respectively in the prior year. Poker revenue was up 1% in the first quarter of 2017 versus the prior year.

Poker revenue was positively impacted by the previously announced changes to our loyalty program, rate increases which did not take effect until late March 2016, increased marketing spend in Q4 2016 versus the prior year, abnormal seasonality in the first quarter of 2016, resulting in a weaker weighting than prior years and the re-launch of Portugal and the launch of PokerStars NJ.

However, the increase was partially offset by cannibalization from our real money online casino products, a decline in the activity on Full Tilt, the temporary cessation of operations in the Czech Republic, and the cessation of operations in certain small jurisdictions.

Our casino and sportsbook combined revenues increased significantly in Q1 2017 to $87 million, with casino representing approximately 92% of the revenues. Revenue growth was primarily the result of the continued rollout of the casino product under the PokerStars brand including the addition of third-party slots, the addition of new geographies to both verticals and the expansion of the sportsbook product.

On a geographic basis, revenues for Q1 2017 were split approximately as follows; 61% from the 28 countries in the European Union, 21% from the rest of Europe, 13% from the Americas, and 5% from the rest of the world. Our Q1 2017 net earnings increased approximately 18% to $66 million, as compared to $55 million during the prior year period.

Our first quarter diluted earnings per common share increased approximately 18% to $0.33 versus $0.28 the prior year. Our first quarter adjusted EBITDA of $151 million was an increase of approximately 22% versus the prior year.

Adjusted EBITDA during the first quarter added back $2 million of termination of employment agreements related to our operational excellence program and $2 million of stock-based compensation.

There were approximately $9 million in other adjustments, including $5 million of certain lobbying and legal expenses, and $3 million of professional fees incurred by the company and the Special Committee of the Board of Directors, a majority of which are in connection with the payments matter and the AMF investigation.

There was also a $7 million reversal of our impairment related to our investments in the Nova Gaming Group.

During the first quarter, adjusted EBITDA and net earnings benefited from the increase in revenues, notably due to the expansion of our online casino. Casino, once again provided strong contribution as we engaged in very limited external marketing. But instead, continued to focus on product expansion and cross-sell.

Profits from the casino vertical will continue to help support our investment in sportsbook. Our first quarter adjusted net earnings per diluted share was $0.56 versus $0.43 in the prior year period.

In Q1 2017, we generated approximately $96 million in operating cash flow or $112 million, excluding the movement in customer deposits. That compares to $45 million in Q1 2016 or $86 million, excluding movements in customer deposits.

Our operating cash flow increased primarily as a result of increased EBITDA. We highlight operating cash flow net of movements in customer deposits because they are not readily available to us and do not impact our operational cash. As we continue to make changes to our ecosystem to benefit our recreational players, we anticipate that customer deposits will continue to fluctuate.

While our operating business generates deposits from players from around the world, primarily in Europe, poker game play is predominantly in U.S. dollars. Therefore, our business is impacted by fluctuations in global currencies against the U.S. dollar, particularly against the Euro, which is the primary deposit in currency of our customers.

In Q1 2017, the purchasing power of our customer base continued to decline. Based on a weighted average of customer deposits, we estimate the value of our customers local currency declined 1% against the U.S. dollar on a year-over-year basis.

Due to the impact of currency fluctuations on our business, we provide a constant currency comparison to show how the underlying business performed excluding the impact of foreign currency rate fluctuations.

On a constant currency basis, our Q1 2017 total revenue was not impacted and likewise, increased 10% versus the comparable prior year period. Our Q1 2017 real money online poker revenue was flat versus the comparable prior year period. In early March, we successfully closed our repricing retrenching an amendment to our first lien term loan.

We have reduced the applicable interest margin on the first lien term loan by 50 basis points and removed the Euribor floor on the Euro tranche. We also shifted the currency mix and reduced our currency risk by increasing our Euro tranche by 100 million and reducing the U.S. dollar tranche by the same amount.

Further, we obtained an amendment to waive our excess cash flow suites due in 2017 and 2018. As a result of this transaction, we estimate that we will save $15.4 million in interest expense over the next 12 months. The $48 million excess cash flows repayment that would have been due at the end of March was used to partially fund the $75 million payment we made at the end of April.

Having repaid the $150 thus far in 2017, there remains $47.5 million, which we estimate will be fully repaid by the end of first half of 2017 using cash on the balance sheet and cash flows from operations. While our first quarter operations were very strong, we expect to face certain headwinds in the second quarter, especially as it relates to poker.

The 2017 rate increases was been in effect for the year-over-year comparison. Also, Q2 2016 was a strong quarter for 2016 with quarterly poker revenues comprising essentially the same weighting of full year poker revenues as Q1 2016, which is abnormal compared to prior years. However, we reaffirm the guidance that we have provided during our fourth quarter conference call and in our fourth quarter earnings release.

On the regulatory front, we are proud to be the first International operator to receive a license in Czech Republic and we are currently operating both online poker and player-versus-player online casino games in that market. We have not yet relaunched our wider casino games offerings including slots or our sportsbook, but intend to seek approval to do so.

Following the enactment of the new license regulations in the Czech Republic, we temporarily ceased operations in that market for approximately six weeks at the beginning of this year until we are issued our license and resumed operations in February. We are adhering to certain new and unusual licensing requirements in the Czech Republic, which have had a negative impact on our operations.

For instance, requiring face-to-face verifications for online gaming accounts. We believe that Czech Republic is unique in this regard and we foresee future jurisdictions following the licensing model set forth in other more mature regulated markets. We also continue to monitor regulatory developments in Australia closely.

Currently, we are permitting individuals from Australia to play poker in our sites. However, as we discussed previously, if the current proposed legislation is enacted in Australia, we intend to block plays in that market. We currently estimate that the proposed legislation could be considered in late May and we would block plays in that market approximately 30 days thereafter.

On the legal front, the appellate briefing process for the competitor litigation has commenced. Based on the current timeline, we anticipate oral arguments could occur in early 2018 with the decision possibly being rendered in the spring or summer of 2018. We will continue to provide material updates including to the estimated timeline as they become available.

I will now turn the call back over to Rafi.

Rafi Ashkenazi

Thank you, Danny. As you can see from our first quarter results, we have been executing our strategy effectively and capitalizing on growth opportunities. In addition, once we had completed the repayment of our deferred payment obligation, we expect to more actively look at inorganic growth opportunities.

To that end, we have recently announced the appointment of Robin Chhabra as our Chief Corporate Development Officer focusing on inorganic growth. Robin is an experienced online gaming executive who most recently served as Group Director of Strategy and Corporate Development for William Hill. We anticipate he will join the company in September 2017 following a brief garden leave from William Hill.

One other item, as this is likely Dannys final earnings call, I would like to take this opportunity to thank him for his many years of tireless work at Amaya. We value the contribution he has made to the company and we wish him well in his retirement.

As it relates to our upcoming Annual Shareholders Meeting, the management information circular will include some special items which we will be asking our shareholders to approve, which I would like to preview with you. One is the relocation of our corporate head office to Toronto as the corporation organized under the Quebec Business Corporations Act, we are required to maintain our corporate head office in the province of Quebec.

Following the appointment of our new CFO, which we are in the final stages of negotiating, we intend to relocate our corporate head office to Toronto where our new CFO will be located. As such, we intend to ask our shareholders to approve a continuance under the Business Corporation Act in Ontario, so that we can become an Ontario corporation and move our corporate head office to Toronto.

Next is our corporate name. Our company has experienced incredible growth in change over the past years. We have divested the entirety of our B2B businesses and today, we are a pure play consumer-facing operator with poker cards as our primary brand. However, we continue to grow and evolve as a company.

As we undergo this transformation, we look to embrace the future of our business, while also recognizing the incredible consumer goodwill and loyalty associated with our primary brands. We have decided to change the name of our corporation from Amaya to The Stars Group Inc. We intend to ask our shareholders to approve this name change at our upcoming annual meeting.

We are excited with the progress that the company has made thus far and we look forward to our shareholders support on these matters as we continue to work to maximize shareholders value. As always, I am very proud of our staffs around the world who have remained focused on our customers by delivering high quality customer service and superior gaming experience and continue to deliver on our strategy each and every day.

Before we open the line for questions, note that, at the direction of the Board of Directors, we will not be addressing any questions relating to the AMS investigation payments matters or related matters.

With that operator, we are now ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Chad Beynon with Macquarie Group. Please proceed with your question.

Chad Beynon

Hi, good morning. Thanks for taking my questions. I know its early in the year, but your first quarter was certainly stronger than I think most people expected and you talked about recognizing an extra month or two of Australian revenues.

Can you maybe talk a little bit about your decision to leave guidance where it is? Is that more around some of the uncertainty around the cross-vertical loyalty rollout or extra casino marketing? Or is it really just a factor of its early and no reason to do it at this point? Thank you.

Rafi Ashkenazi

Okay, so, the two key factors that we have when it comes to the guidance in relation to poker specifically, and keeping poker less in our projections is driven by the VIP or the cross-vertical loyalty program exactly as been indicated and the continued cannibalization that we have from the two other verticals sports and casino.

We are continuing to grow this vertical. Q1 this year versus Q1 last year, we grow poker and casino by $27 million, is quite significant. And the impact of the CVO or the cross-vertical loyalty program is still something that we dont know how to how difficult and how to project, we obviously had the model, but its very hard at this time of the year to be bullish around this.

Chad Beynon

Okay, and my question, I am sorry, was more with respect to the company guidance, the 5.60 to 5.80 of adjusted EBITDA?

Rafi Ashkenazi

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Amaya's (AYA) CEO Rafi Ashkenazi on Q1 2017 Results - Earnings Call Transcript - Seeking Alpha

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