Bragg Gaming Group 3Q26 Earnings Conference Call - BRAGG GAMING GROUP INC

Financial Performance:

• Third-quarter revenue was €20.6 million, a 23% year-over-year decrease; normalized revenue (excluding BetCity migration and Drayton acquisition) was €20 million, down 12% year-over-year.
• Adjusted EBITDA fell to €3 million from €4.4 million in the prior year quarter, resulting in an EBITDA margin of 15%.
• Gross profit declined 21% to €11.6 million, yet gross margin improved to 56% from 55% year-over-year and 52% in Q2, driven by a strategic shift away from low-margin third-party content.
• Operating costs were reduced significantly, with salaries and subcontractors down 30% on an underlying basis due to restructuring programs; the global workforce was reduced by approximately 27% year-to-date.
• Cash balance at September 30th was €2.5 million; a €6 million USD revolving credit facility with Bank of Montreal remains in place with €5.2 million CAD drawn.
• Capitalized development spending currently exceeds operational cash generation, identified as a primary gap management aims to close.

Guidance and Future Outlook:

• No specific forward revenue or earnings guidance was provided for the full year; management intends to provide updated guidance and thoughts on 2027 in the new year after further assessment.
• Near-term priorities focus on disciplined execution, improving balance sheet strength, and generating operating cash flow.
• Proprietary content growth in North America (US and Canada) was 7% year-over-year for the quarter, with expectations for accelerated growth starting in 2027.
• Management anticipates full realization of July restructuring savings in Q4 and 2027, contributing to improved cash flow profiles.

Business Segments and Product Lines:

• Product mix optimization drove margin expansion: third-party content dropped to 39% of revenue (from 52% previously), while proprietary content rose to 19% (from 16%) and exclusive content to 23% (from 14%).
• Drayton Studios, acquired July 22nd, contributed €0.7 million in revenue and €0.3 million in pre-tax profit in the partial quarter, breaking even on a cash basis and arriving with €1.5 million in cash; the acquisition was funded entirely via shares.
• Brazil revenue was €2 million, down 37% year-over-year even prior to regulatory suspension, due to third-party providers moving to direct integration with operators.
• Legacy platform contracts in the Netherlands rolled off as anticipated, significantly impacting total revenue.

Market and Competitive Landscape:

• Brazil's licensed online and casino gaming market was suspended via provisional measure on September 25th, forcing a cessation of supply to Brazilian customers effective October 6th.
• Management asserts that the Brazil shutdown's impact on the bottom line and cash flow is minimal, noting the region primarily contributed low-margin aggregated revenue.
• Company competes directly with major players like Light & Wonder in North America, leveraging its broad distribution infrastructure and Drayton acquisition to capture share.
• The company operates with a licensed footprint across more than 30 regulated markets.

Risks and Challenges:

• Regulatory risks in Brazil pose immediate revenue interruptions, though management views the long-term financial impact as contained.
• Cash flow pressure remains a critical challenge as capitalized development spend outpaces operational cash generation.
• Share price underperformance and investor frustration regarding financial results and balance sheet flexibility are significant external concerns.
• Dependency on low-margin third-party content aggregation requires continued reduction to protect gross profitability.

Management Commentary and Tone:

• Tone was candid, acknowledging share price frustration, revenue declines, and the need for a "simpler, more focused" business approach.
• Interim CEO Morten Tonneson emphasized execution and discipline over transformative narratives, noting the company is not starting from a "standing start" given his prior tenure as COO.
• Board Chair Matt Davey signaled full alignment with shareholders and confirmed the board's readiness to provide sufficient balance sheet flexibility and capital support.
• Management highlighted the strategic shift toward higher-margin proprietary content and the successful early integration of Drayton Studios.

Analyst Questions and Answers:

• North American Growth: Analysts asked for color on the 7% proprietary content growth; management cited the Drayton acquisition and ability to leverage distribution infrastructure to gain share with top operators in 2027 and beyond.
• Guidance & Confidence: When asked about reinstating guidance, management stated they would wait until the new year to ensure realistic expectations, linking confidence restoration to cash generation and execution.
• Capital Support: Inquiries regarding capital sources were met with assurances that options exist, including increasing the BMO credit facility based on receivables or executing private placements similar to the recent transaction involving board and management participation.
• AI Utility: Management detailed that AI is currently driving cost reductions and efficiency across legal, operational, and development teams, with expectations to accelerate game production throughput and quality significantly into 2027.

Other Key Points:

• A leadership transition occurred with Matt Davey stepping into a Chair/Strategic Advisor role and Morten Tonneson becoming Interim CEO.
• Restructuring programs from January and July have collectively reduced the global workforce by 27% since the start of the year.
• Trade receivables from Brazil totaled €2 million; €0.5 million was collected post-quarter-end, with management confident regarding the recovery of the remaining balances.
• The company aims to be more selective regarding product and market investments, eliminating lines that do not earn their place.