8-K: Galaxy Gaming Corrects Financial Release After Calculation Errors

Galaxy Gaming issued a corrected press release after identifying errors in its initial 2023 financial results and 2024 guidance announcement.

Summary

• Galaxy Gaming initially released its 2023 financial results and 2024 guidance on March 25, 2024, but identified two errors.
• The first error was a miscalculation of the net revenue growth rate for 2024 guidance, which was initially stated as 2.4% but corrected to 6.1%.
• The second error was in the disaggregation of revenue table, specifically in the recurring license revenue for GG Digital, which also impacted consolidated figures.
• A corrected press release was issued on March 26, 2024, with the updated figures.
• The company's Q4 2023 gross revenue increased by 25% to $8.4 million, and full year 2023 gross revenue increased by 23% to $31.7 million.
• The company reported a net loss of $1.8 million for 2023, compared to a net loss of $1.77 million in 2022.
• Adjusted EBITDA for 2023 was $10.6 million, a 1% increase compared to 2022, or a 7% increase when adjusting for the Employee Retention Tax Credit (ERTC).
• The company expects recurring license revenue to grow by 23.2% in 2024, while sales of perpetual licenses are expected to decrease by 66.2%.
• Overall, the company projects a 12.8% increase in gross revenue and a 6.1% increase in net revenue for 2024.
• Adjusted EBITDA is projected to increase by 17.9% in 2024.

Sentiment

Score: 5

Explanation: The sentiment is neutral to slightly negative due to the initial errors in the financial release and the reported net loss, but the company is showing strong revenue growth and positive future guidance.

Positives

• Gross revenue increased significantly in both Q4 2023 and the full year 2023.
• The company's net leverage ratio is comfortably within its loan covenant.
• The company anticipates double-digit growth in recurring license revenue in 2024.
• The company is focusing on a sustainable growth model based on recurring revenue.
• The company has made progress in collecting on slow-moving accounts, reducing the bad debt reserve.
• The company's cash position increased to $16.7 million at the end of Q4 2023.

Negatives

• The company reported a net loss for both Q4 2023 and the full year 2023.
• Adjusted EBITDA growth was modest at 1% for the full year 2023, or 7% when adjusted for ERTC.
• Sales of perpetual licenses are expected to decrease significantly in 2024.
• The company incurred higher-than-planned shipping expenses in Q4 2023.
• Intellectual property registration expenses were higher than historical levels.
• The company's cash position decreased compared to the end of 2022.

Risks

• The company's future performance is subject to various risks and uncertainties, including the ability to maintain strategic alliances and grow its iGaming business.
• The company is exposed to risks related to changes in gaming regulations and economic conditions.
• The company's level of indebtedness and restrictions in its loan agreement pose a risk.
• The company is dependent on major customers and the protection of its intellectual property.
• The company is exposed to risks related to cyber-attacks and failures in its information technology systems.
• The company's forward-looking statements are subject to change and inherent risks and uncertainties.

Future Outlook

The company expects a 12.8% increase in gross revenue and a 6.1% increase in net revenue for 2024. Adjusted EBITDA is projected to increase by 17.9% in 2024. The company plans to develop a strategic plan to deliver double-digit revenue growth through organic growth and potential acquisitions.

Management Comments

• Matt Reback, President and CEO, stated that Q4 2023 marked a substantial improvement in operating results compared to the previous quarter.
• Matt Reback believes that opportunistic sales of perpetual licenses peaked in 2023 and that the company will return to a sustainable growth model relying on recurring revenue.
• Harry Hagerty, CFO, stated that the company will now be disclosing revenue on a gross and net basis in both verticals and will break out sales of perpetual licenses.
• Harry Hagerty mentioned that the company's net leverage ratio was 3.7x at the end of Q4 2023, comfortably in compliance with its loan covenant.

Industry Context

The company operates in the casino gaming industry, which is experiencing growth in both land-based and online segments. The company's focus on recurring revenue and iGaming aligns with industry trends. The renegotiation of royalty rates with Evolution reflects the competitive landscape in the online gaming sector.

Comparison to Industry Standards

• Galaxy Gaming's revenue growth of 23% for the full year 2023 is strong compared to some of its peers in the gaming industry, although specific comparisons are difficult without detailed competitor data.
• Companies like Scientific Games (now Light & Wonder) and IGT are major players in the gaming industry, and their performance can be used as a benchmark, although they are much larger than Galaxy Gaming.
• The shift towards recurring revenue models is a common trend in the software and gaming industries, and Galaxy Gaming's focus on this is in line with best practices.
• The company's adjusted EBITDA margin of approximately 33% (10.6M/31.7M) is a reasonable margin for a gaming company, but it is important to compare this to specific competitors to assess its relative performance.
• The company's net leverage ratio of 3.7x is within acceptable limits, but it is important to monitor this metric as the company continues to grow and potentially take on more debt.

Management Changes

Stakeholder Impact

• Shareholders may be concerned about the initial errors in the financial release and the reported net loss.
• Employees may be impacted by the company's performance and future growth plans.
• Customers may be interested in the company's product development and expansion plans.
• Creditors will be monitoring the company's debt levels and compliance with loan covenants.

Next Steps

• The company will update its investor deck to reflect the results.
• Investors are encouraged to send questions to management by April 5, 2024.
• Management will post answers to investor questions on or before April 12, 2024.

Key Dates

Keywords

casino table games, iGaming, financial results, revenue, EBITDA, net loss, recurring license revenue, perpetual licenses, gaming, adjusted EBITDA