Description

GIG is a turnaround story that has already turned, but the numbers have only started to show this for the past couple quarters.  But revenues should continue to grow and margins to expand, especially in the later part of this year as GIG integrates a large pipeline of signed deals. I see a near-term double and longer-term triple from here.

Notes: NOK 22.60 price is Oslo listing.  Also trades in SEK in Stockholm as GIGSEK.  Reports in Euros, and I’ve entered the Market cap and EV in Euros.

Our story begins over 10 years ago, when former CEO Robin Reed co-founded GIG and grew it from almost nothing to well over EUR 100m in revenue by 2018.  In a nutshell, GIG helps gaming operators to operate online, particularly land-based operators.  GIG’s strategy of doing every part of the iGaming value chain (even operating its own iGaming sites) was profitable all the way until just a few years ago, when increasing regulation and increasingly sophisticated competition forced a reckoning.

Reed deserves credit for beginning a transition to open, modular architecture for GIG’s Platform (aka Core) software and also beginning a transition away from it’s previous white-label Platform deals that became increasingly risky and unprofitable as countries (esp in Europe) began to regulate.  Nevertheless, GIG remained in areas it couldn’t compete in an increasingly best-of-breed landscape (e.g. gaming operations, games development, sportsbook).  Moreover, the cost structure was bloated and deadlines had a way of slipping.

In the fall of 2019, the Board cut Reed loose, and promoted Richard Brown from COO to CEO.  Brown had joined GIG in 2017 to manage the Media segment, then as COO brought the gaming operations (aka B2C segment) out of the red.  Concurrently, GIG launched a strategic review.  In the past 18 months, they’ve accomplished the following:

• Discontinued investment in developing casino games, which had never generated much revenue and was unprofitable

• Got discipline on costs - no more lavish parties, restructured Media and Sports segments, reduced G&A headcount from 126 to 39

• Launched revamped Platform products, and now capex will decrease  

• Almost finished migration of IT from cloud-only to hybrid platform.  Should be done in 1Q21.  Annualized savings of ~3.5m.

• Sold B2C operations to Betsson on 4/16/20 and paid down about EUR 30m of debt.  Long story short, the deal - valued at EUR50m - equated to ~6.6x EBIT … clearly a distressed price, but GIG was bumping up against covenants and had a bond coming due.  They got what they could.  Selling made sense, as tightening regulation had squeezed everyone’s margins.  In order to be really successful as an operator, you need to have significant funds available for marketing, and GIG didn’t.  Moreover, potential Tier 1 customers for the platform segment didn’t like a supplier competing with them.  Betsson will stay on as a Platform customer (to support these sites) for 30 months.

• Began once again spending opex to grow the Media segment, particularly in Paid media, where their subsidiary - Denmark-based Rebel Penguin - is probably the best in the business.  For many years, Media (with its 50-70% EBITDA margins) had been the cow milked for cash to fund other ventures.  Over the past few quarters, first-time depositors (FTDs) have been up ~50% yoy.

• 9/7/20 signed JV with Betgenius for Sports division.  This is a great deal that combines Betgenius significant expertise in trading and risk mgmt with GIG’s back and front-end tech, and makes GIG’s sports ambitions finally achievable.  GIG has stemmed the red ink in Sports to a very manageable level andrecently signed a few customers.  I don’t give any credit for Sports in my valuation, but it’s a valuable call option.

• Exited Platform and Sports deals with HardRock Casino.  Sometimes losing a Tier 1 customer can actually be a good thing.  When GIG first signed them in January 2019, they kinda whored themselves on the terms to win a marquee deal.  After major upfront investment, HardRock grew to only ~2% of revenues and was mildly EBITDA negative.  Plus, the deal excluded GIG from pursuing other such deals in the US.  Now they can.

Valuation

Comps Better Collective and Catena Media trade around 9x and 16x EBITDA, respectively.  Putting a modest 10x multiple on my 2021E EBITDA of 21-23m gets me to 210-230m for this division alone.  Note that GIG’s growth and margins compare favorably, and these businesses feature ~100% cash conversion.  That nearly covers the current EUR233m EV by itself.

The Platform business EBITDA margin is currently crossing over into positive territory, thus I’m using a multiple of revenues.  Comps GAN and Bragg Gaming trade at high and mid-teens revenue multiples, respectively.  Owing to GIG’s current lack of Platform profits, let’s put a very conservative 7x multiple on my 2021E revenues of 24m, for a value of 148m.  

As a sanity check, let’s consider the following: once GIG converts its current 3 remaining white label customers to SAAS deals, and onboards the 15 brands in the integration pipeline, it’ll have 37 live brands on the platform.  At the recent average of ~221k revenue per customer per quarter, that would be 32.7m in annual revenue, and I expect them to have all 37 on SAAS by year-end 2021.  That knocks my 148m valuation down from 7x to 4x.  Moreover, when GIG reaches a 40% EBITDA margin (which shouldn't take long, and comps average around the low 40s), EBITDA would be 13.1m, for an EBITDA multiple of 11.3x. These are sticky customers, by the way.

Combined, this is a total value of 320.5m, equating to ~NOK 36 per share. That's giving no credit to any future deal signings for Platform, and no growth for anything beyond 2021, which is just ridiculous.

Despite the flattish margins that the Platform segment has seen owing to the SAAS transition, margins are going up, revenue is less risky, and avg revenue per customer has nearly doubled in the past 5 quarters (i.e. they’re signing higher quality customers.).  What’s more, the cadence of deal signings has accelerated.  Eventual live brands on the platform will be much, much higher than 37.

Catalyst

Growing # of live Platform customers from 22 to 37 through signed deals alone

Continued growth in media

Eventual delisting from Oslo exchange, which would then require Swedish index funds to buy the stock

Regulation of Germany, Netherlands, and additional US states will open up opportunity for all divisions