Business Overview and History
GAN Limited (NASDAQ:GAN) is a leading North American B2B technology provider specializing in real money internet gaming solutions and a prominent international B2C operator of internet sports betting. The company's dual-pronged approach has positioned it as a fintech powerhouse, driving innovation and growth in the rapidly evolving online gaming industry.
GAN Limited was founded in 2002 as a business-to-business (B2B) supplier of enterprise Software-as-a-Service (SaaS) solutions for online casino gaming and sports betting applications. The company's flagship offering, GameSTACK, is a comprehensive platform that enables casino operators to seamlessly extend their online presence, providing a turnkey technology solution for regulated real money internet gaming, online sports gaming, and virtual simulated gaming.
In 2021, GAN further strengthened its market position through the strategic acquisition of Vincent Group p.l.c., a Malta-based public limited company known as Coolbet. This move expanded the company's capabilities, adding a leading B2C online sports betting and casino platform to its portfolio. Coolbet's digital portal allows consumers in select markets across Northern Europe, Latin America, and Canada to engage in sports betting, online casino games, and poker.
GAN's history has been marked by both challenges and strategic developments. In 2021, the company faced a legal dispute after serving a termination notice to a content provider due to unmet contractual obligations. Additionally, GAN's B2C operations in Chile have encountered regulatory uncertainty, with the Chilean tax authority taking varying positions on the application of value-added tax to online gaming activities.
Despite these obstacles, GAN has focused on optimizing its operations and expanding its offerings. The company has worked to address internal costs and streamline its organization to enhance the competitiveness of its B2B segment. GAN has also prioritized expanding its B2B offerings in newly regulated jurisdictions and integrating Coolbet's sports betting technology into its B2B product suite. These efforts have contributed to increased revenues from existing casino operators and driven margin expansion.
The company operates in two segments - B2B and B2C. The B2B segment develops, markets, and sells instances of GameSTACK, GAN Sports, and iSight Back Office technology. These solutions incorporate comprehensive player registration, account funding, and back-office accounting and management tools that enable casino operators to effectively extend their online presence. The B2C segment includes the operations of Coolbet, which develops and operates an online sports betting and casino platform.
On November 7, 2023, the company entered into an Agreement and Plan of Merger with SEGA SAMMY CREATION INC. to be acquired. The merger is expected to close in late 2024 or early 2025, subject to regulatory approvals.
Financial Performance and Ratios
GAN's financial performance has been marked by a mix of growth and cost optimization initiatives. For the nine months ended September 30, 2024, the company reported total revenue of $103.31 million, a 4.7% increase compared to the same period in the prior year. This growth was primarily driven by a 33% increase in B2B segment revenue, which reached $41.71 million, partially offset by a 8.5% decline in B2C segment revenue to $61.60 million.
The company's profitability has shown signs of improvement, with a net loss of $3.81 million for the nine-month period, a significant reduction from the $25.07 million net loss recorded in the same period of 2023. This progress can be attributed to the company's focus on cost rationalization, as evidenced by a 12.5% decrease in product and technology expenses and a 15.3% decline in general and administrative expenses during the period.
In the most recent quarter, GAN reported revenue of $37,098,000, representing a year-over-year growth of 24.4%. The company also achieved a net income of $2,083,000 for the quarter. The increase in revenue was primarily attributable to an expansion of B2B operations in Nevada and recognition of revenue related to migration services connected to a B2B partner exit in Michigan. Growth in Europe was driven by increased player activity and higher margins resulting from favorable sporting event outcomes within the B2C operations. These increases were partially offset by declines in the B2C operations in Latin America driven by reduced player activity, unfavorable exchange rates and lower margins resulting from unfavorable sporting event outcomes.
The B2B segment saw revenue increase by 6.2 million, or 60.9%, in the third quarter of 2024 compared to the same period in 2023. This growth was primarily driven by an expansion of GAN's B2B offerings in Nevada and the recognition of migration service revenue related to a customer exit in Michigan. B2B cost of revenue increased by $0.2 million, or 10.9%, over the same period due to the expansion in Nevada. As a result, the B2B segment contribution, which excludes depreciation and amortization, increased by 73.5% year-over-year.
For the first nine months of 2024, B2B revenue grew by $10.4 million, or 33.0%, compared to the prior year period. This was again driven by the expansion in Nevada and the Michigan migration services. B2B cost of revenue increased by $0.4 million, or 7.2%, leading to a 39.3% increase in segment contribution.
The B2B segment's Gross Operator Revenue, which represents the sum of its customers' gross revenue from SIM, gross gaming revenue from RMiG, and gross sports wins, increased by 44.0% and 45.7% in the third quarter and first nine months of 2024, respectively. This indicates strong growth in the transaction volumes being processed through GAN's platform. However, the B2B Take Rate, which is the percentage of this Gross Operator Revenue retained by GAN, decreased from 2.5% to 2.3% year-to-date due to changes in customer contract terms.
In the B2C segment, revenue increased by 5.5% in the third quarter of 2024 compared to the prior year period, driven by growth in Europe from increased player activity and higher margins due to favorable sporting event outcomes. This was partially offset by declines in Latin America from reduced player activity, unfavorable exchange rates, and lower sports betting margins.
For the first nine months of 2024, B2C revenue decreased by 8.5% year-over-year. The decline was primarily due to the factors impacting the third quarter, namely reduced player activity and unfavorable exchange rates in Latin America, as well as lower sports betting margins.
The B2C segment's Active Customers decreased by 7.4% and 11.6% in the third quarter and first nine months of 2024, respectively, mainly from reduced customer acquisition in Latin America. The B2C Marketing Spend Ratio, which measures marketing expenses as a percentage of revenue, improved from 26.0% to 24.0% in the third quarter due to the deployment of more efficient affiliate marketing strategies in Latin America. This ratio remained relatively stable at 23.0% for the first nine months of the year.
The B2C Sports Margin, which reflects the ratio of wagers minus winnings to total amount wagered, was 7.2% in both the third quarter and first nine months of 2024, compared to 6.0% and 7.2% in the respective prior year periods. The fluctuations were driven by the outcomes of individual sporting events.
Liquidity
GAN's liquidity position remains stable, with a current ratio of 1.74 and a quick ratio of 1.74 as of September 30, 2024. The company's cash balance stood at $36.48 million, providing it with the necessary resources to fund its ongoing operations and strategic initiatives.
The company's debt-to-equity ratio is -8.63, indicating a negative equity position. GAN has access to a $42 million Amended Credit Facility with a financial covenant requiring minimum liquidity of $10 million. In the most recent quarter, the company reported operating cash flow of -$771,000 and free cash flow of $232,925.
Recent Developments and Outlook
In November 2023, GAN announced that it had entered into an agreement and plan of merger with SEGA SAMMY CREATION INC., a subsidiary of SEGA SAMMY HOLDINGS INC. The transaction, which is expected to close in late 2024 or early 2025, subject to regulatory approvals and other customary closing conditions, will see GAN become a privately-held entity, with its shares delisted from the Nasdaq Capital Market.
Shareholders of GAN will receive $1.97 in cash for each ordinary share they hold, a move that will significantly impact the company's financial and operational landscape. The merger with SEGA SAMMY CREATION presents an opportunity for GAN to leverage the combined resources and expertise to further strengthen its position in the rapidly evolving online gaming industry.
Risks and Challenges
Despite the company's progress, GAN faces several risks and challenges that warrant consideration. The highly regulated nature of the online gaming industry, with varying laws and licensing requirements across different jurisdictions, can pose regulatory hurdles and impact the company's ability to expand its reach.
Additionally, the competitive landscape in the B2B and B2C segments remains intense, with established players and new entrants vying for market share. GAN's ability to maintain its technological edge, secure strategic partnerships, and effectively execute its growth strategy will be crucial in navigating this competitive environment.
Furthermore, the company's reliance on a limited number of large customers in its B2B segment, as well as its exposure to macroeconomic conditions and fluctuations in consumer spending patterns, present potential risks to its financial performance.
Conclusion
GAN Limited's transformation from a B2B provider to a dual-faceted fintech powerhouse has positioned the company at the forefront of the rapidly evolving online gaming industry. The company's strategic acquisition of Coolbet, coupled with its focus on cost optimization and the impending merger with SEGA SAMMY CREATION, present compelling opportunities for growth and value creation.
The B2B segment has been the primary driver of GAN's growth, with significant expansion in both revenue and profitability. The B2C segment has faced some challenges, particularly in Latin America, but has shown resilience in its European operations. GAN's ability to leverage its technology and expertise across both the B2B and B2C markets has been a key competitive advantage.
However, the company must navigate the complexities of a highly regulated industry, intense competition, and macroeconomic uncertainties to capitalize on its strengths and deliver sustainable long-term success. Investors will closely monitor GAN's ability to execute its strategic initiatives, maintain its technological edge, and adapt to the ever-changing dynamics of the online gaming landscape.