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creakyhottie   Tuesday, 06/08/21 03:52:39 PM
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Article from Seeking Alpha
Elys Game Technology: Let The Games Begin

Jun. 08, 2021 2:52 PM ETElys Game Technology, Corp. (ELYS)DKNG3 Comments
Summary

Elys Game Technology's proprietary sports betting platform has a strong competitive advantage through its unique ‘omni-channel’ architecture.
A successful market position in Italy sports betting market gives Elys a springboard for expansion into North America.
Large market opportunity is opening in the U.S. as 21 state and local governments embrace sports betting and set up regulatory oversight.
The U.S. market remains at an early stage with no dominant market player, leaving room for early entrants to stake a defensible position.
ELYS may be inefficiently priced and not fully reflective of revenue and earnings potential as the company executes on its international expansion strategy.
Baseball betting
Photo by sb-borg/iStock via Getty Images
The second-worst thing in the world is betting on a golf game and losing. The worst is not betting at all.

-- Bobby Riggs



The door has swung open in the U.S. for legalized sports betting. Elys Game Technology (ELYS) is making a big entrance with a proprietary sports betting platform that has been fine tuned in perhaps the most sophisticated sports wagering market in the world - Italy. Sports betting involves the prediction of sporting event results and placing a wager on the outcome. The earliest recorded wagers were placed by Greeks at the first Olympic games in 776 BCE. The idea quickly spread to Rome where soldiers and citizens alike began betting on everything from board games to horse races. Fast forward to present day, Italians bet enough on sports in the year 2019 to generate $1.77 billion in revenue for operators.

Elys Game Technology is among the dozens of players that share the 15% of the Italy market left for grabs by the top ten operators that together command 85% market share. Elys seemingly inglorious position still delivered $37.3 million in revenue for the company in the year 2020. It has also afforded Elys the setting to perfect a winning business model.

Elys management has arrived in the North America market with a portfolio of technology and expertise that does not appear to be fully appreciated by traders. Less than 3% of the company shares are traded in a day’s session compared to 5% of the shares of DraftKings (DKNG), a widely popular digital sports entertainment and gaming company.

Traders may need to make a quick study of Elys given the company’s imminent plans to debut its game wagering platform at the Grand Central DC, a bar and restaurant in Washington DC. This article jump starts review of Elys Game Technology, its prospects in the North America market and the implications for ELYS valuation.

Elys Expertise

Elys Game Technology has over two decades of experience operating sports betting platforms in the well-regulated Italian betting market. The company offers consumers the chance to place sports wagers in retail venues such as off-track betting shops, restaurants, bars, coffee shops, and convenience stores. Patrons can open a game account, deposit funds and place bets at personal computers available in designated areas or at tables in the venue. These computer terminals also offer lottery and casino gaming.

Elys Game Platform

The company makes a similar leisure betting experience available to consumers online through Internet websites and mobile applications. Consumers can use an e-wallet feature to deposit funds and place bets on their own smart phone, tablet or computer.

In addition to operating its own betting services, Elys also makes its proprietary betting software platform available to third parties as a ‘white label’ betting platform. The Elys Game Board platform is unique in the sports betting industry in allowing independent business venues a customizable betting dashboard, account management reports and customer intelligence modules to evaluate performance.

The Elys Game Board makes it possible for even small proprietors to offer wagering to consumers for a wide range of sports such as basketball, football, soccer, hockey, tennis, and others. The feature-rich sportsbook offers choices for pre-match or in-game modes and fixed or pool odds, all under a branded dashboard. Thus, the independent venue owner can compete effectively for the patronage of consumers who might otherwise head off to the betting products of larger, well established franchise operators.

Elys has accumulated more than 100,000 online user accounts and has a presence in over 1,120 retail venues. The company does not report data on churn or turnover among users. However, it is apparent the company is gaining traction in the European market. A year ago, at the end of 2019, the company reported 68,000 online user accounts, implying a 47% increase in the user base after whatever churn might have taken place in the year 2020.

One of the reasons players may be signing on and staying with the Elys Game Board is its ‘omni-channel’ capability. The platform’s unique architecture allows Elys and its partners to offer anonymous play on a mobile device at a physical venue such as a restaurant or coffee shop. Customers can walk in, sign on and play without the delay of setting up a new account. Thus, savvy bettors can move from venue to venue, seeking out the best odds. This customer-friendly feature has so far not been achieved by other sports betting contenders, even by DraftKings with its fast-trading stock!

Sports Betting in North America

It was a victory for the State of New Jersey in 2018, but every state in the country celebrated the U.S. Supreme Court struck down the Professional and Amateur Sports Protection Act of 1992. The long-standing federal prohibition of sports betting was deemed in violation the constitutionally guaranteed rights of state government to regulate local commerce.

Nearly always strapped for revenue, state legislatures across the country scrambled to investigate the potential in sports betting for tax revenue or fees. By May 2021, twenty U.S. states and Washington DC had taken action to legalize and regulate the new industry. Regulations are pending in another nine jurisdictions, where legislatures have already paved the way with new laws. Another ten states have proposals under consideration, making it clear that most state governments in the U.S. have a keen interest in at least some form of sports betting.

U.S. Market Opportunity

As the world economies gain control over the coronavirus threat, entertainment venues are expected to return to more normal operation, or at least to benefit from increased patronage. Exceptional growth is expected for both retail and on-line sports betting given that the pandemic experience has accelerated the adoption of digital technologies in entertainment. An even more important trend is deepening commercialization of sporting events in general. Industry research firm Technavio has projected 10% compound annual growth in the global sports betting market through 2024,

Perhaps more important for Elys Game Technology than the global market size or the pace of expansion, is the company competitive strengths. The company’s strategy to grow by entering new markets relies on its proven gaming platform and experience in working with retail entertainment venues. Specifically, it is the U.S. market that is key to the company’s immediate future.

The result of U.S. legislative action is a mix of opportunities in retail sportsbooks, full mobile betting, in-person mobile betting, and/or limited mobile betting. Consequently, sports betting is already contributing to the U.S. gaming industry revenue. March Madness, the U.S. premier college basketball tournament, has traditionally been the most wagered event in the U.S. sports calendar. According to the American Gaming Association, in January 2021, sports betting revenue hit a record $375 million and then delivered another $350 million in March 2021.

Even in April 2021, when wagering activity typically falls off, U.S. sports betting revenue totaled $240.3 million. This was still more than three times April 2020, when limitations on social gatherings to slow the spread of coronavirus led to record low sports betting activity. As the U.S. moves toward goals for vaccination against the coronavirus and consumers become more comfortable in public social settings, the country may easily meet or exceed world industry growth rates. Elys leadership cite a report from Morgan Stanley that suggests the U.S. sports betting market could generate as much as $7 billion in annual revenue for operators by 2025.

Net Positive Cash Flow Generation

The impact of travel restrictions, business shutdown and social distancing policies to combat the coronavirus pandemic can be observed in Elys revenue beginning in the first quarter ending March 2020. The natural disaster may have impacted Elys particularly because the company has been dependent primarily on the Italy market, which was subjected in 2020, to repeated and lengthy business shutdown orders as the coronavirus spread through the country. Fortunately, recovery is also apparent in Elys sales in the most recently reported quarter ending March 2021.

Elys Quarter Revenue

It is likely that sports betting seasonality will continue to be in evidence in the company’s quarterly revenue until the company achieves greater scale. That said, adding the U.S. market and its seasonal peak in March, could help smooth the wait for Italy’s seasonal jump in April.

Recent quarter results also show considerable variance in operating results. Investments in new market relationships and other one-time and unusual charges lead to operating losses. Cash flow from operations at least removes the noise from non-cash charges. While there are several quarters where Elys has had to rely on cash resources to support operations, over the last two years the company has been net cash flow positive. Indeed, the two-year sales-to-cash conversion rate is a small, but encouraging 0.5%. While irregular cash flow generation puts some pressure on working capital, net positive conversion of sales to cash flow means that in the long-run cash resources can be targeted at growth investment.

Elys Operating Results

Elys management may not be as worried about quarterly variance in sales activity as investors. The Elys team would like to see strong returns to their investments in advertising and sales campaigns. Reported selling expenses totaled $51.7 million over the two years 2019 and 2020, representing 71% of revenue in those years. Truly, building a position in the hotly contested European market is a demanding proposition and the U.S. is not proving to be a ‘cheap date.’ But what a rich conquest the U.S. represents for Elys with its well differentiated and proven sports betting platform!

Cash Resources and No Debt

Without financial wherewithal, new market opportunity is not much more than aspirational talk. At the end of March 2021, Elys Game Technology held $21.5 million in cash on its balance sheet. The bank account was recently boosted by $3.9 million in new capital from the exercise of warrants. Some of the proceeds were used to pay off the outstanding balance on a bank credit line and to fulfill payment commitments related to a strategic acquisition. The company had no significant long-term debt at the end of March 2021, and working capital was $13.5 million.

The warrant exercise brought shares outstanding to 22.0 million, representing modest dilution relative to the capital infusion. There remain 567,336 warrants outstanding with an average exercise price of $2.66. Thus, nearly all the warrants are at-the-money and could mean an additional $1.5 million in new capital if exercised.

Outstanding options totaling 1.7 million actually represent a bit more potential dilution for current shareholders. The average option exercise is $2.12, making these derivatives in-the-month as well. While the implied capital raise is $3.5 million, only 20% are exercisable in the near-term since most outstanding options are linked to employee compensation.

Thus, it appears cash resources for investment are ample, working capital is adequate for current operations, and sources of new capital are at hand. Some could argue Elys management would be justified in walking through the door to the U.S. market with a bit of swagger.

Potential Headline Catalysts

Whatever its corporate demeanor, Elys Game Technology has been welcomed by a highly motivated partner in Washington DC - Grand Central Bar. The venue awaits approval of a sports betting operator application by the Washington DC Office of Lottery and Gaming. Elys has a similar agreement with Handle19, a sports bar chain, that is attempting to rework its gaming application after an initial denial earlier this year. Each license approval is expected to trigger a new revenue stream for Elys, a development that should drive enterprise value and stock price.

Early investors could be incentivized by a compellingly priced stock relative to market opportunity. Nonetheless, a long position in ELYS will require patience as the business model, even though proven in the Italy market, will still require time to play out in the U.S. market. Investors will need to school themselves against expecting immediate results in one or two quarters.

Note of Caution

In addition to the risks in Elys Game Technology already outlined above - unpredictable variance in revenue and operating results from quarter to quarter, history of quarterly net losses, and a slow moving business model - investors should be aware a stake in ELYS could involve other uncertainties.

As also described above, the U.S. sports betting market is just beginning to open up, with only 20 states and one other governmental jurisdiction having passed legislation and set up regulations. Obviously, the pace of additional state government actions is not easily predicted and if it takes place slowly, that could delay realization of Elys’s strategic plans.

It probably also seems logical that a big market would attract quite a few players to U.S. market. That is certainly true where Elys competes in Italy. In the U.S., competitors may attempt to emulate Elys platform features and that could put a pinch in the company’s ability to attract new customers in the U.S.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

Underwriters of the Prime series may have a beneficial interest in, serve as agents of, or act as advisors to the companies mentioned herein.

This article was written by


Debra Fiakas
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Ms. Fiakas is an experienced investment professional with a diversified and successful track record as a research analyst and as an investment banker. Her career includes experience in all aspects of the equity capital markets with particular emphasis on emerging growth companies operating in technology, energy and conservation sectors. Ms. Fiakas is Managing Member of Crystal Equity Research, LLC. Visit the Crystal Equity Research site: CrystalEquityResearch.com (http://www.crystalequityresearch.com/)
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.



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