Inspired Reports First Quarter 2019 Results

• Total Revenue for the First Quarter of $33.7 Million
• Functional Currency¹ Virtual Sports Revenue Increased 11.0% Year-over-Year
• Net Operating Loss Narrows to $0.7 Million from $0.9 Million in the Prior Year
• Functional Currency Adjusted EBITDA Growth of 18.5% Year-over-Year
• Adjusted EBITDA² Increased to $13.7 Million from $12.4 Million in the Prior Year
• Adjusted EBITDA Margin³ Increased to 40.7% from 36.6% in the Prior Year
• Cash Generation of $3.0 Million During the Quarter
• North American Video Lottery Terminal (“VLT”) Business Expected to Commence Shipments in the Fourth Quarter 2019

Inspired Entertainment, Inc. reported financial results for the three-month period ended March 31, 2019.

Total Revenue for the three months ended March 31, 2019 was $33.7 million, a year-over-year decrease of $3.8 million, on a reported basis, driven mainly by adverse currency movements of $2.5 million, as well as a reduction in non-recurring software licenses and nil margin sales of hardware.  Excluding these sales (software licenses of $1.3 million and nil margin hardware of $3.6 million), revenue increased $3.6 million, or 11.0%, on a functional currency (£) basis, and $1.1 million, or 3.3%, on a reported basis.

Adjusted EBITDA for the three months ended March 31, 2019 was $13.7 million, a year-over-year increase of 18.5% on a functional currency basis and 10.4% on a reported basis.  Adjusted EBITDA margin increased to 40.7% from 36.6% in the prior year, primarily as a result of significant overhead savings, more profitable revenue mix, and more effective business processes.

“Our results for the quarter were in line with our guidance, driven by solid participation revenue, growth in Virtual Sports, and reduced overhead expenses,” said Lorne Weil, Executive Chairman of Inspired Entertainment.  “Most importantly, our high-margin Virtual Sports business, which includes Interactive, delivered a great underlying performance, increasing 11.0% on a functional currency basis.”

Mr. Weil continued, “As we move into the second quarter, we have begun to see the impact of the April implementation of the new £2 stake limit in the UK.  I applaud the efforts of our UK team, which has successfully remodeled and converted our games and software to satisfy the new requirements on an accelerated timetable.  Results to date, albeit only one month, are generally in line with what we were expecting and we continue to believe the projected impact of the reduction in the maximum FOBT betting stake on our Adjusted EBITDA to be approximately $10 million to $11 million annually on a steady state basis.  We remain optimistic about our strategy to mitigate a portion of the potential impact.  However, with only one month of data, we are not yet prepared to predict either player adoption rates or the acceleration of the mitigants with greater specificity.”

“We continue to see strong growth in our Virtual Sports and Interactive businesses and we are extremely focused and encouraged by our business development activity across a number of key territories,” concluded Mr. Weil.  “In particular we have a unique opportunity and a clear strategy to build our VLT, Virtual Sports and Interactive businesses in North America and we expect to see more meaningful results starting in the fourth quarter of 2019 when we plan to commence shipments of VLTs into the market.”

Recent Highlights

Server Based Gaming (“SBG”)

• End of Period Installed Base Increased 11.6% Year Over Year –Installed terminal base at the end of the period increased to 35,286 due to the continued terminal rollout in Greece, growth from new contract awards in the UK Licensed Betting Office (“LBO”) estate, and further machine growth in Italy.
• Total OPAP Terminals Installed Increased to Over 7,300 – The roll out into Greece continued during the period, with an additional 500 terminals having been deployed on site and live as of March 31, 2019. The performance of our Greek terminals continues to be strong compared to those of other suppliers.
• Growth in Italy Estate –Customer Gross Win per unit per day in Italy increased by 4.2% (in Euros) across all customers compared to the same period last year, due to continued improvement in games and account management. However, an increase in tax on revenue reduced Net Win per unit per day by 22%.
• 125 Self Service Betting Terminals (“SSBTs”) sold and deployed in the UK – In addition to the hardware sale margin, these terminals also generate a recurring service fee.
• 50 “Flex” B3 Terminals Sold to a Major Customer in the UK – Terminals were installed towards the end of the first quarter and will result in a recurring service fee and content revenue share to Inspired.
• Over 100 “Sabre Hydra” Terminals Sold – These Electronic Table Games were sold to a major casino customer in the UK and are expected to be installed during the early half of 2019.

Virtual Sports

• Additional Virtual Sports Operators – Number of Virtual Sports operators increased to 101 live worldwide (as of March 31, 2019), up 7.4% from the same time last year.
• Launched Two Streams of Rush Football 2® with BetStars – Both scheduled and on-demand Virtual Sports launched online with BetStars, the international online sports betting brand of The Stars Group Inc., one of the world’s largest online gaming operators.
• Launched Rush Football 2 with the Moroccan Lottery – Virtual Sports went live in Morocco via the Intralot platform in approximately 200 venues.
• Inspired Named Virtual Supplier of the Year – The Gaming International Awards at ICE 2019 recognized Inspired as the Virtual Supplier of the Year.

Interactive

• Number of Live Interactive Customers Increased to 35 – Two new Interactive customers launched during the quarter via the NYX platform.
• Launched Proprietary Virtual Connect Platform with Genting Online – Virtual Horses, Dogs and Football went live in the UK on Genting’s online platform.
• Renewed Bet365 Contract – Inspired to continue to provide Virtual Sports online to Bet365 for a further three years.
• Signed Contract with BCLC to Provide Virtual Sports – New Interactive contract with British Columbia Lottery Corporation (“BCLC”) to supply Virtual Sports on demand, slots and table content.

“Now that the implementation of the £2 maximum stake in the UK is behind us, we are focused on mitigation efforts, including further streamlining of our organization, to more effectively align our resources.  We began this process proactively last quarter and I’m happy to report that we realized over 400 basis points of year-over-year improvement to our Adjusted EBITDA margin in the quarter,” said Stewart Baker, Executive Vice President and Chief Financial Officer of Inspired.  “We have also seen a decrease in our capital expenditures due to lower levels of machine spending and software development, leading to positive cash flow in the quarter.”

Management Outlook and Commentary

As previously announced, the implementation of the reduction in the maximum FOBT betting stake mandated by the Triennial Review took place on April 1, 2019.  Management has made no changes to the outlook previously presented on the projected impact on Adjusted EBITDA to be approximately $10 million to $11 million annually on a steady state basis, assuming exchange rates remain stable.  Outside of the UK FOBT business, management anticipates growth across its business units and more meaningful contributions from its North American business in the fourth quarter of 2019.

Overview of First Quarter Results

Total Revenue for the three months ended March 31, 2019 was $33.7 million on a reported basis.  Revenue for the period decreased 3.5% year-over-year on a functional currency (£) basis, driven mainly by a reduction in SBG nil margin hardware and software license sales.

SBG revenue decreased by $2.4 million on a functional currency, or 8.5% at a constant rate, comprised of a reduction in service revenue of $1.2 million and reduction in hardware sales of $1.2 million on a functional currency at constant rate basis.  Total SBG Recurring Revenue increased 1.1% on a functional currency basis.

Virtual Sports revenue increased by $1.1 million on a functional currency basis, or 11.0% at a constant rate, due to growth in the UK and growth in new customer launches in the rest of the world, as well as one-off income from historic recurring revenues previously unreported to the Company. Total Virtual Sports Recurring Revenue increased 16.7% on a functional currency basis.

Adjusted Revenue, revenue excluding nil margin sales, for the three months ended March 31, 2019 was relatively flat year-over-year on a reported basis and up 6.8% on a functional currency basis.

Adjusted EBITDA for the three months ended March 31, 2019 was $13.7 million, a year-over-year increase of 18.5% on a functional currency (£) basis and an increase of 10.4% on a reported basis.  Adjusted EBITDA margin increased to 40.7%, from 36.6% in the prior year, primarily as a result of overhead savings due to lower staff related costs from group restructuring.

SG&A expenses decreased by $0.9 million, or 5.6%, on a reported basis, to $14.7 million. This decrease was driven by staff related cost savings of $1.5 million.  These savings were offset by an increase in the costs of group restructure of $1.1 million (removed from Adjusted EBITDA) and a decrease in net labor capitalization and manufacturing recoveries of $0.7 million due to mix of projects and lower factory throughput as a result of fewer machines being built in the quarter.

On a reported basis, net operating result improved from a loss of $0.9 million in the prior period to a loss of $0.7 million, mainly due to savings in cost of sales and depreciation and amortization, partly offset by a decrease in revenue and increases in stock-based compensation, acquisition related transaction and SG&A expenses.

For the three months ended March 31, 2019 the Company reported a change in fair value of earnout liability of $2.3 million.  In the prior period, due to changes in share price, the corresponding figure was a $3.8 million gain, a $6.0 million difference.  On March 25, 2019 the shares relating to the earnout liability were issued and will no longer represent a liability to the Company.

About Inspired Entertainment, Inc.

Inspired is a global games technology company, supplying Virtual Sports, Mobile Gaming and Server Based Gaming systems with associated terminals and digital content to regulated lottery, betting and gaming operators around the world. Inspired currently operates approximately 30,000 digital gaming terminals and supplies its Virtual Sports products through more than 40,000 retail channels and over 100 websites, in approximately 35 gaming jurisdictions worldwide. Inspired employs more than 650 employees in the UK and elsewhere, developing and operating digital games and networks. Additional information can be found at www.inseinc.com.