Inspired Entertainment (NASDAQ: INSE) reported Q3 EPS of $0.01, $0.62 better than the analyst estimate of ($0.61). Revenue for the quarter came in at $60.1 million versus the consensus estimate of $40.32 million.

• Total Revenue increased to $60.1 million, from $15.6 million in second quarter 2020 and $26.6 million in third quarter 2019 on a reported basis5. Third quarter 2020 revenue included a $9.3 million payment from a UK LBO customer related to our contractual revenue share of a customer's VAT rebate ("VAT-related income") and $24.3 million from the Novomatic Gaming Technology Group that Inspired acquired on October 1, 2019 ("Acquired Businesses").
• Adjusted EBITDA increased to $25.0 million, from $2.1 million in second quarter 2020 and $8.8 million in third quarter 2019. Third quarter 2020 Adjusted EBITDA included $9.1 million of VAT-related income (in conjunction with third party fees) and $5.1 million for the Acquired Businesses. Excluding these, the legacy business Adjusted EBITDA was $10.9 million, an increase of 24.7% from $8.7 million in the prior year, exhibiting growth in the online business and strong retail recovery immediately following customer's retail venues reopening.
• Total Online Revenue increased to $7.8 million, up 74.7% from third quarter 2019 on a pro forma basis, demonstrating the growing presence and popularity of the Company's online offerings across gaming and Virtual Sports online channels.
• Adjusted EBITDA Margin1 was 41.6% (including the impact of VAT-related income; without the VAT income the margin would have been 31.3%), which compares to 13.5% in second quarter 2020 and 26.2% in third quarter 2019 on a pro forma basis. In addition to acquisition synergies, COVID-19 cost cutting has created increased efficiencies and permanent cost reductions in the business.
• Net Cash Provided by Operating Activities Less Cash from Investing Activities during the quarter increased to an inflow of $14.8 million from an outflow of $4.0 million in the prior year period representing an $18.8 million increase in cash generation. This was helped by a $9.3 million VAT-related income payment as well as strong working capital inflow.

"This quarter's impressive results demonstrate the long-term health of our business and the resiliency of our recurring revenue stream. We have proven in the third quarter that our retail business is well-positioned to recover from COVID-19-related impacts at the same time as we have benefitted from our growing online presence," said Lorne Weil, Executive Chairman of Inspired. "Despite the challenges of COVID-19 in the quarter, our SBG retail business largely returned to its pre-pandemic performance and our Online business grew 75% year-over-year even with the return of sports and retail. The Acquired Businesses were slower to rebound from the COVID-19 summer lockdown but were able to ramp up throughout the quarter."

"In addition to our operational results, we have successfully improved our overall cost structure and streamlined our operations as exhibited by our third quarter margin improvements and increased free cash flow," said Stewart Baker, Executive Vice President and Chief Financial Officer of Inspired. "Bolstering this strong recovery, we received a VAT-related income payment of $9.3 million from a customer during the third quarter and have received $32.5 million so far in the fourth quarter, with an incremental $4.1 million in recoveries anticipated. We expect to use these receipts to pay down debt and further improve our liquidity position."

Management Commentary Regarding COVID-19

The ongoing COVID-19 global pandemic continues to have an impact on our business with our different businesses and geographies affected to varying degrees. Several European countries have re-imposed restrictions on operations up to and including complete or partial closures of our land-based retail customer's venues. Revenue from our land-based retail customers has been impacted thus far in the fourth quarter as a result of the closure of physical locations in England, Italy and Greece.

Management has taken an aggressive range of actions in response to these events, including the implementation of cost-saving measures across its workforce and further delays of non-essential capital expenditures. We are confident we will get through these uncertain times and prosper as our business has proven it can rebound quickly from COVID-19-related impacts. However, we anticipate these events will have a negative impact on our fourth quarter 2020 results.

Weil concluded, "I am very pleased with the third quarter results and proud of the Inspired team for their collective efforts during these challenging times. Whilst we anticipate a negative impact in the fourth quarter due to the recent resurgence of COVID-19-driven measures in parts of Europe, we believe we are well-positioned to recover quickly given (i) the fundamentally local nature of our business comprised of small venues in comparison to destination resorts, (ii) the ability for our machines in the field to be turned on immediately when venues reopen, and (iii) the fact that the vast majority of our business is driven by contracted, recurring revenue which means our backlog remains intact post-lockdown. As we look ahead, we remain focused and disciplined on emerging from this pandemic even stronger and we expect to continue to build the foundation for future growth through the expansion of our Online business, further development of our North American customer base and the acceleration of our UK Pub and Leisure digitization."

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