nspired Entertainment reported Monday its financial results for the three-month period ended June 30, 2019. Total revenue for the three months was $26.7 million, a year-over-year decrease of $10.2 million, or 27.6%, on a reported basis, and $8.7 million, or 23.6%, on a functional currency (£) at constant rate basis. Adjusted EBITDA was $8.9 million, a year-over-year decrease of 42.8% on a reported basis and 39.7% on a functional currency at constant rate basis.
As expected, the company's revenue and Adjusted EBITDA were negatively impacted by the implementation of the new reduction in maximum B2 stakes allowed on fixed-odds betting terminals (FOBTs) to £2 in the UK Licensed Betting Office market implemented on April 1, which caused a decrease of $5.5 million in revenue and $4.0 million in Adjusted EBITDA. Excluding the ‘Triennial Implementation’ —as the company names the UK measure—, revenue and Adjusted EBITDA would have been more in line with the previous quarter's numbers.
Installed terminal base increased by 7.7% year-over-year to 35,077 due to terminal rollout in Greece over the last 12 months, and growth from new contract awards in the UK Licensed Betting Office ("LBO") estate.
During the second quarter, Inspired was awarded additional 580 VLTs in Greece. Following this award, the company is contracted to provide a total of 8,940 VLTs to OPAP, including 380 new Valor VIP terminals. Due to certain legislation (now resolved), the rollout into Greece remained flat during the period with over 7,300 Inspired machines deployed.
In the UK, BGT has agreed to purchase nearly 1,000 of Inspired's used SBG terminals that have been displaced due to shop closures in the UK LBO market and repurpose them as SSBTs in other markets.
"The impact of the Triennial Implementation was in line with our expectations," said Lorne Weil, Executive Chairman of Inspired. "We believe we've taken much of the hit on the loss of revenue in the second quarter with very little mitigation so far. We've actually begun to see the revenue creep back up, with gross win per unit per day improving from 44.5% decline in April to a 38.0% decline in June. This trend has continued thus far in the third quarter and we anticipate the trend will be more pronounced with the acceleration of shop closures and the restructuring mitigation. We remain confident in our plan to manage the effect of this regulatory change and we believe the ultimate projected impact on our Adjusted EBITDA should be at the lower end of the range of our guidance of approximately $10 million to $11 million annually on a steady state basis."
Weil continued: "Looking forward, we are extremely focused and encouraged by our business development opportunities across a number of key territories that we believe will help offset the impact of the Triennial Implementation. We have recently signed an extension with William Hill, our largest customer, through 2022, and were awarded 580 additional terminals in Greece, 380 of which will be our brand new Valor VIP cabinet, which is getting rave reviews. We continue to see positive momentum in our North American business with new Virtual Sports and Interactive agreements in Canada and progress on our initial terminal placements anticipated in the fourth quarter. We have also deployed several interactive content launches, all while generating significant free cash flow."
"We also see our pending transformational acquisition of Novomatic UK's Gaming Technology Group (NTG), which is on track to close in the third quarter, subject to regulatory approval, as a huge catalyst in our business, dramatically increasing our size, scope and scale and augmenting the existing growth trends for our company. In summary, we believe that by the end of 2019 / beginning of 2020 we should have mitigated the impact of the Triennial Implementation to a level at or below our earlier forecasts, added new organic Adjusted EBITDA at least equal to the Triennial Implementation impact, completed the NTG acquisition and begun to realize the benefits of synergy. This would take our profitability to an entirely new level and provide a platform for continued growth thereafter," Weil concluded.
During the second quarter, Inspired announced a definitive agreement to acquire Novomatic UK's Gaming Technology Group (NTG), a leading supplier of Category B3, C and D gaming terminals to pubs, arcades, motorway service areas and holiday resorts in the UK, in a cash transaction for the EUR equivalent of USD 120.0 million. Acquisition combines highly complementary, but largely non-overlapping businesses.
In conjunction with the proposed acquisition, Inspired is expected to refinance its existing indebtedness with a new £220 million GBP-equivalent term loan and £20 million revolving credit facility. Inspired has obtained committed financing for the transaction, which is expected to result in a reduction in cost of debt capital.
Server Based Gaming (SBG) service revenue declined by $7.2 million, or 29.5%, on a functional currency at constant rate basis, driven mainly by the decrease in revenue in the UK LBO market of $5.5 million caused by the Triennial Implementation, which resulted in a 41.1% year-over-year decline in UK LBO Customer Gross win per unit per day. Additionally, there was a decrease in revenue in Greece of $1.9 million driven by a reduction in software license sales of $3.6 million, partly offset by the rollout of terminals which drove additional income of $1.7 million. Revenue in the Italian market increased by $0.2 million due to $0.3 million of license sales, partly offset by an increase in the tax rate.
SBG hardware revenue decreased by $1.3 million to $1.1 million, on a functional currency at constant rate basis, due to lower hardware sales in the UK market of $1.7 million, partly offset by higher Flex terminal sales of $0.3 million ($0.4 million of the prior year sales were all at nil margin) and Electronic Table Game (ETG) sales of the Sabre Hydra terminal of $0.1 million.
On a reported basis, net operating result moved to a loss of $4.5 million from an income of $1.6 million in the prior period, mainly due to reduction in revenue and increases in stock-based compensation and acquisition-related transaction expenses, partly offset by savings in cost of sales, SG&A expenses and depreciation and amortization. The net impact of the Triennial Implementation for the period was $3.7 million. However, the net impact is anticipated to be reduced in future periods as further cost savings are implemented and we see the benefit of reduced costs and machines available for harvesting and sale from store closures and associated returned machines.
Virtual Sports revenue decreased by $0.2 million, or 1.9%, on a functional currency at constant rate basis, primarily driven by a $0.5 million reduction in revenue due to a rephasing of the annual contract with a major customer, however, the contract has been extended for a further two-year term and the company expects to see some benefit in the fourth quarter.
Revenue was also impacted by $0.3 million of long-term Virtual Sports licenses that have now been fully amortized. This was partly offset by revenue growth in the UK Retail of $0.1 million, including revenue from the migration of B2 players due to the Triennial Implementation, growth in Belgium Retail of $0.1 million, growth in Scheduled Online Virtual Sports of $0.2 million, and growth in other existing customers and new customer launches in Retail in the rest of the world of $0.2 million. Therefore, Virtual Sports underlying revenue increased by $0.5 million.
The number of Virtual Sports operators increased to 105 live worldwide as of June 30, up 10.5% from the same time last year. Betfred launched Rush Bingo on a dedicated channel to approximately 1,600 venues, Boylesports deployed a fourth channel of Virtual Sports in Ireland, Danske Spil added two more channels of Virtual Sports content and Superbet started Rush Football 2 in Romania. Ladbrokes Coral began trialing two new Virtual Sports channels with a new event beginning every minute all day on dedicated screens in July.
BetStars launched three new channels of Inspired's Virtual Sports content in June and bet365 is now up to 20 channels of Virtual Content, including a second channel of cricket, in time for the Cricket World Cup in July, and two new channels of Football.
The number of Live Interactive customers increased to 40, as four new Interactive customers launched during the quarter, including in New Jersey and in the UK. Subsequent to the end of the quarter, the company announced a new Interactive contract to supply Virtual Sports on demand, slots and table content to Loto-Quebec.
Also during Q2, a global agreement with SBTech to integrate Inspired's RGS Casino Content onto the SBTech Platform. Following the platform integration, SBTech platform operators will have access to Inspired's on demand Virtual Sports and casino content.
"Integration planning exercises associated with our pending NTG acquisition are going very well," said Stewart Baker, Executive Vice President and Chief Financial Officer of Inspired. "We have a good track record of growing Inspired's margins and we believe we can achieve $12.3 million to $13.3 million of annualized synergies within the first six months of this integration in addition to bringing down the cost of our debt."