Q3 2022 Light & Wonder Inc Earnings Call

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Thank you for your patience.

The light and Linda 2022 started school to Investor Conference School will be starting shortly.

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Welcome to the lightened Wonder 2022 third quarter Investor Conference call.

At this time participants are in a listen only mode.

A brief question and answer session will follow the formal presentation.

To ask a question. Please press star one on your attachment keypad.

And if you change your mind at any time, Please press star two.

And for operator assistance at any point, Please press star zero.

Thank you.

Now, let me turn the call over to Jim going Bessie Senior Vice President Investor Relations for light and Wonder say, Mr. Ghosn Buffy you may begin.

Thank you operator, good afternoon, everyone.

During today's call, we will discuss our third quarter 2022 result, and operating performance.

Led by a question and answer period.

With me today are CEO , Matt Wilson and CFO Jay.

Our call today will contain statements that include forward looking statements.

Private Securities Litigation Reform Act with 1995.

These statements involve certain risks and uncertainties that could cause actual results to differ materially from those discussed during the call.

For information regarding these risks and uncertainties. Please refer to our earnings release issued earlier this afternoon.

Materials relating to this call posted on our website and our filings with the SEC.

We will also discuss certain non-GAAP financial measures.

A description of each non-GAAP measure and a reconciliation of each non-GAAP measure and the most directly comparable GAAP measure can be found in our earnings release as well as in the investors section on our website.

On September 27 of 2021, we announced that we'd entered into a definitive agreement to sell our sports betting business to endeavor and subsequently closed the transaction on September 30 of this year.

During the second quarter, we completed the sale of the lottery business to Brookfield business partners.

Accordingly, we reflected these businesses as discontinued operations in our consolidated statement of operations for all periods presented.

We are reporting our results of operations in three business segments gaming side play and I guess.

Our mountain disclosures, referring to combine include both our continuing and discontinued operations.

As a reminder, this conference call is being recorded.

A replay of this webcast and accompanying materials will be archived in the investors section of our website at www Dot L. N W Dot com.

And now I'll turn the call over to Matt.

Thanks, Jim Good afternoon, everyone and thank you for joining us today.

It's great to be here with you on my first earnings call I'm excited to have taken over the reins at La Wanda and honored that the board is places trust in me to lead the company on its journey to becoming the leading cross platform Global company we.

We have a unique collection of assets that is that the core powerball game technology and our amazing teams.

Focused on continuing to build on our great momentum and capture the incredible opportunity in front of us.

We have undertaken an extraordinary transformation to evolve that portfolio that clearly positions lot in winder delayed the cross platform future for our customers and their players.

This quarter demonstrated the clear progress, we are making strategically operationally and financially.

I want to congratulate our teams for their passion continued focus and dedication. It is this commitment that enabled us to achieve a number of key milestones and provides us with a strong foundation for our future.

I'm very pleased with our performance this quarter and this year, we are successfully executing on our key initiatives and robust roadmap to unlock our full potential.

Turning to the quarter, we closed the sale of the sports betting business, which marked the final step to streamline our organization and further strengthen our balance sheet, enabling us to achieve a net debt leverage ratio of three one times at the end of the third quarter squarely within our target range.

Financial strength and flexibility enables us to further advance our capital allocation priorities returning capital to shareholders through our share buyback program and investing in our core growth areas.

Got in November .

November 4th we repurchased a total of $241 million or $4 4 million of our shares under our 750 million three year share repurchase program.

30% of the total authorization since we implemented the program in March of this year.

With the heavy lifting done around the transactions in the balance sheet. We've now rebranded company with three complementary business units and our R&D engine at the center of our universe with a sharp focus and a clear roadmap to win we are executing on our growth strategy to tight ship.

Hey.

Is that date understanding apply it and customers and what makes great got it.

Why we bolstered our R&D engine over the past couple of years and enhanced our world class game design talent.

The launch of studio X is a great example of this and we received overwhelmingly positive feedback on their first game show catch HOA Dragon and frankly start.

It is a scale guide without R&D engine that provides us with a key competitive advantage and now our family established financial strength and I was asked to invest in our future through various economic cycles.

With games and platform that out center, we are harnessing one of our key competitive advantages robust data analytics can play insights from across the organization to enhance our game product roadmap and our success.

Importantly, we continue to look at ways to advance our business as we invest in our future with the announcement about most recent asset acquisition. The house advantage, we are reinforcing our commitment to our systems business and with John Who's now heading the gory cementing our leadership position in systems, and our ability to chop the future and the increasingly converged gaming industry.

Now, let's turn to quarterly result.

Overall, we delivered strong double digit top and bottom line results year over year with consolidated revenue growth of 20% and consolidated EBITDA growth of 16%.

We made great strides investing in our product roadmap as we scour the original content launches across our businesses.

We achieved strong performance from a number of our new guidance and saw continued share got importantly, despite macroeconomic uncertainty we continue to see strong G. G out level as we benefited from a resilient land based gaming industry.

Successful product roadmap and continued strong performance, you know I gaming and <unk> businesses.

And now let's go into the performance of each business unit.

In gaming, we continue to build on that momentum, making great progress in delivering gains in each business line and with competitive cabinets in each critical segment enhanced systems and table offerings, we are well positioned to benefit as operators continue to invest in their floors.

Our North American premium installed base grew for the ninth consecutive quarter and now stands at a record 45% of our North American installed base mix.

Revenue per day increased approximately 7% year over year and remained on par with second quarter levels, reflecting the resiliency of the gaming industry.

Looking at the most recent Eilers research, we continue to hold the number one spot in premium leaf segment without game Ultimate final link explosion.

Moving to guidance out growth was driven by increased unit sales in both North America and internationally as we shipped 7200 units globally up 45% year over year, demonstrating our ability to continue to meet the increasing demand from operators, while successfully navigating the global supply chain.

From a content perspective in North America, we took two of the top five spots and then you called game rankings.

With Hudson more Pos and goldfish fading Tom Council.

Moving to Australia, we have seen a remarkable three fold increase in our ship share over the last 18 months, which now stands at approximately 20% we hold the top full games in Queensland, which the company first led by a leading title Dragon on waste.

Our systems business North America machines connected to our network have grown sequentially since the first quarter this year and with our acquisition of the high load loyalty solutions platform and other assets from house advantage, we continue to advance our systems capabilities, enabling the player journey.

Gosh. This was again a topic of interest this year, a J J and a leading argues for hardware. It continues to drive growth in our system business and cashless enablement demand for the odd before product remained strong with unit sales nearly doubling year over year and is now deployed across approximately two thirds of the swap machines connected to our systems platform.

And the tables were saying a broad recovery as we continue to add to our vault subscription program and saw continued growth in our shoppers install base.

We received great customer feedback on new table solutions display to <unk>, including the Congress Aqua.

X cross platform content and I'll Shukla connect tables data solution.

You, probably leading positions in every category and that she makes it a lot and Wanda and provides clear competitive advantage. In addition, again new business is highly cash generative, providing the capital to fund the investments across our organization and we couldn't be more thrilled for ship online to be nine permanency of gaming to continue to grow this business going forward.

Moving to our guidance, we have an unrivaled offering for our partners and players.

Land based and digital native content unmatched I gaming platform and leading Pam enables us to participate in every part of the value chain.

In the quarter U S growth remained strong with revenue up approximately 39% year over year, driven by overall market J G outgrow it.

They've been wrapping up out original content offering in the U S with record launches of land buys titles, including coin combo Carnival cow dancing drums, prosperity, and goldfish as well as great content from out Lightning Bulks studio, which continues to post record J J in fact, among the top 20 games in our I gaming platform in the U S in the quarter.

Our original content generated approximately 80% of the J J out in this quarter.

We are launching even more digital native content soon as we bring Elk studios, great games to the U S.

This combination of the strong land based and digital native content offering gives us an unrivaled position in the market as we continue to gain share.

We saw year on year sequential growth in G. I internationally in all region performance benefited from our regional content roadmap and increased original content launches with strong results from geis, including Rainbow riches piles of cash action back Cas shot and stashing, Brad as well as record performance in September from Elk Studios.

We continue to be excited about besides data, which has completed over 30, operator integration since we closed on the acquisition and most recently added partner studio Avatar, UX, where we co developed game and provide expanded content offering to our customers with large dealer, we took a capital efficient approach to enter this important segment of the market.

Combining the targeted acquisition of authentic without proprietary table games, I'd say an extra tape.

We are actively preparing to go live in Michigan, shortly with three major product offering blackjack and baccarat roulette.

Going forward, we are well set up for growth with a number of key initiatives globally, including the continued scaling of our original game launches globally. The ramping of exclusive content for operators and plans to launch a lot of dealer in the U S.

Turning to slide play we delivered another strong quarter with record revenue performance as we outpace the market our investments in our core capabilities continue to drive enhanced engagement and monetization, helping fuel record quarters Jackpot Party and quick hit.

Underlying these results was the quality of our record opt out record monthly paying users and record payer conversion.

So I play continues to make great progress with their investments to centralize that best in class features and capabilities in the Si play engine and in that direct to consumer platform that they expect to launch. This quarter is all adds up to a stronger position as they gain deeper insights into their players drive greater engagement and monetization all pointing to.

<unk> long term growth and margin expansion.

Having said this we are leveraging electricity strong in app advertising technology across our platform.

This provides us with a head start on our AD monetization capabilities accelerating <unk> ability to further enhance play a lifetime value.

<unk> made great progress this year, a number of key initiatives.

As a highly cash generative business and while we have delivered outsized performance. We believe there is considerable opportunity to continue to grow and scale opt out fueled by our talented team evergreen franchisee he cohorts and a disciplined approach to investing.

All of this gives me great confidence that our future has never been brought up.

Our strategy is in place and we are taking share with a robust R&D engine and best in class talent.

Strong balance sheet and operational momentum gives us the ability to leverage our leading industry position evergreen franchises and unmatched platforms to drive sustainable growth and significant value.

Australia, Heartsome culture, and making disciplined investments in our future, while maintaining a laser focus on operations and execution will underpin our success in.

And that will enable us to unlock our full potential and drive greater value for all of our stakeholders.

With that I'll turn it now to discuss our financial progress for the quarter.

Thanks, Matt.

If you're not familiar with our story I've worked with for many years and I'm thrilled to be partnering with him once again as we embark on this exciting next chapter for light and one guy.

I'm incredibly proud of the transformational step that we've taken over the last 18 months.

While executing on our strategy that leverages, our leading positions and platform to drive sustainable differentiation and growth.

Each quarter, we have made tangible progress against our key strategic priorities and is consistent and rapid execution is becoming the hallmark of our organization and our teams are the true superstars, who are making all of this happen.

To accomplish so much.

We completed the final milestone to streamline our organization with the completion of divesting, our sports business, which generated approximately $800 million in gross proceeds.

We achieved our targeted net debt leverage ratio range ending the quarter at three one times a reduction of nearly seven and a half turns or 70% from a peak of 10 and a half times at the end of 'twenty 'twenty.

Third we continue to advance on our capital allocation priorities, returning a significant amount of capital to shareholders.

In fact, we've already repurchased over 30% of the total authorization since March well at the same time investing in key growth initiatives.

Now, let's turn to the quarter's financial highlights.

Consolidated revenues of $648 million increased 20% year over year and accelerated sequentially driven by double digit growth in gaming and timeline.

Net income from continuing operations was $20 million compared to $100 million last year. The prior year reflects a one time $181 million income tax benefit.

The current quarter benefited from higher revenue and lower interest expense.

Importantly, the decline in interest expense of $52 million or 43% in the quarter was the direct result of the significant actions, we took to reduce our debt outstanding.

Consolidated EBITDA was $235 million increased 16% year over year and 11% sequentially.

Year over year results were driven by double digit growth in gaming and gaming.

Consolidated EBITDA margin from continuing operations was 36% versus 38% in the prior year period.

Putting continued investment in our growth initiatives and I gaming and pipeline.

However, margins improved 100 basis point sequentially, reflecting a 200 basis point improvement in gaming.

Well, we continue to see adverse impacts of FX movements on our reported revenues our cost base largely provides us with a natural hedge we thought the revenue impact principally at our I gaming segment, although it did not have a corresponding impact on EBITDA.

On a consolidated basis FX impacts are immaterial to our results.

Now turning to our business segment.

In gaming, we saw another quarter of strong performance demonstrating the success of our products and the resilience of our industry with revenue up 24% to $419 million and EBITDA, increasing 17% to $202 million year over year.

Growth was primarily driven by games sales assistant as we benefited from the increased demand from operators.

We saw continued momentum in gaming operations with revenue, increasing 7% year over year led by growth in our North American premium installed base and elevated our P D levels.

As Matt mentioned, our North American premium installed base grew for the ninth consecutive quarter up 10% year over year and now stands at a record 45% of the total North American installed base.

With the success of our new cabinets and games, we generated revenue per day, a $45.68, while exceeding 2019 levels.

Importantly, we also saw continued strong demand for game sales globally, both replacement and new and expansion unit driving revenue growth of 47% year over year, and 14% sequentially to $140 million.

Combined we sold over 7200 units in the quarter, a 45% year over year increase underscoring the gains we are seeing from our reinvigorated product roadmap and our ability to successfully navigate the dynamic supply chain environment.

Additionally, our systems business continues to scale growing revenue, 35% from a year ago and up 17% sequentially to $70 million led by continued strong I do four hardware sales and an increase in our system's connections.

And then table games revenue increased 17% year over year, and 9% sequentially as we saw continued rebound across all product categories.

We are incredibly pleased with the continued execution and progress we are making in our gaming business and feel great about our ability to drive long term share gains and growth.

Turning to I gaming.

Reported revenue increased 9% to $58 million compared to a year ago, and EBITDA was up 11% to $20 million in the corner.

Importantly on a constant currency basis revenue increased 19% year over year.

Year over year growth was primarily driven by the U S, where we saw market expansion and strong performance from original content launches leading to record G. D are on our platform.

In fact, we have seen eight consecutive quarters of G D. Our growth in the U S on our I gaming platform.

In constant FX terms internationally in the UK and Europe G. On our I gaming platform grew both year over year and sequentially as we continued to benefit from a regionalized content road map and the acquisition of our studios.

Our EBITDA margin was 34% as we continue to invest and expand our original content offering on our platform and as we prepare to launch live dealer in Michigan.

Overall, we feel great about our I gaming business with our leading position and ability to continue to scale with our unmatched product portfolio.

Moving to slide nine our strong performance continued as we achieved an all time quarterly revenue record with revenues growing 17% year over year to $171 million and 7% sequentially.

Importantly, our social casino business grew double digits year over year and once again outpaced the market based on the most recent Eilers report contributing to the majority of the growth we saw in the quarter along with the ellipsis acquisition.

So I placed performance with underpinned by a number of key records, including opt out of the 80 cents translating to growth of 16% year over year, an all time high payer conversion rate of nine 7%.

EBITDA of $43 million in a quarter reflects our investments in growth initiatives, including our cycling engine the upcoming launch of the direct to consumer platform and in marketing innovation campaigns to drive exposure and scale user acquisition.

We anticipate fourth quarter EBITDA margins will improve to the low thirties as we move past the marketing innovation campaign, which had an approximately 500 basis point impact in the third quarter.

Overall, we feel great about side plays business underpinned by its sticky player base strong monetization and low capital intensity. It continues to be highly cash generative and the investments we are making will enhance my place platform and ability to drive sustainable long term growth.

Turning to the balance sheet cash flow and capital allocation.

I'm excited to say that we delivered on our first capital allocation priority paying down debt and achieving our targeted leverage range.

Gross proceeds of $6 $6 billion from the sale of our lottery and sports betting business enabled us to make swift and significant progress transforming our balance sheet, reducing our debt outstanding by $4 $8 billion or 55% since the beginning of the year and ending the quarter with net debt of $2 $7 billion.

Importantly earlier in the year, we were proactive and took advantage of a limited window in the capital markets to refinance and reduce our debt outstanding and lowered the floating portion of our mix, which now stands at less than 40% of the total.

Additionally, with no debt maturities until 2025 and with significant cash flow generation. Our balance sheet is a competitive advantage, we are able to invest in our R&D engine and key growth initiatives, while at the same time servicing our debt maturities all from our cash flows regardless of the economic cycle.

Turning to free cash flow results in the quarter were primarily impacted by an approximately $465 million tax payment related to the lottery divestiture as well as the $25 million payment for the legal sentiment it type play during the quarter.

Looking ahead fourth quarter free cash flow will be impacted by transaction costs related to the divestitures.

<unk> tax payments on the sales of lottery and sports betting transactions of approximately $175 million.

We are firm believers that free cash flow is one of the key drivers of shareholder value and in 2020 three as we move past the strategic initiatives, we will see substantial free cash flow per share as we benefit from our strong growth profile the transformation of our balance sheet the flow through of operational efficiency benefits and active repo.

Sure thing of our shares.

With a strengthened balance sheet and net debt leverage ratio squarely within our targeted range. We are advancing our capital allocation priorities of returning capital to shareholders and making disciplined investments in key growth initiatives.

We've made significant progress returning capital to shareholders and at current trading levels, we continue to see share repurchases as a significant opportunity to enhance shareholder value.

Importantly, we will continue to invest smartly, leveraging our core capabilities in order to enhance long term growth and bolster our leadership position.

R&D as a key way to do that and we are starting to see the success in our new product roadmap.

As we invest we are committed to being laser focused on driving ROI to enhance shareholder value. We will remain disciplined in scale investments to the extent they exceed our return thresholds.

With the financial profile defined by strong revenue growth, increasing margins and profitability as well as scaling free cash flow conversion, we have a strong foundation to enhance returns.

Combined with our disciplined lens on capital allocation. This sets us up well to drive return on invested capital going forward.

Wrapping up I would like to thank our team for their tremendous effort and passion over the last 18 months, we didn't Miss a beat and continue to execute strategically and operationally during this period of substantial transformation.

The dynamic environment, we operate in today validates our strategy and with our strengthened balance sheet and financial flexibility, we have a strong foundation from which to build upon and ground.

Important to this is investing in our people our capabilities in our future and the great News is that we have the financial wherewithal to do this over the long term.

I couldn't be more energized about what's ahead and the opportunity to continue to work with all of our talented teams around the globe as we continue on this journey.

To that end I'd like to thank Jim Bombay before its contributions on enhancing our Investor Relations program and his partnership through the pivotal transformation.

I look forward to continue working closely with him in his new role as CFO at type line.

With that we'll turn it over to the operator for your questions.

Thank you.

If he would like to ask a question. Please press Star then one when you kind of think he Pat.

If you change your mind anytime piece by Staci.

The first question, we have from the phone lines comes from Barry Jonas as Chris Your line is open.

Great Hey, guys. Congrats on the transformation and Matt Congrats on your appointment matter I wanted to start with you and sort of ask you. How you see how you see yourself similar.

Perhaps different than your predecessor.

Yeah, Hi, Barry not the day with you and not to get the first question on my first earnings call from someone I'm sorry.

Familiar with and it was great to spend some time with you at G to a I agree what an incredible transformation. This organization has been through if you think about everything that's been accomplished in the last 18 months from a new strategic vision, a new brand a new board a new chairman new investors are repaired balance sheet, it's been an amazing journey.

This last 18 months most organizations don't go through this level of change in 10 years, let alone 19 months or so the created in Milan that lot and want to thank you for being on this journey with US we know it's been a lot, but it's all for the right reasons and I think we have this amazing platform to go forward and execute behind I wanted to publicly and personally thank Barry Cottle for everything that he has done for us.

So organization Barry recruited me to this company with the intention of May potentially being his successor at some point in time. He did a lot of heavy lifting to get us in a spot that we're in I just want to acknowledge that our importantly, I was right there alongside him in defining that strategy. So I'm completely bought in to the direction of the company. It makes complete sense to me and it's very long.

Nicole I think strategy will change at the margins over time, because markets evolve and things change so we'll.

We will focus on that over time, but importantly, we know who we are we know who we want to be and we have a clear vision, we want to be the leading cross platform Global games company. That's the mission. That's the norm, that's where we're headed and it's time for us to get on and keep executing against that.

I think from my standpoint, where I want my fingerprints to show up on this organization all the time is through a culture.

For all intents and purposes scientific games was a business with five disparate businesses everything from scratch lottery tickets to our sports betting platform's and everything in between through this transformation to lot and Wanda we become this organization with three business lines under one umbrella that are essentially very unique businesses, but also.

So very complementary when you think about the pieces of the portfolio that will lift the land based business social casino and gaming, they're all linked together by this idea of building great games and great technology. So you can see their unique but very complementary and I think the way that my fingerprints will show up over time is that we will have these pain working rig.

Really closely together and really unlocking the portfolio collectively so that's that's really how I think you'll say mining tax shop at the time, but it's been an unbelievable transformation I feel like we have a platform now with all the distractions out of the way for us to just get on and execute and unlock the full potential of the business.

That's great. Thank you for that and just just as a follow up question Ah Theres a lot of uncertainty in the market today, but operators through Q2 earnings are generally talking about stable trends.

Does that translate into your outlook and more specifically your visibility.

Yeah, Great Great question.

It's great to be with authorized at G to wait just a few weeks ago.

You there as well and the time was unbelievably optimistic really I think it goes back to this idea that the gaming industry recession resilient I think it was saying that in the numbers.

Watch closely the operator earnings last week and kudos to them. They got very healthy businesses at the moment with great momentum, we rely on our operator partners to be successful. So we tip, our hat to them and the success that they're having I think can speaking of operators in particular the sentiment is positive you know we're looking at all of these macro trends I'm looking at all the Kpis and data.

Pointing to the industry Bang really resilient I think this goes back to this idea that this macroeconomic environment is being discriminate in the way that it affects different sectors. There's many sectors out there that are facing huge headwinds, but if you look at every kpis that we look at both internally and externally it's pointing to.

Good amount of optimism.

And in App.

Specific industry I think we're coming off the back of to use a pretty chronic underinvestment. So if you think about from a capex standpoint, yeah, 'twenty 2020 'twenty, one where historically lower levels of Capex and I think if the pandemic taught us anything it told us that the economic engine of those casinos.

Four and I think operators are saying a dollar of investment and Capex on our casino floor is the best way for them to deploy their capital capital at the moment. So I think that kind of underpins the optimistic outlook from a capex perspective, and that's translating into great results I think you'll see the numbers he ever up 45% year on year from a new unit perspective.

It's a great result, and then we're seeing a strong funnel into Q4 and beyond and I think importantly, we have an improved portfolio to take full advantage of that kind of refresh capex cycle, and we're ready to fully optimize that so that's my view on on.

On the macro.

That's great. Thank you so much and congrats again.

Appreciate it thank you very much.

Thank you.

Our next question from the line of David Katz of Jefferies. Your line is now open.

Hi afternoon, everyone. Thanks for taking my question.

Just going back to the analyst meeting a while ago, we have a I believe it's a 2025 target out there.

Can you help us think through and or share your thoughts on the trajectory of earnings to get there.

Right.

Could we see something where the growth is modest for another year or so and then a sharp increase.

You know what what do you think that trajectory might look like.

Yeah. Thanks, a thing that David Yeah. So I think back in May in New York, We set out some very clear targets to 2025 I was a part of that strategy are submitted does the gaming numbers in particular for the 2025 times. So I'm feeling really convicted about out our path to get there I spent the first five weeks and the C. I will say reviewing those target.

And reviewing the path to get there and I do say, a clear pathway to getting to those targets and feeling pretty convicted about our ability to actually execute on anything you want to add to that yeah, absolutely I mean to Echo Matt Center that we're absolutely committed to the 1.4 88, EBITDA target and have a lot of confidence in.

I was going to execute just in terms of the phasing David and how we get there you know in gaming as much as the market continues to recover we expect to see that business start to exceed 2019 levels, primarily driven by our share growth story. The great News is we're seeing some real strong momentum in that.

Is it off the success of the breadth and depth of the product portfolio and I gaming, we're really excited to launch like dealer, we know that'll be a key catalyst for us going forward and also we know that it's just a matter of time until we see the proliferation of I gaming expand across the U S. Coupled that with a real focus on launching first party.

Content through that distribution channel that should provide strong double digit growth for us at five play Wow, what a quarter. It had and we've had this vision of investing in that business and really starting to close the gap in terms of opt out we had a record this quarter at 80 cents and we know there's still significant headway in order to get to the leading.

<unk> that we see from our competitors.

That said, we also know that there is room for margin expansion, we're going to go live with our direct to consumer platform here in Q4, which just adds to that bottom line wrapped that up with a number of the operational efficiencies that we're driving to manage and improve margins that essentially ladders up to up to the 1.4, but you should continue to expect.

Double digit growth for us year over year.

Understood.

And if I may sort of follow up.

You know R&D efficiencies just as you know a terminology it's been used quite a bit.

Can you just talk a bit more about how that works.

What kinds of efficiencies.

Getting them.

Just let us inside a little bit on what you're what you're getting out with R&D efficiencies. Please.

Yeah, absolutely, let me open with that and then I'll, let Matt add ons, it's more of a strategic programs he's really carrying at the moment.

If of course, it is nice to hear Matt say it all the time, it's really this R&D engine and we now are great evergreen franchises really resonate across all three of our distribution channels. Historically, we've had a really fragmented approach to the way that we built product now we're working collectively as an organization to make sure. We can take those great brands and push them across.

The portfolio, we've really also looked at the ways in which we invest to grow we know R&D is critical in order to do that organically, we pegged that at about 10% of revenue give or take but rest assured we can make sure that every single dollar we spend is in the right channel driving the right level of return, but Matt maybe you want to talk.

Some of the cross platform work, Yeah, I think this goes back to the idea that we were five disparate businesses across lottery and sports and games and technology and everything in between and the dollar of investment in scientific games was spread across those five businesses. Now we have these three businesses that are very complementary. So a dollar of an R&D investment that goes into the engine build guy.

<unk> success, if we sort of major rival.

But the digital businesses Atlanta, so he knows how to unlock that full potential and we're doing a lot. We had our best guidance workshop about six weeks ago in Southern California, where we had every game designer from each of our businesses in a room talking about the roadmap for the future. This is something we had never done as a business before but now with the streamlining of the organization.

We're able to really harness and focus that energy on building content that we can quickly to port across the different businesses.

I mentioned the other I want to mention is Victor Blanca Who's our CTO. He has a mandate to come and drive some efficiency across our platform and we're currently investing in a cross platform platform, which will allow us to build a game and take it very efficiently across these three markets with very little redundancy. So youll see that kind of run through the <unk>.

And a lot of time, but again these businesses are.

Alright, now portfolio they fit together, so a dollar of investment.

Monetize across the breadth of the portfolio.

Thanks, very much very helpful.

Thanks, Kevin.

Thank you.

We now have and the next question from Brian <unk> with Craig Hallum. Please go ahead to annuity.

Hey, this is will on for Ryan Thanks for taking our questions.

First I wanted to touch on live dealer of course gave a little update about Michigan, there, but we were curious on any further updates on progress or launch plans and what was sort of the interest level you saw G toohey from operators.

Yeah, Thanks for being on the call will and I'll kick it off and hand, it to Tony but I think what dealer was such a natural extension of our market. As you know we've been in the table games laid out for over a decade through the acquisition of Shuffle Master and sorry. This is the idea of la deal are we taking all of that expertise and capability into the digital gaming.

So on the deal and fly any latest ship, we made an acquisition of authentic gaming, which is an incredible platform and a lot deal with Spice Importantly, we bought a business there with great technology, but also a great leadership team that are completely aligned to our vision and values I was excited to have them on the floor at G. Two way of showing the robust roadmap.

Yes, I think this is a segment of the market that's crying out for competition. We believe that competition is really healthy for market that pushes everyone to be better and to do better and to bring value to operators inside I think with operators are pushing against that open door theyre looking for a competitive solution in that space and we're thrilled to be a part of it we're actively boots on the ground and Miss you.

Right now of building out a facility and you'll see that coming to market Imminently and then we have a plan to go to the other I gaming Mark.

Beyond that so it kind of anything you want to add and maybe just a couple brief items to Matt's point, we're really thrilled about being able to enter into this segment. We believe that over time it will be about 30% of the I gaming Tam and we're also really thrilled about just the depth of the products that we have to go live with blackjack Baccarat and Bruce.

Laden importantly, that's about 95% of the turnover in the U S. The combination of those products.

What I'd also just like.

To note is that we were excited to enter into the segment also just given the cash flow profile that the business will ultimately create it'll start to turn positive in 2024 with a great model. That's got a blended fixed fee as well as recurring revenue you know and as we continue to move forward. These are the types.

So acquisitions, and importantly, adjacencies that really do create a capital efficient way for us to expand and grow so all in all really thrilled about the progress and look forward to sharing more news with you soon.

Great. Thanks for the detail on that maybe one follow up sort of on G. TUI what was the interest in the new games, there and how would you compare the launch pipeline in the coming 12 to 18 months to the prior 12 months to 18 months.

Yeah, Great question I felt like G to where it was just a great time for the industry to come together and there was an amazing level of attendance, an amazing level of traffic through the booth.

I think evidenced.

Of our success is due to Weibo's Eilers put out a survey just yesterday actually ranking all of the different suppliers in this space and as an organization like wanted to have the highest ever ranking.

As a business. So I think that points to operate is buying in to the momentum behind our product strategy and so I think they're not really just looking at a cabinet or a guy and they're really looking at the looking at the R&D program and the way the way Architected our portfolio going forward, we launched two really unique cabinets.

At the G to a shadow one of them was a cause Scott a flat, which was really well received and we're seeing some good momentum behind the order book for that product, but then importantly, we launched the cosmic cabinet, which is the premium.

Portrait cabinets and launching that with Frankenstein and Dragon then I think that was the first.

Product released from studio X and you see there in the portfolio led by Ted Hossa Who's made many game in the industry that are paying a whole a fine quality. So I think we're saying that our portfolio getting incrementally better over time, and we now have a very broad array of cabinets in the age of the unit segments and I think the data point that really suggest that we have great momentum.

Is the operators are telling us telling us that through the rankings with the highest ever ranking Hussain at all so I'm feeling really convicted about the portfolio going forward as we as we move into 2020 right I think the other exciting highlight M. G. III. It was just really starting to see a number of game launches. It will really go across all of our various verticals I think it came.

Through loud and clear to Matt's point, we are a United company working hand in hand to really optimize the product portfolio. So I look forward to again sharing some news about those cross platform product launches it will continue to accelerate over the coming months.

Great. Thanks for taking our questions and congrats on the transformation.

Yeah I appreciate that.

Thank you we now have Jeff standstill from Stifel. Please go to Hudson yards.

Hey, good afternoon, everyone. Thanks for taking the questions and that is going to be hearing from you in your new role.

On the social gaming onside play if possible based on what we see from the market estimates from competitor results looks evident that type of play continues to outperform the broader social gaming market. Just curious kind of if you could break down what you see as the main drivers for that outperformance.

Additionally, how are you kind of seeing underlying demand from the social gaming player trend Q3 and into October kind of putting those market share gains aside.

Yeah, Great question, and we see what you say I want to start by saying first of all what a fantastic quarter for Si play so congratulations to Josh Wilson, and the whole time and say to fold often in Tel Aviv massively outpacing the competitors, which is hard to do in a competitive environment, but they're doing that and it's a result that should be really proud of them I'm proud.

To them and it showed up in a number of material wise, we had record revenue. This facade play we had record revenues in jackpot Party quickest and importantly, we had record opt out which kind of points to the sustainability of our business and thought play. It's all underpinned by these investments and we've spoken about this on prior calls and our thoughts like engine, which is really about.

Centralizing our best in class features and capabilities and then leveraging that across each of the individual guidance, it's showing up in retention and monetization and I think the best evidence of that is opt out 80 cents. So that's double where we were three years ago, and then importantly, we see a path to increasing that out that one at a time, where we say a major rivals.

About double our opt out levels at the moment. So that just shows you the capacity for us to continue to show gains in that in that space. I think also an exciting development for us as a direct to consumer platform, which we're launching in Q4 and will have a material impact on our results in 2023, we've seen a major competitors launched a direct to consumer.

Our platform has had amazing success in expanding margins. So yes, again, we say when you say it was a fantastic quarter I think that the job is not done yet the team's motivated and excited to continue to win and continue to take share over the coming years kudos to the whole thing at Salt life.

Great. That's helpful. Thank you for that color then for my follow up I was hoping to kind of ask a similar question as well, maybe maybe a slightly different way you're going to be live in your first day with live dealer.

Michigan.

This quarter.

How do you think about the timing within a given state to kind of ramp operations, you're launching with three games you know, what's the cadence of adding more content and is there any other kind of blocking and tackling needed to kind of get fully up to speed or fully ramped at a given state that we should be contemplating when thinking about the cadence.

So of that business kind of ramping up yeah, it's already thanks.

I'm happy to start and.

Feel free to chime in and you know again, we continue to make really great progress. We're in the final throes, just starting some eyes and crossing the Ts are with the number of the operators as they look to go live in Michigan, which is really exciting for us and you know there is a level of ramp up that you do create from a bit of a bricks and mortar perspective.

And then really it's just about applying the digital content, we have a robust product portfolio I've mentioned, we're kind of going out with the top three games blackjack baccarat and relaxed, we feel really well positioned I think as you think about us expanding into other states, we see some real opportunity in particular as you look at the second half starting to run.

And the Great news is as.

Matt mentioned is it doing continues to really see significant partnership opportunities with a number of operators as they continue to look for ways to define differentiate their product portfolio I mean I. It was amazing when we actually signed this deal originally the number of inbound calls that we had thank thank so much.

Your I P. Putting on my digital platform, we think there's a real value creation opportunity. So excited to get in the market here very quickly and importantly scale throughout next year.

I think you covered most of it is a scalable platform and a scalable product solutions. So it's really about opening up their bricks and mortar facilities and we got lot of thought to do that and we do it in a very capital efficient way. So we recruit a lot of the upfront capex for the deal structure with them with our customers. So you'll see some impact to the capex through next year.

But it's a it's an efficient way for us to launch that that category, which we think is this going to be a massive opportunity for us all the time.

Sure.

Yeah.

Great. That's very helpful. Thank you both I'll pass it on.

Yeah, you're welcome Kim operator, we have time for one more question.

Yeah.

Thank you. Our final question comes from the line of Chad and Jen.

It was Macquarie. Please go ahead when you're ready.

Hi, Good afternoon, Matt and Jim Thanks for taking my question.

Wanted to start on the the system side within the gaming segment from a dollar and percentage basis. It grew I think the fastest year over year in the third quarter that I believe you mentioned that two thirds of the of the units have now been converted to all of you for but can you kind of help frame. This out just in terms of how hard this is.

Feeling can be and then maybe additional software opportunities on the marketing bonus thing not also related related to cashless when should we expect to start seeing some revenues from a cashless enablement.

Yeah, Chad one of the good guys again and thanks for the question glad to be on the call with you yeah. It looks like a huge uptick in terms of demand for our before that's how cashless enabled in game hardware. So what you're saying is operators investing in their floor to get ready to go cashless and we already have.

Long saw them with the technical solutions to make that come to life and we have a number of major customers at the moment. It's about 28000 units connected to cashless in the market place today and again no different authorized at different levels of maturity in terms of where they want to turn that on but we've got that ready ready next to them.

To enable that that cashless. So you are saying that hardware kind of flow through the P&L.

The levels right now, but you'll start to see kind of more.

Operators switch cashless on over time.

Anything you want to add to that yeah. Its really exciting I think our systems business is to your point continuing to see really strong growth and there's no doubt about it behind that is the exciting and with the idea for product I think we've also been able to.

Really focus and ensuring that all of our maintenance revenues.

Our our turned back on which is again, it's just a testament of the recovery of the business.

As we look forward we were really excited also to bring on John walls into the portfolio. He is a real innovator in this space and we want to continue and we will maintain that number one position and systems innovate accordingly, and we're excited about the opportunity to continue to grow the business. Yeah, I think that speaks to our level of.

Ambition and assistance business John is an amazing laid out he's had great success in the market. He's a guy that's been working on converging all of these different entities within within casino operators organization, whether it's a sports platform gaming land buys and he's built a loyalty solution that sits on top of a casino operator system. So thrilled to have him he'd been in there.

[noise] business about five weeks now I just spent the last two weeks in India working with the system same site.

Calories about what John can do for our business and I think systems are set up for success into the future.

That's great. Thanks for all that color and then.

Separately, Tony I wanted to ask about the balance sheet I think interest expense you said about 40% of that debt is floating there were some moving pieces within the quarter as we try to kind.

Kind of bridge to a free cash flow number for next year can you kind of help US just think about interest expense and then also on the call.

Cash taxes, you still have Nols. After these sales any help there would be a would be great. Thanks.

Yeah, absolutely and let me take that kind of in two parts first let me just start to say in credit Gratulate. The team that we had set out for a really embarking on our capital allocation strategy and the first priority being to reconstitute the balance sheet and with the proceeds that we now had delivered in the quarter from the.

Sports It that's for sure we're right. There in fact, we were incredibly pleased to be able to report the three point times that library squarely within our range and if you look at our debt makes we're sitting at about 62% fixed today, and 38%, which is floating inclusive of our fixed rate slop for modeling purposes.

I think the way to think about it is we'll pay about $190 million of interest annually on the fixed portion of the debt and then at current rates.

On the $1 $5 billion at the floating rate that it'll equate to about $100 million of interest expense annually I think some of the good news here too is that in terms of the refinancing we don't have any maturities coming due before 2025 and also you know we've nearly doubled our weighted average maturity of that from two eight years.

And she wanted to 5.5 years. So we've got a really healthy balance sheet, we see that almost as a competitive advantage, allowing us to invest in the future to your point on free cash flow.

We continue to believe free cash flow and free cash flow per share more broadly is the real key metric to drive shareholder value. We're absolutely laser focused on it and as we've streamlined the organization and importantly repair the balance sheet. We're in a good position to yield significant cash to your point on the tax payments in the short term.

In Q4, we're gonna have a few large payments and association with the divestitures in particular, you'll see about $210 million of outflows next quarter and then shifting into Q2 in 2023, there'll be circa $43 million and that should conclude the tax payments associated.

With the divestitures and then looking forward at post those large payments will expect free cash flow to scaled and more normalized levels and you start to look towards the second half of 2023 and I'd also say that we're really focused on ensuring that we drive a strong cash conversion cycle. So every.

The thing we can do operationally to make sure every dollar that's created that there's a large percentage of VAT that flows not only to the bottom line, but also to cash.

Yeah, I think this and causing there I think this is basically the level of transformation the level of transformation that we've been through side have you guys of the company at one point 10, and a half times Levered. We're now squarely within there is three one times, we're focused on generating shareholder value through free cash flow per share you do that by taking share optimizing your business, but also being prudent.

Sue is a capital management side, and we intend to do that.

Thank you everyone for being on the call.

That ends our Q&A session I'll turn it back to the operator, yeah. Thank you. Thank you I'd just like to thank.

Do you all for your time and your support the quarter was a great Testament to the progress we are making in the energy and dedication of our teams who are focused on winning our financial strength combined with the nucleus of a robust R&D engine and best in class talent sets us up well to execute on our strategy and product roadmap to continue to gain share as a laser focus on operations.

Execution of value creation, I'm committed to building on our strong momentum enhancing value for all stakeholders. Finally, I'd just like to say to all lot and wanted to creators. Thank you for your support in my short time in the role as CEO I want good enough for me to you you I appreciate it.

Thank you everyone for joining us on this call I will turn it back to the operator for final comments.

Thank you for joining.

The call has now concluded.

Concluded you may now disconnect your lines.

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