Q3 2023 Light & Wonder Inc Earnings Call
Ladies and gentlemen, please remain holding the conference will begin momentarily again, please remain holding the conference will begin momentarily.
[music].
Good afternoon.
You for attending today's light and Wonder third quarter 2023 earnings conference call.
Name is Alexis and I'll be your moderator for today's call.
All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.
I would now like to pass the call over to Nick Zangari you May proceed.
Thank you operator, and good afternoon, everyone welcome to our third quarter 2023 earnings Conference call with me today are Matt Wilson.
And Oliver Zhao our interim CFO.
During today's call, we will discuss our third quarter 2023 result, and operating performance followed by a question and answer session.
Today's call will contain certain forward looking statements may involve certain risks and uncertainties that could cause actual results to differ materially from those described during the call.
For information regarding these risks and uncertainties. Please refer to our earnings materials were lagging 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 to the luxury directly comparable GAAP measure can be found in our earnings release as well as in the investors section on our website.
In 2022, we completed the sale of the lottery business Brookfield business partners in the second quarter and the sale of the sports betting business doing better in the third quarter. Accordingly, we have reflected these businesses as discontinued operation in our consolidated statements of operation the comparable prior period.
We are reporting our results of continuing operations and three business segments.
Gaming Sideway.
Our mountain disclosures, referring to combined 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.
With that I will now turn the call over to Matt.
Thank you Nick good afternoon, everyone. Good morning, and evening for those in the call around the globe that is joining us on the heels of a very successful third quarter, both financially and operationally.
And wanted to continue to capitalize on our resilient gaming industry once again, delivering double digit growth across all three of our businesses with consolidated revenue growing 13% year over year to $731 million.
After 10 consecutive quarters of year over year topline growth.
We continue to be pleased with the performance that we've consistently delivered since we announced the company's transformation strategy.
These include two new key milestone, which we achieved recently.
As part of that secondary listing on the Australian Duck exchange.
We had been targeting inclusion on the ASX 200 index and this has now come to fruition with Ara.
Into the index on October 18.
Feedback from the Australian Investor community continued to exceed our expectations. The index inclusion enables exposure to a broader base of investors.
Further solidifying our position in the Australian capital market.
Our efforts have not gone unnoticed and this achievement marks an important step towards gaining additional global exposure for the company.
We closed the <unk> transaction on October 20 <unk>.
Finalizing a critical pace about strategic roadmap welcoming the slots I turn it back to the family and fostering greater collaboration amongst attained to execute on our cross platform strategy as.
As highlighted previously our data driven social for an AB testing approach.
<unk> enables us to leverage ask Judy network brands and expertise across the entire <unk> platform to enhance operating efficiency and improve the heat rate.
And we're not stopping here, we executed a number of strategic initiatives that continue to strengthen that focus on who we are as a company are later and gains a platform with a commitment to accelerating R&D investment to build great game import them across our three channels.
In addition to Recalibrating and investing in our global guidance not studios, we are keeping our foot on the pedal as we acquire more industry talent. In fact, we recently announced the addition of industry recognized studio head count people the two hour pain.
<unk> had wildly successful premium and wide area progressive games, she will be leading U S studio starting in 2024.
The significant progress we are making strategically fueling our operational execution and is reflected in our performance at.
At this point I'd like to share some highlights from each of our businesses.
In gaming, where we continue to execute on a robust product roadmap building, great guidance, which led to share gains and momentum in adjacent market expansion.
Gaming operations continues to be driven by our North American premium installation, which grew for the 13th consecutive quarter.
Looking at our progress in optimizing the global installed base, we expect some of the planned removal to wind down in the U S market as well as the EMEA and Latam market over the coming months.
Revenue per day in North America remained elevated as our Wap games, such as monthly Frankenstein, Jody Miller and ultimate filing franchise continue to top the chart on the back of that except for Cognex and newer cabinets.
In fact, the success, we are staying in our evergreen franchise extension gives up the covenant to further broaden the Laclede group.
In this respect we are proud to be the first company in the industry to partner with Netflix on the popular game theory and bring these groundbreaking show to loss across multiple casino platforms.
And we'll continue to invest in lots of titles as part of our strategy, where we can point to a very successful Willy Wonka Wizard of Oz and monopoly game that have consistently demonstrated their longevity on casino floors.
<unk>, we shipped over 8600 units globally with strength again in North America, and international sales as unit shipments grew by 5% and 41% year over year, respectively.
We saw share gains in the North American market in the second quarter, excluding adjacencies.
Based on the latest Max Gaming report, we reached a record 26% share in <unk>.
Australia this quarter and 33% in September along with the benefit from the release of drag and train. The game is performing strongly with its full title is making the top four spots in the new South Wales market in September.
Earlier, DTE, we caught up with the Oregon lottery as we target expansion and adjacency.
This marks the first release of the Prescott Joule screen multi gains domestically.
And post trial I'm happy to share that we will be deploying 1175 of these DLT statewide over the next 12 months.
Now the valued partnership with that and we will be also entering the Georgia coin operated.
That machine or <unk> market will be offering our game on the <unk> cabinet in the first quarter of next year.
Of which the <unk> has been the top indexing multi screen cabinet for over 12 months right.
We are pleased with the strong performance of our games, a cabinet, giving us the confidence to capitalize on opportunities in the various Canadian VLT market.
Turning to systems, we had a strong showing at the global gaming Expo or <unk>, where we are bolstering and enhancing our core capabilities such as our system agnostic global platform engage which enables operators to leverage data to execute a cohesive curated customer journey at every touch point, regardless of location vertical oil.
Platform.
Lastly in tables, where we continue to lead the trend of proprietary table games, and schaeffler as well as invest in talent and our product offering Dr. Mark <unk>, former chairman and CEO of <unk> is now on board as a consultant and Wanda and will assist in the ideation of game design across all platforms with a particular folk.
Some felt based game electronic table game and cross platform content.
Turning to thoughts.
I'm thrilled with our performance and execution in the social casino site.
We've done an incredible job of growing the business with another record revenue of $196 million once again outpacing the market and taking share which is now at 10% we.
We continue to leverage and deploy our thoughts by engine across that portfolio of game.
Led to double digit growth in our four largest game jackpot party quick hit slots gold fish casino and 88 fortunes.
The key to our success at slide Flatline the following.
We adopted Playa first approach with <unk>.
Instant delivery of new content timely features and dynamic community engagement tailored for our players.
So nimble and adaptive to the ever evolving landscape managing the business with a rigorous financial focus on returns on investment.
To that extent, we were able to achieve record monetization metrics and average monthly revenue per paying user and average revenue per daily active user yet again on a steady base of daily active users with payer conversion approaching 11%.
We will continue to invest in our platform, adding automation standardization development NII integration tools and process development to drive organizational efficiency effectiveness and scalability on a fully integrated global scale.
Additionally, our direct to consumer platform will be another key focus in the next phase of execution, ensuring security and ease of use to enable a seamless customer onboarding experience. So far the player feedback kpis and Operability of data is encouraging and we will continue to take a measured approach to introducing and Mike.
That implies to the platform.
This will be a multiyear build for us, but I'm excited about the potential margin.
The road from this initiative.
Like many other companies, we have a global presence and breadth spotlight pain that means a presence in Israel.
First our thoughts go out to those affected by the recent tragic events in the region.
As always after.
First priority is ensuring the safety of our colleagues and their families at this time.
We have any contact with that team members and our operations have not been impacted to date. We are continuing to closely monitor the situation and are committed to doing whatever is necessary to support our colleagues and their families.
As mentioned previously with close the <unk> transaction further fueling our seamless collaboration among the team that will drive momentum to the company's already robust cross platform strategy.
Do you get to see what we can further achieved under a more effective operating model, which enabled further game development synergies under one unified strategy and culture.
On the I gaming, where we maintained a record $70 million in revenue for the quarter. Our core markets revenue was up double digits with total jgr up 16% and U S. G. G are up 22% year over year boosted by the launch of risk Little Piggy meal ticket, which set records in the U S and U K in the first 30 days.
And the launch of two new guidance from the coin combos family terrific Patriarch and Marty Monkey once again validating our cross platform approach, bringing the best land based title to the <unk> channel.
Internationally, we saw record <unk> volumes in Europe, and Canada, <unk> or so.
For the sequential quarter or 22% above the prior year period.
Our content aggregation platform <unk>.
And its ability to scale is second to none.
As we continue to see solid year over year growth from lightning Balkan Elk with the latter up an astounding 64% versus the prior period driven by strong performance from me to date launches, including power ups Metropolis for Rabbit Royale and tropical too.
I'm also pleased to announce the recent launched about lot Cassandra product in Michigan is marked another important step in our cross platform strategy as we look to leverage our proven proprietary table games IP into.
Into the digital space, providing a differentiated experience suppliers online with guys that are familiar with bricks and mortar casinos.
Overall, we are well positioned in all parts of the <unk> value chain underpinned by strong product portfolios and content roadmap with experienced leadership, we will continue to be a thought later in this space through our strategy of leveraging <unk>.
Walter franchise launch in the U K.
Many channel offering such as shared jackpot.
As well as further expansion of our original content.
This will allow us in front of you on an earnings call, we've been able to showcase the exceptional work our team has been doing at two large industry gathering.
Trailing gaming Expo held in Sydney and older more recently <unk> in Las Vegas last month, where I understand that she is attendance passed last year.
Now the validating factor that more people than ever playing game and now the industry is on solid footing.
<unk> always has a large presence at <unk> and <unk> was no exception as a customer centric innovation and stellar player experience were highlighted by customers at the booth.
As I previously mentioned, we announced our partnership with Netflix.
With this <unk> of new screen games slot machine comment a loss on our newest large screen cabinet horizon, which we view as the next evolution of our highly successful jumbo cabinet after the <unk> 75.
We also received great feedback on a wide range of cabinets and games on the floor.
Additionally, we have also been intentional in aligning our portfolio strategy and commercial execution with market trend focusing on product segmentation and understanding what customers want.
As you can say K investments in games and hardware are driving our success and we have ample opportunities ahead of us given the growing demand for our guidance, which we're responding too with continued investment in our robust R&D engine.
And with that I'll hand, it over to all of us to provide more details on our financial performance.
Thanks, Matt and Hello, everyone. It's great to join you today on my first earnings call as interim CFO of late and wonder and to be able to report results that continue to reflect strength across all three businesses and our enviable financial profile.
Throughout this quarter, our teams were able to deliver both strategically and operationally.
Illustrating the continuity and bench strength within the organization.
Importantly, lightened wonder both high recurring cash generative businesses with solid margins underpinned by a healthy balance sheet and we capitalized on the strength this quarter with continued top line growth.
Consolidated revenue increased 13% to $731 million year over year.
Operating income was $147 million in the third quarter, an increase of 65% year over year, while consolidated EBITDA grew 22%.
$286 million for the quarter.
Once again, driven by double digit topline growth across all businesses and margin expansion.
Demonstrating our commitment to growing EBITDA faster than revenue.
Consolidated EBITDA margin during the quarter was 39% compared to 36% in the prior year.
An increase of 300 basis points again evidence that we remain committed to driving sustainable growth and investment in the R&D engine, while also maintaining profitability through various margin enhancement initiatives.
Last quarter, we introduced a new non-GAAP financial measure referred to as adjusted and <unk>.
This non-GAAP measure is provided as supplemental information and is fully described and reconciled in our earnings release.
Adjusted <unk> was $99 million for the quarter and please note that this metric is not comparable to the prior year period due to the materially different debt and tax profile of the company prior to the completion of the divestitures.
Consolidated operating cash flow was $204 million in the quarter, primarily due to the revenue and earnings growth.
With prior year period cash flows largely impacted by $465 million in cash taxes paid related to the divestiture of the lottery business.
Turning to the business units.
In gaming revenue grew 11% year over year to $465 million led by another strong quarter of game sales revenue, which increased 23%.
We continue to see growth across all four business lines year over year.
A true Testament to the investments we've made in developing great games and platforms.
EBITDA once again outpaced revenue growth up 16% to $235 million and EBITDA margin increased 300 basis points to 51% compared to the prior period.
Primarily driven by a favorable gain sales mix in international as well as supply chain initiatives and our continued focus on operational efficiencies.
Gaming operations revenue was up 3% year over year on growth in the North American installed base and average daily revenue up 2% and 4% respectively.
As a result of strong content performance and the continued success in placements of Bureau in cosmic cabinets.
Global game sales momentum continues with North American and international replacement unit shipments, increasing 23% and 20% respectively year over year VAT.
Validating our product roadmap strategy.
With further share gains in Australia, and elevated sales into Asia in the quarter.
Turning to systems.
Revenue increased slightly year over year, primarily as we saw higher I view hardware sales in the quarter, coupled with managed services growth as we continued to expand our recurring revenue stream with the increase partially offset by elevated international sales in the prior year period.
Lastly in tables revenue was up 17% year over year as we benefited from shuffler in utility sales as well as elevated replacement opportunities in Macau and new sales into the Philippines.
The strong project execution and operational prowess, we're seeing enables us to optimize the investments we've made in this business and drive sustainable long term growth.
Onto sucked like where we.
Reported another quarter of record performance as revenue in the quarter grew 15% to $196 million driven by strong year over year double digit growth in the core social casino business.
In fact.
I want to provide some context on how well these gains are performing with some impressive stats.
Beginning with our largest game jackpot party.
Which grew 15% year over year and has seen five consecutive quarters of revenue growth.
Passing the $100 million Mark this quarter.
Quick hit slots gold fish casino and 88 fortunes all grew by double digits and achieved record revenues.
Fully optimizing the power of the signed play engine with a proven evergreen game franchises.
EBITDA was up 42% to $61 million year over year.
Underpinning by strong revenue growth and lower UA spend compared to the prior year quarter, which was impacted by elevated marketing campaign spend.
EBITDA margin increased 600 basis points compared to the prior year to 31% in the quarter.
A reflection of our disciplined and productive UA spend.
And the outcome of our strategic investments leading to the performance and growth Youre seeing today.
Given we've signaled opportunities to drive incremental high return UA investments on the last call you can expect to see some of that take place in the fourth quarter.
Our performance continues to reflect strong player engagement and monetization leveraging engaging game content dynamic live ops and effective marketing strategies.
Average revenue per daily active user grew 20% year over year to a record 96 cents.
And average monthly revenue per paying user grew 12% compared to the prior year approaching a record of approximately $107.
We continue to trend above 600000 monthly paying users with a payer conversion rates now approaching 11%.
With the Si play transaction complete we expect duplicative public company cost synergies to be realized over the next 12 months.
The access to cash on <unk> balance sheet allows for greater capital allocation opportunities and day to day working capital efficiencies.
With the strong momentum we're seeing in the business I'm thrilled that we will all be working together as one team moving forward.
Turning to I gaming, we held record revenue levels at $70 million, a 21% increase year over year.
Driven by continued momentum in the U S market and strength of our original content launches.
U S revenue was up 25% year over year with growth across all states.
Internationally, we saw revenue growth across all regions driven by original content launches in the U K.
Our ramp of Ontario, and scaling of third party content across Europe.
Wagers processed through our open gaming system or $22 billion, an increase of 15% compared to the prior year period.
EBITDA increased 25% to a record $25 million in the quarter, primarily driven by our strong revenue growth in all regions, resulting in an EBITDA margin.
Benefiting from scale, while also investing in content and our live casino product.
As Matt mentioned earlier.
We launched our live casino operations in Michigan, reaching a significant market expansion milestone for our I gaming business and expect that business to scale over time.
We're in a great place to continue expanding our I gaming business with.
With our leading position.
And class aggregation platform and ability to continue to scale with our robust product portfolio.
Our performance this quarter across all three segments reflects the team's commitment to growing the business while maintaining profitability.
The course of the year, we've implemented and executed several cost optimization initiatives.
Supporting the robust margins you see in the quarter, we are constantly evaluating area to drive continuous improvement as the business scales. As an example, the.
The supply chain and sourcing initiatives that we previously implemented continue to support the healthy margins you see in our gaming business.
As we continue to refine our R&D engine it will be guided by our strategic and prudent approach.
Ensuring optimize output with a rigorous assessment of product level ROI.
At the corporate level, we strive to deliver further integration and efficiency within the organization.
To update our prior commentary on the legacy litigation costs within corporate we now expect a modest amount in the fourth quarter with approximately $10 million shifting into 2024.
All things considered.
We will continue to stay laser focused on improving processes and driving sustainable long term profitability through value enhancing projects.
In addition to our operational focus we have a healthy balance sheet and closed the quarter with a strong liquidity profile with approximately $1 8 billion of total available liquidity.
Including roughly $900 million of cash on our balance sheet prior to closing the <unk> transaction.
Given the interest rate environment, we were able to refinance our $550 million 2025, eight and five eights notes in August.
And replace them with a new offering of equal amount priced at seven 5% due 2031.
Which saw strong oversubscription, reflecting our improved credit profile.
Our fixed interest cost is expected to decrease by approximately $6 million annually in the next significant maturity is now five years away in 2028.
Onto free cash flow.
Our reported consolidated free cash flow of $123 million in the quarter.
Primarily due to strong business performance and timing of working capital.
While a portion of the conversion strengthened in the quarter was attributable to favorable timing, we continue to see progress in several cash related initiatives included reducing dsos and expect to improve our annual free cash conversion rate over time.
More importantly, you now see the flow through of our cash generation ability as we move past the strategic and into the execution chapter and light wonder.
Generating free cash flow remains one of our key priorities and we will benefit from our strong growth profile.
Our solid balance sheet and flow through of operational efficiency benefits.
Turning to capital management, our philosophy remains the same.
As we continue to maintain a balanced and opportunistic framework in the context of a healthy balance sheet.
We remain committed to our targeted net leverage range of two and a half to three five times ending the quarter at two eight times.
With the close of the Si play deal in October.
Leverage is expected to be impacted by approximately half a turn.
Still well within our range, providing us with flexibility to further advance our capital allocation initiatives.
With the completion of the <unk> transaction, we now have greater access to the cash generated by Si play.
And we will deploy this capital across the combined organization in the most value accretive way for our shareholders.
We will continue to monitor the interest rate environment and look for opportunities to further optimize our capital structure.
We've returned substantial capital to shareholders with our three year $750 million share repurchase authorization.
<unk> executed approximately 73% of the stock repurchase program in just 17 months to Q3.
Share repurchases were $112 million in the quarter as we continue to be opportunistic while weighing value dislocations in the market against other initiatives.
Importantly, we will continue to invest diligently led.
Leveraging our core capabilities to enhance long term growth and bolster our leadership positions.
As we invest we are committed to driving high ROI to enhance shareholder value.
We will remain disciplined as scale investments only to the extent they exceed our return thresholds.
Lightened wonder is well positioned with a solid financial profile and capital structure, enabling us to navigate through the current environment and our growth trajectory, providing us with flexibility to invest as we execute toward our strategic and financial goals.
At this time I would like to open the call to the Q&A session operator.
Yeah.
Absolutely we will now begin the question and answer session I would like to ask a question. Please press star followed by one on your telephone keypad. If for any reason you would like to move that question. Please press star followed by two.
Again to ask a question.
Starwood.
As a reminder, if you are using a speakerphone. Please pick up your handset before asking a question.
Our first slide.
My apologies our first question comes from the line of Chad Beynon with Macquarie You May proceed.
Afternoon, not Oliver Thanks for all the comments.
So looking on a trailing 12 month basis, you have now generated a little bit under $1 1 billion of EBITDA. So as we think about kind of the path or the milestones to get to.
The $1 4 billion in 2025, so that's about 300 million or about 30% can you talk about you know if youre still on track for that what what is going ahead of expectations behind expectations and then more importantly, as we kind of look over the 12 month period, if the growth should be linear.
Or if a lot of the extra growth will come in 'twenty five.
Hi, Chad thanks for being with us.
From the outset any lot and wanted to create is listening on the line. Congratulations on what is an exceptional quarter well done congratulations.
Yes, I think on the $1 4 billion.
Target, it's really one quarter at a time when we put out in may of 'twenty, two we needed 15% Tiger to get us to the $1 4 billion. We've delivered 22% growth. This quarter, we delivered 26% growth year to date. So clearly we are trending about the target line went down to 15% I think from where we're at now we need about 12%.
I got to get us to the $1 4 billion sorry.
So very encouraged about the direction of travel we're just refresh that long range plan and we're still on track to deliver on that $1 $4 billion target. We've also built a cost optimization program into our plants or mitigate against any potential headwinds, but yeah. I think we're trending above the target line at the moment and we're on a path to deliver the one.
One 4 billion and we feel highly convicted that Oliver anything you want to add to that yeah, Matt as you mentioned, we've got incredible momentum in the business right. Now in fact, we just posted our fourth consecutive quarter of year over year revenue growth across all three business units, which gives us a lot of confidence in.
In gaming for us to achieve our commitments were really need three things one modest share gains in our core class III business. So thats across both game sales and gaming operations the.
The second is proliferation of Adjacencies. So we've talked about markets like VLT, Georgia co am HR in class II.
And then three is really continued investments in our R&D engine with a focus on talent.
What should drive share gains for us over time.
Si play perspective, we continue to drive record revenues and grow share where we landed at over 10% share. According to Eilers in Q3, and we will also continue to scale <unk> like we've done over the last couple of years.
<unk> made significant UA investments and we'll continue to do so efficiently and effectively while also still seeing stability in our player base and we continue to lead the market and player retention.
I gave my perspective, you know expanding our content offering through our core business and then scaling our product portfolio over time will drive sustainable growth into the future and on top of all of that business execution that we just mentioned to Matt's point, we continue to post healthy margins in the quarter and have opportunities to expand.
And that over time as we continue to be laser focused on our margin enhancement initiatives. So the long and short of it our momentum and the performance in this quarter and really year to date that we've seen really gives us confidence in our ability to capture the opportunities. We see we see ahead, but also deliver on the $1 4 billion talk a minute.
Yeah.
Thank you both nice results I appreciate it.
Yeah.
Yeah, you're welcome. Thank you for your question.
The next question comes from the line of Barry Jonas with Twist you May proceed.
Yeah.
Hey, guys.
I wanted to ask about gaming specifically visibility, we're starting to hear operators talk about macro softness I'd say at least parts of their their player base. So with that are you seeing any of that today in game ops or.
You hear about Capex budgets for next year. Thanks.
Yeah. Thanks, Barry I think we leave with a healthy level of paranoia as everyone in the industry and we look daily at the metrics that.
Point to any macro softness so from our vantage point.
On balance I think the industry is proving to be very resilient when you've got a number of different windows into consumer behavior. I think if you look at op days in premium gaming up as an example, they are up year on year, they're up sequentially. I think you can look at the <unk> monetization, which is really kind of a manifestation of consumers' willingness to pay again.
Sequentially I think in our gaming domestically, you're saying kind of market growth in the mid 20, and a lot of these kind of newer market.
We keep looking for the recession, that's supposed to be coming we've been waiting for to use for it it hasn't arrived yet.
We always say to use a guiding parlance you play the hand that you're dealt and not the habits in the shoe and at the moment, we say very healthy signs of growth and lots of things that are within our control building better guidance is the appetite to any macro softness and thats why we put a lot of our effort and energy I think.
Importantly, we got good visibility into the pipeline, we see a solid pipeline for Q4 and beyond.
I think cryo with all consistent with prior quarters, yes from our vantage point of the industry still look very healthy on balance yes, just one thing to build on your point, Matt is we do continue to see encouraging data points with our coin in trends so.
Totally backed by our high performing titles, such as monsters Frankenstein, turning to the planet moolah matter or even USL franchises. So we are encouraged by the trends that we're seeing not only our performance, but to Matt's point, the healthy GTI levels and the resilient gaming consumer overall, so we will continue to monitor this closely well to Matt's point, what we do.
Best which is providing great products services and experiences to our customers.
That's great. Thank you so much.
Thank you. Thank you for your question.
The next question comes from the line of Brian <unk> with Craig Hallum.
Pete.
Hey, good afternoon, Matt Oliver maybe just following up on that curious conversations how they compare to Q2 of this year as people are thinking about current spend next year spend but also in the context of squid games was big unveil curious how you think about that game I guess historically, there's been pretty.
Quick turnover from Fad type content.
And so curious what Ted and you guys see in this game specifically that has you excited and what youre hearing from potential buyers of the game and putting it on the floor.
Yeah, Great question, I think from the outset, I'll say Gee to where it was very well attended this year, which again I think points to the resiliency of the industry people are more interested in what's coming in terms of product than they've ever been.
I think what we started JJ, where they're really focused portfolio focused around brands and franchises.
There are really targeted at growing that core player.
So it's really about bringing the brand that we have in the portfolio back to life.
Coupled with some interesting investments in.
And I pay like what we've done so yeah, I think that was a big gun violence something different you know I think what consumers customers told us about that specific brand I think the thing that drove us to that brand was the gamification elements to the show itself. It just lends itself to building a great product. So yes, I mean, Ted has a history of bringing these types of brands.
A market he he built a product called the walking dead in a prior life, which was that at GGP game of the year very successful game has similar characteristics in terms of the type of brands. So, yes, I think what you're saying from us as a portfolio of games that target different players different brands different franchises, we have what we want to be a player.
All of our segments.
Thank you.
One really positive sign per hour showing at etsy to wait till the islands.
Virtual roundtable, the wake off the gateway in.
The panel of three.
It was the best in show in two out of the three.
Panelists chose lot and Wanda.
As the best in show I think make less.
That it's two out of three that that so we're pretty happy with that but that out, but really a reflection of operators, saying that momentum.
One of the things that we're building.
Great. Thanks, guys nice job.
Thank you for your question.
The next question comes from the line of in Japan with Mcmahon Atlantic You May proceed.
Okay.
Hi, guys. Thanks for taking my question. So the question is mainly on site plan I was just wondering just given the internalization can you talk through it.
<unk>.
Some of the benefits of internalization, we will have I think you mentioned just access to the cash capital allocation.
In terms of collaboration.
And then is there anything material to call out from a cost synergies perspective, corporate cost savings that we should be aware of as well.
Yeah, Great question now that you've teased out kind of the three critical areas. We sit focuses question around I'll say first and foremost the operating momentum and <unk> has never been stronger and another record for them. It's amazing they are the fastest growing social casino business in the industry inside suggesting the whole thought by the time you should feel.
Im very encouraged about.
The performance.
This quarter, so yes top full guidance in slot play also set records, that's really been underpinned by the investments we've made in the <unk> engine and kind of talk of UI. So yeah. The <unk> integration has gone really well, it's gone as well as we could have expected it feels like I. Nevertheless, sorry, it's gone very famously so thanks to the entire <unk>.
Yes, I think there are all those three elements that you touched on all of them want to dig into some of the details around the cost.
Well I think from a collaboration standpoint. This is one of the key drivers that really led US down this strategic initiative about Reintegrating Firefly entitled 80, It's unlocking the full potential of a beta site business.
In the broader context of R&D allows us to be a lot more precise with AB testing social surveying sorry, yes, it's really about bringing them back in so we can fully unlocked out I guess, one thing we can point to as a demonstration of that we had out best games workshop. This wake in Florida, where we had all of our designers from Si play from a gaming and from the line.
Gaming time working together.
To dream up the next wave of great industry, leading content and I think this business now is lot and wanted to kind of lives and breathes up the quality of the content the entire ecosystem.
Does better when we do a better guidance, so you're really starting to say that the collaboration coming to fruition.
And just at a high level over the next 12 months, we will realize some corporate cost center it isn't going to be primarily around the duplicative public company costs, but.
More importantly, I think you hit it is it gives us access to the cash on <unk> balance sheet, coupled that with just the highly cash generative business that they have.
Be able to then fuel other strategic initiatives over time, so yeah, we feel great about <unk> ability to grow long term and we're going to continue and invest in our core capabilities in yeah.
We're thrilled to have him back back home with a light wonder.
Alright, thanks very much.
Thank you for your question.
The next question comes from the line of Joe Stauff with Susquehanna.
You May proceed.
Thanks, Hey, Matt Oliver I wanted to ask about.
You know kind of the status of the North American.
Game Ops turnaround, Matt I think you had some commentary.
Saying that in terms of say the mix the switch out whatever the right terminology is too to kind of get the right balance of premium.
Into the installed base is coming to an end that youll be there in the near term.
What I wanted to ask is what's the right way, possibly the think about upside for the revenue per day unit.
What can that get to it's kind of tough to tell.
To estimate, but I was wondering like how much.
Say pricing powers as.
Again, as you sort of hit that inflection point and what it can mean for the revenue per day.
Yeah, Great Great question, there's a few things to unpack there I think if you think about our gaming ops installed base at the most macro level as the U S business and then there's the international business. So then if you double click on the U S business, specifically, there's kind of two component parts of that there's the premium gaming ops installed base.
Which is the largest profit pool in the gaming industry anywhere in the World and then you have these public markets, which is really the New York lottery market, the Delaware lottery market in the public market. There has been a shift that's been since the new entrants that have entered that market side. We've naturally had some of the info base eroded we knew about that it was a it was a.
A moment in time when you have.
Via RFP some.
Allotment.
So that's all factored into our long range plan.
Yes. The biggest thing we're most excited about is that premium gaming operations install base with growing up for 13 consecutive quarters.
In a row now I've just had a notable pick up in Q3 in terms of net adds so I think the economics that drive that premium Danny operation.
Business with two things, adding more premium units into the install base and great locations, and then driving up a day through great.
Great locations, but also a better guidance than I think.
You're saying sequentially those op hay days I'll be saying it year over year. Those days are up. So yes. We think we can continue to add more and more games over the coming quarters and as we introduce better games that the yield should go up as well so that it's a powerful combination driving that that business I know, it's in some ways distorted in the numbers because we can.
All these things up collectively about now.
Underlying that premium gaming installed.
Install base and business logic is a lot of operating momentum. So we're feeling good about that and we also think that we continue to optimize our installed base globally. So you know as we fine tune our legacy fleet driving longevity on the floor for some of these units that will scale, our ROI for us in the long term so to your point in north.
<unk>, we do expect the public gaming removals to wind down here in the fourth quarter and then internationally. We did have the removals in both Europe and Latin America. The Latam removals relates to really one specific customer of approximately 2000 units and we expect the European removals to also wind down.
Here in the coming months, so moving forward, we do expect to grow share and Rpgs in part due to just the continued success of our great titles and content. So Frankenstein from studio acts as an example, but we're definitely not going to stop there and we're going to continue to capitalize on the franchise extensions and new IP such as <unk>.
Such as squid game as well as new cabinets like horizon, which received really strong interest at G. TUI. So.
Overall, we've made some really great progress in optimizing our installed base and we view our increased investment in R&D and talent as an opportunity for us to go.
Really on the offensive from our gaming Operations' perspective.
Thanks, a lot.
Thank you for your question.
The next question comes from the line of Jeff.
Jeff Stent shell with Stifel. You May proceed.
Hi, great. Thanks, Good afternoon, guys. Thanks for taking our questions.
Starting off here I wanted to hit on free cash flow conversion looks like headline was about 43% during the quarter closer to 37%. If you strip out the impact of working capital long term targets for 2025, if I recall correctly. We're we're 45%. So you do seem to be approaching that target quite rapidly I guess my question is.
Anything changed incrementally that impacts those prior free cash flow conversion targets, whether positively or negatively or should we continue to expect to see kind of low to mid 40% type levels from here on out of 2025 approaches. Thanks.
Yeah. Thank you for that question.
Well listen we delivered incredible results in the quarter to your to your point you called out there. Our Q3 free cash flow conversion rate was strong very strong at 43% of that yielded $123 million in free cash flow. The team did a tremendous job in managing DSO in and gaming and high gaming businesses.
In addition, we did have some timing benefits related to working capital more broadly that said this will continue to be a focus of ours going forward now that we've moved past our strategic transactions and we are executing here in Q4, we do expect the free cash flow conversion to trend over 30%.
<unk> here and then we'll scale that over time.
There is no doubt that generating free cash flow absolutely remains one of our key priorities and it was more just firm believers that free cash flow is one of the key drivers of shareholder value. So we will continue to benefit from our strong growth profile and then solid balance sheet, but also the flow through of any operational efficiency benefits that we see.
Said that well I wont Miss a chance to give the attainment of a plug but if you look at these results. It its growth its margin expansion and you say are flowing through to the free cash flow.
They were some of the highlights of this quarter until quite the margins and the cash flow.
That's great. Thanks for the color guys and then if I could just squeeze in one more question.
For you, Matt So my view their launch now that you've gotten that off the ground a little bit time to wrap your head around it any any kind of insights.
Anything that caught you by surprise, whether other technology or kind of otherwise at that as that product continues to ramp and then can.
Could you just could you just kind of walk us through how you see the ramp progressing bringing more customers in kind of getting higher and higher DDR share for your games, just any sort of thoughts on the phasing of the ramp up would help as well. Thanks.
Yeah, Yeah, you're welcome Yeah, I think it's a very exciting segment, yes, we know it's going to get to 30% of the gaming Tam over time. So this is a multiyear opportunity for us. It's a segment that we belong in <unk>.
Think about the shuffle master I pay the things that we can bring to this sector.
Our yes, our ability to execute in that space. So yeah. We're just in the very very early innings. So we're excited about the future, but it'll take time to ramp I think the thing that probably surprised us most.
What's the timeline to get compliance in this first state I think when regulators look at anyone doing anything for the first time it takes a little longer than you anticipate to get full approval, but we have that now and so I think the fact that we live in the U S that gives us.
Our confidence that we can move into other states. All the time, we wanted to do it in a very capital efficient way.
Not in a huge hurry to accelerate our plans do you Wanna get Michigan, Youre up and running at scale before we move into other markets, but yeah like I said, it's a multiyear plan, but we're comfortable with where we're at and the opportunity that's in front of us.
Great. That's really helpful color, Thanks, again and nice quarter.
Thanks.
Thank you for your questions. The next question comes from the line of David Katz with Jefferies. You May proceed.
Hi afternoon, Thanks for taking my questions Hi, everyone.
I wanted to just go back over capital allocation.
The different alternatives.
Obviously, the buybacks are important on an ongoing basis.
It's been some tuck in activity periodically.
What can we expect and how do you think about the boundaries looking forward in terms of how you might allocate choices.
Yeah, I'll, let out all of the kind of walked through the the waterfall of priority for us and now coming out of the G to ensure there was a lot of industry discussion about potential consolidation not just from the App and I'll say M&A is interesting for us, but probably for low on the priority list. We've just done a huge amount of work to divest them.
Pretty large scale assets to focus the platform to reduce complexity. So we wouldn't be in a huge hurry to do a big pace of M&A that would.
That's why I'm more complexity back into the platform for us, it's really about executing against the vision now. So if we saw some tuck in opportunities that help accelerate our vision helped propel us towards is cross platform vision that we have and we would absolutely do it but I think M&A fourth lower net project portable yep.
Hi, David So yeah, I mean listen all of our capital management strategy broadly speaking you know really remains intact. The <unk> transaction was a significant milestone for us as a business and we continue to see the benefit of our strong balance sheet really does position us well to take on value accretive opportunities as they arise.
In terms of leverage we are comfortably within our targeted range of two and a half and three five times, even after an approximate half churn increase from funding the <unk> transaction.
We continued to be active in the share repurchase program through Q3, and you saw us take advantage of what we think is an important value creation opportunity and we repurchased $112 million worth of shares in the quarter.
Given the uptick in leverage from a cycle from the Safeway transaction, you may see us a bit more conservative in the near term the near term with the share repurchase program, but make no mistake about it long term. We feel this is absolutely a significant value creation opportunity for us. So so moving forward, we will continue to advance our <unk>.
Other capital allocation priorities in a very disciplined manner. So you'll see as we see business continue to grow this creates additional capacity for further investments in R&D talent Capex.
We believe will provide excellent returns for us down the road and then after investing in these organic opportunities.
In the context of a healthy balance sheet. We will then deploy any excess capital that we have and the most value.
You're creating way for our shareholders whether thats.
The share repurchase program I mentioned earlier additional debt reduction or just disciplined accretive M&A. So we have significant optionality, just given where we are from a cash flow perspective and balance sheet point of view. So so yeah, we are well positioned to drive sustainable growth into the future.
Yeah.
Got it thank you very much.
Thanks, David.
Thank you for your question.
Next question comes from the line of Paul Mason with Emt.
Hey, guys great results.
This is Australia I just wanted to ask a bit about like the performance that we've had a couple of quarters in a row.
They're doing really really well and.
Okay.
Wanted to ask like how much do you think is that attributable to sort of the actions you guys have taken versus competitive environment or.
Specifically like Dragon trying, which obviously you've said has been doing really well advocates.
Or would you sort of decompose the performance there.
I'm glad you asked this question Paul Yeah, I think.
Now like all markets Australia.
The gaming market very Darwin I stick by by operators bought the best games and so you know over the last few quarters, we've been able to put out some really incredible titles in the Australian market I think that the lightest of which was dragging try and we showed you that at the <unk> show in August and well.
While we locked out chances with that product given the caliber of talent that was building it and the way. The game is designed you you never really know until you get the flies to vote with their dollars and they are voting with their dollars and a pretty profound way we have the top four games in new South Wales on the top programs in Queensland, but two markets that we live in we've just got approval in Victoria.
I think dragon trials in the very very early innings of what could be a multi multi year.
Opportunity for us. So we're very excited about that so that was Australia and team members on the line you know its been a longtime coming within a sub 10% player down there for a long time, we've we're now in the mid Twenty's, we shipped 33% in September.
The outstanding performance in the Australian market, we've come a long way, but like I always say the best is yet to come.
Yeah.
Thank you for your question.
If you would like to ask a question. Please press star followed by one.
The next question comes from the line of Brian Gallagher with Jordan.
Proceed.
Hey, Matt Hey, I'll have a good afternoon, Tim Allen W.
I'd like to focus on timing, it's on my outright sales.
Replacement demand, we're looking at about.
<unk> thousand units a huge 20 16000 units for you guys. That's 4000 a quarter.
First of all Matt is that sort of scalable and ratable, but second of all.
Adjacency opportunities she's got the Canadian provinces origin, Illinois, I tried Shah can you sort of unpack what the potential opportunity that is for the next 12 months plays.
Yeah.
Yeah, Hey, Ron.
I think she have online gaming say I did a fantastic presentation in our license of the Adjacencies that Jay till we really kind of laying out what this opportunity looks like and it's significant for us we just going back into these markets that we haven't been in for a very long time. So by definition every incremental unit that we sell in these adjacent markets is.
Sure. So the biggest one that we really kicked off with ourselves with a significant order there, but all of them you don't want to just touch on kind of the makeup of those adjacent categories. Yeah to your point, we did sign that contract with <unk> for just over 1100 units those units will be distributed over the next 12 months.
In addition, we are recent announcements on the entrance in the Georgia co end markets through our distributor bets and we also expect to enter that market. In 2024. So we will have share expansion opportunities in other adjacent markets, such as Canada, VLT, HHR and class II class II markets.
Lastly, what I'd say is if you. If you were if you were at your two week you would have seen a very targeted section in our booth dedicated to our adjacent markets, which was very well received by our customers and we will get it we're going to continue to invest R&D dollars to support this critical critical space and the gaming team has just done an incredible job of create.
<unk>.
A strong product roadmap that will not only support our core class III growth, but then the proliferation into the adjacent markets.
Thanks, Scott and just.
Belgium, I'm looking at your operating leverage on gaming you have.
Had some nice margin expansion. Despite the fact that you've had a disproportionate increase in revenues in <unk> sales, which is typically lower margin. So clearly there's some good work being done behind the scenes around supply chain operating efficiencies et cetera. All of it can you sort of shed some light in terms of what we could see in terms of operating leverage going forward.
We're taking consideration mix effects.
Yeah. Thank you Ron Yeah, we delivered exceptional numbers and we continue to post really healthy margins is as we demonstrated here in the quarter. We did benefit from some revenue mix in the quarter, but we also do have opportunities to expand margins over time as we work through our margin enhancement initiatives across the business.
Our performance this quarter across all three segments really reflects the team's commitment to growing the business, while maintaining profitability and over the course of the year, we have implemented and executed several cost optimization initiatives and some examples there supply chain sourcing initiatives that were previously implemented.
But then support the healthy margins you see in gaming, but you also see the efficient management of UA expenses marketing expenses from our side play perspective.
Even at the corporate level, we're gonna be driving further integration and efficiency within the organized organization. So all things considered we will continue to improve process and systems, while driving sustainable long term profitability and I said as I said earlier, we are incredibly pleased with the team's execution. This quarter, yeah, I think as a commodity.
There are some public recognition I think the supply chain team and gaming specifically as an industry.
One of the most hard pressed coming through the coverage isn't to manage to that pay off and then come out the other side really driving some some efficiency programs, it's showing up in the numbers of module and Daniel exceptional this quarter.
Thanks, guys congratulations.
Thanks, Ron.
Thank you for your question.
That concludes the question answer session I will now turn the line back to Matt for any closing or additional remarks.
Thank you.
In conclusion I'd like to express my gratitude to all employees for their unwavering commitment to making H diet lot and Wanda a resounding success. Our dedicated teams continue to work passionately expanding our game library, enhancing our technology, ensuring that our games deliver unparalleled performance and exceptional experiences the thoughts I'd say and strong.
I should say in that business are now fully in the fault and we look forward to further amplify our success together as one I gaming is just hitting its stride as we continue to expand our content portfolio.
We are uniquely positioned with our three complementary businesses integrated through our cross platform approach supported by a robust R&D engine solid balance sheet and increasing cash flow.
As I reflect on what it is now my 20th year in the industry filled with excitement for the promising future that lies ahead for lot and Wanda and the entire gaming industry. We've achieved some very significant milestones and through our team's desire to continuously improve and stretch the limits of innovation lot and wanted to converge new hot.
Thank you to everyone, who has joined us for the call today, you'll support is greatly appreciated and we extend our best wishes to all of you as we enter the holiday season.
That concludes the light and wandered third quarter 2023 earnings conference call. Thank you for your participation you may now disconnect your lines.