Q3 2024 Inspired Entertainment Inc Earnings Call
Speaker Change: Good morning everyone and welcome to the Inspire the Entertainment 3rd Quarter 2024 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session.
Speaker Change: If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. If you would like to review your question, press star 1 again. Please note today's event is being recorded.
Speaker Change: The safe harbor statement also applied on today's conference call as the company's management will be making certain statements that will be considered forward looking under securities laws and rules of SAC.
Speaker Change: These statements are based on management's current expectations or beliefs and are subject to risks, uncertainties, and changes in circumstances.
Speaker Change: In addition, please note that the company will discuss both CAAP and non-CAAP financial measures. Our reconciliation is included in the earnings press release. With that completed, I would now like to turn the call over to Lauren Whale, the company's Executive Chairman. Mr. Whale, please go ahead.
Lauren Whale: Thank you, operator. Good morning, everyone, and thank you for joining our call today.
Lauren Whale: We understand there's some pretty stiff conference call competition this morning, so we definitely appreciate having you with us.
Lauren Whale: In a few minutes Brooks will take us through the businesses in some detail highlighting the primary growth drivers
Lauren Whale: our underlying plans. So exploit them and the trends we're seeing.
Speaker Change: But from 30,000 feet, I would summarize things as follows. The interactive business continues on a growth tear, where we're seeing the compound effect of accelerating revenues and expanding margins.
Speaker Change: Virtual sports is maintaining extraordinary margins while revenues continue to tread water.
Speaker Change: We think revenue is approaching an inflection point, as the previously discussed customer concentration impact flattens out. The rest of the customer base experiences healthy growth, especially in the digital space. Brooks will talk about this some more in a minute.
and we see the impact of important new products.
Speaker Change: And lastly, our retail-oriented businesses are performing very nicely, benefiting from normal business-as-usual conditions in our various markets.
Speaker Change: Overall year-to-year EBITDA growth in the third quarter was 13 percent.
Speaker Change: And our EBITDA margins are inching closer to our 40% target.
Speaker Change: Entering a period of normalcy is having a particularly positive impact on our cash performance.
Speaker Change: We don't normally provide forward guidance, as you know, but I think we'll make an exception here and mention
Speaker Change: That we expect our cash balance to be between $50 and $55 million at the end of the first quarter of 25, with this year's fourth quarter being somewhere in between.
Speaker Change: Well, it's a bit of an oversimplification of the accounting. The increase in cash over the nine-month period ended in March 2025, will therefore have been roughly $30 million.
Speaker Change: representing, in our mind, an appropriate cash conversion percentage of the underlying nine-month EBITDA.
Speaker Change: As our cash approaches these levels, we can once again consider asset allocation alternatives.
Speaker Change: The matter of cash is also informing our thinking concerning our holiday park business, about which we get asked, obviously, quite often.
Speaker Change: When we first began to consider the sale of holiday parks, we challenged ourselves to develop a plan to consolidate and re-engineer the remaining retail businesses so as to recapture through cost reduction all the EBITDA being sold.
Speaker Change: As for the Holiday Parks business itself, we're currently projecting free cash flow of at least $5 million in 2025, a coupon we're quite happy to keep clipping until further developments.
Speaker Change: Lastly, as we announced in the press release issued yesterday, James Richardson is joining us as our new CFO starting on January 1st, 2025.
Speaker Change: as hopefully you read in the press release we put out yesterday. James has an extensive background.
Speaker Change: will be of great value to the company, so I look forward to welcoming James on our next conference call early next year.
Speaker Change: I'd also like to take this time to thank Marilyn Jensen who has been our interim CFO since the end of last year and has done a genuinely tremendous job over the last 12 months.
Speaker Change: Marilyn has agreed to stay on as our transformation officer through the middle of next year and so we thank her for her continued commitment to the company and with that I'll hand it over to Brooks.
Thank you, Lorne, and I echo your...
Brooks: She's been terrific to work with for the last year or so. So I'll try to expand on the comments on the individual segments as well as the progress.
Brooks: on some of our operating initiatives to progress towards our goal of the 40% EBITDA margins, which I'm happy to report reached 38.6% in the third quarter, which was up three percent, three percentage points from quarter three of last year.
Brooks: even with increased costs as we prepare for the full launch in Brazil by the end of the year. Our adjusted EBITDA margin in this segment is now up to 67.6 percent.
Brooks: This growth was fairly well spread out between performance in the UK and North America and is due in large part to the continuation of strong and consistent game roadmaps and we're starting to see good growth in some of our other key markets such as Italy.
Brooks: We expect to add both Peru and South Africa in the fourth quarter this year and expect that these markets will also help the growth profile.
Brooks: We're very proud of our reputation as being the seasonal games leader and we have a great lineup of Christmas themed games ready for December, typically our peak month of the year.
Brooks: We plan to add additional studio capacity in the next quarter or two with one of the studios focused primarily on the North American market exclusively to support our growth and to continue to deliver the quantity and quality of games to this expanding segment.
Brooks: We also continue to refine our iLottery content strategy and game deployment, and we'll be updating progress on that on our next call.
Brooks: We showed some of our major enhancements to the hybrid dealer category at G2E including a standard roulette game, Brazil roulette game, and a very exciting side bet roulette game called four ball extra bet with a two wheel configuration leading to an exciting innovation for roulette.
Brooks: This product set shows the unique configurability of Hybrid Dealer and offers a gameplay that you can't experience with physical wheels.
Brooks: We also showed the new Caesars bonus game called Caesars Palace Wheel of Winds and expected to get this game and the other roulette games live this year or early next year.
Brooks: We also announced new contracts with both FanDuel and Lotto Quebec and expect to be live in additional states, provinces, and countries over the next quarter or two as our pipeline of customers and products and jurisdictions continues to build.
Brooks: Needless to say, we're very bullish on the interactive segment continuing to be a primary driver of the growth of our digital business.
Brooks: The other part of our digital business, virtual sports, continues to be impacted by the decline of our largest customer in the segment. However, all other customers' recurring revenue grew 11% year-over-year with 21% of that growth coming from the online segment of that customer base.
Brooks: We still firmly believe that the combination of new licensed products like our NFL, NBA, and our recently announced NHL license
Brooks: Along with new geographies like Brazil, we'll get this segment back into growth mode. But we've been beset by delays due to customer resource issues, technical integrations, and regulatory approvals, which frankly just slowed the process down more than we'd like.
Brooks: For example, we're live with only two customers with our NFL product, but the NFL game is actually performing very well with those two customers.
Brooks: Neither of which happens to be in North America, which we ultimately believe will be the biggest market for the NFL game. It's now looking more like the end of the year in the beginning of 2025 before we'll solve some of these issues.
Brooks: Our gaming segment had a solid quarter with revenue, excluding low margin sales, up modestly at 4% year-over-year, but with EBITDA increasing 29% year-over-year.
Brooks: It's always difficult to make exact comparisons in this segment due to the nature of timing, revenue mix.
Brooks: and one-time sales but we're starting to see the impact of some of our cost savings initiatives coming through the income statement and we'll see that accelerate in the fourth quarter with the shutdown of our manufacturing facility in Wales and going to a fully outsourced manufacturing model.
Brooks: We have a number of deliverables in the fourth quarter and the first quarter of twenty-five, including 720 terminals to WC-LC, the installation of close to 5,000 Vantage terminals to Evoque, formerly William Hill, and the start of the installation of up to 4,000 terminals to OPAP in Greece.
Brooks: We expect to see the benefit of the conversion of the evoked terminals modestly in Q4, and the biggest impact starting in Q1, and I'm happy to announce that the first site conversion happened in late October.
Brooks: We also introduced a new cabinet at G2A, the Valiant, which is our first portrait cabinet.
Brooks: specifically designed for the North American market. The response we received from our customers and potential customers was overwhelming, and we're already starting to take orders for this product, largely on the improved performance we're seeing in our North American install base.
Brooks: This success is driving us to explore leveraging our cabinet, content, and system capabilities for adjacent markets like Class II and HHR, and we'll update as we finalize our review.
Brooks: Lastly, our lottery systems business, which is reported in our gaming segment, grew 8% year-over-year, and we're making tremendous progress on our new cloud-based lottery system that we'll deploy and start to market in 2025.
Brooks: The Leisure segment performed well in its historically busiest quarter with revenue up 5% year-over-year and EBITDA increasing by 17% year-over-year, demonstrating the benefit of the operating leverage in this business and the impact some of our operating efficiencies are having on our financial results.
Brooks: In the pub, bingo, and motorway service segments are bearing fruit, and we continue to believe that they are key components of our land-based business, and frankly leverage the combined technology and content development function that supports all of our business.
Brooks: The third quarter EBITDA of $30.1 million with close to 40% EBITDA margins along with the product and geography expansions that I outlined earlier in my remarks gives us confidence both in our strategy and the ability to deliver improving results in Q4 and going into 2025.
Speaker Change: And with that, I'll hand it back over to Lorne for any final remarks before we open up to Q&A. Thanks, Bruce. No, I don't have any.
Final remarks at this time so operator if
you would please open the program up to Q&A.
Speaker Change: Absolutely. We will now begin the question and answer session. If you'd like to ask a question at this time, simply press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again.
Speaker Change: And your first question comes from the line of David Bain with B Riley Securities. David, please go ahead.
Speaker Change: Great, thank you. Hi Lauren and Brooks. Thanks for all the info. I'm trying to ask this the best way I can, but it just seems like a large, you know, collective 2025 impact. I mean the William Hill Vantage, Cabinet Uplift, Hybrid Contribution, Interactive Growth, now the Structural Margin Improvements.
Speaker Change: It just looks like there's a lot of levers that can impact next year and I'm hoping to just get broad-based thoughts.
Yeah.
Speaker Change: I'm surprised you asked that question. You won't be surprised by my answer either.
Is the organic growth in
Speaker Change: The interactive business, you know, the potential of hybrid dealer to.
I mean the tremendous potential of
Speaker Change: you know, the restructuring program that I and Brooks both refer to.
I think if you put all those things together.
Speaker Change: I'm comfortable saying we're comfortable with the consensus, certainly. I don't think right this minute I would want to go beyond that in terms of
Let's say guidance, but maybe as we get
Speaker Change: Early into next year and a few things that right now are not a hundred percent clear Clarify we might be inclined to
Speaker Change: I don't have a recording saying that I was saying any more than that.
Speaker Change: you know, thinking about your own valuation, is there a skew and balance between M&A and share, potential share repurchases, where do you think the focus may be?
I don't I don't think
Speaker Change: So right now our balance sheet is in pretty good shape you know and and as I mentioned our cash
Speaker Change: is getting better and better and better. I mean the strategy of more and more of the growth coming from businesses that have
Speaker Change: Very little capital intensity in relation to their profitability is really beginning to work.
So...
Thumb
Speaker Change: ...would seriously consider or are seriously considering, I think we can...
very comfortably debt finance.
Speaker Change: And therefore, I don't think using cash to buy back stock
Speaker Change: and enhancing our organic growth through acquisition are necessarily in conflict with one another.
Speaker Change: Okay. Very good. Thanks, guys. Good morning. Have a good morning.
Speaker Change: And your next question comes from the line of Barry Jonas with Tourist Securities. Barry, please go ahead.
Barry Jonas: Hey guys, good morning. Thanks for the very helpful commentary as always and the remarks.
Barry Jonas: Just a few follow-ups, can you give maybe some update or more color rather on the uplift you're seeing with some of the product refreshes in the gaming market, specifically maybe Vantage with William Hill. Just trying to understand what that uplift is relative to overall market trends.
Speaker Change: Well, I'll answer the William Hill part, but also probably talk a little bit about what we're seeing.
Speaker Change: Illinois and some of the other markets in North America. So you remember
Speaker Change: you know, with our uplift from both the Betfair and Paddy Power.
Speaker Change: is probably at its all-time high and how we know that the strategy is working is that we continue to get additional orders but more importantly we're getting pretty much subscription orders from all of our customers in Illinois refreshing their content on an ongoing basis.
Speaker Change: So, I think in regards to gaming cabinet performance really across the estate, things are all going pretty well.
Speaker Change: Great, great. And then, you know, just as a follow-up, you know, you have the announcement with Vandal about bespoke content. You've done other stuff before on the interactive side. Just curious if you could talk more about the bespoke business model. Like, what does pricing margins look like in those deals versus more off-the-shelf? Is that something we'll see more of with customers of varying sizes?
Speaker Change: Yeah, I think what we want to do ideally particularly in the hybrid dealer segment is have a blend of both.
Speaker Change: And frankly with the creativity of their team, has come up with a pretty amazing concept and we've built a demo of it for them. So they're perfect for bespoke content.
Speaker Change: of all of it will be recurring revenue but some of the bespoke content will be getting paid up front fees to develop that for them. Obviously as you can imagine it takes longer to do the bespoke work versus just rolling out standard products. So I think for us ultimately having a mix of both is the right way to go.
Great, thank you.
Sure thing, thanks Barry.
Speaker Change: And your next question comes from the line of Chad Baynon with Macquarie. Chad, please go ahead.
Speaker Change: Hi. Good morning, Brooks, Lauren. Thanks for taking my question. I wanted to start with the interactive segment, particularly focused on UK and Ireland, based on what some of your partners have reported so far, and we'll see more of the next.
Speaker Change: A couple days, it looks like that market has stabilized and starting to grow again. Can you just talk broadly in terms of...
Speaker Change: from a macro sense, but frankly from a market share percentage. So one of the nice advantages of the UK is that that data is public.
so we can actually literally track.
Speaker Change: We're certainly excited about the Brazil market coming on in January. So yeah, I mean, you know, the interactive business in particular, and kind of going to my comments.
Speaker Change: It's really driven by the quality of the games, the quantity of the games, and being able to deliver when you say you're going to deliver, so their customers can kind of plan that out. So we seem to be doing a pretty good job in that area. Well, what I would add to that too, Chad, is that
specifically with respect to your question about the UK.
is in the UK, we're able to...
We have
Speaker Change: It's not surprising that our market share in the UK is considerably higher than it is in other places.
Okay, great.
Speaker Change: Next, in terms of the 40% margin goal, Brooks, that you've talked about.
Speaker Change: In the back half of 25 or 26, just kind of thinking about the digital versus gaming. Thank you.
Speaker Change: Well I'll come in and I'll let Loren comment how he feels about guidance, but I think you guys all probably have a sense of how he feels about that. But but clearly in terms of as the business continues and we've been talking about this kind of quarter after quarter but you're seeing it in the in the results
Speaker Change: And, frankly, virtuals at very high margins, you know, that's going to be pushing things over the, you know, to the 40% and over, probably more than any other factors, really the mix.
They actually...
I would prefer not to comment on that, but...
retail to digital, obviously with the
Speaker Change: and, in the case of interactive, and growing even within interactive. So, there's a certain inevitability to the margins moving into the 40s.
Speaker Change: You know, to pinpoint the timing. I think, again, as we get
Speaker Change: through the end of this year and early into next year, some things might change.
Speaker Change: be happening that would, again, give us more confidence about being more precise about when we think that 40% plus will happen.
Okay. Thank you both. Nice quarter. Thanks, Chad.
Speaker Change: And your next question comes from the line of Jordan Bender with Citizens JMP. Jordan, please go ahead.
Good morning, everyone. I want to start on hybrid dealer.
Speaker Change: You know, with a couple quarters now under your belt with that product in the market, are you able to parse out kind of who those customers are? Are they splitting time between life dealers, helping grow that overall market? I guess ultimately, you know, what are the data points that you bring to new conversations, new operators to show, you know, this is kind of how the product helps.
Speaker Change: Yeah, I mean I think it would probably be, you know, MGM could probably answer that better than I can on some of it, but what we do get from MGM in terms of the data is the fact that they have not only the active player numbers continue to kind of grow, but the repeat. So you've got people that are playing this game on a daily basis.
Speaker Change: than the wheel game that we've introduced. So obviously we're pretty excited to get that out in the market this quarter and the beginning of next quarter to see if it really does drive the kind of behaviors that we've seen in the wheel game. But thus far, what we look at is obviously what the GGR is, but how many active players are playing and how many repeat...
Speaker Change: Players are playing so all of those metrics so far are very good And remember we only have one game in two jurisdictions at this point So we'll obviously know a lot more about player behavior over the next quarter or two
Speaker Change: Helpful. And then just to follow up, you know, we talked about capital allocation, balance sheet, M&A, buybacks. I guess I'll try a different combination here, but would you look to use debt at this point to buy back some of your shares?
Speaker Change: Well it's a complicated question because part of the reason we have...
Speaker Change: As much cash as we do, obviously, is because we have debt. So, even if we didn't incur any incremental debt...
Speaker Change: using any of the cash that we have right now or that we might generate over the course of the next six months because we expect to generate you know a significant amount of cash.
if we use that cash.
Speaker Change: The buyback stock in effect. We're using debt because we have debt so It's it's it's kind of a complicated Question if the question is would we incur any incremental debt to buyback stock? I think the answer to that is absolutely no
Speaker Change: Yeah, I guess the latter was more the question of would you look to have leverage to buy back shares, but that was loud and clear. No, that we would not do.
Okay, thank you very much.
Thanks, Jordan.
Speaker Change: Again, if you would like to ask a question, simply press star followed by the number 1 on your telephone keypad.
Speaker Change: And your next question comes from the line of Ryan Sigdal with Craig Halem Capital Group. Ryan, please go ahead.
Ryan Sigdal: Hey, good morning guys one quick one for me If I look at I know the the struggles and challenges with your largest virtual sports customer but if I'm just looking at the absolute number of customers interactive continues to be up and to the right and grow really nicely you're at 172 virtuals are at 57
Ryan Sigdal: And if I look over the last couple of years, Virtuals is basically flat. Interactive, again, has doubled and tripled. So I guess, what's the biggest challenge in getting customers to integrate interactive content and games but not add the Virtual Sports with it?
Speaker Change: Yeah, well you mentioned one of it is is integrations, but it's really more
I guess it's really two things. One is regulatory.
getting markets to approve virtual sports.
Speaker Change: So, it's a common outlook. Brazil will end up being a very good test market for us. Obviously, soccer, as you know, is the biggest product for us.
Speaker Change: Brazil's going to be a soccer-crazy market. It's pretty liberal from a regulatory standpoint, so really Brazil right now is about just signing up customers and getting them live.
DraftKingsman Fan Duel and the Virtues.
Speaker Change: of virtual sports, but you know, Brazil is probably the next big market where we're going to see a lot of operators and we'll have more kind of a sense if that answers your question. Again, it's Lauren. The other thing I would add to that is, isn't the one opportunity to expand the customer base
for virtual sports is, I happen to think,
Speaker Change: In terms of virtual sports in the lottery space, that's actually very, very exciting.
Thanks guys. Good luck.
Thank you.
Speaker Change: There is no further question at this time. I will now turn the call back over to Lorne Will with closing remarks. Lorne?
Lorne Will: Thanks, Operator. Again, thanks everybody for joining. We're just slightly past 8.30, which I think is when
Some other calls are going to begin, so...
Lorne Will: I'll just wrap it up by saying, you know, thanks for being with us this morning. We're pretty happy with the third quarter. You know, the rest of this year and next year is beginning to look good.
Speaker Change: Very, very good. And so we look forward to talking to you in a few months. Thank you.
Speaker Change: That concludes today's call. Thank you all for joining. You may now disconnect.