Q4 2024 Inspired Entertainment Inc Earnings Call
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Good morning, everyone, and welcome to the Inspired Entertainment 4th 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. If you would like to ask a question during this time, press star on your telephone keyboard. Please note, today's event is being recorded.
Please refer to the company's Safe Harbor Statement that appears in the fourth quarter of 2024 earnings pressed release.
This Safe Harbor Statement also applies to today's conference call as the company's management will be making certain statements that will be considered forward-looking under security disloss and rules of the statements of the SEC.
These statements are based on management's current expectations or beliefs and are subject to risks, uncertainties, and changes in circumstances.
In addition, please note that the company will discuss both GAAP and non-GAAP financial measures. Our consultation is included in the earnings press release. Is that completed?
I will now turn the conference call over to Lauren Watt, the company's Executive chairman, Mr. Wile, please go ahead.
Lauren Weil: Thank you operator, good morning everyone and thank you for joining our fourth quarter earnings call
First, let me say I'm sorry that due to circumstances beyond our control, the press release.
Lauren Weil: went out later than it usually does, and I hope that hasn't caused too much consternation.
Lauren Weil: and we welcome today our new CFO James Richardson. James joined at the beginning of the year just as we were knee deep into the audit process and with this call today we successfully conclude his baptism by fire.
Lauren Weil: Reflect minor revisions to prior results due to the timing, but not the total amount of revenue recognition.
Lauren Weil: We can discuss this more in Q&A if anybody wants to understand it more clearly. As a result of these revisions, we intend to file our 10k by Wednesday this week or by the end of the week at the very latest.
Lauren Weil: Additionally, and perhaps more importantly, as we'll be disclosed in the 10K, we recently received a letter from the SEC informing us that our inquiry is now closed and that they would be taking no further action. We are of course very pleased with this outcome.
Lauren Weil: The results for the fourth quarter of the full year are in line with expectations and we feel that all the business areas are in very good shape.
Lauren Weil: Interactive Accountant for Approximately 22% of overall company Eva Dah after corporate cost allocation in the fourth quarter, and given its given growth trajectory, we think it will reach well over 25% by the end of the first quarter.
Lauren Weil: I think it's maybe not widely understood that in the handful of states that have both eye gaming and sports betting...
Lauren Weil: Primarily New Jersey, Pennsylvania, and Michigan. Eye-gaming dwarf sports betting by a ratio of four or five to one. Of course, we can't predict the rate at which new states will adopt eye-gaming legislation. We can't predict the rate at which new states will adopt eye-gaming legislation.
Lauren Weil: But my many years in the gaming industry, I'd rather not say how many convinced me that as was the case with horse racing, lottery, casino gaming, tribal gaming, and most recently sports betting.
Lauren Weil: The eventual spread of eye gaming is inevitable, especially as in the current environment. Individual states begin finding themselves short of cash.
Lauren Weil: So the opportunity for us in this business is limitless and our commitment to product and technology performance is concomitant.
Lauren Weil: The other part of our digital business virtual sports continues to perform at an extraordinarily high level of profitability.
But at the same time, continues to try our patience [inaudible]
Lauren Weil: During our third quarter call we predicted that we expected virtuals for its revenue to hit an inflection point during the fourth quarter and this did not happen.
Lauren Weil: Brooks will delve into all this in more detail in a moment, but given performance so far this quarter, we seem to have indeed passed the inflection point butchered by a number of deliberate actions we have taken to strengthen the business.
Lauren Weil: We expect our overall digital business to approach 60% of EBITDA by year end.
Lauren Weil: At the same time, our retail-oriented businesses continue to perform very well with content creation and distribution being the primary drivers.
Lauren Weil: The only jurisdiction in America so far to adopt a server-based gaming model.
Our products are performing extremely well.
Lauren Weil: Our installed base of razors and our generated an excellent recurring stream of blades.
Lauren Weil: With there being a lot of talk today about recession, I want to mention that our business right now is structured extremely well to sail through any downturn.
Lauren Weil: Over half our profit, as I mentioned a moment ago, is digital. Over 85% of our revenue is contractually recurring. Our EBITDA margins are high and our leverage quite comfortable. But let me conclude by touching on a couple of these points.
Lauren Weil: While one-time equipment sales account for only 10% of our overall business, we speak very well for our inherent recession resistance.
Lauren Weil: They sometimes fall disproportionately late in the fourth quarter and 2024 was one of those years as a result.
Lauren Weil: There was a significant year to year increase in accounts receivable for year and 23 to year and 2024.
Lauren Weil: and this in turn resulted in our year in cash being less than anticipated.
Lauren Weil: A snapshot a few weeks later would have shown a very significant difference.
Lauren Weil: Consequently, we've been working hard with the goal of having a new facility in place prior to June .
Lauren Weil: With the expectation that rates are likely to generally drift downward, and perhaps down still more so in the event of a recession, our new facility is more likely to be floating rate rather than fixed as it is now, and to be generally more flexible.
And with that, I'll turn it over to Brooks.
Brooks Pierce: Okay, thank you more than they usually do. I'll try to get some more color to the fourth quarter and year-end and what we're seeing thus far with the first quarter of 2025.
Brooks Pierce: Let's start with our digital business segment, Interactive, which includes hybrid dealer and virtual sports, where we've seen consistent growth.
Brooks Pierce: Ryan Rack of Segment Group, revenue by over 13% quarter over quarter and we're seeing the operating leverage within this segment with adjusted the EBITDA margins increasing to 65% for the full year from 55% last year.
Brooks Pierce: We've seen those trends continue into the first quarter of the year with February actually being the second highest daily average revenue month we've ever seen.
Brooks Pierce: These revenue and EVDOT trends are broad-based from both a geographic basis and from a customer basis with no specific concentrations in either, but the growth we're seeing with Tier 1 customers in particular is very gratifying. [inaudible]
Brooks Pierce: We're seeing all of this with very little contribution thus far from the Brazil market launch in January , and we expect that to be a very good market for us. This performance is really a testament to the great work done by the product team and concert with strong account management and our roadmap for the year looks very strong.
Moving over to Hybrid Dealer, we're now live with three customers including Beyn MGM, Beth 365, and Caesars.
Brooks Pierce: We continue to see strong performance from this group across multiple geographies, but we still believe the best is yet to come. We expect to launch our next branded Roulette game with Lotto Quebec in the second quarter, along with an expected launch of our four ball extra bet game. [inaudible]
Brooks Pierce: Both of these are significant in their own right and we look forward to reporting on their progress in the near future. The pipeline of customers for our hybrid dealer game is robust with a very good mix of both geographies and tier one and tier two customers.
Brooks Pierce: 2024 was a challenging year for our virtual sports businesses we've discussed many times and was largely due to a revenue reduction from our largest customer.
Brooks Pierce: The rest of our customer-based actually showed modesty earlier growth in 2024 and as mentioned in our earnings release we've made the decision to consolidate the virtual product and technical function that had previously been separate into the company-wide product and technical group.
Brooks Pierce: This group has largely been responsible for our success in the interactive segment, the development of our hybrid dealer products.
Brooks Pierce: The Successful Launch of our Advantage Cabinet in the UK as well as notable growth in our North American VLT footprint. I'm very excited by the early progress of this combination and the group has already presented some exciting new innovations in virtual sports.
Brooks Pierce: We've shared these innovations with our two largest customers in both are enthusiastic about getting these out to the market and to their players.
Brooks Pierce: Scroops also been instrumental in the development of our first online lottery product for virtual sports in the U.S. market that we'll be launching with the Ristocrat Interactive into the Virginia lottery at the end of April [inaudible]
Brooks Pierce: We've seen the stabilization of our virtual revenue in the first quarter thus far and the combination of the new organization, new products and key new markets like Brazil give us confidence that we can get the virtual sports business back into growth mode.
Brooks Pierce: In our land-based business, our gaming segment had EBITDA growth of 42% year-over-year-in-the-fourth quarter, due in part to gaming hardware sales in the period.
Brooks Pierce: We expect the rollout of our vantage cabinet to the William Hill estate to be completed by the end of first quarter and we are using the benefit of that conversion as vantage cabinet replacements are producing cash box growth and access of 10% on a light for light basis.
Brooks Pierce: We're also in the early stages of rolling out new cabinets to our customers in Greece with the introduction of a slantop cabinet, our first iteration of this violent Greece and we expect to start seeing the benefit of new cabinets in this key geography as we get further in the year.
Brooks Pierce: We also showed a new portrait cabinet at G2E in October and October , excuse me, for the first time and have started trials in Illinois and expect this to be successful
Brooks Pierce: We're indexing at our highest levels ever in Illinois and we've had most of our customers sign up for our subscription service which gives a good recurring revenue stream to this market that's maturing and allows us to keep our content fresh and showing in the performance.
Brooks Pierce: In our leisure segment, we showed a solid 7% revenue growth year over year in Q4, with a larger increase in EBITDA growth, due in part to improve margins from cost improvements and some one-time adjustments.
Brooks Pierce: We've extended the contracts with our two largest MSA customers, Motel and Welcome Break, and are seeing improved performance there as well.
Brooks Pierce: Q4 is seasonally the lowest quarter for a holiday parks business, but we're gearing up here in the first quarter for the 2025 season.
Brooks Pierce: So in summary, our land-based businesses, including our lottery systems contract in the Dominican Republic, continue to perform well and provide a steady source of recurring work.
Brooks Pierce: This allows us to continue to drive our digital businesses, which represent more than 50% of our combined EBITDA.
Brooks Pierce: Furthermore, we expect to see the benefit of our reorganization in the virtual sports segment as well as new milestones for our hybrid deal product as we move further to 2025. And with that, I'll pass it back to the operator for Q&A.
Speaker Change: At this time, I would like to remind everyone in order to ask a question. Press star then the number one on your telephone keypad. We will post for a distant moment to compile the Q&A roster.
Speaker Change: The first question comes from Paragonus from Truist Securities. Your line is open.
Speaker Change: Hey guys, good morning. It's Patrick Kioh on for Barry this morning. To start off on virtual sports, I think we understand the struggles with your largest customer, but could you dive any deeper into the challenges that segment is facing? Thanks.
Speaker Change: Yeah, I think it's well if you in looking at the numbers it really is driven by one customer but we're starting to see I think as we mentioned some stabilization with that customer which actually gives us some great comfort in the rest of the business.
has shown modest growth in the same periods.
Speaker Change: So, and I talked to a large part about this reorganization of the product group.
Speaker Change: and we've taken that out to show to our two biggest customers, both of which really thought it was a great innovation and want to get it live as soon as possible.
Speaker Change: We feel confident that the margins are extremely high over 70% EBITDA margins, so we still feel very bullish about the virtual sports business on a going forward basis.
Speaker Change: Okay, great to hear. Thank you for that. As my follow up, have there been any updates to how you're thinking about M&A, either from a buy or sell side perspective here, including any thoughts on the strategic review of holiday parks? Thanks again.
Well, on this strategic review of holiday parks.
We're where we have been, which is that we're
We're seriously exploring the sale of holiday parks.
We're cautiously, cautiously optimistic that we're going to...
and we've been working on-
Speaker Change: restructuring the rest of the business and anticipation of doing that.
Brooks Pierce: Beyond that, I don't think we have any intention or any reason to be thinking about divestment because the rest of the businesses are performing extremely well as Brooks talked about a second ago.
as far as on the A side of M&A.
Brooks Pierce: You know, we're always looking for something that makes sense. We have an active program doing that, our balance sheet is.
Brooks Pierce: is a very good shape in terms of having capacity to do something. We have a fairly rigid set of criteria for anything we might do.
Uh, right now there's nothing-
Brooks Pierce: on the horizon, but we continue to look, and if something...
It comes along that fits the criteria, then we'll go ahead with it, but right now again, there's
There's nothing beyond that I can say.
Great. I appreciate it.
Speaker Change: The next question comes from Jordan Bender from Citizens. Your line is open.
Speaker Change: Our number one, I was wondering if we could get an update on where the UK white paper sits today and are there any noticeable impacts we should expect in the market or for your business in 2025.
Yeah, probably the...
Speaker Change: Assume that and all of our budgeting and forecasting, and we think it will have a minimal impact, because we'll continue to innovate from a game standpoint to deal with that. But we expected that news coming, and I think it starts in April .
Probably the part that we're waiting for is...
Speaker Change: the liberalization of B3 cabinets so that we could get, you know, there's a restriction now on the number of B3 cabinets.
Speaker Change: that you can have in the UK, and there's been a lot of talk about that being liberalized a little bit, which would obviously be very good for us in terms of some of our one-time sales in the UK, but that's still to be determined.
Speaker Change: Thank you for that. And on the fall of the cash balance, just dipping quarter of a quarter. Should we still expect, I think you gave guidance of one, two cash of 50 to 55 million, is that still the right way to think about it? Yeah.
Speaker Change: There's been some delay in the receivables so I think directionally it's right and we'll have to see as we as we get a little bit further along but I'd say it's probably a little higher than we then we would expect it's probably going to be a little bit lower than that Yeah, I don't understand that it's Eric
Speaker Change: At the time of the cash payments for certain suppliers like for the William Hill deployments, we actually accelerated that. We're going to get that done by the end of March. I think earlier we've got it going to be early Q2. We'll have that done by the end of this quarter. So there's been some supplier payments that just sort of accelerated. Okay, so.
That's some things everyone.
Speaker Change: The next question comes from Ryan Sigdahl from Craig Holland, Capitol Group. Your line is open.
Ryan Sigdal: Hey guys, I want to say on virtual sports, so given the high single-digit growth outside of your top customer there, it implies pretty big declines from that customer which we know, but I guess what gives you the confidence to say that...
Ryan Sigdal: You're past that inflection point. I feel like we've heard that for several quarters now that the business was plateauing and it continues to drift lower So curious what you've seen you're today in 2025 and kind of real time
halfway through March, you know, it really has kind of leveled out.
Ryan Sigdal: and look, we still happen to believe that on a going forward basis, Brazil, in particular, is going to be a very significant market for us.
Ryan Sigdal: Bet365, and Patano in Brazil, which represent right now about 40 percent.
Ryan Sigdal: Helpful, Hybrid Dealer, you mentioned three customers live with, Seasers, MGM Bet 365. You had a press release from FANDUAL launching a Hybrid Dealer game back in October , I guess curious where that stands, because presumably it's not live yet.
Project. Fandals have been great to deal with on this.
Ryan Sigdal: and we would expect this product not to go out until right before the launch of football season.
Ryan Sigdal: in 2025, so it won't be supported then, but I think it'll be frankly with Fandals' participation. I think it will be a pretty significant product launch.
Great, thank you guys, good luck!
Thank you
Speaker Change: Again, Judy have a question. Kylie Press star followed by the number one.
Speaker Change: The next question comes from Chad Beynon from McHare Group. Your line is open.
Speaker Change: Hey guys, good morning. This is Aaron on for Chad. Thanks for taking our question.
Speaker Change: Uh, first one is to ask about, um, you know, given additional bandage machines and other retail opportunities, can you just talk about cat X news and what that means for cash flow?
Speaker Change: Yeah, well, I think in terms of CAPEX, you know, we mentioned the Motto and Welcome Break Renewals, which will require some CAPEX.
Upgrading a number of our pub customers, and that will also take CapEx, but I think all of that's...
Speaker Change: wants to add anything to this, but it's going to be roughly the same as what we've seen in the last couple of years, so nothing out of the ordinary.
Speaker Change: Okay, next helpful. I also wanted to ask about the lottery business. Can you just talk about where you see the opportunities in 2025 to drive growth or side new contracts, and how should we be thinking about the benefits from the new cloud based lottery system? Thank you.
Speaker Change: Yeah, thanks. No, that's a good question. So we are we are planning to hand over to our customer.
Speaker Change: because we think that's the first time, we think that will be the first time.
I Lottery stayed with doing over a billion in sales.
Speaker Change: So we're super excited about that product in both Virginia, lottery and aristocrat have been very involved in the in the delivery of that and we still believe lastly in on
Opportunity S. So Lottery is a very key segment.
Great, thank you. Appreciate the color.
No problem.
Speaker Change: That concludes our Q&A session. I will now turn the call over to Larnwile, the company's Executive Chairman for Closing remarks.
Thank you very much operator.
I don't really have much to add. I think
Speaker Change: I think Brooks gave a very comprehensive overview of where each of the businesses is. I do agree with him that everything we're seeing seems to suggest that the virtual sports business is.
It has passed an inflection point.
I think the...
Speaker Change: The most important point is as far as virtual sports goes as we've put.
A Significantly Renewed Focus [inaudible]
on Product Development and Product Enhancement. I think for a while because we had...
Speaker Change: A Tiger by the tail with Interactive, we were throwing everything but the kitchen sink at Interactive and you can see by...
Speaker Change: The phenomenal growth in both revenue and profitability that that that focus in that development.
Has really paid off, and I think to be honest, for a period of time, we...
Speaker Change: We're probably under investing, under investing in product development of virtual sports just because the interactive opportunity was so huge but now I think we're not diverting resources, we're adding resources
Speaker Change: And I feel cautiously more than cautiously optimistic that we can duplicate.
Speaker Change: in virtual sports, what we've been seeing with Interactive now that we've got the focus on product enhancements and I think we'll start to see this in the next few quarters.
Speaker Change: We look forward to talking to you in a few months.
Thank you.
Speaker Change: Ladies and gentlemen, that concludes today's call. Thank you all for joining and you may now disconnect.