Inspired Entertainment, Inc. Q4 FY2024 Earnings Call

Good morning, everyone, and welcome to the Inspired Entertainment Fourth Quarter 2024 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Please note, today's event is being recorded. Please refer to the company's safe harbor statement that appears in the fourth quarter 2024 earnings press release, which is also available in the Investors section of the company's website. 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 securities laws 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. A reconciliation is included in the earnings press release. With that completed, I will now turn the conference call over to Lorne Weil, the company's Executive Chairman. Mr. Weil, please go ahead.

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 went out later than it usually does, and I hope that hasn't caused too much consternation. With me as usual are Brooks Pierce and Eric Carrera, 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. Adjusted EBITDA for the fourth quarter was $30.9 million, up 22% from last year. The full year adjusted EBITDA of $100.1 million, and $99.3 million for '24 and '23, respectively, reflect minor revisions to prior results due to the timing, but not the total amount of revenue recognition. 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 10-K by Wednesday this week or by the end of the week at the very latest. Additionally and perhaps more importantly, as we'll be disclosed in the 10-K, 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. The results for the fourth quarter and full year are in line with expectations, and we feel that all the business areas are in very good shape. The Interactive business continues to be the star of the show with fourth quarter revenue and EBITDA growth of 45% and 105%, respectively. Interactive accounted for approximately 22% of overall company EBITDA after corporate cost allocation in the fourth quarter. Given this growth trajectory, we think it will reach well over 25% by the end of the first quarter. I think it's maybe not widely understood that in a handful of states that have both iGaming and Sports Betting, primarily New Jersey, Pennsylvania, and Michigan, iGaming or Sports Betting by a ratio of 4 or 5 to 1. Of course, we can't predict the rate at which new states will adopt iGaming legislation, 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, the eventual spread of iGaming is inevitable, especially, as in the current environment, individual states begin finding themselves short of cash. So the opportunity for us in this business is limitless and our commitment to product and technology performance is concomitant. 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. During our third quarter call, we predicted that we expected Virtual Sports revenue to hit an inflection point during the fourth quarter, and this did not happen. 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, buttressed by a number of deliberate actions we have taken to strengthen the business. Given modest acceleration in Virtual Sports together with the aforementioned anticipated growth in Interactive, we expect our overall Digital business to approach 60% of EBITDA by year-end. At the same time, our retail-oriented businesses continued to perform very well with content creation and distribution being the primary drivers. In Illinois, for example, the only jurisdiction in America so far to adopt a server-based gaming model, our products are performing extremely well and our installed base of razors now generated an excellent recurring stream of blades. 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. 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. While one-time equipment sales account for only 10% of our overall business, which speaks very well for our inherent recession resistance. They sometimes fall disproportionately late in the fourth quarter and 2024 was one of those years. As a result, there was a significant year-to-year increase in accounts receivable for year-end to year-end 2024, and this in turn resulted in our year-end cash being less than anticipated. A snapshot a few weeks later would have shown a very significant difference. Finally, on the subject of leverage, most of you would know that our current credit facility matures in June 2026 and would therefore become current in 2025. Consequently, we've been working hard with the goal of having a new facility in place prior to June. 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.

Okay. Thank you, Lorne. I usually do, I'll try to give some more color to the fourth quarter and year-end, and what we're seeing thus far with the first quarter of 2025. So let's start with our digital business segments, Interactive, which includes Hybrid Dealer and Virtual Sports, where we've seen consistent growth. Our Interactive segment grew revenue by over 13% quarter-over-quarter, and we're seeing the operating leverage within this segment with adjusted EBITDA margins increasing to 65% for the full year from 55% last year. 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. These revenue and EBITDA 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. 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 in concert with strong account management and our road map for the year looks very strong. Moving over to Hybrid Dealer. We're now live with three customers, including BetMGM, bet365, and Caesars. 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 Loto-Quebec in the second quarter, along with an expected launch of our 4 Ball Extra Bet game. 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 1 and Tier 2 customers. 2024 was a challenging year for our Virtual Sports business, as we've discussed many times and was largely due to a revenue reduction from our largest customer. The rest of our customer base actually showed modest year-over-year growth in 2024. And as mentioned in our earnings release, we've made the decision to consolidate the Virtuals product and technical function that had previously been separate into the company-wide product and technical group. This group has largely been responsible for our success in the Interactive segment, the development of our Hybrid Dealer products, the successful launch of our Vantage cabinet in the U.K., 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. We've shared these innovations with our two largest customers, and both are enthusiastic about getting these out to the market and to their players. This group has 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 Aristocrat Interactive into the Virginia Lottery at the end of April. We've seen the stabilization of our Virtuals revenue in the first quarter thus far and the combination of the new organization, new products, and key new markets, like Brazil, gives us confidence that we can get the Virtual Sports business back into growth mode. 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. We expect the rollout of our Vantage cabinet to the William Hill estate to be completed by the end of the first quarter, and we're already seeing the benefit of that conversion as Vantage cabinet replacements are producing cash box growth in excess of 10% on a like-for-like basis. We're also in the early stages of rolling out new cabinets to our customers in Greece with the introduction of a slant-top cabinet, our first iteration of this style in Greece, and we expect to start seeing the benefit of new cabinets in this key geography as we get further into the year. We also showed a new portrait cabinet at G2E in October for the first time and have started trials in Illinois and expect this to be successful. 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 performance. 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 improved margins from cost improvements and some one-time adjustments. We continue to see the performance of our Vantage driving increased performance in pubs, and we're adding this to our customers' locations significantly as we move through the first half of 2025. We've extended the contracts with our two largest MSA customers, Moto and Welcome Break, and are seeing improved performance there as well. Q4 is seasonally the lowest quarter for our holiday parks business, but we're gearing up here in the first quarter for the 2025 season. 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 revenue. This allows us to continue to drive our digital businesses, which represent more than 50% of our combined EBITDA. 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 into 2025. And with that, I'll pass it back to the operator for Q&A.

The first question comes from Barry Jonas from Truist Securities. Your line is open.

Hey, guys. Good morning. It's Patrick Keel 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.

I think if you look at the numbers, they are largely influenced by one customer, but we're beginning to see some stabilization with that customer, which provides us with confidence in the rest of the business, which has shown modest growth during the same periods. I've also mentioned the reorganization of the product group, which we've integrated into the main operations. We've developed some exciting new innovations based on the success we've had in Sports Betting and same-game parlays. We've presented these innovations to our two largest customers, both of whom are enthusiastic about them and want to implement them as soon as possible. We remain confident about the margins; as Lorne noted, they are very high, exceeding 70% EBITDA margins. Therefore, we are optimistic about the future of the Virtual Sports business.

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 a sell side perspective here? Including any thoughts on the strategic review of holiday parks. Thanks, again.

Well, on the strategic review of holiday parks, we have been seriously exploring the sale of holiday parks. We're cautiously optimistic that we're going to come to a favorable conclusion. But until something is firm, obviously, there's not much more we can say, but it's certainly moving in the right direction. And we've been working on restructuring the rest of the business in anticipation of doing that. 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 buy side of M&A, we're always looking for something that makes sense. We have an active program doing that. Our balance sheet is in very good shape in terms of having capacity to do something. We have a fairly rigid set of criteria for anything we might do. Right now, there is nothing on the horizon, but we continue to look. And if something comes along that fits the criteria, then we'll go ahead with it. But right now, again, there's nothing beyond that that I can say.

Great. Appreciate it.

The next question comes from Jordan Bender from Citizens. Your line is open.

Good morning, everyone. I was wondering if we could get an update on where the U.K. white paper sits today and are there any noticeable impacts we should expect in the market or for your business in 2025?

Yeah. Probably there's one development that's going to happen and one that we actually hope will happen. In terms of the stakes limits. So that's a fact, and that's going to happen. And we've assumed that in 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 new regulation was coming and I think it starts in April. Probably the part that we're waiting for is the liberalization of B3 cabinets, so that we could get, there's a restriction now on the number of B3 cabinets that you can have in the U.K. 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 U.K., but that's still to be determined.

Thank you for that. And on the follow-up, the cash balance is dipping quarter-on-quarter. Should we still expect, I think you gave guidance of 1Q cash of $50 million to $55 million. Is that still the right way to think about it?

I would say, it's going to be a little bit lower than that because I think as Lorne talked about, there's been some delay in the receivables. So I think directionally it's right, and we'll have to see as we get a little bit further along. But I'd say, it's probably a little higher than we would expect. It's probably going to be a little bit lower than that.

I wanted to add to that, Eric. At that time, we accelerated the timing of cash payments for certain suppliers, like those related to the William Hill deployments. We plan to complete that by the end of March. Earlier, we indicated it would be early in Q2, but we will finish it by the end of this quarter. So, there have been some supply-related payments that have just been expedited.

Thanks, everyone.

The next question comes from Ryan Sigdahl from Craig-Hallum Capital Group. Your line is open.

Hey, guys. I want to stay 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 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 year-to-date in 2025 and kind of real time?

Yeah. Well, I can definitely give some comfort on that since I have seen real-time data in the first quarter and at least halfway through March, it really has kind of leveled out. A lot of that is in part, probably the only difficulty that we've seen is in Brazil. This transition starting January 1, where everybody had to kind of shut their accounts down and bring their accounts back up. So January was just a little bit soft, but February actually recovered from that. 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. Two of our biggest customers, bet365 and Betano in Brazil, which represent right now about 40% of the market in Brazil are seeing very strong results. And as we start adding more and more customers, I think we've done press releases on our partnership with Kambi, our partnerships with Altenar, plus some of our individual deals. We expect Brazil, by the time it's all said and done, to probably end up being the biggest market we have. So first quarter pretty stabilized, but certainly we think there's a lot of potential for growth in Virtual Sports still.

Helpful. Hybrid Dealer, you mentioned three customers you're live with Caesars, MGM, bet365. You had a press release from FanDuel, launching a Hybrid Dealer game back in October. I guess curious where that stands because presumably, it's not live yet.

No. It's not live yet. And it's a pretty big bespoke project. FanDuel has been great to deal with on this. And we would expect this product not to go out until right before the launch of the football season in 2025. So it won't be before then, but I think it will be, frankly, with FanDuel's participation, I think it will be a pretty significant product launch.

Great. Thanks, guys. Good luck.

Thank you.

The next question comes from Chad Beynon from Macquarie Group. Your line is open.

Hey, guys. Good morning. This is Aaron on for Chad. Thanks for taking our question. First wanted to ask about given additional Vantage machines and other retail opportunities, can you just talk about CapEx needs and what that means for cash flow?

Yeah. Well, I think in terms of CapEx, we mentioned the Moto and Welcome Break renewals, which will require some CapEx. We're in the midst of upgrading a number of our pub customers, and that will also take CapEx. But I think all of that's been planned for and budgeted for, so nothing has come out of the woodwork that is unexpected. So I think from a CapEx standpoint, Eric can jump in if he 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.

Got you. Okay. That's 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 sign new contracts and how should we be thinking about the benefits from the new cloud-based lottery system? Thank you.

Thank you for the question. We plan to hand over to our customer by the end of this month or early April for their acceptance testing. The development is mostly complete, and we believe that once it's in the disaster recovery stage, it will be the most advanced lottery system available. Lorne can elaborate on the potential for selling a system like this globally. We view the lottery through various lenses, with excitement around the launch of Virtual Sports with the Virginia Lottery and Aristocrat at the end of April, as we anticipate it to be the first online lottery product in the U.S. Virginia Lottery is a strong iLottery state with over $1 billion in sales, and both Virginia Lottery and Aristocrat have been significantly involved in this initiative. Additionally, we see e-instant as a natural progression for some of our successful content from around the world. Although the development of e-instant is slightly behind our desired timeline, we still see it as a valuable opportunity. Overall, the lottery is a key segment for us that we may not emphasize enough, but we believe substantial opportunities in this area will emerge in the next few quarters.

Great. Thank you. Appreciate the color.

No problem.

That concludes our Q&A session. I will now turn the call over to Lorne Weil, the company's Executive Chairman for closing remarks.

Thank you very much, operator. I don't have much to add. Brooks provided a thorough overview of the status of each business. I agree that the Virtual Sports segment appears to have reached a turning point. The key takeaway for Virtual Sports is our renewed emphasis on product development and enhancements. For some time, we were highly focused on Interactive, dedicating significant resources there, which has resulted in remarkable growth in both revenue and profitability. In hindsight, we may have under-invested in Virtual Sports due to the large opportunity with Interactive. However, we are now increasing our resources rather than diverting them, and I feel cautiously optimistic that we can replicate the success seen in Interactive within Virtual Sports, especially with our focus on product enhancements. I believe we will start to see progress in the coming quarters. Other than that, everything else is in great shape. The balance sheet is solid, cash is healthy, and we look forward to our next discussion in a few months. Thank you.

Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.