Inspired Entertainment, Inc. Q3 FY2025 Earnings Call

Good morning, and welcome to the Inspired Entertainment Third Quarter 2025 Conference Call. Please note that today's event is being recorded. Before we start, please refer to the company's forward-looking statements in the third quarter 2025 earnings press release and accompanying slide presentation, both available in the Investors section of the company's website at www.inseinc.com. These statements also apply to today's conference call. Management will be making forward-looking statements as defined by United States securities laws. These statements reflect management's current expectations and beliefs and are subject to various risks and uncertainties that may cause actual results to differ significantly from those expressed or implied. For more information about these risks and uncertainties, please refer to the company's filings with the Securities and Exchange Commission. The company is not obligated to update or review any forward-looking statements unless required by law. During today's call, both GAAP and non-GAAP financial measures will be discussed. Reconciling these non-GAAP measures to the most comparable GAAP measures can be found in today's earnings release and slide presentation, which are available on the website. As a reminder, the slide presentation will be advanced by the operator to accompany management's remarks. A PDF version of the slides will be available after the call in the Investors section of the company's website. With that, I would like to turn the 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 third quarter conference call. As we reported earlier this morning, third quarter and trailing 12-month adjusted EBITDA were $32.3 million and $110 million, respectively, both well ahead of consensus and last year, and a result that we're pleased with. In a departure from traditional protocols, we have prepared a brief slide deck today summarized here on Slide 4, which will be presented by President and CEO, Brooks Pierce, and myself. There are a lot of moving parts right now, the sale of holiday parks, the restructuring of pubs, and the continued phenomenal growth of interactive as examples that paint a very exciting picture, and we feel that this kind of comprehensive discussion will help us put everything in proper perspective. Then at the conclusion, we will discuss earnings, balance sheet, and cash flow projections for '26 and '27. To begin, I'll hand it over to Brooks, who will discuss in some detail, current results and operations.

Okay. Thanks, Lorne. Before I dive into the business update, I want to briefly address the upcoming U.K. budget announcement on November 26 and the discussion around potential tax changes in the gaming industry. There's been a lot of coverage and discussion on all sides of the issue and its impact on the industry, but frankly, this isn't new. We've successfully managed through the 2019 triennial, which cut maximum stakes in betting shops from effectively GBP 50 to GBP 2, a major change that we navigated through product innovation and operational discipline. Today, performance in that business is well above pre-triennial levels. Potential shop closures have been in the headlines as well, and our experience tells us that this is also manageable. Typically, lower-performing shops are most at risk, and much of that play finds its way to nearby shops, effectively lowering our servicing costs. The potential increase in remote gaming duty would be another facet that we have experience dealing with. We've managed similar changes in other markets, and our performance in the Interactive segment speaks to our ability to adapt effectively. Once the U.K. budget is announced, we'll share more specifics. But in the meantime, we're planning proactively and are confident in our ability to manage changes effectively, just as we have in the past. We have a number of levers and opportunities at our disposal to navigate our way through this. Okay. Moving to the next slide. We're pleased with the performance of the business in the third quarter and are carrying that momentum into the fourth quarter. We're confident we'll exceed Q4 2024 performance and current guidance, assuming current FX rates don't change materially. The Interactive and Gaming segments were particularly strong, with Interactive achieving more than 40% year-over-year adjusted EBITDA growth for the ninth consecutive quarter. October is now complete, and it is the single largest revenue month for this segment in our history, and last week was the biggest week we've ever had. This was all highlighted by the success of some of our seasonal games, but frankly, we're seeing strong performance throughout the portfolio and market share gains across our key geographies in both the U.K. and North America. We're also pleased to see a second consecutive quarter of stabilization in the Virtual Sports segment, and we are confident that it will grow year-over-year in the fourth quarter. The close of the sale of the holiday parks business on November 7 is a milestone in our shift to higher adjusted EBITDA margins, lower CapEx, and close to 40% lower headcount going forward. Taking the proceeds from the holiday park sale to improve our net leverage puts us in a stronger financial position as we move through the fourth quarter and into 2026. In addition, we announced today that our Board has reauthorized a $25 million share buyback plan as part of our plans going forward. The next slide demonstrates the success of our strategy in making North America a bigger part of our business, largely due to the growth we're seeing in this market from our Interactive business, but we are also gaining momentum in our North American VLT business that I'll cover in more detail later in the presentation. The success of the Vantage cabinet in the William Hill estate is coming through in our results and was highlighted recently by Evoke in their trading update. We're also starting to see the impact on performance of the refreshed terminals in the Greek estate. Although year-over-year performance in the Virtual segment continues to be impacted by the taxation that started in January in Brazil, our comps in the fourth quarter and 2026 will be easier, and we've introduced several initiatives and increased our customer counts in Brazil and Turkey, and we're starting to see some of that improvement come through the numbers. As you can see on Slide 8, we've been generating solid year-over-year adjusted EBITDA growth every quarter, and the trailing 12 months adjusted EBITDA is now at $110 million. It is certainly a positive, but the most important aspect of this slide is the impact we expect to see going forward with the sale of the holiday parks business and the move in our pubs business to a machine and content-led strategy. Both the Interactive and Virtual segments are operating at higher than 60% EBITDA margins after corporate allocations, and we expect the operating leverage of both of these segments to strengthen further as revenue increases. The combination of margin expansion, the sale of the holiday parks business, and the change in the pubs business model will significantly reduce our capital intensity and positively impact cash flow. The next couple of slides highlight not only the strong performance of the Interactive segment, but frankly, the significant opportunity we see ahead as additional iGaming states potentially come online, which we believe could be transformational for our business. Our content is resonating broadly across all key geographies, and we're positioning the business to scale across even more. Looking ahead to next year, we plan to increase game deliveries through added capacity and a new interactive studio. The most common feedback we get from customers is they want more of our great content, and we're excited to deliver on that challenge. As we've discussed previously, we're very bullish on the opportunity for an increase in the number of iGaming states. It's clear that iGaming is a much larger opportunity than online sports betting, as evidenced by the GGR from just three of the existing iGaming states. The delivery of additional states is very seamless and should produce significant operating leverage as the only real cost to add states is in bandwidth. We don't have a crystal ball, of course, but we're confident that states will see the opportunity, and we feel it's a matter of when, not if. Now moving over to Hybrid Dealer. We've been talking about Hybrid Dealer for some time, and we felt validated to have won the award at G2E for Innovative Product of the Year. More importantly, we're starting to see the network effect of rolling this product out across our customer base. We have a good mix of both Tier 1 and Tier 2 customers and have seen success with both. Our William Hill-branded roulette game in the U.K. is producing amazing results, which we view as proof of concept for other operators. The next phase of development will emphasize and highlight our proprietary player-favorite content, such as our Wolf It Up! and Piggy Bank family of games. We see this as the natural evolution of our product strategy, supported by an increasing pace of game delivery to meet the strong market demand. While Hybrid Dealer is not expected to be as large as the broader interactive market, we believe it will be a valuable complement to our portfolio, enhance our offering, add diversity to our content, and contribute meaningfully in 2026 and beyond. Moving over to Gaming. Our Gaming business continues to perform well across our three key markets of the U.K., Greece, and North America. In the U.K., we're gaining share in the betting shop business with the addition of two key customers. In Greece, our new cabinets are strengthening our leading position, and with nearly half of our machines still to be upgraded, we see continued opportunity for growth. In North America, performance in Illinois and key Canadian provinces is at its highest level since we introduced these products into mature markets, which is never easy. Notably, 98% of our Illinois customers ordered our game pack subscriptions this year, validating our philosophy that server-based gaming is a powerful tool for operators to keep their players engaged, and we see applicability for that in many more markets around the world. And now I'll pass it over to Lorne.

Thanks, Brooks. A lot of interesting concepts and data to digest. I'll begin with Slide 14, giving a snapshot of where we are at the end of the third quarter. I apologize if some of this material was repetitious for those who have been following us for a while, but it will help level set for anyone new to the story. So we're starting with trailing 12-month revenue, adjusted EBITDA, and EBITDA margin of $310 million, $110 million, and 35%, respectively. The digital retail mix is just under 50-50 and net leverage ratio of 3.2x. As we move through the rest of the material, I'll try to explain why we're confident in projecting significant expansion in margins, reductions in leverage, and strong free cash flow. Slide 15 summarizes the underlying dynamics that have been underway for some time. Earlier, Brooks talked about the high margin, relatively low CapEx, and scalability of our digital business. It's the swing of the mix of our business in that direction that's a primary driver of financial performance. In parallel, the divestiture of the holiday park business provides an immediate boost to margins. The operational reengineering going on throughout the company allows us to make up for the divested holiday parks' EBITDA. In a moment, I'll quantify with some specificity on the exact impact of each of these three elements. Slide 16 summarizes the three things that, of course, everybody wants: revenue growth, expanding margins, and growing free cash flow. Although generally, in my experience, you only get to pick two. And as the slide implies, in our case, the three are highly interdependent. Our revenue growth is driven by the compounding of market share gains within growing markets, with content development and greater allocation of resources to marketing recently having been the principal underlying drivers. Revenue growth, revenue mix, and scalability together drive expanding margins, and the latter combined with declining CapEx drives free cash flow, if only it were that easy in execution. Slide 17 decomposes our projection of a 1,000 basis point increase in adjusted EBITDA margin between now and 2027, with the increase being almost equally split between the increased digital mix, the sale of holiday parks, and the operational reengineering that we are undergoing. Regarding the latter, we expect most of the benefits to begin to take effect in the first quarter of 2026. Which finally brings us to Slide 18, where we bring this all together. To summarize, we're projecting the digital mix after corporate allocation to reach 60% by 2027; headcount to decline by nearly 40%; adjusted EBITDA margin to grow by 10 percentage points, from 35% to 45%; free cash flow conversion to reach 30% of EBITDA; and net leverage to decline to 2. A few minutes ago, Brooks discussed the expectation of increased U.K. gaming taxes in the November U.K. budget. It's for this reason that for now, we've expressed absolute adjusted EBITDA guidance in terms of high single-digit growth, which will then translate to more specific guidance once the tax proposal is known. As Brooks mentioned earlier, we've been through this drill before, and we're confident we can do much to mitigate any impact. I should mention that certain important upsides, new iGaming states, for example, would be significant additional mitigating factors as they do not factor at all into our analysis. Finally, this entire discussion is focused on organic growth and does not reflect any expectation of M&A impact, which we continue to look at very carefully. And with that, we can open to Q&A. Operator, we can have Q&A now, please.

And your first question comes from the line of Ryan Sigdahl of Craig-Hallum.

Appreciate kind of the targets and laying out the path over the next several years of what this company looks like. Still kind of digesting that in real-time, but very back of the envelope math, maybe staring at Slide 18 here. If we assume EBITDA grows at a high single-digit CAGR, EBITDA margin expands by 10 points over the next 2 to 3 years. I guess that implies revenue is kind of flattish, maybe even down? I guess, walk through what's going on there, and maybe part of that is the starting point of holiday parks included or not?

Yes. The main reason for that is the departure of the holiday parks business, which is the largest factor affecting revenue as you outlined. However, we are confident that the other business segments will continue to grow at different rates. The Interactive business is performing exceptionally well, and we also anticipate growth in both the Gaming and Virtuals sectors.

I think it's just a comparison of the starting baseline. For Virtual Sports, I heard they expect year-over-year growth in Q4. What gives you the confidence in the acceleration since it was up sequentially and seems to be stabilizing? What leads you to believe there will be a reacceleration in growth, at least sequentially, that will return you to year-over-year growth by Q4?

Yes. We've made some adjustments with our largest customer and are starting to see benefits from that. Additionally, we've gained new customers in Brazil, adding six in the quarter, though their full impact won't be felt until the fourth quarter. We're also experiencing positive growth from our operations in Turkey, and we're introducing another content stream in that market. Altogether, these factors give us confidence in our growth prospects. Our target for fourth quarter EBITDA is 7.2 from last year, which represents a significant amount we need to achieve for growth.

If I may, a quick follow-up just on that, any commentary or added detail on what those adjustments with your largest customer were? And then I'll hop back in the queue.

Thanks. No, I think we'll probably keep that between us and our customer, if you don't mind.

Your next question comes from the line of Barry Jonas of Truist Securities.

Lorne, can you expand a little on your M&A commentary in the prepared remarks? Just curious what the pipeline looks like and the types of companies deals you'd be most interested in?

Sure. To start, from a financial perspective, we are focused on deals that have strong connections with our company and current operations, allowing us to expect significant immediate synergies and financial rationale. We will avoid opportunities that are overly diversifying or involve excessive prices that we cannot offset with operational synergies. Our main priority is maintaining that focus. Regarding the types of companies we are interested in, we would consider what is commonly referred to as tuck-in acquisitions that enhance our existing businesses. The most probable candidates would be interactive studios or businesses with products or market segments we currently do not serve but that could be easily integrated. This could also apply to our equipment business. I believe it’s unlikely that we would pursue anything large-scale in terms of M&A right now because our business is performing well. There are plenty of opportunities for tuck-in acquisitions, which is our current focus.

Got it. And then I noticed there was a release about your premium iGaming entrance into West Virginia recently. Just curious if you could talk more about that? And then any other notable jurisdictions you'll be soon to enter, hopefully?

Yes. So we've started with DraftKings and Rush Street, I think, are the two first customers in West Virginia. For a while, we were kind of waiting to see how some of these markets develop. Delaware as well, which was originally pretty small, but Rush Street's made that into a pretty amazing market. The same goes for West Virginia. So several of our operator customers were pressing us to get the content in all their markets. So clearly, West Virginia is rolling out, and we'll start seeing the impact of that here in the fourth quarter. I think the rest is what we talked a little bit about is new states. I think the only state we're not in now is Rhode Island, which is kind of a unique environment. Any states added will be a huge bonus for us. In terms of the international markets, I think we have almost 500 customers now. We're pretty much in every market you can think about. I would say that probably the biggest market that we're not participating in a meaningful way that we hope to is probably South Africa. Brazil is growing and some of the other Latin American markets are growing. So we kind of have no lack of geographical opportunities for us.

Great. Congrats on the quarter and appreciate the new targets.

Your next question comes from the line of Jordan Bender, Citizens.

Maybe just follow up on the M&A comments. First, you mentioned you're going to open a new interactive studio. Are you buying this, or is this an organic initiative? And then maybe more broadly, kind of related to the M&A part of this, have you seen multiples for studios come down at all? I know those have been quite elevated in years past. It seems like that's kind of a natural fit for the trajectory of your business at this point?

Sure, I'll address the first part and touch on the second part as well, and then Lorne can add more. We are building the studio ourselves and have hired a manager for it. He will start after the first of the year due to a noncompete clause, and we will develop it. It will include much of the content we are recognized for, but we will also allow him the opportunity to experiment with new types of content to expand our offerings. Regarding mergers and acquisitions, we have reviewed numerous studios. The biggest challenge for us is that many of these studios generate revenue in markets we won't enter, which has held us back from pursuing acquisitions in the past, but we are still keeping an eye on the opportunities. As our content pipeline grows, more companies are emerging, so we are continually exploring this area. Perhaps Lorne can elaborate further?

Yes. No, I don't have anything to add to that. I think that's right.

Perfect. And just following up, on the share buyback, it's been a couple of years since you've bought back stock. Can you just maybe remind us of your philosophy? Is this going to be a programmatic buyback, opportunistic? Just anything to help us there.

Yes, to address the point about not having done a buyback for the last couple of years, that was mainly due to the accounting issue we have now completely resolved. During that time, we couldn't buy back stock. Now, with that behind us, we are generating ample cash and have a strong cash position, so we are clearly in a position to proceed. We believe that our stock is currently at an attractive level, irrespective of differing philosophies on share buybacks within the capital allocation context. However, I expect our approach will remain opportunistic rather than programmatic, as we continue to balance the need to reduce our leverage ratio to the levels outlined in our projections, which is a priority. We cannot predict when significant M&A opportunities will arise, and we will need to act on those when they do. Therefore, while we will certainly be more aggressive in our buyback efforts than we have been in recent years, we will not adopt a fixed program for it.

And your next question comes from the line of Chad Beynon of Macquarie.

I wanted to revisit, Brooks, your comment about interactive October being the largest in history and obviously looking at the financials for Q3, the $11 million of EBITDA. So maybe the first question, are you adding new partners in your biggest market like the United Kingdom? Are you just gaining market share? And then the second part of that, do you think that certain partners are better cushioned against some regulatory changes? I know we'll hear more about that. But yes, I guess, just wanted to ask about Tier 1, 2, 3 partners versus just overall share in that market.

Yes. Thanks, Chad. Yes, I mean it's kind of exactly what you would want. It's pretty broad-based. It's across our three biggest markets, North America, U.K., and Greece, but some of the other smaller markets are growing as well. Principally, we're gaining share. I think we are ranked #4 or #5 in the most recent Eilers report in North America. We've made a focused shift to build games that resonate with the North American players, and that's turning out. All the big guys, whether it's DraftKings, FanDuel, BetMGM, Rush Street, are all doing better and better. But it really goes all the way through Tier 2, Tier 3, lower markets. It's a pretty broad-based performance across the business. And as I said, the October numbers were great. We get the advantage of having Halloween. I mentioned that last week was the single biggest week we've ever had. We had the confluence of payday in the U.K., Halloween, and the resetting of limits all happen in one week. That led to phenomenal results. As we move into the fourth quarter, December is historically one of the biggest, if not the biggest month, with all the Christmas games. November is also very good. So the fourth quarter is shaping up nicely.

Regarding prediction markets, you have very limited exposure to North American sports betting. We've observed many publicly traded companies declining due to increased competition in that area. Can you discuss how prediction markets might impact any of your business segments?

No, we aren't seeing anything. Unfortunately, the area that could potentially be impacted is the Virtuals in North America. As I have mentioned in several calls, we are frustrated by the slow progress in getting Virtual Sports established in North America. While the NBA and NFL content is resonating well in markets outside of North America, we are still struggling to encourage more operators in North America to launch. That is really the only segment of the business that I see being affected. We are not observing any impact in the interactive space from prediction markets taking players away. I believe they are quite separate, even though the operators attempt to cross-sell; the players are distinctly different.

Your next question comes from the line of Josh Nichols of B. Riley Securities.

Great to see the parks business approaching a sale here and the stock buyback. Sorry if it was already addressed, I joined the call a few minutes late. But I wanted to just talk about the Interactive business, phenomenal growth that you've been seeing there overall. I think it's on pace for something like close to 50% growth this year. Do you expect that pace is likely to continue next year? And what are the key drivers that you see that's going to be driving Interactive, whether that's like Brazil or expanding your partnerships with some players in the U.S. and things that are in the pipeline for that business?

Yes, we touched on this earlier, and I'm happy to revisit it. We've seen nine consecutive quarters of over 40% EBITDA growth, which makes things a bit more challenging mathematically. However, October's numbers were excellent, and we anticipate the fourth quarter will build on that success. The primary feedback from our customers is that they love our games and game mechanics but want more variety. That's why we're investing in our studio to increase output and bring more games to market, which should help us maintain our growth rates. With the vast amount of content available now, it's essential to combine quality with quantity. Our game design teams have developed some innovative mechanics, including a persistence game called Player Link that's boosting engagement. We have many options to explore, and we hope to keep this winning streak going.

And then last question for me, Virtual Sports, obviously a smaller piece of the business today, but good to see how that business has stabilized over the last couple of quarters. You talked about trying to get up and running with some more operators in the U.S. What needs to be done to really get that business back into growth for 2026? And are there a couple of larger opportunities that you're kind of optimistic about when we look beyond just the fourth quarter but for next year really?

Yes. I mean, so not to put any undue pressure on BetMGM, but they're likely to be the first big operator in North America. They've gone live with us in Ontario and are seeing phenomenal results over the last few months. It's got some regulatory and resource challenges that we're working through with them, but we expect to go live with them yet this quarter. I'm hoping that will be a catalyst for a number of other operators to see that virtual sports resonates and works in every other market we've been in, and we think it will in North America. Unfortunately for us, we haven't been able to, frankly, because the operators have many priorities they're working on for their iGaming and sports business, and virtuals just kind of have slid down their priority list a little bit. But I still believe it will resonate. I still believe we have licensed content with the NFL, NBA, and NHL that will resonate with the North American player base. Once we get one of the big guys, hopefully BetMGM first, live in North America, and they do well, I think that will catalyze the other big operators to put some resources to this. It's not a challenge for us; it's really just a resource issue for the other guys.

And there are no questions. I will now turn the conference back over to Mr. Weil for the closing remarks.

Thank you, operator, and thank you all for joining the call today. I know we may have lost some listeners due to Sportradar starting just five minutes ago. However, I want to emphasize that we are very optimistic about the business at this moment. The remainder of this year looks promising, and we are confident that as we progress through 2026 and 2027, we can achieve the performance goals we discussed in the presentation. Thank you once again for your support, and we look forward to our next conversation in a few months. Thank you.

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